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 Limiteds 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 $8.00 per ADS.
We have received approval for listing the ADSs on the NASDAQ
Global Market under the symbol MOBI.
Investing in our ADSs involves risks. See
Risk Factors beginning on page 15.
Neither the United States Securities and Exchange Commission nor
any state securities commission or other regulatory body has
approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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Per ADS
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Total
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Public Offering Price
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$
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8.00
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$
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58,000,000
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Underwriting
Discount
(1)
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$
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0.56
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$
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4,060,000
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Proceeds to Sky-mobi Limited (before expenses)
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$
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7.44
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$
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45,570,000
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Proceeds to the selling shareholders (before expenses)
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$
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7.44
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$
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8,370,000
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(1)
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We have agreed to reimburse the
underwriters for some of their incurred expenses in connection
with this offering. See Underwriting beginning on
page 163.
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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
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Piper
Jaffray
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Oppenheimer & Co.
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Rodman & Renshaw, LLC
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The date of this prospectus is December 9, 2010
TABLE OF
CONTENTS
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Page
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1
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15
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44
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45
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46
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47
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48
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50
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51
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53
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58
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90
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95
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100
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119
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125
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132
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135
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138
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146
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155
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157
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163
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168
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169
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169
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169
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F-1
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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
dealers obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold allotments or
subscriptions.
PROSPECTUS
SUMMARY
The following summary should be read in conjunction with the
more detailed information and financial statements appearing
elsewhere in this prospectus. In addition to this summary, we
urge you to read the entire prospectus carefully, especially the
risks of investing in our ADSs discussed under Risk
Factors before deciding whether to buy our ADSs.
Our
Company
We operate the leading mobile application store in China, as
measured by revenues in 2009, according to a report dated May
2010 commissioned by us and prepared by Analysys International,
an independent research and advisory firm, or the Analysys
Report. The Analysys Report estimates that our revenues
accounted for approximately 50% of all revenues generated from
mobile application stores in China in 2009. On our mobile
application store, Maopao, users can browse, download and
purchase a wide range of applications and content such as
single-player games, mobile music and books. In addition, we
have established a leading mobile social network community in
China, the Maopao Community, where we operate mobile social
games and provide applications and content with social network
functions to our registered members. Maopao enables mobile
applications and content to be downloaded and run on a variety
of mobile handsets with different hardware and operating system
configurations. We currently target the feature phone market,
which is the largest mobile phone segment in China, according to
the Analysys Report. We collaborate with handset companies to
pre-install Maopao on mobile handsets before shipment. From
January 1, 2007 to September 30, 2010, Maopao had
approximately 479 million cumulative users. Over the same
period, we offered over 770 applications and over 61,000
content titles in our Maopao application store and the
cumulative number of downloads reached 3.6 billion.
As an innovator of the mobile application business model in
China, we are centrally positioned in Chinas mobile
application ecosystem, which includes:
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users
, especially those of younger age with modest
income, who constitute the majority of Chinas 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;
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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;
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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
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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
users 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.
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We share sales proceeds from Maopao with handset companies,
content providers and payment service providers, which we
believe helps align the interest of these industry participants
with ours, motivates them to provide better products and
services to users and fosters a long term mutually beneficial
relationship with us.
We have achieved substantial growth since we launched Maopao in
2006. There were approximately 32.3 million,
379.6 million and 1,613.9 million downloads of
applications and content titles from Maopao in the fiscal years
ended March 31, 2008, 2009 and 2010, respectively, and
approximately 559.2 million and 1,554.6 million in the
six-month periods ended September 30, 2009 and 2010,
respectively.
On our Maopao Community, our registered members can create their
virtual profiles, befriend others who share similar ideas,
interests or activities, and view the profiles or track the
status of their friends through blogs, pictures, instant
messages and other functions. One of the most popular features
of the Maopao Community is mobile social games, where our
registered members interact with each other in the wireless game
world. We operate these mobile social games on our own server
network through advanced cloud computing technology to ensure
the best user experience. As of September 30, 2010, our
Maopao Community attracted 44.6 million registered members
and our peak concurrent users reached approximately 233,000. We
offer our own virtual currency, K Currency, for members of
our Maopao Community to purchase virtual items in our social
network applications and mobile social games.
Our revenues grew from RMB18.6 million in the fiscal year
ended March 31, 2008 to RMB544.3 million
($81.3 million) in the fiscal year ended March 31,
2010, representing a compounded annual growth rate, or CAGR, of
441.0%. Our revenues increased by 40.2% to RMB336.7 million
($50.3 million) in the six-month period ended
September 30, 2010 from RMB240.1 million in the
six-month period ended September 30, 2009. We incurred a
loss from operations of RMB5.3 million in the fiscal year
ended March 31, 2008 and achieved profit from operations of
RMB37.6 million, RMB124.0 million
($18.5 million), RMB65.3 million and
RMB12.8 million ($1.9 million) in the fiscal years
ended March 31, 2009 and 2010 and the six-month periods
ended September 30, 2009 and 2010, respectively. Our loss
was RMB10.6 million, RMB113.5 million,
RMB229.8 million ($34.3 million) RMB92.0 million
and RMB53.6 million ($8.0 million) in the fiscal years
ended March 31, 2008, 2009 and 2010 and the six-month
periods ended September 30, 2009 and 2010, respectively. Our
adjusted profit was RMB0.8 million, RMB44.3 million
and RMB115.7 million ($17.3 million) for fiscal years
2008, 2009 and 2010, respectively, and RMB68.9 million and
RMB24.1 million ($3.6 million) in the six-month
periods ended September 30, 2009 and 2010, respectively.
For more information about adjusted profit, a financial measure
not in accordance with International Financial Reporting
Standards, or IFRS, please see Summary
Consolidated Financial and Operating Data.
Industry
Background
China has the worlds largest mobile subscriber market.
According to reports released by the PRC Ministry of Industry
and Information Technology, or MIIT, in January 2006 and
February 2010, the number of mobile subscriptions in China
increased from 393.4 million as of the end of 2005 to
747.4 million as of the end of 2009, representing a CAGR of
17.4%. Correspondingly, the Chinese mobile handset installed
base has also grown to 792.2 million units at the end of
2009, according to the Analysys Report. The handset market in
China can be divided into three segments: feature phones, smart
phones and basic phones. Feature phones are low cost
multi-function mobile communication devices that have
proprietary operating systems which make it difficult for users
to install and remove software. According to the Analysys
Report, the feature phone market segment represented
approximately 64.2% of the total mobile handset installed base
in China in 2009, and is expected to remain the largest segment
in the foreseeable future as feature phones offer Chinas
price-sensitive mobile phone users broad functionality at
compelling price points. Smart phones accounted for 15.8% of the
total mobile handset installed base in China in 2009, according
to the Analysys Report, and they are expected to grow rapidly,
reaching approximately 36.9% market share in 2013.
Historically, the majority of applications and services provided
through mobile data services were based on short messages, or
SMSs, and were either accessed through a mobile carrier operated
menu or pre-installed on mobile handsets. These services
included ring tones, simple games and wallpapers, among others.
Today, users seek to consume more sophisticated multimedia and
interactive functions via mobile phones. Increasingly rich
content
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and more complex applications are therefore becoming available.
Key growth areas of mobile applications and services include
mobile social games and social network applications and content.
Despite relatively modest average income levels of mobile users,
mobile services are used by a wide spectrum of Chinese
consumers, with users younger than 30 years old
representing 59.3% of all mobile subscribers in 2009, according
to the Analysys Report. These users have a strong desire for
social interaction, acceptance and affordable entertainment. The
majority of the growth of mobile Internet application and
services revenues in China has been derived from users younger
than 30 years old, who accounted for 71.2% of the mobile
Internet user base as of June 2010, according to a report
released by China Internet Network Information Center, or
CNNIC, in July 2010.
Independent mobile application stores have emerged in China to
aggregate applications or content from different content
providers in a central platform which enables a large number of
users to easily browse, find and pay for applications and
content. These mobile application stores enable a more efficient
ecosystem for mobile Internet application and content
development, distribution and consumption by addressing major
challenges facing the mobile Internet application and services
market in China, including limited payment alternatives, the
difficulty for users to find content and for content providers
to reach users, the high cost of content development and the
lack of incentive for handset manufacturers. These independent
mobile application stores allow more flexible payment options,
enhance user experience through content aggregation, enable more
efficient and cost-effective content development and increase
incentives for content distribution. The mobile Internet
application and services market size in China is expected to
increase from RMB7.7 billion in 2008 to
RMB260.4 billion in 2013, according to the Analysys Report,
representing a CAGR of 102.2%.
Our
Strengths and Strategies
We believe the following strengths enable us to compete
effectively and capture opportunities in the rapidly growing
mobile application store market in China:
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leading mobile application store and fast-growing mobile
community in China;
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innovative business model and a central position in the mobile
application ecosystem;
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diverse portfolio of popular and high-quality content;
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differentiated user-oriented operations enabling outstanding
user experience;
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strong technological expertise and research and development
capabilities; and
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experienced management team with proven track record.
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Our objective is to grow profitably by building on our
leadership position in China with the goal of becoming a global
dominant mobile application store. The key elements of our
strategy include:
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establish a strong consumer brand among handset users;
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further increase user activity and monetize our large user base;
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capitalize on the growth of smart phone market;
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increase usage of third-party payment and collection system;
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maintain and extend technological leadership;
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further increase the installed base of Maopao; and
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expand overseas user base to strengthen our business and
revenues.
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Our Risks
and Challenges
The successful execution of our strategies is subject to certain
risks and uncertainties that may materially affect us, including
those relating to:
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our limited operating history;
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measures introduced by the PRC government and mobile network
operators aimed at mobile applications-related services;
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our ability to maintain cooperation relationships with handset
companies, content providers and payment service providers;
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our dependence on mobile service providers, and ultimately
mobile network operators, for the collection of a substantial
majority of our revenues;
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billing and transmission failures, which are often beyond our
control;
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our ability to compete effectively; and
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our ability to capture opportunities in the expected growth of
the smart phone market.
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Please see Risk Factors and other information
included in this prospectus for a detailed discussion of these
risks and uncertainties.
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Our
Corporate Structure
The following diagram illustrates our anticipated shareholding
and corporate structure and the place of incorporation of each
of our subsidiaries and special purpose entities, or SPEs,
controlled by us, immediately following this offering:
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(1)
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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.
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(2)
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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.
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(3)
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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.
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(4)
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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.
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(5)
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Shenzhen Heisha Technologies Co., Ltd. is currently 65% owned by
Fanyi and 35% owned by an independent third party.
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We are a Cayman Islands company and conduct our business
operations principally in China through our PRC subsidiaries and
SPEs. Foreign ownership in the mobile application store business
is subject to restrictions under current PRC laws, rules and
regulations. To comply with the applicable PRC laws, rules and
regulations, 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 these SPEs, but exercise effective control
over operations of these SPEs and receive economic benefits
generated from these SPEs through various contractual
arrangements with these SPEs and their respective shareholders.
However, these contractual arrangements may not be as effective
in providing us with control over the SPEs as direct ownership
of these companies. In addition, these SPEs or their
shareholders may breach the contractual arrangements with us. In
such cases, we would have to rely on legal remedies under PRC
law, which may not always be effective, particularly in light of
uncertainties in the PRC legal system. For detailed analysis of
risks associated with these contractual arrangements, see
Risk Factors Risks Related to Doing Business
in China.
Xplane Ltd., a British Virgin Islands company controlled by
Mr. Michael Tao Song, our chairman and chief executive
officer, and his wife, has substantial influence over our
company. Xplane Ltd. currently holds 72.0% of our outstanding
share capital on an as-converted basis.
Corporate
Information
Our principal executive offices are located at 10/F, Building B,
United Mansion, No. 2, Zijinhua Road, Hangzhou, Zhejiang
310013, Peoples Republic of China. Our telephone number at
this address is
(86-571) 8777-0978.
Our registered office in the Cayman Islands is located at the
offices of Codan Trust Company (Cayman) Limited at Cricket
Square, Hutchins Drive, P.O. Box 2681, Grand Cayman
KY1-1111, Cayman Islands. Our agent for service of process in
the United States is CT Corporation System, located at 111
Eighth Avenue, New York, New York 10011.
Investors should contact us for any inquiries through the
address and telephone number of our principal executive offices.
Our principal website is
www.sky-mobi.com
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information on our websites is not part of this prospectus and
you should not consider any information on, or that can be
accessed through, our websites as part of this prospectus.
Conventions
which Apply to this Prospectus
Unless otherwise indicated, statements in this prospectus as to
the number of common shares and ADSs outstanding immediately
after this offering (i) exclude 11,149,400 common shares
issuable upon the exercise of stock options issued under our
2010 Share Incentive Plan that are outstanding as of the
date of this prospectus, (ii) assume full exercise of the
warrants to purchase up to 3,389,800 Series A preferred
shares which we issued to
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our existing preferred shareholders, (iii) assume the
conversion of all of the Series A preferred shares
outstanding immediately before the offering into common shares
at a conversion rate of
one-to-one
upon the completion of this offering, (iv) assume that the
underwriters do not exercise their option to purchase additional
ADSs in the offering, and (v) exclude common shares
reserved for future grants under our Share Incentive Plan.
References to share information and per share data reflect the
200-for-1 share split effected on November 18, 2010, in
which every common share and series A preferred share was
subdivided into 200 ordinary shares and series A preferred
shares, respectively, and the par value of the shares was
changed from $0.01 per share to $0.00005 per share.
Except where the context otherwise requires and for purposes of
this prospectus only:
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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;
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China or PRC refers to the Peoples
Republic of China, excluding, for the purpose of this prospectus
only, Taiwan, Hong Kong and Macau;
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shares or common shares refers to our
common shares, par value $0.00005 per share;
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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;
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ADRs refers to the American depositary receipts,
which, if issued, evidence our ADSs;
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ADSs refers to our American depositary shares, each
of which represents eight common shares;
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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;
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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.
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mobile service providers are payment service providers who
utilize mobile network operators billing channels pursuant
to their agreements with mobile network operators;
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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;
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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;
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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
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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.
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This prospectus contains translations of certain RMB amounts
into U.S. dollars at specified rates. For all dates through
December 31, 2008, all translations from RMB to
U.S. dollars were made at the noon buying rate in the City
of New York for cable transfers in RMB per U.S. dollar as
certified for customs purposes by the Federal Reserve Bank of
New York, or the noon buying rate. For January 1, 2009 and
all later dates and periods, the exchange rate refers to the
noon buying rate as set forth in the H.10 statistical release of
the Federal Reserve Board. Unless otherwise stated, the
translation of RMB into U.S. dollars has been made at the
noon buying rate in effect on September 30, 2010, which was
RMB6.6905 to $1.00. We make no representation that the RMB or
U.S. dollar amounts referred to in this prospectus could
have been or could be converted into U.S. dollars or RMB,
as the case may be, at any particular rate or at all. See
Risk Factors Risks Related to Doing Business
in China Governmental control of currency conversion
may adversely affect the value of your investment. On
December 3, 2010, the noon buying rate was RMB6.6628 to
$1.00.
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The
Offering
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Offering price
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$8.00 per ADS
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ADSs offered by us
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6,125,000 ADSs
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ADSs offered by the selling shareholders
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1,125,000 ADSs
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Over-allotment option
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We and the selling shareholders have granted the underwriters an
option, which is exercisable within 30 days from the date
of this prospectus, to purchase up to an aggregate of 1,087,500
additional ADSs.
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ADSs outstanding immediately after this offering
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7,250,000 ADSs
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Common shares outstanding immediately after this offering
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257,389,800 shares
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ADSs to common share ratio
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Each ADS represents eight common shares. The ADSs may be
evidenced by ADRs issued.
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The ADSs
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The depositary will hold the common shares
underlying your ADSs. You will have rights of an ADS holder as
provided in the deposit agreement among us, the depositary and
owners and beneficial owners of ADSs from time to time.
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We do not have any present plan to declare or pay
any dividends in the near future. If, however, we declare
dividends on our common shares, the depositary will pay you the
cash dividends and other distributions it receives on our common
shares, after deducting its fees and expenses.
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You may turn in your ADSs to the depositary in
exchange for common shares. The depositary will charge you fees
for any exchange.
|
|
|
|
We may amend or terminate the deposit agreement
without your consent. If you continue to hold your ADSs, you
agree to be bound by the deposit agreement as amended.
|
|
|
|
To better understand the terms of the ADSs, you should carefully
read the Description of American Depositary Shares
section of this prospectus. You should also read the deposit
agreement, which is filed as an exhibit to the registration
statement that includes this prospectus.
|
|
Reserved ADSs
|
|
At our request, the underwriters have reserved for sale, at the
initial public offering price, up to an aggregate of 725,000
ADSs to certain directors, officers, employees and associates of
our company through a directed share program. These reserved
ADSs account for an aggregate of approximately 10% of the ADSs
offered in the offering.
|
|
Use of proceeds
|
|
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
estimated underwriting discount and offering expenses payable by
us.
|
9
|
|
|
|
|
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.
|
10
Summary
Consolidated Financial and Operating Data
You should read the following information in conjunction with
our consolidated financial statements and related notes,
Selected Consolidated Financial and Operating Data
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
The following summary consolidated statement of comprehensive
income data for the fiscal years ended March 31, 2008, 2009
and 2010, and the 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, as issued by the International Accounting Standards
Board. 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 our results expected for any future
period.
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
12
|
|
|
|
|
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.
|
Operating
Data
The following table sets forth the number of new users added for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The following table sets forth the number of registered members
of our Maopao Community as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The following table sets forth total user downloads of our
single-user applications and content titles for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
13
The following table sets forth our selected quarterly operating
data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
14
RISK
FACTORS
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.
15
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. Chinas 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.
16
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:
|
|
|
|
|
other independent application store operators which offer mobile
application stores similar to ours, such as Shenzhen Shenxunhe
Technology Co., Ltd., Shanghai Snowfish Tech. Co., Ltd. and
Shanghai Coolbar Co., Ltd.
|
|
|
|
handset companies that have developed their own proprietary
application stores, such as iTunes App Store on iPhones and
other mobile devices from Apple Inc. or the Ovi Store on Nokia
handsets;
|
|
|
|
mobile software providers, such as Guangzhou Ucfly Company,
which has developed UCWeb, a mobile handset browser;
|
|
|
|
emerging mobile operating systems which have their own
application stores, such as Symbian;
|
|
|
|
mobile network operators that provide their own application
stores, such as Monternet Mobile Market from China Mobile and
the UNI-Info Platform from China Unicom; and
|
|
|
|
large Chinese Internet companies that may develop and operate
their own mobile application stores, such as Tencent and Baidu.
|
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
Mobiles
17
dominant position in Chinas 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 providers
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 users
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:
|
|
|
|
|
the mobile network operator experiences technical problems with
its network which prevent the transmission of MR data;
|
18
|
|
|
|
|
the delivery of mobile applications and content through Maopao
to a user is prevented because the users phone is turned
off for an extended period of time, or the users prepaid
phone card has run out of value; and
|
|
|
|
we experience technical problems with Maopao that prevents the
delivery of our applications and content.
|
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 Mobiles 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 Mobiles 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, Apples 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.
19
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:
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any reduction in or failure to grow the user base of the
existing community-based applications and other content provided
through Maopao;
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any decrease in popularity of the existing community-based
applications and content in the market or any decrease in their
purchases due to intensifying competition or other factors;
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failure by us or relevant third-party content providers to make
quality upgrades, enhancements or improvements to these
applications and content in a timely manner in response to user
preferences;
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failure by us or relevant third-party content providers to
develop and launch new community-based applications and content
appealing to users;
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our failure to efficiently operate community-based applications
and content and provide effective customer service;
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our failure to comply with regulatory requirements with respect
to these applications and content; or
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any breach of related software security, prolonged server
interruption due to network failures, hacking activities or
other factors or any other adverse developments relating to
these applications and content.
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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
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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 Peoples 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 brands 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.
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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,
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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.
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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.
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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
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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:
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fluctuations in currency exchange rates;
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our ability to select the appropriate geographical regions for
international expansion;
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difficulty in identifying appropriate local content providers,
handset companies, mobile service providers
and/or
joint
venture partners and establishing and maintaining good
cooperation relationships with them;
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difficulty in understanding local market and culture;
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compliance with foreign laws and regulations that apply to our
international operations, including without limitation, import
and export requirements, foreign exchange controls and cash
repatriation restrictions, data privacy requirements, labor
laws, and anti-competition regulations; and
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increased costs associated with doing business in foreign
jurisdictions.
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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
26
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.
27
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 managements
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
managements 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 managements assessment or may
issue a report
28
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 Managements 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:
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diversion of managements attention;
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difficulties in retaining personnel of the acquired companies;
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unanticipated problems or legal liabilities; and
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tax and accounting issues.
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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
29
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:
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investors perception of, and demand for, securities of
mobile application store operators in China;
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conditions of the United States and other capital markets in
which we may seek to raise funds;
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our future results of operations, financial condition and cash
flows;
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PRC governmental regulations of foreign investment in China;
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economic, political and other conditions in China; and
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PRC governmental policies relating to foreign currency
borrowings.
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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.
30
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
Chinas 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 Chinas significant
growth in the past 30 years. If the PRC governments
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
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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 Diannengs 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 Diannengs business
license or Hangzhou Sky, Mijia or Fanyis 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.
32
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 arms-length price and adjust Hangzhou
Sky, Mijia or Fanyis 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
Managements 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
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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
Enterprises 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 Enterprises
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
34
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.
35
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 SAFEs 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
36
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
37
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 partys 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.
38
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
39
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 shareholders 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
40
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.
41
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.
42
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.
43
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are
based on our managements 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:
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our business strategies and initiatives as well as our business
plans;
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our future business development, results of operations and
financial condition;
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expected changes in our revenues and certain cost or expense
items;
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our expectations with respect to increased revenue growth and
our ability to sustain profitability;
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our products under development or planning;
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our ability to attract clients and further enhance our brand
recognition; and
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trends and competition in the mobile applications industry.
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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.
44
USE OF
PROCEEDS
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:
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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;
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approximately $5 million for sales and marketing
activities, including the promotion of our brand among
users; and
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the balance for general corporate purposes, including overseas
expansion and research and development activities.
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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.
45
DIVIDEND
POLICY
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.
46
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2010:
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on an actual basis;
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on a pro forma basis to reflect the automatic conversion of all
of our outstanding Series A preferred shares into
50,000,000 common shares immediately upon the completion of this
offering; and
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on a pro forma as adjusted basis to reflect (i) the
automatic conversion of all of our outstanding Series A
preferred shares into 50,000,000 common shares immediately upon
the completion of this offering, (ii) the full exercise of
our outstanding warrants, and (iii) the issuance and sale
of 49,000,000 common shares in the form of ADSs by us in this
offering at the initial public offering price of $8.00 per
ADS, after deducting the underwriting discounts and estimated
offering expenses payable by us (assuming the over-allotment
option is not exercised).
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You should read this table together with our consolidated
financial statements and the related notes included elsewhere in
this prospectus and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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As of September 30, 2010
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Actual
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Pro Forma
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Pro Forma as Adjusted
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(RMB)
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($)
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(RMB)
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($)
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(RMB)
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($)
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(In thousands)
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Series A preferred shares, $0.00005 par value,
62,142,800 shares authorized and 50,000,000 shares
issued and outstanding on an actual basis; nil authorized,
issued or outstanding on a pro forma and pro forma as adjusted
basis
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501,903
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75,017
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Warrants
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30,681
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4,585
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30,681
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4,585
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Equity (deficit):
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Share capital ($0.00005 par value, 937,857,200 shares
authorized, 155,000,000 shares issued and outstanding on an
actual basis, 205,000,000 shares issued and outstanding on
a pro forma basis and 257,389,800 issued and outstanding on
a pro forma as adjusted basis
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59
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9
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76
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11
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94
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14
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Share premium
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501,886
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75,015
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812,601
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121,456
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Reserves
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86,937
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12,994
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86,937
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12,994
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86,937
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12,994
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Retained earnings (deficit)
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(436,908
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)
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(65,303
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)
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(436,908
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)
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(65,303
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)
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(436,908
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)
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(65,303
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)
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Total equity (deficit)
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(349,912
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)
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(52,300
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)
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151,991
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22,717
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462,724
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69,161
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Total capitalization
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182,672
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27,302
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182,672
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27,302
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462,724
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|
69,161
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47
DILUTION
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 $5.85 per
ADS, to purchasers of ADSs in this offering.
The following table illustrates this dilution:
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Per Common share
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Per ADS
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Initial public offering price
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$
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1.00
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$
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8.00
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Net tangible book value as of September 30, 2010
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$
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(0.34
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)
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$
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(2.70
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)
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Pro forma net tangible book value as of September 30, 2010
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$
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0.11
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$
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0.89
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Increase in pro forma as adjusted net tangible book value
attributable to this offering
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$
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0.16
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$
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1.26
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Pro forma as adjusted net tangible book value after the offering
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$
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0.27
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$
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2.15
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Amount of dilution in pro forma as adjusted net tangible book
value to new investors in the offering
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$
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0.73
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$
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5.85
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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 $8.00 per ADS)
before deducting underwriting discounts and estimated offering
expenses. The total number of common shares does not include
common shares underlying the ADSs issuable pursuant to the
exercise of the over-allotment option granted to the
underwriters.
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Common Shares
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Purchased
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Total Consideration
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Average Price
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Average Price
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Number
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Percent
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Amount
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Percent
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Per Common Share
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Per ADS
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Existing shareholders
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208,389,800
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80.96
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%
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$
|
4,007,750
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7.56
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%
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|
$
|
0.02
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|
$
|
0.15
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New investors
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49,000,000
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|
|
|
19.04
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|
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|
49,000,000
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|
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|
92.44
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%
|
|
|
1.00
|
|
|
|
8.00
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|
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Total
|
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257,389,800
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|
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|
100
|
%
|
|
$
|
53,007,750
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|
|
|
100
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%
|
|
$
|
0.21
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
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.
49
EXCHANGE
RATE INFORMATION
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate
|
|
|
Period
|
|
|
|
|
|
|
Period
|
|
End
|
|
Average(1)
|
|
Low
|
|
High
|
|
Fiscal Year ended March 31, 2006
|
|
|
8.0167
|
|
|
|
8.1234
|
|
|
|
8.2765
|
|
|
|
8.0167
|
|
Fiscal Year ended March 31, 2007
|
|
|
7.7232
|
|
|
|
7.8843
|
|
|
|
8.0300
|
|
|
|
7.7232
|
|
Fiscal Year ended March 31, 2008
|
|
|
7.0120
|
|
|
|
7.4197
|
|
|
|
7.7345
|
|
|
|
7.0105
|
|
Fiscal Year ended March 31, 2009
|
|
|
6.8329
|
|
|
|
6.8532
|
|
|
|
7.0185
|
|
|
|
6.7800
|
|
Fiscal Year ended March 31, 2010
|
|
|
6.8258
|
|
|
|
6.8268
|
|
|
|
6.8371
|
|
|
|
6.8176
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
|
|
|
6.7815
|
|
|
|
6.8184
|
|
|
|
6.8323
|
|
|
|
6.7815
|
|
July
|
|
|
6.7735
|
|
|
|
6.7762
|
|
|
|
6.7807
|
|
|
|
6.7709
|
|
August
|
|
|
6.8069
|
|
|
|
6.7873
|
|
|
|
6.8069
|
|
|
|
6.7670
|
|
September
|
|
|
6.6905
|
|
|
|
6.7396
|
|
|
|
6.8102
|
|
|
|
6.6869
|
|
October
|
|
|
6.6705
|
|
|
|
6.6675
|
|
|
|
6.6912
|
|
|
|
6.6397
|
|
November
|
|
|
6.6670
|
|
|
|
6.6538
|
|
|
|
6.6892
|
|
|
|
6.6330
|
|
December (through December 3)
|
|
|
6.6628
|
|
|
|
6.6622
|
|
|
|
6.6630
|
|
|
|
6.6609
|
|
Source: Federal Reserve Statistical Release
|
|
(1)
|
Annual averages were calculated by using the average of the
exchange rates on the last day of each month during the relevant
year. Monthly averages are calculated by using the average of
the daily rates during the relevant month.
|
50
ENFORCEABILITY
OF CIVIL LIABILITIES
We were incorporated in the Cayman Islands in order to enjoy the
following benefits:
|
|
|
|
|
political and economic stability;
|
|
|
|
an effective judicial system;
|
|
|
|
a favorable tax system;
|
|
|
|
the absence of exchange control or currency
restrictions; and
|
|
|
|
the availability of professional and support services.
|
However, certain disadvantages accompany incorporation in the
Cayman Islands. These disadvantages include:
|
|
|
|
|
the Cayman Islands has a less developed body of securities laws
as compared to the United States and these securities laws
provide significantly less protection to investors; and
|
|
|
|
Cayman Islands companies may not have standing to sue before the
federal courts of the United States.
|
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:
|
|
|
|
|
recognize or enforce judgments of United States courts obtained
against us or our directors or officers predicated upon the
civil liability provisions of the securities laws of the United
States or any state in the United States; or
|
|
|
|
entertain original actions brought in each respective
jurisdiction against us or our directors or officers predicated
upon the securities laws of the United States or any state in
the United States.
|
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.
51
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.
52
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
You should read the following information in conjunction with
our consolidated financial statements and related notes and
Managements 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.
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, except number of shares and per share data)
|
|
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
|
)
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, except number of shares and per share data)
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
(53,565
|
)
|
|
|
(8,005
|
)
|
Loss and total comprehensive loss attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners of the Company
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
(91,960
|
)
|
|
|
(53,191
|
)
|
|
|
(7,950
|
)
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
(91,960
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
(0.07
|
)
|
|
|
(0.76
|
)
|
|
|
(1.53
|
)
|
|
|
(0.23
|
)
|
|
|
(0.61
|
)
|
|
|
(0.35
|
)
|
|
|
(0.05
|
)
|
Weighted average number of common shares used in loss per
share
calculations
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
80,555,600
|
|
|
|
104,166,600
|
|
|
|
129,166,600
|
|
|
|
129,166,600
|
|
|
|
122,916,800
|
|
|
|
148,998,200
|
|
|
|
148,998,200
|
|
Pro forma earnings per share
unaudited
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
0.78
|
|
|
|
0.11
|
|
|
|
|
|
|
|
0.05
|
|
|
|
0.01
|
|
Weighted average number of common shares used in pro forma
earnings per share
calculations
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
181,282,754
|
|
|
|
181,282,754
|
|
|
|
|
|
|
|
200,725,359
|
|
|
|
200,725,359
|
|
|
|
|
(1)
|
|
Includes share-based compensation
expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For the Six-Month Period Ended September
|
|
|
2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands)
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
21
|
|
|
|
|
|
|
|
920
|
|
|
|
137
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
539
|
|
|
|
81
|
|
|
|
|
|
|
|
4,222
|
|
|
|
631
|
|
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
576
|
|
|
|
86
|
|
|
|
|
|
|
|
2,094
|
|
|
|
313
|
|
General and administration expenses
|
|
|
8,964
|
|
|
|
5,421
|
|
|
|
2,348
|
|
|
|
351
|
|
|
|
1,272
|
|
|
|
16,553
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,964
|
|
|
|
5,421
|
|
|
|
3,606
|
|
|
|
539
|
|
|
|
1,272
|
|
|
|
23,789
|
|
|
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
(2)
|
|
Holders of our restricted shares
are entitled to participate in dividends on an equal basis with
holders of our common shares. As such dividends are not subject
to restriction as to use, the restricted shares are considered
participating and basic loss per share has been computed using
the two-class method as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For the Six-Month Period Ended September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands, except number of shares and
per share data)
|
|
Loss attributable to the owners of the Company for the period
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
(91,960
|
)
|
|
|
(53,191
|
)
|
|
|
(7,950
|
)
|
Less: amount allocated to restricted shares
|
|
|
4,907
|
|
|
|
34,666
|
|
|
|
31,917
|
|
|
|
4,770
|
|
|
|
16,604
|
|
|
|
974
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,693
|
)
|
|
|
(78,787
|
)
|
|
|
(197,885
|
)
|
|
|
(29,577
|
)
|
|
|
(75,356
|
)
|
|
|
(52,217
|
)
|
|
|
(7,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic and diluted
|
|
|
80,555,600
|
|
|
|
104,166,600
|
|
|
|
129,166,600
|
|
|
|
129,166,600
|
|
|
|
122,916,800
|
|
|
|
148,998,200
|
|
|
|
148,998,200
|
|
Basic and diluted loss per share
|
|
|
(0.07
|
)
|
|
|
(0.76
|
)
|
|
|
(1.53
|
)
|
|
|
(0.23
|
)
|
|
|
(0.61
|
)
|
|
|
(0.35
|
)
|
|
|
(0.05
|
)
|
For fiscal years 2008, 2009 and 2010, the effect of conversion
of the convertible redeemable preferred shares and the exercise
of share options and warrants have been excluded from the
computation of diluted loss per share as their inclusion would
be anti-dilutive.
|
|
|
(3)
|
|
Pro forma earnings per share for
the year ended March 31, 2010 and the six-month period
ended September 30, 2010, are computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For the Six-Month Period Ended September 30,
|
|
|
2010
|
|
2010
|
|
|
(RMB)
|
|
($)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands, except number of shares and
per share data)
|
|
Loss for the year/period-basic and diluted
|
|
|
(197,885
|
)
|
|
|
(29,577
|
)
|
|
|
(53,191
|
)
|
|
|
(7,950
|
)
|
Plus: loss on changes in fair value of convertible redeemable
preferred share
|
|
|
290,135
|
|
|
|
43,365
|
|
|
|
59,620
|
|
|
|
8,911
|
|
Plus: finance cost of dividend payment to preferred shareholders
|
|
|
5,417
|
|
|
|
810
|
|
|
|
4,333
|
|
|
|
648
|
|
Plus: Loss on modification of convertible redeemable preferred
shares
|
|
|
44,439
|
|
|
|
6,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income basis and diluted
|
|
|
142,106
|
|
|
|
21,240
|
|
|
|
10,762
|
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation basic
|
|
|
129,166,600
|
|
|
|
129,166,600
|
|
|
|
148,998,200
|
|
|
|
148,998,200
|
|
Plus: Convertible redeemable preferred shares
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Shares necessary to pay cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average common shares outstanding
basic and diluted
|
|
|
181,282,754
|
|
|
|
181,282,754
|
|
|
|
200,725,359
|
|
|
|
200,725,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share basic and diluted
|
|
|
0.78
|
|
|
|
0.11
|
|
|
|
0.05
|
|
|
|
0.01
|
|
55
Non-IFRS
Financial Data
The following table sets forth the reconciliation of adjusted
profit for the year/period, a non-IFRS financial measure, from
loss for the year/period, our most directly comparable financial
measure presented in accordance with IFRS, for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For the Six-Month Period Ended September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands)
|
|
Loss for the 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
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 from operations
excluding share-based compensation expenses, loss (gain) on
changes in fair value of convertible redeemable 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 profit
(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 convertible redeemable 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 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 total 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.
|
56
Operating
Data
The following table sets forth the number of new users added for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For 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
|
|
The following table sets forth the number of registered members
of our Maopao Community as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The following table sets forth total user downloads of our
single-user applications and content titles for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For 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
|
|
The following table sets forth our selected quarterly operating
data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 applications 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
|
|
57
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with our audited consolidated financial statements. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results and the timing of
selected events could differ materially from those anticipated
in these forward-looking statements as a result of various
factors, including those set forth under Risk
Factors and elsewhere in this prospectus.
Overview
We operate the leading mobile application store in China, as
measured by revenues in 2009, according to the Analysys Report.
On our Maopao application store, users can browse, download and
purchase a wide range of applications and content such as
single-player games, mobile music and books. In addition, we
have established a leading mobile social network community in
China, the Maopao Community, where we operate mobile social
games and provide applications and content with social network
functions to our registered members. Maopao enables mobile
applications and content to be downloaded and run on a variety
of mobile handsets with different hardware and operating system
configurations. We currently target the feature phone market,
which is the largest mobile phone segment in China, according to
the Analysys Report. We collaborate with handset companies to
pre-install Maopao on mobile handsets before shipment. From
January 1, 2007 to September 30, 2010, Maopao had
approximately 479 million cumulative users. Over the same
period, we offered over 770 applications and over
61,000 content titles in our Maopao application store and
the cumulative number of downloads reached 3.6 billion.
We generate revenues primarily through users purchases of
the applications and content offered on the Maopao application
store. A majority of these applications and content are
developed by third-party content providers, with the remaining
developed by us in-house. We collect payments primarily through
mobile service providers, which utilize mobile network
operators billing channels to collect payment for
users purchases on Maopao. Starting from the fiscal year
ended March 31, 2010, we also work with independent payment
processing agents to collect user payments through a variety of
payment channels, including prepaid cards, bank remittance and
online payments. Through such third-party payment channels, our
users can deposit funds into accounts they register with us and
then use such funds to purchase mobile applications and other
content through our virtual currency, the K Currency.
Currently only registered members of our Maopao Community
purchasing virtual items in mobile social games and social
network applications in the Maopao Community can pay through
K Currency. Although we have not historically collected a
significant portion of our sales proceeds through the
K Currency, we aim to significantly increase the use of
K Currency among our users in connection with the growth of
our registered membership base in the Maopao Community.
We share sales proceeds from Maopao with handset companies,
content providers and payment service providers. Costs
associated with payments under such sharing arrangements with
these industry participants account for most of our cost of
revenues.
We have achieved substantial growth since we launched Maopao in
2006. There were approximately 32.3 million,
379.6 million, 1,613.9 million downloads of
applications and content titles from Maopao in the fiscal years
ended March 31, 2008, 2009 and 2010, respectively, and
approximately 559.2 million and 1,554.6 million in the
six-month periods ended September 30, 2009 and 2010,
respectively. We have also established an active user base on
our own social network community, the Maopao Community, where
the number of registered members increased from approximately
1.5 million as of March 31, 2009 to approximately
44.6 million as of September 30, 2010.
Our revenues grew from RMB18.6 million in the fiscal year
ended March 31, 2008 to RMB544.3 million
($81.3 million) in the fiscal year ended March 31,
2010, representing a CAGR of 441.0%. Our revenues increased by
40.2% to RMB336.7 million ($50.3 million) in the
six-month period ended September 30, 2010 from
RMB240.1 million in the six-month period ended
September 30, 2009. We incurred a loss from operations of
RMB5.3 million in the fiscal year ended March 31, 2008
and achieved profit from operations of RMB37.6 million,
RMB124.0 million ($18.5 million), RMB65.3 million
and RMB12.8 million ($1.9 million) in the fiscal years
ended March 31, 2009 and 2010 and the six-month periods
ended September 30, 2009 and 2010, respectively. We
incurred
58
a loss of RMB10.6 million, RMB113.5 million,
RMB229.8 million ($34.3 million), RMB92.0 million
and RMB53.6 million ($8.0 million) in the fiscal years
ended March 31, 2008, 2009 and 2010 and the six-month
period ended September 30, 2009 and 2010, respectively,
which included non-cash charges on changes in the fair value of
our convertible redeemable preferred shares and warrants to
purchase our convertible redeemable preferred shares, and loss
on modification of the convertible redeemable preferred shares,
in the amounts of RMB4.4 million, RMB153.0 million,
RMB342.0 million ($51.1 million),
RMB159.7 million and RMB63.7 million
($9.5 million) in the fiscal years ended March 31,
2008, 2009 and 2010 and the six-month periods ended
September 30, 2009 and 2010, respectively. Such charges
will cease to impact our consolidated statements of
comprehensive income after the completion of this offering
because all convertible redeemable preferred shares will
automatically convert into our common shares and all warrants
are no longer exercisable then. Our adjusted profit for the
year, a non-IFRS financial measure, was RMB0.8 million,
RMB44.3 million and RMB115.7 million
($17.3 million) for fiscal years 2008, 2009 and 2010,
respectively, and RMB68.9 million and RMB24.1 million
($3.6 million) in the six-months period ended
September 30, 2009 and 2010, respectively. For more
information about adjusted profit, a financial measure not in
accordance with IFRS, please see Summary Consolidated
Financial and Operating Data.
Factors
Affecting Our Results of Operations
We have benefited from general conditions affecting the mobile
applications industry in China, including overall economic
growth, which has resulted in increases in disposable income and
discretionary consumer spending; government and industry
initiatives accelerating the technological advancement and
growth of the mobile handset and mobile applications industry;
the growing popularity and increasing reliance on mobile
handsets not only for communication needs, but also for sourcing
information and entertainment; and favorable demographic trends,
particularly the growing urbanization of young people who are
more inclined to use mobile applications and content. Our
results of operations will continue to be affected by such
general conditions.
Our results of operations are also directly affected by the
following specific factors, including:
Our
ability to increase the installed base of our application
stores
Our revenues and results of operations are significantly
affected by the overall size of our user base, which in turn is
determined by the size of the installed base of our Maopao
application store and demand for handsets manufactured by
handset companies that pre-install the Maopao application store.
We currently primarily target the feature phone market, which is
the largest mobile phone segment in China and is expected to
continue to dominate the Chinese handset market in the next
three years, according to the Analysys Report. In addition to
continuing our focus on the feature phone market, we launched a
version of Maopao for smart phones that runs on the Symbian
operating system in April 2010 and plan to develop more
application stores for other smart phones such as Android phones
once the market for such phones reaches a critical mass in
China. The fast growth of the Chinese handset market is
characterized by fragmentation of and rapid innovation in design
and functionality. We believe our continued success depends on
the continued growth of the feature phone market, the successful
development of our new mobile application stores for smart
phones and our ability to maintain and enhance our relationships
with handset companies and establish cooperation with additional
handset companies, particularly those with substantial market
share or high growth potential.
As of September 30, 2010, we had pre-installation
arrangements with over 440 handset companies and from
January 1, 2007 to September 30, 2010, Maopao had
approximately 479 million cumulative users. Our large user
base among feature phone users has contributed to our revenue
growth and has solidified our central position in the mobile
application ecosystem. We are also developing a version of
Maopao that can be downloaded over the air to handsets,
including some smart phones, so that users with existing
handsets without Maopao pre-installed can download and install
Maopao to gain access to the applications and content on Maopao.
We also intend to pre-install Maopao in smart phones, in
particular Android-based smart phones. User acceptance of
over-the-air
download of Maopao and our ability to pre-install Maopao in
smart phones will also affect our user base and results of
operations in the future.
59
Our
ability to continue to source and offer popular applications and
content and monetarize our large user base
We generate revenues primarily through users purchases of
mobile applications and other content offered on Maopao, which
substantially depends on our ability to source applications and
content that appeal to rapidly changing user preferences,
mobilize our user base into a community of active members and
appropriately price our content offerings. Our ability to
identify and offer applications and other content appealing to
our target users in China, such as popular local card games,
mobile social games, mobile books, dating-related applications
and other social network functions, has significantly
contributed to our revenue growth. We believe the popularity of
our applications and content on Maopao will affect the
stickiness of our users and their willingness to spend money on
such applications and content. As user preferences for mobile
applications and other content can change quickly, our results
of operations will significantly depend on our ability to
continually source, aggregate and update the applications and
content on Maopao to cater to users interest and attract
users to download and pay for such applications and content. In
particular, we believe our users have growing interest in mobile
community-based applications and content, and we have been
focusing on developing our Maopao Community, which features
applications and content with social network functions, such as
mobile social games.
We plan to enhance our mobile community content offerings with a
focus on mobile social games. Revenues from mobile social games
have grown rapidly since February 2010, when we launched Fantasy
of the Three Kingdoms, our first major mobile social game, and
we intend to further increase our offerings of mobile social
games to capture user interest. We expect to introduce several
new mobile social games over the next year. We also plan to
improve access to the Maopao Community by prioritizing the
placement of our community offerings within the Maopao store.
Furthermore, we are also in the process of expanding the usage
of our unified account management system so that each of our
users has a unique passport on Maopao which will facilitate
users access and use of Maopao Community functions. We
expect to incur additional operational costs as the expansion of
the Maopao Community will require more resources in terms of
personnel, server capacity and customer support. However, we do
not expect such additional costs to have a material impact on
our total operating expenses. We believe that the expansion of
community-based content and applications and the development of
the Maopao Community will have a positive effect on our
liquidity, capital resources and results of operations going
forward. However, we have limited experience in this area and a
number of factors could materially and adversely affect our
expansion plans. See Risk Factors Risks
Related to Our Business and Our Industry 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 usually determine the prices of applications and content on
the Maopao application store. In addition to paid applications
and content, we usually offer certain applications and content
free of charge to generate user interest. We believe our results
of operations will be significantly affected by our ability to
balance free offerings with paid offerings and set appropriate
price points in order to optimize monetarization of our user
base.
Our
ability to improve efficiency of sales proceeds collection from
mobile service providers and increase the use of third-party
payment channels
Currently, a substantial majority of our revenues is collected
through mobile service providers who utilize mobile network
operators billing channels to collect sales proceeds from
users purchases on the Maopao application store. Billing
and transmission failures, such as failure to transmit
MR data due to technical problems experienced with the
network or service providers failure to collect all or
part of sales proceeds due from network operators, adversely
affect such channels collection efficiency. Different
mobile service providers ability to avoid and address such
failures vary. When users make a purchase from the Maopao
application store, we have the flexibility to direct the
purchase to the mobile service provider of our choice. We aim to
maximize the results of collecting sales proceeds through mobile
service providers that we believe have better collection
performance, shorter payment period and lower transmission error
rate, and closely monitoring our relationships with mobile
service providers to lower collection risk. We share such sales
proceeds collected with mobile service providers, who in turn
have revenue-sharing arrangements with mobile network operators.
Payment channel cost was the
60
largest component of our cost of revenues in the fiscal years
ended March 31, 2008, 2009 and 2010 and the six-month
periods ended September 30, 2009 and 2010.
In addition, to diversify users payment options, we have
introduced our own form of virtual payment, the K Currency,
which users can purchase using a variety of means. Although we
have not historically collected a significant portion of sales
proceeds through the K Currency, we aim to significantly
increase the use of K Currency among our users. We have
entered into payment cooperation agreements with eight payment
processing agents and are actively promoting the use of
third-party payment channels among our users, such as offering
promotional K Currency to users making payment through
third-party payment channels. Because as a percentage of sales
amounts, costs charged by payment processing agents are
generally lower than costs charged by mobile service providers,
we believe the increasing utilization of third-party payment
channels will also help reduce our cost of revenues and can
potentially improve our profitability. Furthermore, as currently
users can only purchase virtual items in our social network
applications and mobile social games in the Maopao Community
with the K Currency, the percentage of sales proceeds
collected from third-party payment channels is also largely
affected by the growth of such community-based applications and
content titles. We plan to extend the availability of these
third-party payment channels to all our users for all
applications and content, in the form of a branded billing
gateway, which we named the Easy Mobile Pay System.
Our
ability to control costs related to handset companies and
content providers
We share sales proceeds with handset companies pre-installing
Maopao application store as well as content providers from whom
we license their applications and content. Aggregate amounts
paid to handset companies and content providers constituted a
significant portion of our total cost of revenues in the three
fiscal years ended March 31, 2010 and the six-month periods
ended September 30, 2009 and 2010. Therefore, any change in
our sales proceeds sharing percentage with the handset companies
and content providers, due to competition or otherwise, could
significantly affect our results of operations. For some
third-party applications or content titles, we make a one-time
payment to the content provider for all of its rights. If such
applications or content titles, or applications or content
titles developed by our in-house team, become popular with
users, we may achieve a higher profit margin compared to
applications or content titles with revenue sharing arrangements
with content providers.
In line with industry practice in the PRC, we share sales
proceeds with content providers and handset companies based on
user transaction data provided by mobile service providers, and
exact shared amounts are calculated based on corresponding
content or handset model identification information attached
with such data. To share such sales proceeds, handset companies
need to build in a specific authorization code we designate to
identify handset companies, as well as applications or content
titles, when pre-installing the Maopao application store.
Historically, when introducing a new handset model in a short
time frame, handset companies might have pre-installed our
application store to enhance handset features without having
obtained the authorized codes from us. In such circumstances,
these handsets could still access Maopao, but we would not be
able to properly recognize the handset model from which a
particular transaction is originated and, as a result, we would
not be able to share sales amounts with handset companies for
transactions effected through these handsets. Our track record
of sharing sales proceeds with handset companies and our
reputation in the industry promoted our brand and our capability
to generate additional revenue streams for handset companies. As
such, more handset companies worked with us to pre-install our
authorized codes when they pre-installed Maopao in the fiscal
year ended March 31, 2009 compared with the fiscal year
ended March 31, 2008. Therefore, during the same period,
the percentage of transactions effected through Maopao for which
we need to share sales proceeds with handset companies
increased, and our cost of revenues associated with payments to
handset companies increased accordingly.
Our
ability to address challenges associated with policy changes and
mobile network operators business practices
PRC government authorities and mobile network operators may from
time to time issue or revise rules, policies or guidelines,
which may affect our results of operations. For example, in
January 2010, China Mobile began to implement new measures,
under which any party offering mobile applications and content
that are embedded in handsets was required to introduce
additional notices and confirmations to users during the
purchase
61
of such offerings. In addition, previously, a single SMS code
could be used for multiple service offerings or partners, while
under these measures, users may need to send two confirmation
SMSs before a transaction can be effected, which makes it more
burdensome for users to purchase applications and content
through Maopao. As a result, some users make fewer purchases of
applications and content through Maopao. In addition, when more
SMSs need to be transmitted to effect the same volume of
transactions, we may face incremental billing and transmission
failures. As a result, any of these measures may lead to a
higher percentage of downloads that fail to result in payments,
which would affect our revenues and results of operations. 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. We
expect this will adversely affect our revenues and results of
operations in the quarter ended December 31, 2010.
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 in the
third quarter of 2010 and is expected to adversely affect our
revenue in the fourth quarter of 2010 as well. In response to
this issue, we are in the process of migrating our servers to
another hosting service provider that does not have such
interconnectivity problem. 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.
In addition, the key mobile network operators enhanced their
efforts in policing inappropriate mobile content and other
inappropriate activities in late 2009 and early 2010.
Consequently, mobile network operators unilaterally terminated
the 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 these mobile service providers charging users
service fees without their consents. We thus directed our users
to make payments through other mobile service providers, and we
experienced delays associated with such switches, which resulted
in a loss of revenues during the switch period. Furthermore,
different mobile service providers have different settlement
efficiencies and proceeds sharing ratios, therefore, as a result
of such switches our revenues and cost may be adversely affected.
Our
ability to achieve a high level of operating
efficiency
Our operating expenses include research and development
expenses, sales and marketing expenses and general and
administrative expenses, mainly consisting of salary and
benefits expenses, including share-based compensation expenses,
professional fees, training expenses, overhead and communication
expenses. Operating expenses excluding share-based compensation
increased from RMB5.2 million to RMB62.3 million
($9.3 million) from fiscal year 2008 to fiscal year 2010,
and from RMB23.4 million to RMB63.9 million
($9.6 million) from the six-month period ended
September 30, 2009 to the six-month period ended
September 30, 2010, as our business expanded rapidly in its
early years and we hired more personnel and incurred more
expenses to support our growth. Operating expenses excluding
share-based compensation decreased as a percentage of our total
revenues from 28.2% to 11.4% from fiscal year 2008 to fiscal
year 2010, primarily due to our ability to enhance operating
efficiency with the growth of our revenues. Operating expenses
excluding share-based compensation increased from 9.7% to 19.0%
from the six-month period ended September 30, 2009 to the
six-month period ended September 30, 2010, primarily as a
result of our increased headcount and sales and marketing
activities. After becoming a public company, we expect our
operating expenses to increase in absolute amount, and we aim to
maintain or enhance our operating efficiency when our business
further scales up.
Description
of Certain Statement of Operations Items
Revenues
Our revenues amounted to RMB18.6 million,
RMB207.2 million and RMB544.3 million
($81.3 million) in the fiscal years ended March 31,
2008, 2009 and 2010, respectively, and RMB240.1 million and
RMB336.7 million ($50.3 million) in the six-month
periods ended September 30, 2009 and 2010, respectively, as
we rapidly expanded our user base, resulting in increased user
purchases of mobile application and content offerings on Maopao.
62
In the three fiscal years ended March 31, 2010 and the
six-month periods ended September 30, 2009 and 2010, we
derived a substantial majority of our revenues from provision of
mobile applications and other content through our Maopao
application store, which we refer to as application store
revenues. A substantial majority of our sales proceeds were
collected through mobile service providers, who utilize mobile
network operators billing channels pursuant to their
agreements with network operators. Currently, our users can
purchase all of our single-user applications and content titles
and some social network applications offered in our Maopao
application store through mobile service providers billing
channels. Prior to April 2010, our users could also pay for
applications and virtual items offered through Maopao Community
through service providers, although revenues from such payment
were immaterial in the three fiscal years ended March 31,
2010. Starting from April 2010, we no longer provide such a
payment option. We recognize application store revenue on a
gross basis and recognize the commissions retained by the mobile
service providers and mobile network operators as cost of
revenues in the consolidated statements of comprehensive income.
We offer our own virtual currency, K Currency, for members
of our Maopao Community to purchase virtual items in our
community-based applications including our mobile social games
and social network applications. We refer to such revenues as
Maopao Community revenues through K Currency. Users can
purchase K Currency through a number of payment options,
including pre-paid phone cards, pre-paid game cards, bank debit
cards, wire-transfers and Alipay, and we collect sales amounts
through payment processing agents. We record Maopao Community
revenues through K Currency net of fees charged by payment
processing agents.
We also record certain fees and commissions we receive as other
revenues. For example, certain mobile service providers sell
their mobile applications and other content to mobile phone
users through Maopao, for which we charge a commission fee at a
percentage of the revenues that the mobile service providers
receive from mobile phone users with respect to such
applications and content. In addition, we place some of our
mobile applications and content, such as some simple card games
and mobile music and books we license, on websites or mobile
platforms of certain service providers, and charge a commission
when such mobile applications and content are sold.
The following table sets forth application store revenues,
Maopao Community revenues through K Currency and other
revenues, both in absolute amount and as a percentage of total
revenues, 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, except percentages)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application store revenues
|
|
|
14,799
|
|
|
|
79.6
|
%
|
|
|
196,308
|
|
|
|
94.7
|
%
|
|
|
515,768
|
|
|
|
77,090
|
|
|
|
94.8
|
%
|
|
|
223,670
|
|
|
|
93.1
|
%
|
|
|
312,790
|
|
|
|
46,751
|
|
|
|
92.9
|
%
|
Maopao Community revenues through K Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,578
|
|
|
|
535
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
19,549
|
|
|
|
2,922
|
|
|
|
5.8
|
|
Other revenues
|
|
|
3,795
|
|
|
|
20.4
|
|
|
|
10,931
|
|
|
|
5.3
|
|
|
|
24,912
|
|
|
|
3,723
|
|
|
|
4.6
|
|
|
|
16,469
|
|
|
|
6.9
|
|
|
|
4,342
|
|
|
|
649
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
18,594
|
|
|
|
100.0
|
%
|
|
|
207,239
|
|
|
|
100.0
|
%
|
|
|
544,258
|
|
|
|
81,348
|
|
|
|
100.0
|
%
|
|
|
240,139
|
|
|
|
100.0
|
%
|
|
|
336,681
|
|
|
|
50,322
|
|
|
|
100.0
|
%
|
Our significant revenue growth is primarily due to the growth in
user downloads of our applications and content titles, which in
turn is driven by an expansion of the installed base of Maopao
in mobile handsets, an increase in the diversity and quality of
our content portfolio and improvement in our ability to identify
and source content that appeals to our users. In the fiscal year
ended March 31, 2010 and the six-month period ended
September 30, 2010, the number of new users added to our
Maopao application store increased to approximately
220.5 million and 172.3 million, respectively, from
approximately 10.2 million in the fiscal year ended
March 31, 2008. In the month of September 2010, we
introduced 37 new applications and games and more than 5,600
content
63
titles including mobile music, books and videos. The following
table sets forth total user downloads of our single-user
applications and content titles for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Six-Month
|
|
|
For the Fiscal Year
|
|
Period Ended
|
|
|
Ended March 31,
|
|
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
|
|
We expect Maopao Community revenues through K Currency to
increase in the foreseeable future as we further develop our
Maopao Community and increase the use of K Currency among
our users. The following table sets forth our selected quarterly
Maopao Community operating data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended
|
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
2010
|
|
2010
|
|
|
(In millions)
|
|
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
|
|
Cost
of Revenues and Gross Margin
Our cost of revenues consists primarily of costs associated with
payments to industry participants and direct costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, except percentages)
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with payments to industry participants
|
|
|
9,645
|
|
|
|
99.6
|
%
|
|
|
128,357
|
|
|
|
95.3
|
%
|
|
|
341,542
|
|
|
|
51,049
|
|
|
|
96.4
|
%
|
|
|
146,396
|
|
|
|
97.4
|
%
|
|
|
219,022
|
|
|
|
32,736
|
|
|
|
92.7
|
%
|
Direct cost
|
|
|
36
|
|
|
|
0.4
|
|
|
|
6,330
|
|
|
|
4.7
|
|
|
|
12,809
|
|
|
|
1,914
|
|
|
|
3.6
|
|
|
|
3,846
|
|
|
|
2.6
|
|
|
|
17,199
|
|
|
|
2,571
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
9,681
|
|
|
|
100.0
|
%
|
|
|
134,687
|
|
|
|
100.0
|
%
|
|
|
354,351
|
|
|
|
52,963
|
|
|
|
100.0
|
%
|
|
|
150,242
|
|
|
|
100.0
|
%
|
|
|
236,221
|
|
|
|
35,307
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs associated with payments to industry participants
represent consideration paid to (i) mobile service
providers for collecting application store revenues;
(ii) handset companies for pre-installing Maopao onto their
handsets before shipment; and (iii) content providers for
licensing applications and content that we provide on the Maopao
application store.
As consideration for using their payment channels, we generally
share with mobile service providers a percentage of our sales
proceeds collected through them. Our cooperation agreements with
mobile service providers usually contain provisions relating to
proceeds sharing ratios, processing fee ratio and billing rate
of mobile network operators. We usually settle our balance with
the mobile service providers every month. Revenues generated
through our top three mobile service providers, the operating
companies of Kongzhong, Changsha Zhangxun and Tom.com,
contributed to approximately 22.2%, 15.2% and 12.8% of our total
revenues for the six-month period ended September 30, 2010,
respectively. Our contracts with mobile service providers are
usually for a term of one or two years. Our contracts with
operating companies of Kongzhong and Changsha Zhangxun expired
in November 2010, and we have been able to renew the contract
with Kongzhong on the same terms as the contract that expired.
We are in the process of finalizing the renewal of the
cooperation agreement with Changsha Zhangxun under substantially
similar terms. We are currently working with Changsha Zhangxun
under the original contractual terms pursuant to an oral
agreement and expect the renewal of the cooperation agreement to
be completed in December 2010.
64
We generally pay handset companies a percentage of the sales
proceeds we receive from payment channels that are generated
from their handsets. To share such sales proceeds, handset
companies need to build in a specific authorization code we
designate for each handset when pre-installing Maopao.
We usually pay content providers a percentage of the sales
proceeds we receive from payment channels that are derived from
their content. For certain applications and content titles, we
make a small one-time payment to the content provider to acquire
all associated rights, all of which we include in our cost of
revenues at the time of such acquisition. We do not capitalize
and amortize such payments over the life of the application or
content title because such applications and content titles
usually have short life cycles and the acquisition cost for each
application or content title is relatively low.
Direct costs include primarily fees we pay for outsourcing
design-related work for pre-installing the Maopao application
store on handsets, salaries and benefits for Maopao application
store operation employees, utilities, depreciation of equipment
and office expenses directly related to the operation of Maopao.
We purchased additional servers and other computer equipment
used for Maopao application store operation in the three months
ended March 31, 2010. Subsequent to such purchase, we
expect depreciation under our direct cost to increase due to
depreciation relating to such equipment. Direct costs increased
in absolute amount and as a percentage of our total revenues in
recent years primarily as a result of the increased outsourcing
costs associated with design-related work for pre-installing the
Maopao application store on handsets following the expansion of
the installed base of the Maopao application store and the
increased salaries and benefit expenses for Maopao application
store operation employees.
Our gross margins were 47.9%, 35.0% and 34.9% in the fiscal
years ended March 31, 2008, 2009 and 2010 respectively, and
37.4% and 29.8% in the six-month period ended September 30,
2009 and 2010, respectively. Our gross margin decreased in the
fiscal year ended March 31, 2009, compared to the fiscal
year ended March 31, 2008, primarily due to an increase in
costs associated with handset companies. This increase was
primarily due to more handset companies recognition of the
Maopao application stores monetization capability in
fiscal year 2009 compared to fiscal year 2008 and the resulting
increase of the percentage of their handsets pre-installing the
Maopao application store with authorized codes embedded. Our
gross margin decreased from the six-month period ended
September 30, 2009 to the same period in 2010, primarily
due to (i) an increase in payment channel costs associated
with mobile service provider as a result of policy changes by
China Mobile and other mobile network operators, (ii) an
increase in costs associated with content providers as our
mobile social games, for which we generally share a relatively
high percentage of sales proceeds with content providers, gained
popularity, and (iii) and increase in direct costs as a
result of increase in headcount and costs related to purchases
of servers and other equipment in connection with our expanded
operations of mobile social games.
Operating
Expenses
Our operating expenses consist of research and development
expenses, sales and marketing expenses and general and
administration expenses. The following table sets forth a
breakdown of our operating expenses in terms of amount and as a
percentage of our total operating expenses 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, except percentages)
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
1,283
|
|
|
|
9.0
|
%
|
|
|
12,902
|
|
|
|
36.9
|
%
|
|
|
26,900
|
|
|
|
4,021
|
|
|
|
40.8
|
%
|
|
|
11,103
|
|
|
|
45.0
|
%
|
|
|
24,831
|
|
|
|
3,711
|
|
|
|
28.3
|
%
|
Sales and marketing expenses
|
|
|
800
|
|
|
|
5.6
|
|
|
|
5,293
|
|
|
|
15.2
|
|
|
|
21,511
|
|
|
|
3,215
|
|
|
|
32.6
|
|
|
|
7,433
|
|
|
|
30.2
|
|
|
|
19,677
|
|
|
|
2,941
|
|
|
|
22.4
|
|
General and administration expenses
|
|
|
12,123
|
|
|
|
85.4
|
|
|
|
16,725
|
|
|
|
47.9
|
|
|
|
17,507
|
|
|
|
2,617
|
|
|
|
26.6
|
|
|
|
6,110
|
|
|
|
24.8
|
|
|
|
43,142
|
|
|
|
6,448
|
|
|
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,206
|
|
|
|
100.0
|
%
|
|
|
34,920
|
|
|
|
100.0
|
%
|
|
|
65,918
|
|
|
|
9,852
|
|
|
|
100.0
|
%
|
|
|
24,646
|
|
|
|
100.0
|
%
|
|
|
87,650
|
|
|
|
13,100
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
Our research and development expenses consist primarily of
salaries and benefits for personnel engaged in the research and
development of Maopao and mobile applications and content and
communication fees we paid for testing our research and
development work. Our share-based compensation charges allocated
under research and
65
development expenses amounted to approximately
RMB0.5 million ($81,000) and RMB4.2 million
($0.6 million) in the fiscal year ended March 31, 2010
and the six-month period ended September 30, 2010,
respectively. We did not have share-based compensation charge
allocated under research and development expenses for either of
the fiscal years ended March 31, 2008 and 2009. Research
and development expenses accounted for 6.9%, 6.2% and 4.9% of
our total revenues in the fiscal years ended March 31,
2008, 2009 and 2010 respectively, and 4.6% and 7.4% in the
six-month period ended September 30, 2009 and 2010,
respectively. Our research and development expenses increased in
recent years primarily due to our hiring additional engineers
and researchers and increases in fees we paid for outsourcing
research and development work. We expect that our research and
development expenses will further increase in the future as we
continue to devote resources to improve Maopao and the overall
user experience.
Sales and
marketing expenses
Our sales and marketing expenses primarily consist of salaries
and benefits for our sales and marketing staff, training
expenses for our sales team, travelling, entertainment and sales
office related expenses as well as marketing survey fees. Our
share-based compensation charges allocated under sales and
marketing expenses amounted to approximately RMB0.6 million
($86,000) and RMB2.1 million ($0.3 million) in the
fiscal year ended March 31, 2010 and the six-month period
ended September 30, 2010, respectively. We did not have
share-based compensation charge allocated under sales and
marketing expenses for either of the fiscal years ended
March 31, 2008 and 2009. Sales and marketing expenses
accounted for 4.3%, 2.6% and 4.0% of our total revenues in the
fiscal years ended March 31, 2008, 2009 and 2010,
respectively, and 3.1% and 5.8% in the six-month period ended
September 30, 2009 and 2010, respectively. Our sales and
marketing expenses increased in the absolute amount in recent
years, primarily due to the growth of our sales and marketing
team as well as an expansion of our marketing efforts. We expect
that our sales and marketing expenses will increase in absolute
amount as we further promote our Maopao brand name in future
periods and devote efforts to further expanding the handset
installation base of the Maopao application store.
General
and administration expenses
Our general and administration expenses primarily consist of
salaries and benefits for our general and administration,
finance and human resources personnel, training expenses,
depreciation and amortization expenses, office rentals,
professional service fees and other expenses incurred in
connection with general corporate purposes. Our share-based
compensation charges allocated under general and administration
expenses amounted to RMB9.0 million, RMB5.4 million
and RMB2.3 million ($0.3 million) in the fiscal years
ended March 31, 2008, 2009 and 2010, respectively, and
RMB1.3 million and RMB16.6 million ($2.5 million)
in the six-month period ended September 30, 2009 and 2010,
respectively. General and administration expenses accounted for
approximately 65.2%, 8.1% and 3.2% of our total revenues in the
fiscal years ended March 31, 2008, 2009 and 2010,
respectively, and 2.5% and 12.8% in the six-month period ended
September 30, 2009 and 2010, respectively. Our general and
administration expenses as a percentage of our total revenues in
the fiscal year ended March 31, 2008 was relatively high,
primarily due to RMB9.0 million of share-based compensation
relating to a Share Vesting Agreement we entered into with
individual shareholders of Xplane Ltd. as discussed below. We
expect our general and administration expenses to increase in
absolute amount as we incur additional expenses in connection
with the expansion of our business and our operations as a
publicly traded company, which include expenses related to
improving and maintaining our internal control over financial
reporting and complying with our reporting obligations.
Other
Gains (Losses)
Our other gains (losses) included primarily impairment on
investment in associates, interest income, government grants and
foreign exchange gains. In addition to bank interest income, we
also had income from change in fair value of investment at fair
value through profit or loss related to our investment in a
financial asset with a commercial bank, and income from loan
receivable related to an investment product purchased from a
commercial bank in China.
66
Finance
Costs
We incurred finance costs in the fiscal years ended
March 31, 2008 and 2010 and the six-month period ended
September 30, 2010. In the fiscal year ended March 31,
2008, the finance costs were related to issuance of our
Series A convertible redeemable preferred shares. In the
fiscal year ended March 31, 2010 and the six-month period
ended September 30, 2010, the finance cost was related to
distribution payable to our Series A convertible redeemable
preferred shares.
Share
of Results of Associates
We have three associates that are non-listed companies primarily
engaged in wireless technology development and related
applications in the PRC. The results and assets and liabilities
of these associates are incorporated in our consolidated
financial statements using the equity method of accounting.
Share-based
Compensation
In March 2010, we adopted our 2010 Share Incentive Plan, or
the 2010 Plan. The maximum number of shares that may be issued
under the 2010 Plan is 15,000,000 shares. As of the date of
this prospectus, the aggregate number of our common shares
underlying our outstanding options under the 2010 Plan is
11,149,400. The option holders are not entitled to dividends nor
do they have voting rights.
On March 1, 2010, we granted an aggregate of
6,385,400 share options to executive officers and other
employees with exercise prices of $0.26 per share having
various vesting provisions over four years. On April 1,
2010, Xplane Ltd. agreed to award 2,467 of its restricted shares
to several specified employees of our company. On the same day,
we also granted 1,443,600 share options to our employees.
The total estimated compensation cost relating to the above
April grants is approximately RMB73 million
($10.9 million). On September 15, 2010, we granted an
aggregate of 3,320,400 share options with exercise prices of
$0.26 per share to executive officers and other employees.
On August 2, 2007, we entered into a Share Vesting
Agreement with Xplane Ltd. and each of the then individual
shareholders of Xplane Ltd. Pursuant to this agreement, among
the 150,000,000 common shares owned by Xplane Ltd., we have the
right to repurchase 75,000,000 shares, or restricted
shares, at the par value of $0.00005 per share from Xplane
Ltd., in the event of voluntary or involuntary termination of
the individual shareholders employment with us. The
repurchase right terminates in 36 equal monthly installments.
The holders of the restricted shares retain voting and dividend
rights but are restricted to sell such non-vested restricted
shares. This arrangement has been accounted for as a reverse
share split followed by the grant of a restricted share award
under a performance-based plan due to the fact that each of the
then individual shareholders of Xplane Ltd. is also our
employee. This has resulted in total compensation cost of
approximately RMB16.4 million that is amortized on a graded
basis over the restricted shares vesting period of
36 months.
In the fiscal years ended March 31, 2008, 2009 and 2010, we
had share-based compensation charges of RMB9.0 million,
RMB5.4 million, RMB3.6 million, respectively, and
RMB1.3 million and RMB23.8 million ($3.6 million)
in the six-month period ended September 30, 2009 and 2010,
respectively. The share-based compensation expense recognized
during these three fiscal years and the six month periods ended
September 30, 2009 and 2010 was as follows:
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For the Fiscal Year Ended March 31,
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For the Six-Month Period Ended September 30,
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2008
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2009
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2010
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2009
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2010
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(RMB)
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(RMB)
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(RMB)
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($)
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(RMB)
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(RMB)
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($)
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(In thousands)
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Cost of revenues
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143
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21
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920
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137
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Research and development expenses
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|
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539
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81
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4,222
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631
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Sales and marketing expenses
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576
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86
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2,094
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313
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General and administration expenses
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8,964
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5,421
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2,348
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351
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1,271
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16,553
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2,474
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Total
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8,964
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5,421
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3,606
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539
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1,272
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23,789
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3,555
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67
Information related to our option grants is set forth below.
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Weighted-Average
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Fair Value of the
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Common Shares
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Underlying the
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Grant Date
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Number of Options
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Options as of the
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Fair Value
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Grant Date
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Granted
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Exercise Price
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Grant Date
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Valuation Type
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of Option
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March 1, 2010
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6,385,400
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$
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0.26
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$
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1.302
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Retrospective
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$
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1.100
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April 1, 2010
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1,443,600
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$
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0.26
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|
|
$
|
1.295
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|
Retrospective
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$
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1.100
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September 15, 2010
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3,320,400
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|
$
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0.26
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|
|
$
|
1.490
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|
|
Retrospective
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|
$
|
1.273
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|
On April 1, 2010, Xplane Ltd. awarded 2,467 restricted
shares to certain of our employees.
Taxation
Cayman
Islands
We are incorporated in the Cayman Islands. Under the current law
of the Cayman Islands, we are not subject to income or capital
gains tax. In addition, payment of dividends by us to our
shareholders is not subject to withholding tax in the Cayman
Islands.
China
PRC
Enterprise Income Tax, or EIT
Prior to January 1, 2008, companies established in China
were generally subject to a state and local EIT at statutory
rates of 30% and 3% respectively. Our SPE, Hangzhou Sky, was
established in 2005 and qualified as a software
enterprise in 2007. Under the PRC tax laws and regulations
then-effective, an enterprise qualified as a software
enterprise was entitled to an exemption from EIT for the
first two profitable years and a 50% reduction of its applicable
EIT rate for the subsequent three years, Hangzhou Sky was thus
entitled to a full exemption from the EIT in 2008 and 2009 and a
50% reduced EIT rate from 2010 to 2012.
On March 16, 2007, the National Peoples Congress of
China enacted a new enterprise income tax law, i.e. the PRC
Enterprise Income Tax Law, which took effect beginning
January 1, 2008. On December 6, 2007, the State
Council also adopted the Implementing Rules for the Enterprise
Income Tax Law, or the Implementing Rules, which also took
effect beginning January 1, 2008. Under the PRC Enterprise
Income Tax Law, foreign invested enterprises, or FIEs, and
Chinese domestic companies are subject to EIT at a uniform rate
of 25%. Our PRC subsidiaries and SPEs other than Hangzhou Sky
are currently subject to the EIT rate of 25%.
Preferential tax treatments will continue to be granted to
entities that are classified as high and new technology
enterprises strongly supported by the State or that
conduct business in encouraged sectors, whether FIEs or domestic
companies. On February 22, 2008, the Ministry of Finance
and the State Administration of Taxation, or the SAT,
promulgated the Notice on Several Preferential Policies in
Respect of Enterprise Income Tax, or Notice No. 1,
reiterating the policy that a software enterprise newly
established within China may, upon determination, be exempted
from income taxes for its first two profit-making years and
shall be subject to the income tax at half the standard rate for
the next three years. On April 24, 2009, the Ministry of
Finance and SAT promulgated the Notice on Several Issues
Relevant to the Implementation of the Preferential Policies on
Enterprise Income Tax, which states that, the software
enterprises and the integrated circuit production enterprises
established prior to the end of 2007 may, upon
certification, enjoy the preferential policies on the EIT
reductions and exemptions within specified periods as provided
in Notice No. 1. Therefore, Hangzhou Sky may continue to
enjoy an exemption from the 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. In
addition, Hangzhou Sky was qualified as a high and new
technology enterprise in 2008, which entitled it to a 15%
preferential EIT rate from 2008 to 2010. Hangzhou Sky elects to
enjoy the preferential tax treatment as a software
enterprise.
However, continued qualification as a high and new
technology enterprise is subject to a review every three
years by the relevant government authorities in China, and
continued qualification as a software enterprise is
68
subject to an annual assessment by the relevant government
authorities in China. Consequently, there is no assurance that
Hangzhou Sky will continue to meet the qualifications or that
the relevant government authorities will not revoke Hangzhou
Skys high and new technology enterprise or
software enterprise statuses in the future. Any
increase in Hangzhou Skys EIT rate may have a material
adverse effect on our results of operations.
In addition, under the PRC Enterprise Income Tax Law and the
Implementing Rules, 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% as we are a
non-resident enterprise incorporated outside of the PRC, unless
there is a tax treaty with China that provides for a different
withholding arrangement. Distributions of earnings generated
before January 1, 2008 are exempt from PRC withholding tax.
The PRC Enterprise Income Tax Law provides that enterprises
established outside 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. We cannot assure you that we will
not be deemed to be a PRC resident enterprise under the PRC
Enterprise Income Tax Law and be subject to the PRC enterprise
income tax at the rate of 25% on our worldwide income. See
Risk Factors Risks Related to Doing Business
in China 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.
PRC
Business Tax
Taxpayers providing taxable services in China are required to
pay a business tax at a statutory tax rate of 5% of their
revenues. Pursuant to relevant tax rules, a 3% business tax rate
is applicable to each of Hangzhou Sky, Mijia and Fanyi with
respect to its business of value-added telecommunications
services that falls under the definition of value-added
telecommunications services under the Catalog for
Classifications of Telecommunications Business.
Critical
Accounting Policies and Estimates
We prepare our financial statements in conformity with IFRS,
which requires us to make judgments, estimates and assumptions.
We continually evaluate these estimates and assumptions based on
the most recently available information, our own historical
experience and various other assumptions that we believe to be
reasonable under the circumstances. Since the use of estimates
is an integral component of the financial reporting process,
actual results could differ from our expectations as a result of
changes in our estimates.
An accounting policy is considered critical if it requires an
accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time such estimate is
made, and if different accounting estimates that reasonably
could have been used, or changes in the accounting estimates
that are reasonably likely to occur periodically, could
materially impact the consolidated financial statements. We
believe that the following accounting policies involve a higher
degree of judgment and complexity in their applications and
require us to make significant accounting estimates. The
following descriptions of critical accounting policies,
judgments and estimates should be read in conjunction with our
consolidated financial statements and other disclosures included
in this prospectus.
Revenue
Recognition
Application
Store Revenues
Revenue is recognized when it is probable that the economic
benefits will flow to us, and revenue can be measured reliably
and collectability is reasonably assured.
We generate a majority of revenues from the sale of a wide range
of single user mobile applications and content, such as
single-player games, mobile music and books and other multimedia
content to mobile handset users. Users can download and purchase
the mobile applications and content from Maopao. We have
cooperation agreements with handset companies to pre-install
Maopao on mobile handsets before they reach users. The
applications and content are delivered to users through mobile
network operators in China. We contract with mobile
69
service providers, who further contract with and utilize mobile
network operators billing channels, to collect payment
from our users on our behalf. Mobile service providers and
mobile network operators, through the mobile service providers,
are entitled to a percentage of the gross sales proceeds
collected from our users by the mobile network operators.
For application store revenues, we recognize revenues on a gross
basis and recognize the commissions retained by mobile service
providers and mobile network operators as a cost of revenues.
Maopao
Community Revenues through K Currency
As an alternative to utilizing mobile service providers, we also
contract with independent payment processing agents to process
prepaid cards or online payment solutions into user accounts.
User accounts are charged up with cash credit, which may be
converted into our own virtual currency, K Currency. Users can
use K Currency to purchase virtual items in mobile social
games and social network applications in the Maopao Community.
As Maopao Community revenues through K Currency are derived from
the purchase of virtual items having an unlimited life, such
revenues are initially deferred and are subsequently recognized
in future periods based on historical customer retention rates,
which is the rate users remain active in the Maopao Community,
ranging from one to twelve months. Maopao Community revenues
through K Currency do not include commission we pay to agents
for processing user prepayments. A substantial majority of
Maopao Community revenues are collected through K Currency.
Other
Revenues
We also allow mobile service providers to sell their mobile
applications to mobile users through Maopao. We charge the
mobile service providers commissions based on a percentage of
the sales proceeds generated by the mobile service providers. In
addition, we place some of our mobile applications and content,
such as some simple card games and mobile music and books we
license, on websites or mobile platforms of certain service
providers, and charge a commission when such mobile applications
and content are sold. We recognize revenue upon receipt of
monthly statements from the mobile service providers.
Share-based
Compensation
We use a fair-value based method in accordance with IFRS to
account for share-based compensation. We utilized the discounted
cash flow method, or DCF, under the income approach for the
valuation of our enterprise value. The income approach measures
the current value of a business or asset by calculating the
present value of its future economic benefits such as cash
earnings, cost savings, tax deductions, and proceeds from
disposition. Value indications are developed by discounting
expected cash flows to their present value at a rate of return
that incorporates the risk-free rate for the use of funds, the
expected rate of inflation and risks associated with the
particular investment. The discount rate selected is generally
based on rates of return available from alternative investments
of similar type and quality as of the valuation date.
The DCF methodology views a company as an operating entity, with
the principal focus of the analysis on the operating
entitys ability to generate debt-free cash flow in the
future. Debt-free cash flow is defined as cash that is available
either to invest in new or existing businesses or to distribute
to investors. Reasonable projections of revenues, expenses, and
working capital and capital expenditures form the basis for
estimating the future debt-free cash flows that a company will
likely generate from its existing business.
A market derived weighted-average cost of capital, or WACC, was
used in determining the appropriate discount rate in the
valuation. At different valuation dates, the WACC was calculated
to be between 18% and 33%.
We also applied discounts for lack of marketability, or DLOM, to
our equity value to reflect the fact that there is no ready
public market for our shares as we are a closely held private
company. Based on the calculation of the put option and with
consideration of timing to an expected initial public offering,
the DLOM is estimated at 5% to 27% as at different valuation
dates.
70
Share
Options
Valuation Assumptions:
We estimated the fair
value of stock options using the Black-Scholes option pricing
valuation model using the following assumptions:
Expected Volatility:
We estimated the expected
volatility based on the historical daily share price volatility
of comparable companies over a period commensurate with the
expected life of the options.
Expected Term:
We estimated the expected term
based on the timing of the expected public offering, the vesting
schedule and the life of the options.
Risk-Free Interest Rate:
We based the
risk-free interest rate on the yield to maturity of the
U.S. Treasury bond yield curve as of the valuation date and
for a similar duration as the expected life of the options.
We review our estimates of the number of options that are
expected to ultimately vest and, to the extent necessary, make
adjustments to those estimates. Our share-based compensation
expense may change based on changes to these estimates.
Restricted
Shares
The fair market value of the restricted shares granted in August
2007 was RMB0.22 ($0.03) per share based on the fair value of
our underlying common shares on the grant date. The excess of
the fair market value of the restricted shares over the par
value resulted in total compensation cost of approximately
RMB16.4 million ($2.5 million) that is amortized over
the vesting period of 36 months.
The fair value of the Xplane Ltd. restricted shares granted in
April 2010 was RMB25,710 ($3,702) per share. We recognize the
total amount of approximately RMB62.4 million
($9.3 million) as compensation expense over the five year
vesting period.
Convertible
Redeemable Preferred Shares and Warrants
We have elected to designate our Series A convertible
redeemable preferred shares and warrants as financial
liabilities carried at fair value through profit or loss. They
are measured at fair value, with changes in fair value
recognized directly in profit or loss.
The convertible redeemable preferred shares and warrants do not
have a quoted price in an active market. Determining the fair
value of convertible redeemable preferred shares and warrants
requires making complex and subjective judgments regarding
projected financial and operating results, the unique business
risks, the liquidity of the common shares and the operating
history and prospects at the time of issuance. Therefore, these
fair values are inherently uncertain and highly subjective.
Management estimates and assumptions are reviewed periodically
and are adjusted if necessary. Changes to these estimates and
assumptions could result in significant change in the fair value
of the convertible redeemable preferred shares and warrants.
On March 1, 2010, we and shareholders of Series A
convertible redeemable preferred shares entered into an
amendment agreement (the Amendment) pursuant to
which we agreed to sell 5,000,000 common shares to
Series A shareholders at par value $0.00005 per share
for total cash consideration of US$250 and the Series A
shareholders shall waive their certain rights relating to option
grants. We recorded the intrinsic value of the
5,000,000 shares or RMB44,441,000 ($6,642,000), equal to
the fair value of the common shares on March 1, 2010 less
the exercise price of $250, as a loss on modification of
convertible redeemable preferred shares.
We utilized the DCF method under the income approach for the
valuation of our enterprise value. Please refer to
Share-based Compensation for description
of the methodology, assumptions and estimates used in the
valuation of enterprise value. We then used the Black-Scholes
option pricing model in the valuation of the convertible
redeemable preferred shares and warrants. In calculating the
fair value of the warrants, we used multiple inputs, including
the fair value of the preferred shares, warrant exercise price,
expected life, risk free rate, dividend yield and expected
volatility.
71
The change in fair value of Series A preferred shares and
warrants was primarily due to the growth of our business and our
enhanced ability to generate operating cash flow. The fair value
attributable to the change in credit risk of Series A
preferred shares was not material.
Taxation
We estimate income tax expense for each jurisdiction in which we
operate and for each period presented, which includes estimating
current tax exposure as well as assessing realizable deferred
tax assets and deferred tax liabilities.
As of March 31, 2008, 2009 and 2010, our deferred tax
assets were nil, RMB1.2 million and RMB4.4 million
(US$0.7 million), respectively, and RMB3.0 million and
RMB4.4 million ($0.7 million), respectively as of
September 30, 2009 and 2010, primarily resulting from
temporary differences between accounting and tax bases. We
recognize deferred income taxes for temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the consolidated financial statements, and
net operating loss carry forwards and credits by applying
enacted statutory tax rates applicable to future years. In the
event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of their recorded
amount, an adjustment to the carrying amount of our deferred tax
assets would increase our net income in the period such
determination was made. Likewise, if we determined that we would
not be able to realize all or part of our net deferred tax
assets in the future, an adjustment to the carrying amount of
our deferred tax assets would be charged to our consolidated
statements of comprehensive income in the period such
determination is made. We considers positive and negative
evidence to determine whether some portion or all of the
deferred tax assets will more likely than not be realized. This
assessment considers, among other matters, the nature, frequency
and severity of recent losses, forecasts of future
profitability, the duration of statutory carryforward periods,
our experience with tax attributes expiring unused and tax
planning alternatives. Our ability to realize deferred tax
assets depends on our ability to generate sufficient taxable
income within the carryforward periods provided for in the tax
law. No deferred tax asset has been recognized in respect of tax
losses of RMB1.2 million ($0.2 million) as of
March 31, 2010 due to the unpredictability of future profit
streams.
Internal
Control Over Financial Reporting
Prior to this offering, we have been a private company with
limited accounting and other resources with which to address our
internal controls and procedures. In connection with the
preparation and external audit of our consolidated financial
statements as of March 31, 2007, 2008 and 2010 and for the
three-year period ended March 31, 2010, we noted two
material weaknesses and two significant deficiencies in our
internal control over financial reporting. The material
weaknesses identified by us were (i) the 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.
We have engaged in, and will continue to engage in, substantial
efforts to address these material weaknesses and significant
deficiencies in our internal control over financial reporting.
We have taken or plan to take the following ongoing initiatives
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting
subsequent to March 31, 2010:
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providing further training to our financial and accounting staff
to enhance their knowledge of IFRS; and
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|
|
hiring competent internal IT auditor to upgrade our computer
systems and monitor the performance of our system on a
continuous basis and formulating detailed plans to address each
key aspect of design deficiencies identified with respect to our
computer system after further internal analysis and discussion.
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In addition, we plan to engage an advisory firm to advise us on
compliance with requirements under the Section 404 of the
Sarbanes-Oxley Act. We expect to incur an aggregate cost of
approximately RMB4.5 million ($0.7 million) in
connection with our internal control compliance efforts in the
two fiscal years ending March 31, 2011 and 2012.
72
Consolidated
Results of Operations
The following table sets forth a summary of our consolidated
results of operations by amount and as a percentage of our total
revenues for the periods indicated. This information should be
read together with our audited consolidated financial statements
and related notes and unaudited condensed financial statements
and related notes included elsewhere in this prospectus. The
operating results in any period are not necessarily indicative
of the results that may be expected for any future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
For the Six-Month Period Ended September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
(RMB)
|
|
(%)
|
|
(RMB)
|
|
(%)
|
|
(RMB)
|
|
($)
|
|
(%)
|
|
(RMB)
|
|
(%)
|
|
(RMB)
|
|
($)
|
|
(%)
|
|
|
(In thousands, except percentages)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application store revenues
|
|
|
14,799
|
|
|
|
79.6
|
%
|
|
|
196,308
|
|
|
|
94.7
|
%
|
|
|
515,768
|
|
|
|
77,090
|
|
|
|
94.8
|
%
|
|
|
223,670
|
|
|
|
93.1
|
%
|
|
|
312,790
|
|
|
|
46,751
|
|
|
|
92.9
|
%
|
Maopao Community revenues through K Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,578
|
|
|
|
535
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
19,549
|
|
|
|
2,922
|
|
|
|
5.8
|
|
Other revenues
|
|
|
3,795
|
|
|
|
20.4
|
|
|
|
10,931
|
|
|
|
5.3
|
|
|
|
24,912
|
|
|
|
3,723
|
|
|
|
4.6
|
|
|
|
16,469
|
|
|
|
6.9
|
|
|
|
4,342
|
|
|
|
649
|
|
|
|
1.3
|
|
Total revenues
|
|
|
18,594
|
|
|
|
100.0
|
|
|
|
207,239
|
|
|
|
100.0
|
|
|
|
544,258
|
|
|
|
81,348
|
|
|
|
100.0
|
|
|
|
240,139
|
|
|
|
100.0
|
|
|
|
336,681
|
|
|
|
50,322
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
(9,681
|
)
|
|
|
(52.1
|
)
|
|
|
(134,687
|
)
|
|
|
(65.0
|
)
|
|
|
(354,351
|
)
|
|
|
(52,963
|
)
|
|
|
(65.1
|
)
|
|
|
(150,242
|
)
|
|
|
(62.6
|
)
|
|
|
(236,221
|
)
|
|
|
(35,307
|
)
|
|
|
(70.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,913
|
|
|
|
47.9
|
|
|
|
72,552
|
|
|
|
35.0
|
|
|
|
189,907
|
|
|
|
28,385
|
|
|
|
34.9
|
|
|
|
89,897
|
|
|
|
37.4
|
|
|
|
100,460
|
|
|
|
15,015
|
|
|
|
29.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(1,283
|
)
|
|
|
(6.9
|
)
|
|
|
(12,902
|
)
|
|
|
(6.2
|
)
|
|
|
(26,900
|
)
|
|
|
(4,021
|
)
|
|
|
(4.9
|
)
|
|
|
(11,103
|
)
|
|
|
(4.6
|
)
|
|
|
(24,831
|
)
|
|
|
(3,711
|
)
|
|
|
(7.4
|
)
|
Sales and marketing expenses
|
|
|
(800
|
)
|
|
|
(4.3
|
)
|
|
|
(5,293
|
)
|
|
|
(2.6
|
)
|
|
|
(21,511
|
)
|
|
|
(3,215
|
)
|
|
|
(4.0
|
)
|
|
|
(7,433
|
)
|
|
|
(3.1
|
)
|
|
|
(19,677
|
)
|
|
|
(2,941
|
)
|
|
|
(5.8
|
)
|
General and administration expenses
|
|
|
(12,123
|
)
|
|
|
(65.2
|
)
|
|
|
(16,725
|
)
|
|
|
(8.0
|
)
|
|
|
(17,507
|
)
|
|
|
(2,617
|
)
|
|
|
(3.2
|
)
|
|
|
(6,110
|
)
|
|
|
(2.5
|
)
|
|
|
(43,142
|
)
|
|
|
(6,448
|
)
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(14,206
|
)
|
|
|
(76.4
|
)
|
|
|
(34,920
|
)
|
|
|
(16.9
|
)
|
|
|
(65,918
|
)
|
|
|
(9,852
|
)
|
|
|
(12.1
|
)
|
|
|
(24,646
|
)
|
|
|
(10.3
|
)
|
|
|
(87,650
|
)
|
|
|
(13,100
|
)
|
|
|
(26.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) from operations
|
|
|
(5,293
|
)
|
|
|
(28.5
|
)
|
|
|
37,632
|
|
|
|
18.2
|
|
|
|
123,989
|
|
|
|
18,532
|
|
|
|
22.8
|
|
|
|
65,251
|
|
|
|
27.2
|
|
|
|
12,810
|
|
|
|
1,915
|
|
|
|
3.8
|
|
Other gains
|
|
|
417
|
|
|
|
2.3
|
|
|
|
857
|
|
|
|
0.4
|
|
|
|
3,531
|
|
|
|
528
|
|
|
|
0.6
|
|
|
|
804
|
|
|
|
0.3
|
|
|
|
10,180
|
|
|
|
1,522
|
|
|
|
3.1
|
|
Finance costs
|
|
|
(1,329
|
)
|
|
|
(7.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
(810
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,333
|
)
|
|
|
(648
|
)
|
|
|
(1.3
|
)
|
Share of results of associates
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
*
|
|
|
(1,255
|
)
|
|
|
(188
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,735
|
)
|
|
|
(409
|
)
|
|
|
(0.9
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
(4,156
|
)
|
|
|
(22.4
|
)
|
|
|
(134,616
|
)
|
|
|
(65.0
|
)
|
|
|
(290,135
|
)
|
|
|
(43,365
|
)
|
|
|
(53.3
|
)
|
|
|
(160,913
|
)
|
|
|
(67.0
|
)
|
|
|
(59,620
|
)
|
|
|
(8,911
|
)
|
|
|
(17.7
|
)
|
Gain (loss) on changes in fair value of warrants
|
|
|
(239
|
)
|
|
|
(1.3
|
)
|
|
|
(18,423
|
)
|
|
|
(8.9
|
)
|
|
|
(7,548
|
)
|
|
|
(1,128
|
)
|
|
|
(1.4
|
)
|
|
|
1,176
|
|
|
|
0.5
|
|
|
|
(4,051
|
)
|
|
|
(605
|
)
|
|
|
(1.2
|
)
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,439
|
)
|
|
|
(6,642
|
)
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(10,600
|
)
|
|
|
(57.0
|
)
|
|
|
(114,633
|
)
|
|
|
(55.3
|
)
|
|
|
(221,274
|
)
|
|
|
(33,073
|
)
|
|
|
(40.7
|
)
|
|
|
(93,682
|
)
|
|
|
(39.0
|
)
|
|
|
(47,749
|
)
|
|
|
(7,136
|
)
|
|
|
(14.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
1,180
|
|
|
|
0.6
|
|
|
|
(8,528
|
)
|
|
|
(1,275
|
)
|
|
|
(1.6
|
)
|
|
|
1,722
|
|
|
|
0.7
|
|
|
|
(5,817
|
)
|
|
|
(869
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year/period
|
|
|
(10,600
|
)
|
|
|
(57.0
|
)
|
|
|
(113,453
|
)
|
|
|
(54.7
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
(42.2
|
)
|
|
|
(91,960
|
)
|
|
|
(38.3
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
(15.9
|
)
|
Total comprehensive loss for the year/period
|
|
|
(10,600
|
)
|
|
|
(57.0
|
)%
|
|
|
(113,453
|
)
|
|
|
(54.7
|
)%
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
(42.2
|
)%
|
|
|
(91,960
|
)
|
|
|
(38.3
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
(15.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month
Period Ended September 30, 2010 Compared to Six-Month
Period Ended September 30, 2009
Revenues.
Our revenues increased by 40.2%, or
RMB96.5 million, to RMB336.7 million
($50.3 million) in the six-month period ended
September 30, 2010 from RMB240.1 million in the
six-month period ended September 30, 2009, primarily due to
an increase in our application store revenues and Maopao
Community revenues through K Currency, partially offset by a
decrease in other revenues.
Our application store revenues increased by 39.8%, or
RMB89.1 million, from RMB223.7 million in the
six-month period ended September 30, 2009 to
RMB312.8 million ($46.8 million) in the six-month
period ended
73
September 30, 2010, primarily due to an increase in the
number of downloads of applications and content titles from
Maopao from 559.2 million in the six-month period ended
September 30, 2009 to 1,554.6 million in the six-month
period ended September 30, 2010 as we increased the
installed base of Maopao and offered more applications and
content catering to user demand through our application store.
Our cumulative number of users from January 1, 2007
increased from 174.5 million as of September 30, 2009
to 478.9 million as of September 30, 2010. Our average
revenue per download decreased from the six-month period ended
September 30, 2009 to the same period in 2010, primarily
due to the introduction of new measures by China Mobile and
other mobile network operators that adversely affected the
number of downloads for which we can recognize revenues. See
Factors Affecting Our Results of
Operations Our ability to address challenges
associated with policy changes and mobile network
operators business practices. In addition, we
introduced more packages of applications and content that users
can download for a flat fee, which also contributed in the
higher growth rate of the number of downloads, compared to the
growth of revenues in this period. The price we charged for our
application and content offerings did not change between these
two periods.
We launched the K Currency in April 2009; however, we did not
generate a meaningful amount of revenues through K Currency in
the six-month period ended September 30, 2009 because we
had not launched any mobile social games and our other social
networking application offerings were also very limited in this
period. We generated Maopao Community revenues through K
Currency of RMB19.5 million ($2.9 million) in the
six-month period ended September 30, 2010. The increase is
primarily due to the successful launch of mobile social games
such as the Fantasy of the Three Kingdoms.
Our other revenues decreased by 73.6%, or RMB12.1 million,
from RMB16.5 million in the six-month period ended
September 30, 2009 to RMB4.3 million
($0.7 million) in the six-month period ended
September 30, 2010, primarily because of the termination of
our WAP billing business and a reduction of platform services to
offer third-party service providers applications and
content on Maopao.
Cost of Revenues.
Our cost of revenues
increased by 57.2%, or RMB86.0 million, to
RMB236.2 million $35.3 million in the six-month period
ended September 30, 2010 from RMB150.2 million in the
six-month period ended September 30, 2009, primarily due to
the growth of our revenues resulting in increased costs under
our revenue-sharing arrangements with industry participants from
RMB146.4 million in the six-month period ended
September 30, 2009 to RMB219.0 million
($32.7 million) in the six-month period ended
September 30, 2010. To a lesser extent, the increase in
cost of revenues in this period was also due to an increase in
direct costs as a result of increase in headcount and costs
related to purchases of servers and other equipment in
connection with our expanded operations of the Maopao Community.
Gross Profit.
As a result of the foregoing,
our gross profit increased by 11.8%, or RMB10.6 million, to
RMB100.5 million ($15.0 million) in the six-month
period ended September 30, 2010 from RMB89.9 million
in the six-month period ended September 30, 2009 and our
gross margin decreased to 29.8% in the six-month period ended
September 30, 2010 from 37.4% in the six-month period ended
September 30, 2009. Our gross margin in the six-month
period ended September 30, 2010 decreased compared to the same
period in 2009 as the increases in our cost of revenues outpaced
the increases in our revenues, which was primarily due to the
increases in payment channel costs associated with mobile
service provider as a result of policy changes by China Mobile
and other mobile network operators, an increase in costs
associated with content providers as our mobile social games,
for which we generally share a relatively high percentage of
sales proceeds with content providers, gained popularity, and an
increase in our investment in personnel and equipment for the
growth of Maopao Community.
Operating Expenses.
Our operating expenses
increased by 255.6%, or RMB63.0 million, to
RMB87.6 million ($13.1 million) in the six-month
period ended September 30, 2010 from RMB24.6 million
in the six-month period ended September 30, 2009. The
increase in our operating expenses was primarily due to
increases in our general and administration expenses, and to a
lesser extent, increases in our research and development
expenses and sales and marketing expenses.
|
|
|
|
|
Our research and development expenses increased by 123.6%, or
RMB13.7 million, to RMB24.8 million
($3.7 million) in the
six-month
period ended September 30, 2010 from RMB11.1 million
in the
six-month
period ended September 30, 2009, primarily due to an
RMB7.5 million increase in salaries and benefits for our
research and development personnel from RMB9.4 million in
the six-month period ended September 30,
|
74
|
|
|
|
|
2009 to RMB17.0 million ($2.5 million) in the
six-month period ended September 30, 2010, which resulted
primarily from additional engineers and developers we hired in
the six-month period ended September 30, 2010. Our research
and development staff increased to 260 as of September 30,
2010 from 135 as of September 30, 2009. In the six-month
period ended September 30, 2010, we also had
RMB4.2 million ($0.6 million) share-based compensation
charges allocated under research and development expenses,
whereas we did not have any share-based compensation charges
allocated under research and development expenses in the same
period in 2009.
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Our sales and marketing expenses increased by 164.7%, or
RMB12.2 million, to RMB19.7 million
($2.9 million) in the six-month period ended
September 30, 2010 from RMB7.4 million in the
six-month period ended September 30, 2009 primarily due to
an RMB4.7 million increase in salaries and benefits for our
sales and marketing personnel from RMB5.7 million in the
six-month period ended September 30, 2009 to
RMB10.4 million ($1.6 million) in the six-month period
ended September 30, 2010, which resulted primarily from
additional sales and marketing employees we hired in the
six-month period ended September 30, 2010. Our sales and
marketing staff increased to 128 as of September 30, 2010
from 35 as of September 30, 2009. In the six-month period
ended September 30, 2010, we also had RMB2.1 million
($0.3 million) share-based compensation charges allocated
under sales and marketing expenses, whereas we did not have any
share-based compensation charges allocated under sales and
marketing expenses in the same period in 2009.
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Our general and administration expenses increased by 606.0%, or
RMB37.0 million, to RMB43.1 million
($6.4 million) in the six-month period ended
September 30, 2010 from RMB6.1 million in the
six-month period ended September 30, 2009, primarily due to
RMB16.6 million ($2.4 million) in share-based
compensation charges allocated under general and administration
expenses in the six-month period ended September 30, 2010
compared to RMB1.3 million in the six-month period ended
September 30, 2009. The increase is also due to an
RMB7.9 million increase in salaries and benefits for our
general and administrative staff from RMB0.6 million in the
six-month period ended September 30, 2009 to
RMB8.6 million ($1.3 million) in the six-month period
ended September 30, 2010, which mainly resulted from
additional general and administrative employees we hired in the
six-month period ended September 30, 2010. Our general and
administrative employees increased to 65 as of
September 30, 2010 from 27 as of September 30, 2009.
We also incurred higher professional fees in the six-month
period ended September 30, 2010 due to the engagement of
consultants in that period to advise on our corporate culture.
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Profit from Operations.
As a result of the
foregoing, our profit from operations decreased by 80.4%, or
RMB52.4 million, to RMB12.8 million
($1.9 million) in the six-month period ended
September 30, 2010 from RMB65.3 million in the
six-month period ended September 30, 2009.
Other Gains (Losses).
We had other gains of
RMB10.2 million ($1.5 million) in the six-month period
ended September 30, 2010 compared to other gains of
RMB0.8 million in the six-month period ended
September 30, 2009. The gains in the six-month period ended
September 30, 2010 were primarily related to
RMB9.8 million ($1.5 million) in exchange gains
relating to the liabilities owed to our preferred shareholders,
due to the appreciation of the Renminbi during this period, as
such liabilities are denominated in U.S. dollars.
Finance Costs.
Our finance costs was
RMB4.3 million ($0.6 million) in the six-month period
ended September 30, 2010 due to a distribution payable to
preferred shareholders. We did not incur any finance cost in the
six-month period ended September 30, 2009.
Loss on Changes in Fair Value of Convertible Redeemable
Preferred Shares.
The loss on changes in fair
value of convertible redeemable preferred shares was
RMB59.6 million ($8.9 million) in the six-month period
ended September 30, 2010, compared to RMB160.9 million
in the six-month period ended September 30, 2009. We have
designated the Series A preferred shares as financial
liabilities carried at fair value through profit or loss. The
fair value of our preferred shares increased in the six-month
period ended September 30, 2010 as a result of the increase
in our enterprise value, albeit as a slower pace compared to the
same period in 2009. In the six-month period ended
September 30, 2009, our enterprise value increased
dramatically as our company experienced robust growth. In the
same period in 2010, our enterprise value grew at a more
moderated rate, primarily as a result of the impact of the
policy changes instituted by China Mobile and other mobile
network operators and our investment in
75
growing our Maopao Community. As a result, we had a lower loss
on change in fair value of Series A preferred shares in the
six-month period ended September 30, 2010 compared to same
period in 2009.
Gain (loss) on Changes in Fair Value of
Warrants.
The loss on changes in fair value of
warrants was RMB4.1 million ($0.6 million) in the
six-month period ended September 30, 2010, compared to a
gain of RMB1.2 million in the six-month period ended
September 30, 2009. We have designated the warrants as
financial liabilities carried at fair value through profit or
loss. We had a loss on change in fair value of warrants shares
in the six-month period ended September 30, 2010 as a
result of an increase in our enterprise value with the growth of
our business. The gain on change in fair value of warrants in
the six-month period ended September 30, 2009 was mainly
due to the increase in excise price and the resultant decrease
in the number of warrant shares as a result of the modification
of warrants during that period, partially offset by the increase
of our enterprise value.
Loss before Tax.
As a result of the foregoing,
our loss before tax decreased by 49.0%, or RMB45.9 million,
to RMB47.7 million ($7.1 million) in the six-month
period ended September 30, 2010 from RMB93.7 million
in the six-month period ended September 30, 2009.
Income Tax Benefit (Expense).
Our income tax
expense was RMB5.8 million ($0.9 million) in the
six-month period ended September 30, 2010 compared to an
income tax benefit of RMB1.7 million in the six-month
period ended September 30, 2009, primarily due to the
increase of Hangzhou Skys tax rate from 0% to 12.5%
starting January 1, 2010 due to the expiration of its tax
exemption holiday and the increase in Mijia and Fanyis
taxable income.
Loss for the Period.
As a result of the
foregoing, our loss for the period decreased by 41.8% to
RMB53.6 million ($8.0 million) in the six-month period
ended September 30, 2010 from RMB92.0 million in the
six-month period ended September 30, 2009.
Total Comprehensive Loss for the Period.
As a
result of the foregoing, our total comprehensive loss for the
period decreased by 41.8% to RMB53.6 million
($8.0 million) in the six-month period ended
September 30, 2010 from RMB92.0 million in the
six-month period ended September 30, 2009.
Fiscal
Year Ended March 31, 2010 Compared to Fiscal Year Ended
March 31, 2009
Revenues.
Our revenues increased by 162.6%, or
RMB337.0 million, to RMB544.3 million
($81.4 million) in fiscal year 2010 from
RMB207.3 million in fiscal year 2009, primarily due to an
increase in our application store revenues, and the addition of
Maopao Community revenues through K Currency.
Our application store revenues increased by 162.7%, or
RMB319.5 million, from RMB196.3 million in fiscal year
2009 to RMB515.8 million ($77.1 million) in fiscal
year 2010, primarily due to an increase in the number of
downloads of applications and content titles from Maopao from
379.6 million in fiscal year 2009 to 1,613.9 million
in fiscal year 2010 as we increased the installed base of Maopao
and offered more applications and content catering to user
demand through our application store. Our cumulative number of
users from January 1, 2007 increased from 86.1 million
as of March 31, 2009 to 306.6 million as of
March 31, 2010. Our average revenue per download decreased
from fiscal year 2009 to fiscal year 2010, after the
introduction of new measures by China Mobile and other mobile
network operators. See Factors Affecting Our
Results of Operations Our ability to address
challenges associated with policy changes and mobile network
operators business practices. The price we charged
for our application and content offerings did not change between
these two periods. However, we introduced more packages of
applications and content that users can download for a flat fee.
We launched the K Currency in April 2009 and in the first
fiscal year after its introduction, we generated Maopao
Community revenues through K Currency of
RMB3.6 million ($0.5 million), primarily due to the
rapid growth of the number of registered members of the Maopao
Community from approximately 1.5 million as of
March 31, 2009 to approximately 20.4 million as of
March 31, 2010, and the increase in the number of member
log-ins from 30.9 million in fiscal year 2009 to
994.4 million in fiscal year 2010. The Maopao Community
offers mobile social games and other social network applications
enabling user interaction.
Our other revenues increased by 127.9%, or RMB13.9 million,
from RMB10.9 million in fiscal year 2009 to
RMB24.9 million ($3.7 million) in fiscal year 2010,
primarily because users accessed more third-party service
76
providers applications and content on Maopao after we
increased offerings of such applications and content through
Maopao.
Cost of Revenues.
Our cost of revenues
increased by 163.1%, or RMB219.7 million, to
RMB354.4 million ($53.0 million) in fiscal year 2010
from RMB134.7 million in fiscal year 2009, primarily due to
the growth of our revenues resulting in increased costs under
our revenue-sharing arrangements with industry participants from
RMB128.4 million in fiscal year 2009 to
RMB341.5 million ($51.0 million) in fiscal year ended
2010.
Gross Profit.
As a result of the foregoing,
our gross profit increased by 161.8%, or RMB117.4 million,
to RMB189.9 million ($28.4 million) in fiscal year
2010 from RMB72.6 million in fiscal year 2009, and our
gross margin was stable with 34.9% in fiscal year 2010 compared
to 35.0% in fiscal year 2009.
Operating Expenses.
Our operating expenses
increased by 88.8%, or RMB31.0 million, to
RMB65.9 million ($9.8 million) in fiscal year 2010
from RMB34.9 million in fiscal year 2009. The increase in
our operating expenses was primarily due to increases in our
research and development expenses and sales and marketing
expenses, and to a lesser extent, an increase in general and
administration expenses.
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Our research and development expenses increased by 108.5%, or
RMB14.0 million, to RMB26.9 million
($4.0 million) in fiscal year 2010 from
RMB12.9 million in fiscal year 2009, primarily due to an
RMB11.4 million increase in salaries and benefits for our
research and development personnel from RMB10.8 million in
fiscal year 2009 to RMB22.1 million ($3.3 million) in
fiscal year 2010, which resulted primarily from additional
engineers and developers we hired in fiscal year 2010. Our
research and development staff increased to 163 as of
March 31, 2010 from 114 as of March 31, 2009. In
fiscal year 2010, we had RMB0.5 million ($81,000)
share-based compensation charges allocated under research and
development expenses.
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Our sales and marketing expenses increased by 305.7%, or
RMB16.2 million, to RMB21.5 million
($3.2 million) in fiscal year 2010 from RMB5.3 million
in fiscal year 2009 primarily due to an RMB12.6 million
increase in salaries and benefits for our sales and marketing
staff from RMB3.9 million in fiscal year 2009 to
RMB16.5 million ($2.5 million) in fiscal year 2010,
which primarily resulted from additional sales and marketing
employees we hired in fiscal year 2010. Our sales and marketing
employees increased to 50 as of March 31, 2010 from 25
as of March 31, 2009. In fiscal year 2010, we had
RMB0.6 million ($86,000) share-based compensation charges
allocated under sales and marketing expenses. We also had higher
training expenses for our sales and marketing staff, as well as
expenses in connection with increased marketing activities with
handset companies and content providers.
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Our general and administration expenses increased by 4.8%, or
RMB0.8 million, to RMB17.5 million ($2.6 million)
in fiscal year 2010 from RMB16.7 million in fiscal year
2009, primarily due to an RMB2.0 million increase in office
rental from RMB1.7 million in fiscal year 2009 to
RMB3.7 million in fiscal year 2010, as we expanded our
office space to accommodate our expansion, and an
RMB1.9 million increase in depreciation primarily related
to our servers and other computer equipment from
RMB0.5 million in fiscal year 2009 to RMB2.4 million
($0.4 million) in fiscal year 2010, primarily due to our
business expansion, partly offset by a decrease in share-based
compensation charges. In fiscal year 2010, we had
RMB2.3 million ($0.3 million) in share-based
compensation charges allocated under general and administration
expenses compared to RMB5.4 million in fiscal year 2009.
The reduction between these two periods was primarily due to a
reduction of amortization charges associated with restricted
shares grants relating to the then individual shareholders of
Xplane Ltd.
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Profit from Operations.
As a result of the
foregoing, our profit from operations increased by 229.8%, or
RMB86.4 million, to RMB124.0 million
($18.5 million) in fiscal year 2010 from
RMB37.6 million in fiscal year 2009.
Other Gains (Losses).
We had other gains of
RMB3.5 million ($0.5 million) in fiscal year 2010
compared to other gains of RMB0.9 million in fiscal year
2009. The gains in fiscal year 2010 were primarily related to
income on loan receivable and other investment of
RMB1.1 million ($0.2 million) and RMB1.1 million
($0.2 million) in interest income and RMB0.6 million
($0.1 million) in a local government grant to us as a
high-tech service company. The gains in fiscal year 2009 were
primarily related to a RMB0.4 million local government
grant to us as a high-tech service company and
RMB0.3 million in exchange gains and RMB0.2 million in
interest income.
77
Finance Costs.
Our finance costs was
RMB5.4 million ($0.8 million) in fiscal year 2010 due
to a distribution payable to preferred shareholders. We did not
incur any finance cost in fiscal year 2009.
Share of Results of Associates.
Our share of
results of associates amounted to RMB1.3 million
($0.2 million) in fiscal year 2010 related to three of our
associates that are non-listed companies primarily engaged in
wireless technology development and related applications in the
PRC. We invested in the other two associates in February and
March 2009, respectively, and our share of results of associates
was RMB83,000 in fiscal year 2009.
Loss on Changes in Fair Value of Convertible Redeemable
Preferred Shares.
The loss on changes in fair
value of convertible redeemable preferred shares was
RMB290.1 million ($43.4 million) in fiscal year 2010,
compared to RMB134.6 million in fiscal year 2009. We have
designated the Series A preferred shares as financial
liabilities carried at fair value through profit or loss. The
fair value of our Series A preferred shares increased
significantly in fiscal year 2010, due to a significant increase
of our enterprise value. Our enterprise value increased
significantly because of the significant growth of our business
operations and the increase in our revenues and operating
profit, which lead to significant increase in our expected
future cash flow.
Loss on Changes in Fair Value of Warrants.
The
loss on changes in fair value of warrants was
RMB7.5 million ($1.1 million) in fiscal year 2010,
compared to RMB18.4 million in fiscal year 2009. We have
designated the warrants as financial liabilities carried at fair
value through profit or loss. The decrease in loss on changes in
fair value of warrants from fiscal year 2009 to fiscal year 2010
is mainly due to increase in excise price and the resultant
decrease in the number of warrant shares as a result of the
modification of warrants in fiscal year 2010, partially offset
by the increase of our enterprise value.
Loss on Modification of Convertible Redeemable Preferred
Shares.
The loss on modification of convertible
redeemable preferred shares was RMB44.4 million
($6.6 million) in fiscal year 2010. In March 2010, we and
the Series A shareholders agreed on certain modifications
to the Series A preferred shares and agree to issue to them
an additional 5,000,000 common shares. We recorded the intrinsic
value of the 5,000,000 shares of RMB44.4 million
(US$6.6) million), equal to the fair value of the common
shares on March 1, 2010 less the exercise price of $250, as
a loss on modification of convertible redeemable preferred
shares in the consolidated statements of comprehensive income
with a corresponding increase in equity. We did not incur such
loss in fiscal year 2009.
Loss before Tax.
As a result of the foregoing,
our loss before tax increased by 93.0%, or
RMB106.6 million, to RMB221.3 million
($33.1 million) in fiscal year 2010 from
RMB114.6 million in fiscal year 2009.
Income Tax Benefit (Expense).
Our income tax
expense was RMB8.5 million ($1.3 million) in fiscal
year 2010 compared to an income tax benefit of
RMB1.2 million in fiscal year 2009, primarily due to the
increase of Hangzhou Skys tax rate from 0% to 12.5%
starting January 1, 2010 due to the expiration of its tax
exemption holiday and the increase in Mijia and Fanyis
taxable income.
Loss for the Year.
As a result of the
foregoing, our loss for the year increased by 102.5% to
RMB229.8 million ($34.3 million) in fiscal year 2010
from RMB113.5 million in fiscal year 2009.
Total Comprehensive Loss for the Year.
As a
result of the foregoing, our total comprehensive loss for the
year increased by 102.5% to RMB229.8 million
($34.3 million) in fiscal year 2010 from
RMB113.5 million in fiscal year 2009.
Fiscal
Year Ended March 31, 2009 Compared to Fiscal Year Ended
March 31, 2008
Revenues.
Our revenues increased by
RMB188.6 million to RMB207.2 million in fiscal year
2009 from RMB18.6 million in fiscal year 2008, primarily
due to an increase in our application store revenues.
Our application store revenues increased by
RMB181.5 million from RMB14.8 million in fiscal year
2008 to RMB196.3 million in fiscal year 2009, primarily due
to a significant increase in the number of downloads of
applications and content titles from Maopao from
32.3 million in fiscal year 2008 to 379.6 million in
fiscal year 2009. Our mobile application store business was in
early stage of development in fiscal year 2008, which
experienced substantial growth in fiscal year 2009 as we were
able to significantly increase the number of mobile handsets
with Maopao pre-installed. Our cumulative number of users from
January 1, 2007 increased from 10.2 million as of
March 31, 2008 to 86.1 million as of March 31,
2009. The price we charged for our application
78
and content offerings did not change between these two periods.
However, we introduced more packages of applications and content
that users can download for a flat fee.
We launched the K Currency in April 2009, and did not have
any Maopao Community revenues through K Currency prior to
fiscal year 2010.
Our other revenues increased by 188.0%, or RMB7.1 million,
from RMB3.8 million in fiscal year 2008 to
RMB10.9 million in fiscal year 2009, primarily because
users accessed more third-party service providers
applications and content on Maopao after we increased offerings
of such applications and content through the Maopao application
store.
Cost of Revenues.
Our cost of revenues
increased to RMB134.7 million in fiscal year 2009 from
RMB9.7 million in fiscal year 2008, primarily due to the
growth of our revenues resulting in increased costs under our
revenue-sharing arrangements with industry participants from
RMB9.6 million in fiscal year 2008 to RMB128.4 million
in fiscal year 2009. Cost of revenues also increased as a
percentage of our revenues from 52.1% in fiscal year 2008 to
65.0% in fiscal year 2009, primarily due to an
RMB49.3 million increase in costs associated with handset
companies primarily as a result of handset companies
increasing recognition of the Maopao application stores
monetization capability and the resulting increase of the
percentage of their handsets pre-installing Maopao application
store with authorized codes embedded.
Gross Profit.
As a result of the foregoing,
our gross profit increased by RMB63.7 million to
RMB72.6 million in fiscal year 2009 from
RMB8.9 million in fiscal year 2008, and our gross margin
decreased to 35.0% in fiscal year 2009 from 47.9% in fiscal year
2008.
Operating Expenses.
Our operating expenses
increased by 145.8%, or RMB20.7 million, to
RMB34.9 million in fiscal year 2009 from
RMB14.2 million in fiscal year 2008. The increase in our
operating expenses was primarily due to an increase in our
research and development expenses, and to a lesser extent to
increases in our sales and marketing expenses and general and
administration expenses.
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Our research and development expenses increased by
RMB11.6 million to RMB12.9 million in fiscal year 2009
from RMB1.3 million in fiscal year 2008, primarily due to
an RMB10.0 million increase in salaries and benefits for
our research and development personnel from RMB0.8 million
in fiscal year 2008 to RMB10.8 million in fiscal year 2009,
which resulted primarily from additional engineers and
developers we hired in fiscal year 2009. Our research and
development staff increased to 114 as of March 31, 2009
from 47 as of March 31, 2008. Our average salaries and
benefits of research and development staff also increased in
fiscal year 2009 compared to that in fiscal year 2008.
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Our sales and marketing expenses increased by
RMB4.5 million to RMB5.3 million in fiscal year 2009
from RMB0.8 million in fiscal year 2008, primarily due to
an RMB3.6 million increase in salaries and benefits for our
sales and marketing staff from RMB0.4 million in fiscal
year 2008 to RMB4.0 million in fiscal year 2009, which
mainly resulted from additional sales and marketing employees we
hired in fiscal year 2009. Our sales and marketing staff
increased to 25 as of March 31, 2009 from 13 as of
March 31, 2008. We also had higher marketing expenses,
including travel and communication expenses, due to increased
promotional activities with handset companies and content
providers.
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Our general and administration expenses increased by
RMB4.6 million to RMB16.7 million in fiscal year 2009
from RMB12.1 million in fiscal year 2008, primarily due to
salaries and benefits increase for our general and
administrative staffs from RMB0.8 million to
RMB4.2 million and RMB1.4 million increase in training
expenses for our management and other administrative personnel
from RMB0.9 million in fiscal year 2008 to
RMB2.4 million in fiscal year 2009, and an
RMB1.4 million increase in office rental from
RMB0.3 million in fiscal year 2008 to RMB1.7 million
in fiscal year 2009 as we expand our office space to accommodate
our expansion, partly offset by a decrease in share-based
compensation charges. In fiscal year 2009, we had
RMB5.4 million share-based compensation charges allocated
under general and administration expenses compared to
RMB9.0 million in fiscal year 2008, primarily due to
reduction of such amortized charges associated with restricted
shares grants relating to the then individual shareholders of
Xplane Ltd.
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79
Profit (loss) from Operations.
As a result of
the foregoing, our profit from operations was
RMB37.6 million in fiscal year 2009, compared to our loss
from operations of RMB5.3 million in fiscal year 2008.
Other Gains.
Our other gains in fiscal year
2009 were RMB0.9 million, compared from RMB0.4 million
in fiscal year 2008. The gains in the fiscal year ended
March 31, 2009 were related to RMB0.4 million local
government grant to us as a high-tech service company,
RMB0.3 million in exchange gains and RMB0.2 million in
interest income. The gains in fiscal year 2008 were related to
RMB0.3 million in exchange gains and RMB0.1 million in
interest income.
Finance Costs.
Our finance costs were
RMB1.3 million in fiscal year 2008, associated with the
cost of issuing Series A preferred shares. We did not incur
any finance cost in fiscal year 2009.
Share of Results of Associates.
Our share of
results of associates amounted to a loss of RMB83,000 ($12,000)
in fiscal year 2009. We invested in two of our associates in
February and March 2009, respectively, and our share of loss was
RMB83,000 in fiscal year 2009. We did not have any share in gain
or loss of associates in fiscal year 2008.
Loss on Changes in Fair Value of Convertible Redeemable
Preferred Shares.
The loss on changes in fair
value of convertible redeemable preferred shares was
RMB134.6 million in fiscal year 2009, compared to
RMB4.2 million in fiscal year 2008. We have designated the
Series A preferred shares as financial liabilities carried
at fair value through profit or loss. The fair value of our
Series A preferred shares increased significantly in the
fiscal year ended March 31, 2009 due to a significant
increase of our enterprise value, which resulted in the increase
in loss on changes in fair value of Series A Preferred
Shares. Our enterprise value increased significantly because of
the significant growth of our business operations and the
increase in our revenues and operating profit, which lead to
significant increase in our expected future cash flow.
Loss on Changes in Fair Value of Warrants.
The
loss on changes in fair value of warrants was
RMB18.4 million in the fiscal year ended March 31,
2009, compared to RMB0.2 million in the fiscal year ended
March 31, 2008. We have designated the warrants as
financial liabilities carried at fair value through profit or
loss. Similar to the loss on changes in fair value of
Series A Preferred Shares, such increase in loss on changes
in fair value of warrants was due to the increase of our
enterprise value.
Loss before Tax.
As a result of the foregoing,
our loss before tax increased by RMB104.0 million to
RMB114.6 million in fiscal year 2009 from
RMB10.6 million in fiscal year 2008.
Income Tax Benefit.
Our income tax benefit was
RMB1.2 million in fiscal year 2009, compared to nil in
fiscal year 2008 due to the tax benefits enjoyed by Hangzhou Sky
attributable accrued expenses that will be tax deductible in the
future.
Loss for the Year.
As a result of the
foregoing, our loss for the year increased to
RMB113.5 million in fiscal year 2009 from
RMB10.6 million in fiscal year 2008.
Total Comprehensive Loss for the Year.
As a
result of the foregoing, our total comprehensive loss for the
year increased to RMB113.5 million in fiscal year 2009 from
RMB10.6 million in fiscal year 2008.
80
Unaudited
Quarterly Results of Operations
The following table presents our selected unaudited quarterly
results of operations for the eight quarters in the period from
October 1, 2008 to September 30, 2010. This
information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in
this prospectus. We have prepared the unaudited condensed
consolidated financial information for the quarters presented
below on the same basis as our audited consolidated financial
statements. The unaudited condensed consolidated financial
information include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for
the quarters presented. Our limited operating history makes it
difficult to predict future operating results. The historical
quarterly results presented below are not necessarily indicative
of the results that may be expected for any future quarters or
periods.
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For Three-Month Period Ended
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December 31,
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March 31,
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June 30,
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September 30,
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December 31,
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March 31,
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June 30,
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September 30,
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2008
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2009
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2009
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2009
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2009
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2010
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2010
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2010
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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(RMB)
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($)
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(In thousands, except percentages)
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Revenues:
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Application store revenues
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55,032
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|
|
80,317
|
|
|
|
93,087
|
|
|
|
130,583
|
|
|
|
150,750
|
|
|
|
141,348
|
|
|
|
154,458
|
|
|
|
158,332
|
|
|
|
23,665
|
|
Maopao Community revenues through K Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,196
|
|
|
|
2,382
|
|
|
|
5,663
|
|
|
|
13,886
|
|
|
|
2,075
|
|
Other revenues
|
|
|
3,847
|
|
|
|
2,728
|
|
|
|
4,794
|
|
|
|
11,675
|
|
|
|
5,222
|
|
|
|
3,221
|
|
|
|
2,648
|
|
|
|
1,694
|
|
|
|
254
|
|
Total Revenues
|
|
|
58,879
|
|
|
|
83,045
|
|
|
|
97,881
|
|
|
|
142,258
|
|
|
|
157,168
|
|
|
|
146,951
|
|
|
|
162,769
|
|
|
|
173,912
|
|
|
|
25,994
|
|
Cost of
revenues
(1)
|
|
|
(36,570
|
)
|
|
|
(58,768
|
)
|
|
|
(62,343
|
)
|
|
|
(87,899
|
)
|
|
|
(106,386
|
)
|
|
|
(97,723
|
)
|
|
|
(111,322
|
)
|
|
|
(124,899
|
)
|
|
|
(18,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22,309
|
|
|
|
24,277
|
|
|
|
35,538
|
|
|
|
54,359
|
|
|
|
50,782
|
|
|
|
49,228
|
|
|
|
51,447
|
|
|
|
49,013
|
|
|
|
7,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses
(1)
|
|
|
(4,136
|
)
|
|
|
(3,512
|
)
|
|
|
(5,103
|
)
|
|
|
(6,000
|
)
|
|
|
(6,840
|
)
|
|
|
(8,957
|
)
|
|
|
(11,943
|
)
|
|
|
(12,888
|
)
|
|
|
(1,926
|
)
|
Sales and marketing
expenses
(1)
|
|
|
(1,853
|
)
|
|
|
(1,802
|
)
|
|
|
(3,309
|
)
|
|
|
(4,124
|
)
|
|
|
(4,643
|
)
|
|
|
(9,435
|
)
|
|
|
(7,632
|
)
|
|
|
(12,045
|
)
|
|
|
(1,800
|
)
|
General and administration
expenses
(1)
|
|
|
(5,636
|
)
|
|
|
(4,211
|
)
|
|
|
(2,650
|
)
|
|
|
(3,460
|
)
|
|
|
(2,718
|
)
|
|
|
(8,679
|
)
|
|
|
(20,554
|
)
|
|
|
(22,588
|
)
|
|
|
(3,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(11,625
|
)
|
|
|
(9,525
|
)
|
|
|
(11,062
|
)
|
|
|
(13,584
|
)
|
|
|
(14,201
|
)
|
|
|
(27,071
|
)
|
|
|
(40,129
|
)
|
|
|
(47,521
|
)
|
|
|
(7,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) from operations
|
|
|
10,684
|
|
|
|
14,752
|
|
|
|
24,476
|
|
|
|
40,775
|
|
|
|
36,581
|
|
|
|
22,157
|
|
|
|
11,318
|
|
|
|
1,492
|
|
|
|
224
|
|
Other gains (losses)
|
|
|
202
|
|
|
|
(93
|
)
|
|
|
302
|
|
|
|
502
|
|
|
|
2,143
|
|
|
|
584
|
|
|
|
2,970
|
|
|
|
7,210
|
|
|
|
1,078
|
|
Finance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
|
|
|
|
(4,333
|
)
|
|
|
|
|
|
|
|
|
Share of results of associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,255
|
)
|
|
|
(1,675
|
)
|
|
|
(1,060
|
)
|
|
|
(159
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
(9,484
|
)
|
|
|
(65,488
|
)
|
|
|
(23,996
|
)
|
|
|
(136,917
|
)
|
|
|
(58,570
|
)
|
|
|
(70,652
|
)
|
|
|
(30,369
|
)
|
|
|
(29,251
|
)
|
|
|
(4,372
|
)
|
Gain (loss) on changes in fair value of warrants
|
|
|
(1,304
|
)
|
|
|
(9,348
|
)
|
|
|
10,207
|
|
|
|
(9,031
|
)
|
|
|
(3,943
|
)
|
|
|
(4,781
|
)
|
|
|
(2,070
|
)
|
|
|
(1,981
|
)
|
|
|
(296
|
)
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before tax
|
|
|
98
|
|
|
|
(60,177
|
)
|
|
|
10,989
|
|
|
|
(104,671
|
)
|
|
|
(29,206
|
)
|
|
|
(98,386
|
)
|
|
|
(24,159
|
)
|
|
|
(23,590
|
)
|
|
|
(3,525
|
)
|
Income tax benefit (expense)
|
|
|
497
|
|
|
|
797
|
|
|
|
694
|
|
|
|
1,028
|
|
|
|
1,284
|
|
|
|
(11,534
|
)
|
|
|
(5,141
|
)
|
|
|
(676
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) for the period
|
|
|
595
|
|
|
|
(59,380
|
)
|
|
|
11,683
|
|
|
|
(103,643
|
)
|
|
|
(27,922
|
)
|
|
|
(109,920
|
)
|
|
|
(29,300
|
)
|
|
|
(24,266
|
)
|
|
|
(3,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes share-based compensation
expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Three-Month Period Ended
|
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
2010
|
|
2010
|
|
2010
|
|
|
(In RMB thousands)
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
461
|
|
|
|
459
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539
|
|
|
|
2,128
|
|
|
|
2,094
|
|
Sales and marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576
|
|
|
|
1,055
|
|
|
|
1,039
|
|
General and administration expenses
|
|
|
1,174
|
|
|
|
931
|
|
|
|
725
|
|
|
|
546
|
|
|
|
388
|
|
|
|
689
|
|
|
|
8,204
|
|
|
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,174
|
|
|
|
931
|
|
|
|
725
|
|
|
|
546
|
|
|
|
388
|
|
|
|
1,947
|
|
|
|
11,848
|
|
|
|
11,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Non-IFRS
Financial Data
The following table sets forth the reconciliation of adjusted
profit for the 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 Three Months Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(In RMB thousands)
|
|
|
Profit (loss) for the period
|
|
|
595
|
|
|
|
(59,380
|
)
|
|
|
11,683
|
|
|
|
(103,643
|
)
|
|
|
(27,922
|
)
|
|
|
(109,920
|
)
|
|
|
(29,300
|
)
|
|
|
(24,266
|
)
|
Share-based compensation expenses
|
|
|
1,174
|
|
|
|
931
|
|
|
|
725
|
|
|
|
546
|
|
|
|
388
|
|
|
|
1947
|
|
|
|
11,848
|
|
|
|
11,941
|
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
9,484
|
|
|
|
65,488
|
|
|
|
23,996
|
|
|
|
136,917
|
|
|
|
58,570
|
|
|
|
70,652
|
|
|
|
30,369
|
|
|
|
29,251
|
|
Loss (gain) on changes in fair value of warrants
|
|
|
1,304
|
|
|
|
9,348
|
|
|
|
(10,207
|
)
|
|
|
9,031
|
|
|
|
3,943
|
|
|
|
4,781
|
|
|
|
2,070
|
|
|
|
1,981
|
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,439
|
|
|
|
|
|
|
|
|
|
Foreign exchange (gain) loss relating to loss on changes in fair
value of convertible redeemable preferred shares and warrants
|
|
|
238
|
|
|
|
9
|
|
|
|
(114
|
)
|
|
|
(80
|
)
|
|
|
(19
|
)
|
|
|
(89
|
)
|
|
|
(2,538
|
)
|
|
|
(7,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted profit for the
period
(1)
|
|
|
12,795
|
|
|
|
16,396
|
|
|
|
26,110
|
|
|
|
42,790
|
|
|
|
34,960
|
|
|
|
11,810
|
|
|
|
12,449
|
|
|
|
11,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For more information on non-IFRS financial measures, see
Selected Consolidated Financial and Operating
Data Non-IFRS Financial Data.
|
Our total revenues generally increased in the eight-quarter
period from October 1, 2008 to September 30, 2010,
with the exception of the three months ended March 31,
2010, when our total revenues decreased primarily due to the new
measures introduced by China Mobile and other key mobile network
operators including (i) requiring users to send multiple
SMSs before a transaction can be effected, resulting in fewer
purchases and increased billing and transmission failures and
(ii) termination of services provided by certain service
providers, and the delays associated with our switching from the
terminated service providers resulted in loss of revenues. See
Factors Affecting Our Results of
Operations Our ability to address challenges
associated with policy changes and mobile network
operators business practices.
Cost of revenues generally changed from quarter to quarter in
line with changes in revenues. Cost of revenue as a percentage
of total revenues changed from quarter to quarter primarily due
to changes of (i) service providers through which we
collected our revenues and the percentage of revenues we
collected through individual service providers, which have
different collection performance and sales proceeds sharing
arrangements with us, (ii) contribution to our revenues by
handsets of individual handset companies or by individual
applications and content titles with which we have different
sales proceeds sharing arrangements, and (iii) increases in
direct cost primarily due to expansion of the Maopao Community.
82
Our research and development expenses generally increased from
quarter to quarter over the eight-quarter period as we hired
more research and development personnel, except in the three
months ended March 31, 2009, because we accounted for the
year-end bonus paid to our employees in December 2008 in the
three months ended December 31, 2008. Our sales and
marketing expenses stayed stable or increased over the
eight-quarter period, as we expanded our sales and marketing
team and incurred higher marketing expenses, except for a
decrease in the three months ended June 30, 2010 when we
adjusted our sales and marketing team structure and reduced
compensation levels. Our general and administrative expenses
varied from quarter to quarter, reflecting changes in the amount
of compensation paid to administrative personnel, professional
fees and asset depreciation. Our general and administrative
expenses increased sharply in the three-month periods from
March 31, 2010 to September 30, 2010 as we incurred
higher share-based compensation expenses, salaries and benefits,
professional fees and training expenses in those periods.
In the future, our quarterly results of operations may be
affected by seasonal trends caused by user behavior and demand
for our applications and content offerings. We expect our
revenues to be higher during holiday or vacation periods, when
users make more purchases of applications and other content
through our mobile application store. Our cost of revenues,
mainly consisting of costs associated with payments to industry
participants and direct costs, may also rise during holiday
periods. Such seasonality may appear less prominent in the past
eight quarters ended September 30, 2010 because of the
continued growth of our revenues during such period, but may
become more prominent in the future. Other factors that may
cause our quarterly operating results to fluctuate include,
among others, changes in general economic conditions in China,
changes in the competitive landscape, and the impact of
unforeseen events, such as unexpected natural disasters or
changes in industry policies from local and central governments.
Liquidity
and Capital Resources
The following table sets forth a summary of our net cash flows
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)
|
|
Net cash from operating activities
|
|
|
769
|
|
|
|
30,056
|
|
|
|
160,506
|
|
|
|
23,990
|
|
|
|
71,703
|
|
|
|
87,573
|
|
|
|
13,088
|
|
Net cash used in investing activities
|
|
|
(649
|
)
|
|
|
(25,788
|
)
|
|
|
(96,763
|
)
|
|
|
(14,462
|
)
|
|
|
(43,014
|
)
|
|
|
7,673
|
|
|
|
1,147
|
|
Net cash from (used in) financing activities
|
|
|
25,244
|
|
|
|
|
|
|
|
(16,250
|
)
|
|
|
(2,429
|
)
|
|
|
|
|
|
|
(11,948
|
)
|
|
|
(1,785
|
)
|
Net increase in cash and cash equivalents
|
|
|
25,364
|
|
|
|
4,268
|
|
|
|
47,493
|
|
|
|
7,099
|
|
|
|
28,689
|
|
|
|
83,298
|
|
|
|
12,450
|
|
Cash and cash equivalents at beginning of period
|
|
|
130
|
|
|
|
23,825
|
|
|
|
27,618
|
|
|
|
4,128
|
|
|
|
27,618
|
|
|
|
75,105
|
|
|
|
11,226
|
|
Effect of foreign exchange rate changes
|
|
|
(1,669
|
)
|
|
|
(475
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
193
|
|
|
|
(280
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
23,825
|
|
|
|
27,618
|
|
|
|
75,105
|
|
|
|
11,226
|
|
|
|
56,500
|
|
|
|
158,123
|
|
|
|
23,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To date, we have financed our operations primarily through cash
generated from operations and the issuance of Series A
preferred shares. Our cash and cash equivalents consist of cash
on hand and highly liquid investments which are unrestricted as
to withdrawal or use, and which have maturities of three months
or less when purchased. As of March 31, 2008, 2009 and
2010, we had RMB23.8 million, RMB27.6 million and
RMB75.1 million ($11.2 million) in cash and cash
equivalents, respectively. In the near future, we anticipate
that our primary sources of liquidity will come from cash flow
from operations and the proceeds of this offering.
Beginning on or after August 2, 2011, upon written notice,
holders of the Series A preferred shares may require us to
redeem in cash all or a portion of the then-outstanding
Series A preferred shares at a price that is equal to the
83
greater of (i) the actual Series A preferred share
purchase price, plus all accrued and unpaid dividends, and
(ii) the fair market value of the Series A preferred
shares. All of our Series A preferred shares will
automatically be converted into common shares immediately upon
the completion of this offering. Even if we are required to
redeem the Series A preferred shares, we do not expect the
redemption to materially impact our future liquidity.
We are a holding company, and we rely principally on dividends
and other distributions 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 and SPEs in China is required to set aside
at least 10% of its after tax profits, as determined on a
calendar year basis and in accordance with PRC GAAP, if any, to
fund a statutory reserve until such reserve reaches 50% of its
registered capital. The amount of this statutory reserve of
RMB500,000 as of March 31, 2010 and September 30, 2010
is the same under both PRC GAAP and IFRS and is reflected as
statutory reserve in the consolidated statements of changes in
equity within our consolidated financial statements. These
reserves are not distributable as cash dividends. The difference
between the net profit, as determined under PRC GAAP, and the
amount allocated to statutory reserve, for each of our
subsidiaries and SPEs in China represents amounts that are free
of restriction. Such amounts differ from subsidiary or SPE
equity less statutory reserve as determined IFRS due to
accounting differences between PRC GAAP and IFRS. The aggregate
retained earnings of our PRC subsidiaries and SPEs after setting
aside required statutory reserves funding, determined in
accordance with PRC GAAP, amounted to RMB147.5 million
($22.0 million) and RMB148.2 million
($22.2 million), as of March 31, 2010 and
June 30, 2010, respectively. However, the amount of
retained earnings distributable to our offshore entities may be
less than such amounts, as any dividend distribution may be
subject to relevant taxes in the PRC when our SPEs make payments
to our PRC subsidiaries under contractual arrangements, and
during the process of dividend distribution from our PRC
subsidiaries to the offshore entities. As discussed in
Dividend Policy, we do not have any present plan to
declare and pay in the near future any dividends on our shares
or ADSs and currently intend to retain most, if not all, of our
available funds and any future earnings to operate and expand
our business. 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. These statutory reserves as
requested by the PRC laws are different from the reserve as
recorded in our consolidated financial statements prepared and
presented in accordance with IFRS, which includes
(i) share-based compensation reserve, (ii) the amount
which represents the fair value of the common shares on
March 1, 2010 less the exercise price of $250, as a loss on
modification of convertible redeemable preferred shares, and
(iii) capital contribution.
We receive economic benefits generated from our SPEs through
various contractual arrangements entered into by Dianneng, our
PRC subsidiary, with the SPEs. Such contractual arrangements
include technical support service agreements, strategy
consulting service agreements and intellectual property license
agreements with Hangzhou Sky and Mijia, respectively, and an
exclusive business cooperation agreement with Fanyi. Under these
contractual arrangements, our SPEs will pay to Dianneng their
earnings in the form of services fees and royalties. Our PRC
subsidiaries will pay their earnings to our offshore
intermediate holding company primarily through dividends.
Operating
Activities
Our net cash generated from operating activities in the
six-month period ended September 30, 2010 was
RMB87.6 million ($13.1 million). We incurred a loss
before tax of RMB47.7 million ($7.1 million),
including non-cash loss on changes in fair value of convertible
redeemable preferred shares and warrants of RMB63.7 million
($9.5 million), non-cash finance costs of
RMB4.3 million ($0.6 million) relating to a
distribution payable to Series A preferred shares,
share-based compensation of RMB23.8 million
($3.6 million), share of results of associates of
RMB2.7 million ($0.4 million), net foreign exchange
loss of RMB9.5 million ($1.4 million), and
depreciation and amortization of RMB6.2 million
($0.9 million). Adjusting for non-cash items, our operating
cash flow before movements in working capital was
RMB42.2 million, largely due to the growth in our user base
and resulting increase in purchases of applications and content
on Maopao. Movements in working capital provided an additional
net increase in cash of RMB45.5 million
($6.8 million), including an increase in trade and other
payables of RMB38.2 million ($5.7 million), which is
primarily attributable to an increase in trade payables of
RMB18.7 million ($2.8 million) following our business
growth, including primarily amounts payable to industry
participants, and increases in salaries and benefits payable of
RMB10.7 million ($1.6 million), partly offset by an
increase in trade
84
and other receivables of RMB2.0 million
($0.3 million), primarily from mobile service providers,
following our business growth.
Our net cash generated from operating activities in the fiscal
year ended March 31, 2010 was RMB160.5 million
($24.0 million). We incurred a loss before tax of
RMB221.3 million ($33.1 million), including non-cash
loss on changes in fair value of convertible redeemable
preferred shares and warrants and loss on modification of
convertible redeemable shares in the amount of
RMB342.1 million ($51.1 million), non-cash finance
costs of RMB5.4 million ($0.8 million) relating to a
distribution payable to Series A preferred shares,
share-based compensation of RMB3.6 million
($0.5 million), and depreciation and amortization of
RMB2.5 million ($0.4 million). Adjusting for non-cash
items, our operating cash flow before movements in working
capital was RMB130.7 million ($19.5 million), largely
due to the growth in our user base and resulting increase in
purchases of applications and content on Maopao. Movements in
working capital provided an additional net increase in cash of
RMB29.9 million ($4.5 million), including an increase
in trade and other payables of RMB58.0 million
($8.7 million), which is primarily attributable to an
increase in accrued commission of RMB27.3 million
($4.1 million), which primarily related to our business
growth, an increase in trade payables of RMB13.8 million
($2.1 million) following our business growth, including
primarily amounts payable to industry participants, and
increases in salaries and benefits payable of
RMB9.3 million ($1.4 million), partly offset by an
increase in trade and other receivables of RMB28.7 million
($4.3 million), primarily from mobile service providers,
following our business growth.
Our net cash generated from operating activities in fiscal year
2009 was RMB30.1 million. We incurred a loss before tax of
RMB114.6 million, which included non-cash expenses,
including non-cash loss on changes in fair value of convertible
redeemable preferred shares and warrants of
RMB153.0 million and share-based compensation of
RMB5.4 million. Adjusting for non-cash items, our operating
cash flow before movements in working capital was
RMB44.0 million, largely due to the growth in our user base
and resulting increase in purchases of applications and content
on Maopao application store. Movements in working capital for
the period resulted in net reduction in cash of
RMB13.9 million, including an increase in trade and other
receivables of RMB41.6 million, primarily from mobile
service providers, following our business growth, partly offset
by an increase in trade and other payables of
RMB27.5 million which primarily relates to (i) an
increase in trade payables of RMB14.0 million and an
increase in accrued commission of RMB8.3 million following
our business growth, including primarily amounts payable to
industry participants, and (ii) increases in salaries and
benefits payable of RMB3.4 million as well as taxes payable
of RMB1.1 million following our business growth.
Our net cash generated from operating activities in fiscal year
2008 was RMB0.8 million. We incurred a loss before tax of
RMB10.6 million, which included non-cash expenses,
including share-based compensation of RMB9.0 million and
non-cash loss on changes in fair value of convertible redeemable
preferred shares and warrants of RMB4.4 million. Adjusting
for non-cash items, our operating cash flow before movements in
working capital was RMB3.8 million. Movements in working
capital for the period resulted in a net reduction in cash of
RMB3.0 million, resulting from an increase in trade and
other receivables of RMB5.8 million, primarily from mobile
service providers, following our business growth, partly offset
by an increase in trade and other payables of
RMB2.8 million including primarily amounts payable to
industry participants, following our business growth.
Investing
Activities
Net cash generated from investing activities was
RMB7.7 million ($1.1 million) in the six-month period
ended September 30, 2010, including receipt of loan
receivable of RMB25.0 million ($3.7 million) and
redemption of investment at fair value through profit or loss of
RMB15.5 million ($2.3 million) as a result of the maturity
of our investment products, partially offset by cash paid for
purchase of servers and computer equipment of RMB34.9 million
($5.2 million).
Net cash used in investing activities was RMB96.8 million
($14.5 million) in fiscal year 2010, including (i) an
RMB35.0 million ($5.2 million) payment for term
deposits, (ii) an RMB15.0 million ($2.2 million)
investment and a RMB25.0 million ($3.7 million)
investment product from a commercial bank in China, both of
which matured in May 2010, and (iii) RMB16.0 million
($2.4 million) used for the purchase of property and
equipment, primarily servers and other computer equipment, and
(iv) RMB12.5 million ($1.9 million) used in
investment in associates, partially offset by repayment from
related parties of RMB7.6 million ($1.1 million).
85
Net cash used in investing activities was RMB25.8 million
in fiscal year 2009, including (i) an RMB15.0 million
payment for term deposits, (ii) an increase in amount due
from related parties of RMB8.1 million relating to our cash
advances to related parties, (iii) RMB2.3 million used
for the purchase of property and equipment, primarily servers
and other computer equipment; and (iv) RMB0.6 million
used in investment in associates, offset by net cash of
RMB0.2 million we received as interest income.
Net cash used in investing activities was RMB0.6 million in
fiscal year 2008, involving RMB0.7 million used for the
purchase of property and equipment, primarily servers and other
computer equipment, partly offset by net cash of
RMB0.1 million we received as interest income.
Financing
Activities
Net cash used in financing activities was RMB12.0 million
($1.8 million) in the six-month period ended
September 30, 2010, due to the dividends paid to common
shareholders.
Net cash used in financing activities was RMB16.3 million
($2.4 million) in fiscal year 2010, due to the dividends
paid to common shareholders.
We did not conduct any financing activities in fiscal year 2009.
Net cash provided by financing activities was
RMB25.2 million in fiscal year 2008, resulting from the
proceeds received from the issuance of Series A preferred
shares and warrants, which was partly offset by issuance costs
of RMB1.3 million paid in connection with the issuance of
Series A preferred shares and warrants.
Capital
Expenditures
We had capital expenditures of RMB0.7 million,
RMB2.3 million and RMB16.0 million ($2.4 million)
in the years ended March 31, 2008, 2009 and 2010
respectively, and RMB3.1 million and RMB34.9 million
($5.2 million) in the six-month periods ended
September 30, 2009 and 2010, respectively, all of which
were mainly used to purchase servers and computers to support
the expansion of our business.
We plan to spend approximately RMB65 million
($9.7 million) in capital expenditures in fiscal year 2011,
of which approximately RMB50 million ($7.5 million)
will be used for the enhancement and expansion of our
application store, primarily in connection with deployment of
servers and equipment, to support further development of our
Maopao Community and community-based applications and other
content, with the remainder of approximately RMB15 million
($2.2 million) being used for all other capital
expenditures.
We currently anticipate that we will be able to meet our needs
to fund operations for at least the next 12 months with
operating cash flow and existing cash balances. We may, however,
require additional cash resources due to changed business
conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If these
sources are insufficient to satisfy cash requirements, we may
seek to sell additional equity or debt securities or to obtain a
credit facility. The sale of additional equity or equity-linked
securities could result in additional dilution to shareholders.
The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financial
covenants that would restrict operations. Financing may not be
available in amounts or on terms acceptable to us, if at all.
Contractual
Obligations
The following table sets forth our contractual obligations as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
|
Less Than
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Total
|
|
Total
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands)
|
|
Operating lease commitments
|
|
|
12,596
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
13,904
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(1)
|
|
|
12,596
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
13,904
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
(1)
|
|
Does not include our obligation to redeem in cash all or a
portion of the then-outstanding Series A preferred shares
at a price that is equal to the greater of (i) the actual
Series A preferred share purchase price, plus all accrued
and unpaid dividends, and (ii) the fair market value of the
Series A preferred shares. Beginning on or after
August 2, 2011, shareholders of the Series A preferred
shares may require us to redeem in cash all or a portion of the
then-outstanding Series A preferred shares upon written
notice, at a price that is equal to the greater of (i) the
actual Series A preferred share purchase price, plus all
accrued and unpaid dividends, and (ii) the fair market
value of the Series A preferred shares. All of our
Series A preferred shares will be automatically converted
into common shares immediately upon the completion of this
offering.
|
Off-Balance
Sheet Arrangements
We have not entered into any financial guarantees or other
commitments to guarantee the payment obligations of any third
parties. In addition, we have not entered into any derivative
contracts that are indexed to our own shares and classified as
shareholders equity, or that are not reflected in our
consolidated financial statements. Furthermore, we do not have
any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market
risk support to such entity. Moreover, we do not have any
variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services
with us.
Quantitative
and Qualitative Disclosure about Market Risk
Foreign
Exchange Risk
Our revenues and purchases are generally denominated in
Renminbi. Our assets and liabilities are also denominated in
Renminbi, except for cash held in other currencies, which
amounted to RMB2.8 million and RMB32.0 million as of
March 31, 2010 and September 30, 2010, respectively,
and U.S. dollar denominated convertible redeemable
preferred shares which are subject to redemption at the greater
of the purchase price or the fair value of the preferred shares
on and after August 2011. As a result, fluctuations in the
exchange rates between the U.S. dollar and Renminbi will
affect our results of operations and financial condition. Such
fluctuations will also affect us with respect to the translation
of the net proceeds that we will receive from this offering into
Renminbi. The Renminbis exchange rate with the
U.S. dollar is affected by, among other things, changes in
Chinas political and economic conditions and Chinas
foreign exchange policies. The Peoples Bank of China
regularly intervenes in the foreign exchange market to limit
fluctuations in RMB exchange rates and achieve policy goals. 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.
To the extent that we need to convert U.S. dollars we
receive from this offering into RMB for our operations or other
uses within the PRC, appreciation of the RMB against the
U.S. dollar would have an adverse effect on the RMB amount
we would receive from the conversion. On the other hand, a
decline in the value of RMB against the U.S. dollar could
reduce the U.S. dollar equivalent amounts of our financial
results, the value of your investment in our company and the
dividends we may pay in the future, if any, all of which may
have a material adverse effect on the price of our ADSs. As of
September 30, 2010, we had RMB-denominated cash balances of
RMB176.0 million. Assuming we had converted the
RMB176.0 million into U.S. dollars at the exchange
rate of $1.00 for RMB6.6905 as of September 30, 2010, this
cash balance would have been $26.3 million. Assuming a 1%
depreciation of the RMB against the U.S. dollar, this cash
balance would have decreased to $26.0 million as of
September 30, 2010 resulting in $0.3 million of
foreign exchange loss.
87
Interest
Rate Risk
We do not have any outstanding long-term or short-term loans.
Our exposure to interest rate risk primarily relates to interest
income generated by excess cash invested in bank deposits with
original maturities of three months or less and time deposits
with maturity terms of three months or more but less than one
year. If we borrow money in future periods, we may be exposed to
interest rate risk related to interest expenses incurred by any
short-term or long-term bank borrowings. We have not used any
derivative financial instruments to manage our interest risk
exposure. We have not been exposed, nor do we anticipate being
exposed, to material risks due to changes in interest rates.
However, our future interest income may be lower than expected
due to changes in market interest rates.
Inflation
Risk
In recent years, inflation has not had a material impact on our
results of operations. According to the 2009 China Statistical
Yearbook and a report released by the National Bureau of
Statistics of China in February 2010, the change in
Chinas Consumer Price Index was 4.8%, 5.9% and -0.7% in
calendar year 2007, 2008 and 2009, respectively. If inflation
rises, it may materially and adversely affect our business.
Credit
risk
We collect revenues primarily through mobile service providers.
Our maximum exposure to credit risks from these mobile service
provides is equivalent to the total carrying amount of loan
receivable, trade and other receivable and amounts due from
related parties of RMB5.9 million, RMB55.6 million and
RMB104.7 million ($15.6 million) as of March 31,
2008, 2009 and 2010, respectively, and RMB76.8 million as
of September 30, 2010. In order to minimize the credit
risk, we assess the credit worthiness of the mobile service
providers prior to contracting with them. In addition, we
allocate revenue payments among mobile service providers based
on their payment history and the assessment of their
relationship with the mobile network operators, which will
impact the mobile service providers ability to pay. We
further monitor the subsequent performance of the mobile service
providers in order to mitigate collection risk going forward. In
addition, we review the recoverable amount of each individual
trade receivable at the end of each reporting period to
determine if provision should be made for uncollectible amounts.
We have concentration of credit risks with exposure limited to
certain mobile service providers. As of March 31, 2008,
2009 and 2010, our top two, four and ten mobile service
providers in terms of accounts receivable balances accounted for
approximately RMB3.1 million, RMB21.9 million and
RMB61.8 million ($9.2 million), or 61%, 48% and 86% of
our trade receivable, respectively. As of September 30,
2010, our top ten mobile service providers in terms of accounts
receivable balances accounted for approximately
RMB48.9 million, or 84.2% of our trade receivable. We
closely monitor the subsequent settlement of trade receivables
and do not grant long credit periods to the counterparties.
As of March 31, 2008, 2009 and 2010 and September 30,
2010, substantially all of our cash and cash equivalents and
time deposits were held by reputable financial institutions. We
believe that we are not exposed to unusual risks as these
financial institutions have high credit quality. We have not
experienced any losses on deposits of cash and cash equivalents
and short-term investments. Prior to entering into contracts, we
make a credit assessment of our counterparties to assess the
collectability of the contracts.
Recently
Issued Accounting Pronouncements
We have not early adopted the following new and revised
standards, amendments or interpretations that have been issued
but are not yet effective:
In 2008, the IASB issued IFRS 3 (revised), Business
Combinations (IFRS 3 (revised)), and IAS 27,
Consolidated and Separate Financial Statements
(IAS 27 (revised)), which include greater emphasis
on the use of fair value. The standards focus on changes in
control as a significant economic event and introduce
requirements to remeasure interests to fair value at the time
when control is achieved or lost, and recognize directly in
equity the impact of all transactions between controlling and
non-controlling shareholders not involving a loss of control.
The standards further focus on what is given to the seller as
consideration, rather than what is spent to achieve the
acquisition. IFRS 3 (revised) and IAS 27 (revised) is effective
for accounting
88
periods beginning on or after July 1, 2009. We are
currently evaluating the impact of adoption of this standard on
our consolidated financial statements.
On October 28, 2010, the IASB issued amendments to
IFRS 9 Financial Instruments. The amendments
address the accounting for financial liabilities, specifically
volatility in the income statement arising from measuring debt
at fair value. With the new requirements, an entity choosing to
measure a liability at fair value will present the portion of
the change in its fair value due to changes in the entitys
own credit risk in the other comprehensive income section of the
income statement, rather than within profit or loss. IFRS 9
is effective for financial statements in annual periods
beginning on or after January 1, 2013. Early adoption of
the amendments is permitted; however, entities that elect early
adoption must also apply the financial asset requirements in
IFRS 9. We are currently evaluating the impact of adoption
on its consolidated financial statements.
In 2009, the IASB issued Improvements to IFRSs, a
collection of amendments to twelve IFRSs, as part of its program
of annual improvements to its standards. IAS 1,
Presentation of Financial Statements, was amended to
provide clarification that the potential settlement of a
liability by the issue of equity is not relevant to its
classification as current or non-current. By amending the
definition of current liability, the amendment permits a
liability to be classified as non-current, provided the entity
has an unconditional right to defer settlement by transfer of
cash or other assets for at least 12 months after the
accounting period, notwithstanding the fact that the entity
could be required by the counterparty to settle in shares at any
time. The amendment is effective for accounting periods
beginning on or after January 1, 2010. We are currently
evaluating the impact of adoption of this new standard on our
consolidated financial statements.
In November 2009, IFRIC Interpretation 19, Extinguishing
Financial Liabilities with Equity Instruments, or IFRIC
19, was issued. IFRIC 19 requires a gain or loss to be
recognized when a liability is settled through the issuance of
the entitys own equity instruments. The amount of the gain
or loss recognized in profit or loss will be the difference
between the carrying value of the financial liability and the
fair value of the equity instruments issued. If the fair value
of the equity instruments cannot be reliably measured then the
fair value of the existing financial liability is used to
measure the gain or loss. IFRIC 19 must be applied in annual
periods beginning on or after July 1, 2010. Earlier
application is permitted. It must be applied retrospectively
from the beginning of the earliest comparative period presented.
We will apply IFRIC 19 effective April 1, 2011. We are
currently evaluating the impact of adoption of this new standard
on our consolidated financial statements.
On November 2008, IFRIC Interpretation 17, Distribution of
non-cash assets to owners, or IFRIC 17, was issued. IFRIC
17 provides guidance on accounting for arrangements wherein an
entity distributes non-cash assets to shareholders either as a
distribution of reserves or as dividends. IFRS 5,
Non-current assets held for sales and discontinued
operations, has also been amended to require that assets
are classified as held for distribution only when they are
available for distribution in their present condition and the
distribution is highly probable. IFRIC 17 is effective for
annual periods beginning on or after July 1, 2009. We will
apply IFRIC 17 effective April 1, 2010. We are currently
evaluating the impact of adoption of this new standard on our
consolidated financial statements.
In November 2009, the IASB issued a revised version of IAS 24,
Related party disclosures. The amendment removes the
requirement for government-related entities to disclose details
of all transactions with the government and other
government-related entities, and clarifies and simplifies the
definition of a related party. The amended definition may
require entities to provide additional related party
disclosures. The revised standard is effective for annual
periods beginning on or after January 1, 2011, with earlier
application permitted. We are currently evaluating the impact of
adoption of this new standard on our consolidated financial
statements.
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CORPORATE
HISTORY AND STRUCTURE
Our
History
We commenced operations through Hangzhou Sky, a limited
liability company established in China, in 2005. Hangzhou Sky is
principally engaged in our cooperation with handset companies
and providing mobile applications and content to our users. To
enable us to raise capital from international investors, our
holding company, Sky-mobi Limited (formerly Profit Star
Limited), was incorporated under the laws of the Cayman Islands
in April 2007. In June 2007, we incorporated Pusida, our
wholly-owned subsidiary in China.
PRC laws currently restrict foreign-invested entities engaging
in value-added telecommunication services. To comply with PRC
laws, we conduct our value-added telecommunication services
through three SPEs, Hangzhou Sky, Mijia and Fanyi. In August
2007, through Pusida, we entered into certain contractual
arrangements with Hangzhou Sky and its shareholders through
which we gained effective control over the operations of
Hangzhou Sky.
In January 2007, Mijia was incorporated in China. In August
2007, through Pusida, we entered into certain contractual
arrangements with Mijia and its shareholders through which we
gained effective control over the operations of Mijia. Mijia
focuses primarily on our cooperation with mobile service
providers.
On August 2, 2007, we issued in a private placement an
aggregate of 50,000,000 Series A preferred shares for an
aggregate purchase price of $3.5 million to Sequoia Capital
China II L.P.
In July 2009, Fanyi was incorporated in China. Fanyi focuses
primarily on our cooperation with content providers and billing
and payment processing. In December 2009, we incorporated
Dianneng, our wholly-owned subsidiary in China. In December
2009, through Dianneng, we entered into certain contractual
arrangements with Fanyi and its shareholders through which we
gained effective control over the operations of Fanyi.
In July 1, 2010, through Dianneng, we entered into
contractual arrangements with Hangzhou Sky, Mijia and their
respective shareholders to replace their previous contractual
arrangements with Pusida.
In May 2010, we incorporated Profit Star Software (HK) Limited,
or Profit Star HK, our wholly-owned subsidiary, in Hong Kong. We
transferred all of our equity interest in Pusida and Dianneng to
Profit Star HK.
In May 2010, we and an independent third party established
Shenzhen Heisha Technologies Co., Ltd., or Heisha. We invested
RMB2.9 million and obtained a 65% equity interest in
Heisha. Heisha cooperates with overseas parties to provide
mobile payment processing agent services in overseas markets,
such as India, Thailand and the Philippines.
In July 2010, Sky Global Network Technologies Limited (Hong
Kong), a wholly-owned subsidiary of Fanyi, was incorporated in
Hong Kong, primarily engaging in mobile application store
services for the overseas market.
In October 2010, Profit Star Limited changed its name to
Sky-mobi Limited.
In October 2010, we incorporated Sky Network International
Limited, or Sky BVI, our wholly-owned subsidiary, in the British
Virgin Islands. We plan to make Sky BVI our intermediary holding
company by transferring all of our equity interest in Profit
Star HK to Sky BVI.
On November 18, 2010, our shareholders approved a
200-for-1
share split of our ordinary shares and series A preferred
shares which became effective immediately. At the same time, the
par value of the shares was changed from $0.01 per share to
$0.00005 per share. Unless otherwise noted, all share
information and per share data included in the prospectus and
accompanying financial statements has been adjusted to reflect
this share split and change in par value.
90
Our
Corporate Structure
The following diagram illustrates our anticipated shareholding
and corporate structure and the place of incorporation of each
of our subsidiaries and SPEs immediately following this offering:
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(1)
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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.
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(2)
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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.
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(3)
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Hangzhou Sky Network Technologies Co., Ltd., or Hangzhou Sky, is
our SPE in China and is currently 80% owned by Mijia and 20%
owned by Ms. Qinyi Zhu, wife of Mr. Michael Tao Song.
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(4)
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Hangzhou Fanyi Technologies Co., Ltd., or Fanyi, is our SPE 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.
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(5)
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Shenzhen Heisha Technologies Co., Ltd. is currently 65% owned by
Fanyi and 35% owned by an independent third party.
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We have entered into contractual arrangements with Hangzhou Sky,
Mijia, Fanyi and their respective shareholders, through which we
exercise effective control over operations of these entities and
receive economic benefits generated from shareholders
equity interests in these entities. As a result of these
contractual arrangements, under IFRS, we are considered the
primary beneficiary of Hangzhou Sky, Mijia and Fanyi and thus
consolidate their results in our consolidated financial
statements. See Risk Factors Risks Related to
Doing Business in China If the PRC government
determines that the contractual arrangements that establish the
structure for operating our business strategy do not comply with
applicable PRC laws and regulations, we could be subject to
severe penalties.
Contractual
Arrangements with Hangzhou Sky and its Shareholders
Our relationships with Hangzhou Sky and its shareholders are
governed by a series of contractual arrangements. Under PRC
laws, each of Hangzhou Sky and Dianneng is an independent legal
person and neither of them is exposed to liabilities incurred by
the other party. Other than pursuant to the contractual
arrangements between Hangzhou Sky and Dianneng, Hangzhou Sky is
not required to transfer any funds generated from its operations
to Dianneng.
Service Agreements.
Hangzhou Sky and Dianneng
have entered into the following service agreements: a technical
support service agreement, a strategy consulting service
agreement and an intellectual property license agreement, under
which Hangzhou Sky engages Dianneng as its exclusive provider of
technical support and strategy consulting services and Dianneng
agrees to grant to Hangzhou Sky a non-exclusive and
non-transferable license to use certain intellectual properties
owned by it for Hangzhou Skys businesses. Hangzhou Sky
shall pay to Dianneng service fees and royalties as determined
by Dianneng based on the services provided and the actual use of
the intellectual properties, respectively. Dianneng shall own
any intellectual properties created or obtained by Hangzhou Sky
under the strategy consulting service agreement.
Equity Pledge Agreement.
Hangzhou Sky and its
shareholders, namely Mijia and Ms. Qinyi Zhu, have entered
into an equity pledge agreement with Dianneng, under which each
shareholder of Hangzhou Sky pledged all of its/her equity
interest in Hangzhou Sky to Dianneng as collateral for all of
Hangzhou Skys payments due to Dianneng under the above
service agreements. If any event of default as defined under
this agreement occurs, Dianneng, as the pledgee, will be
entitled to dispose of the pledged equity interests in certain
manners, including negotiating with such shareholders for the
transfer of the pledged equity interests.
Purchase Option and Cooperation
Agreement.
Hangzhou Sky and its shareholders have
entered into a purchase option and cooperation agreement with
Dianneng, under which each shareholder of Hangzhou Sky
irrevocably granted to Dianneng or its designee an exclusive
option to purchase its/her equity interest in Hangzhou Sky or
all or a part of the assets owned by Hangzhou Sky at the
purchase price equal to the amount of the registered capital of
Hangzhou Sky or the corresponding part thereof. Dianneng may
exercise such option at any time. In addition, Hangzhou Sky and
its shareholders agree that without Diannengs consent,
Hangzhou Sky will not sell, transfer, mortgage or otherwise
dispose of any of its assets, business or beneficial interests,
engage in any transactions that could substantially affect its
assets, liabilities, operations, equity interests or other legal
rights, or declare any dividend, unless all the equity interests
in or assets of Hangzhou Sky have been transferred to Dianneng
through exercising of the option under this agreement.
92
Powers of Attorney.
Each shareholder of
Hangzhou Sky has executed a power of attorney to irrevocably
grant to Dianneng or its designee the power of attorney to
exercise all of its/her rights as a shareholder of Hangzhou Sky,
including the right to appoint and elect board members and
senior management members and other voting rights.
Contractual
Arrangements with Mijia and its Shareholders
Our relationships with Mijia and its shareholders are governed
by a series of contractual arrangements. Under PRC laws, each of
Mijia and Dianneng is an independent legal person and neither of
them is exposed to liabilities incurred by the other party.
Other than pursuant to the contractual arrangements between
Mijia and Dianneng, Mijia is not required to transfer any funds
generated from its operations to Dianneng.
Service Agreements.
Mijia and Dianneng have
entered into the following service agreements: a technical
support service agreement, a strategy consulting service
agreement and an intellectual property license agreement, under
which Mijia engages Dianneng as its exclusive provider of
technical support and strategy consulting services and Dianneng
agrees to grant to Mijia a non-exclusive and non-transferable
license to use certain intellectual properties owned by it for
Mijias businesses. Mijia shall pay to Dianneng service
fees and royalties as determined by Dianneng based on the
services provided and the actual use of the intellectual
properties respectively. Dianneng shall own any intellectual
properties created or obtained by Mijia under the strategy
consulting service agreement.
Equity Pledge Agreement.
Mijia and its
shareholders, namely Mr. Tao Song, Mr. Li Ou,
Mr. Yan Tang, Mr. Zhiyi Xia, Ms. Zi Jin,
Mr. Guoping Qu, Mr. Wenjie Wu, Mr. Zhe Wang,
Mr. Wanyan Shao, Mr. Qing Yan and Mr. Rui Zeng,
have entered into an equity pledge agreement with Dianneng,
under which each shareholder of Mijia pledged all of
his/her
equity interest in Mijia to Dianneng as collateral for all of
Mijias payments due to Dianneng under the above service
agreements. If any event of default as defined under this
agreement occurs, Dianneng, as the pledgee, will be entitled to
dispose of the pledged equity interests in certain manners
including negotiating with such shareholders for the transfer of
the pledged equity interests.
Purchase Option and Cooperation
Agreement.
Mijia and its shareholders have
entered into a purchase option and cooperation agreement with
Dianneng, under which each shareholder of Mijia irrevocably
granted to Dianneng or its designee an exclusive option to
purchase
his/her
equity interest in Mijia or all or a part of the assets owned by
Mijia at the purchase price equal to the amount of the
registered capital of Mijia or the corresponding part thereof.
Dianneng may exercise such option at any time. In addition,
Mijia and its shareholders agree that without Diannengs
consent, Mijia will not sell, transfer, mortgage or otherwise
dispose of any of its assets, business or beneficial interests,
engage in any transactions that could substantially affect its
assets, liabilities, operations, equity interests or other legal
rights, or declare any dividend, unless all the equity interests
in or assets of Mijia have been transferred to Dianneng through
exercising of the option under this agreement.
Powers of Attorney.
Each shareholder of Mijia
has executed a power of attorney to irrevocably grant to
Dianneng or its designee the power of attorney to exercise all
of
his/her
rights as a shareholder of Mijia, including the right to appoint
and elect board members and senior management members and other
voting rights.
Contractual
Arrangements with Fanyi and its Shareholders
Exclusive Business Cooperation
Agreement.
Under the exclusive business
cooperation agreement between Fanyi and Dianneng, Fanyi engages
Dianneng as its exclusive provider of technical and business
support and consulting services and shall pay to Dianneng
service fees equal to the amount of 100% of Fanyis net
income. Dianneng shall exclusively own any intellectual
properties arising from the performance of this agreement. This
agreement has a term of 10 years unless earlier terminated
by Dianneng with a 30 days prior written notice or
renewed by it with a written confirmation before the expiration
of this agreement.
Equity Pledge Agreement.
Fanyi and its
shareholders, namely Mr. Tao Song and Mr. Tao Yang,
have entered into an equity pledge agreement with Dianneng,
under which each shareholder of Fanyi pledged all of his equity
interest in Fanyi to Dianneng as collateral for all of
Fanyis payments due to Dianneng under the above exclusive
business cooperation agreement. If any event of default as
defined under this agreement occurs, Dianneng, as the pledgee,
will be entitled to dispose of the pledged equity interests.
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Exclusive Purchase Option Agreement.
Fanyi and
its shareholders have entered into an exclusive purchase option
agreement with Dianneng, under which each shareholder of Fanyi
irrevocably granted to Dianneng or its designee an exclusive
option to purchase his equity interest in Fanyi at the purchase
price equal to the amount of the registered capital of Fanyi
actually contributed for the equity interest to be purchased.
Dianneng may exercise such option at any time and may choose to
pay the above purchase price through cancelling the loan owed to
it by Fanyis shareholders under the loan agreements and
thus will not need to pay any additional amount. In addition,
Fanyi and its shareholders agree that without Diannengs
consent, Fanyi will not engage in certain events including
selling, transferring, mortgaging or otherwise disposing of any
of its assets, business or beneficial interests or declaring any
dividend.
Loan Agreements.
Each shareholder of Fanyi has
entered into two loan agreements with Dianneng. Under these loan
agreements, Dianneng lent loans of RMB7.5 million
($1.1 million) and RMB2.5 million ($0.4 million)
to these shareholders, respectively, solely for them to provide
such funds to Fanyi for the business development and capital
increase of Fanyi. Each of these loans has a term of
10 years, which can be extended upon written consent of the
parties thereto. One of the shareholders shall, at
Diannengs discretion, repay the loan by transferring his
equity interest in Fanyi to Dianneng or its designated third
party according to the above exclusive purchase option
agreement. The part of the purchase price under the exclusive
purchase option agreement which exceeds the principal under this
loan agreement shall be regarded as the interest on this loan
and shall be paid to Dianneng by Fanyi. For the other
shareholder, Mr. Tao Yang, Dianneng can only request
Mr. Yang to repay the loan by transferring his equity
interest in Fanyi to Dianneng or Diannengs designated
third party and the share transfer price shall settle all the
principals and interests incurred under the loan.
Powers of Attorney.
Each shareholder of Fanyi
has executed a power of attorney to irrevocably grant to
Dianneng or its assignee the power of attorney to exercise all
of his rights as a shareholder of Fanyi, including the right to
appoint board members and senior management members, other
voting rights and the right to sell, transfer, pledge or
otherwise dispose of all or a part of his equity interest in
Fanyi.
94
INDUSTRY
BACKGROUND
Growth of
Mobile Phone Usage
Chinas economy has grown significantly in recent years.
According to the 2009 China Statistical Yearbook and a report
released by the National Bureau of Statistics in February 2010,
disposable income of urban households in China per capita grew
from RMB10,493 in 2005 to RMB17,175 in 2009, representing a CAGR
of 13.1%. The increasing disposable income and urbanization have
been driving consumer demand for goods and services, including
the use of mobile phones.
According to reports released by the MIIT in January 2006 and
February 2010, the number of mobile subscriptions in China
increased from 393.4 million as of the end of 2005 to
747.4 million as of the end of 2009, representing a CAGR of
17.4%, making China the worlds largest mobile subscriber
market. We expect the number of mobile subscriptions in China
will continue to increase rapidly in the next few years. The
size of mobile subscriptions in China is more than
2.5 times the size in the U.S., which was
286.6 million as of the end of 2009, according to World
Cellular Information Service, or WCIS, of Informa Telecoms
& Media, an independent research and advisory firm, and we
expect the size of mobile subscriptions in China will continue
to be approximately 2 or 3 times the size in the U.S. in the
next few years. However, the mobile phone penetration rate in
China was approximately 56.0% as of the end of 2009, relatively
low compared to more developed countries. For example, according
to WCIS, the mobile phone penetration rate in the U.S. was
91.5% as of the end of 2009.
As set forth in the chart below, despite relatively modest
average income levels of mobile users, mobile services are used
by a wide spectrum of Chinese consumers, with users younger than
30 years old representing 59.3% of all mobile subscribers
in 2009, according to the Analysys Report.
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Monthly Income of Mobile Users in China
2009
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Age Distribution of Mobile
Users in China
2009
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Source: Analysys Report, May 2010
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Young people in China have a strong desire for social
interaction, acceptance and entertainment. However, in many
Chinese cities, the available entertainment options including
television, radio and movie theaters are often limited,
unattractive or unaffordable for the average young consumer. As
a result, many of these young people access the Internet through
computers and mobile phones to play games, listen to music, read
news, share content and find and interact with other users
through online communities or instant messaging platforms. To
enrich their personal and social lives in spite of their
typically moderate income levels, many of these younger users
are willing to pay for such Internet and mobile applications and
services, which are considerably more affordable compared with
other forms of entertainment.
Growth of
the Chinese Mobile Phone Market
The Chinese mobile handset installed base has grown from
417.0 million units in 2005 to 792.2 million units in
2009, representing a CAGR of 17.4%, according to the Analysys
Report. The substantial majority of handsets purchased in China
are not sold or controlled by mobile network operators who
typically do not subsidize handset purchases by bundling service
plans. Most users therefore make separate decisions with regard
to the purchase of a mobile handset and of a service plan. The
absence of carrier subsidies and limited spending power of the
average
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Chinese mobile handset user have resulted in handsets costing
RMB1,500 or less to represent 74.3% of the total market in 2009,
according to the Analysys Report.
The handset market in China can be divided into three segments:
feature phones, smart phones and basic phones. Smart phones are
high-end, technologically advanced devices with personal
computer-level versatility that operate advanced operating
systems such as Android, Apples iOS, BlackBerry OS, Linux,
Palm WebOS, Symbian and Windows Mobile.
Feature phones are low cost multi-function mobile communication
devices that have proprietary operating systems which make it
difficult for users to install and remove applications. A
typical feature phone today allows users to send text messages,
emails and video clips, take photographs, play games, access the
Internet, listen to music, pay bills and perform other functions
typically supported by higher end and more expensive smart
phones. According to the Analysys Report, the feature phone
segment represented approximately 64.2% of the total mobile
handset installed base in China as of the end of 2009 and is
expected to maintain its market share of approximately 60.0% of
the total mobile handset installed base in China at the end of
2013 as feature phones offer Chinas price-sensitive mobile
phone users broad functionality at compelling price points.
Smart phones accounted for 15.8% of the total mobile handset
installed base in China in 2009 according to the Analysys
Report. It is expected to grow rapidly, reaching approximately
36.9% market share in 2013.
The chart below sets forth the breakdown of the total mobile
handset installed base in China by segment.
Breakdown
of Total Mobile Handset Installed Base in China
Source: Analysys Report, May 2010
The mobile handset market in China is fragmented with over 100
handset brands as of the end of 2009 according to the Analysys
Report, with domestic brands accounting for approximately 45%
market share in 2009, up from approximately 35% in 2007.
Domestic Chinese handset companies are able to rapidly launch
new models, incorporate new features and respond to changing
user preferences by having easy access to standardized low-cost
chipsets, reference designs, liquid crystal display screens,
memory and other components as well as the capabilities of
independent design houses, or IDHs.
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Growth in
Mobile Internet Application and Services Market in
China
Historically, the majority of applications and services provided
through mobile data services were SMS-based and were either
accessed through a mobile carrier operated menu or pre-installed
on the mobile phone. These services included ring tones, simple
games and wallpapers, among others. Today, users seek to consume
more sophisticated multimedia and interactive function via
mobile phones. Increasingly rich content and more complex
applications are therefore becoming available. The item-based
revenue model has become a common revenue model for mobile
social games and other social network applications and content.
Key growth areas of mobile applications and services include:
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Mobile social games.
Mobile social games and
other forms of Internet-based entertainment are becoming
increasingly popular in China. Mobile social games and advanced
mobile casual games enable players to participate interactively
in virtual worlds and collaborate or compete with each other on
a large scale, thereby offering players a sense of fulfillment
within a community setting. Mobile social games are a way for
many players to express themselves and to create a virtual
personality and are important social outlets for many players.
The interactive nature of social games can also allow players to
have personalized, customizable social networking experiences,
including romance and friendship. In addition, these mobile
social games require a significant amount of players time
and commitment to develop the skills and character attributes
required to progress to the next level. These factors reinforce
players loyalty to and time spent on mobile social games.
The growth of mobile Internet application and services revenues
in China has been driven in part by users younger than
30 years old, who form 71.2% of the mobile Internet
user base as of June 2010, according to a report released by the
CNNIC in July 2010. This age group makes up the majority of
users who play mobile social games regularly. For mobile social
games, players are more likely to be attracted to playing
item-based games since they are able to play the basic features
of an online game for free. The model also presents players with
personalized and differentiated service portfolio and increases
the ability of online game companies to generate higher revenues
per player by offering additional virtual items through new
expansion packs.
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Social network applications and
content.
Mobile applications and services are
offering more social network functions which include instant
messaging, video communication, blogging, profiling, sharing of
pictures, virtual gifting and others. These services enable a
user to create his or her mobile profile and befriend other
users who share similar ideas, interests or activities, and view
the profiles or track the status of their friends through blogs,
pictures, videos, sound clips and more. Through these social
network functions, users are able to build their network of
friends and be a part of a broader community whereby they can
communicate and socialize instantaneously and with ease. One
advantage of social network functions delivered through the
mobile platform, as opposed to the Internet, is that users can
connect to their mobile community at any time and any location
via their mobile handsets, greatly enhancing the ease of user
interaction. For other social network functions, users are able
to buy virtual items to enhance their identities, avatars or
other virtual assets to express themselves in the community.
They are also able to buy virtual gifts for friends, which can
be delivered instantaneously and are significantly less
expensive than the physical items. By being able to purchase
items on an individual basis, users can customize their own
virtual experience, establish a new identity virtually, and even
live vicariously through a virtual life.
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The number of mobile Internet users in China increased
significantly in recent years and we believe such number will
continue to increase rapidly in the next few years. According to
a report released by the CNNIC in July 2010, in the first half
of 2010, 61.5% of mobile Internet users in China had used mobile
instant messaging: 48.4% had used mobile search and 35.5% had
used mobile social network functions.
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Mobile
Internet Application & Services Market Size in
China
Source: Analysys International, May 2010
The traditional system is not well-suited to efficiently serve
either the needs of the various industry participants or those
of the users, mainly due to the fragmentation and complexity of
the traditional industry value chain. The traditional system
depicted above faces a number of major issues, including:
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Limited payment alternatives
Typically, users
pay for content and services developed by a content provider
through a mobile service provider who in turn relies on the
mobile network operators for collection of the actual funds. The
multi-layer collection and settlement system results in reliance
on the mobile network operators, increases settlement complexity
and uncertainty, and therefore, decreases collection efficiency.
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Difficulty for users to find content and for content
providers to reach users
For an end user, it is
difficult and time-consuming to search for applications or
content they are interested in, and at the same time, it is
difficult for an individual content provider to reach a large
number of users efficiently.
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High cost of content development
Each new
application or service needs to be designed to be compatible
with as many handset operating systems and hardware
configurations as possible, which requires upfront investment by
the content providers or mobile service providers and results in
prolonged time to market. Pre-installing features on mobile
handsets requires individual negotiation with handset companies,
while more advanced features and applications can only be added
during the handset design stage, making it more challenging to
pre-install such features on large numbers of handset models.
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Lack of incentive for handset manufacturers
Handset companies typically do not generate any additional
revenues following the sale of a handset, and only a limited
number of applications and features are pre-installed from which
they may generate limited revenues. They also may not possess
sufficient internal capabilities to source and install large
numbers of applications or content or develop the necessary
payment channels in-house.
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Emergence
of Independent Mobile Application Stores in China
Independent mobile application stores aggregate applications or
content from different content providers in a central platform
which enables large numbers of users to easily browse, find and
pay for applications and content. Unlike closed mobile
application stores, such as Apples App Store which is
exclusive to its iPhone, independent mobile application stores
in China can operate on a wide range of handset models from
different manufacturers.
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These platforms typically consist of middleware software, which
is pre-installed on handsets or sometimes is downloaded by the
users onto their handsets.
These mobile application stores enable a more efficient
ecosystem for mobile Internet content and application
development, distribution and consumption as they play a central
role and enable the following:
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More flexible payment options
By
collaborating with various payment service providers, including
payment processing agents that are not mobile service providers,
an independent mobile application store is able to offer users a
broad range of efficient payment options with less reliance on
mobile network operators.
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Enhanced user experience through content
aggregation
By sourcing and aggregating an
extensive selection of quality applications and content from
content providers, in a central location, independent mobile
application stores make it easier for users to find desirable
content and applications.
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More efficient and cost-effective content
development
Content providers need to design for
only one platform and design standard that in turn is compatible
with a wide range of handset models; as a result, it is less
costly and easier for content providers to create applications
and content and to reach a large number of potential users.
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Increased incentives for content distribution
By cooperating with a large number of handset companies and
having these application stores pre-installed on a wide variety
of handset models, content providers are able to reach a large
user base, and mobile phone companies can earn a share of the
mobile Internet revenues generated on the phones sold.
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Many participants in the mobile application ecosystem in China
are potential providers and operators of such mobile Internet
application stores, including the mobile network operators,
mobile service providers, handset companies, major Chinese
Internet companies and certain providers of mobile handset
technology components. However, according to the Analysys
Report, independent mobile application store operators have been
the early movers and currently are the market leaders, which we
believe results from their neutrality and willingness to share
sales proceeds with other ecosystem participants.
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BUSINESS
Overview
We operate the leading mobile application store in China, as
measured by revenues in 2009, according to the Analysys Report.
The Analysys Report estimates that our revenues accounted for
approximately 50% of all revenues generated from mobile
application stores in China in 2009. On our Maopao application
store, users can browse, download and purchase a wide range of
applications and content such as games, music and books. In
addition, we have established a leading mobile social network
community in China, the Maopao Community, where we operate
mobile social games and provide applications and content with
social network functions to our registered members. Maopao
enables mobile applications and content to be downloaded and run
on a variety of mobile handsets with different hardware and
operating system configurations. We currently target the feature
phone market, which is the largest mobile phone segment in
China, according to the Analysys Report. We collaborate with
handset companies to pre-install Maopao on mobile handsets
before shipment, and from January 1, 2007 to
September 30, 2010, Maopao had approximately 479 million
cumulative users. Over the same period, we offered over
770 applications and over 61,000 content titles in our
Maopao application store and the cumulative number of downloads
reached 3.6 billion.
As an innovator of the mobile application business model in
China, we are centrally positioned in Chinas mobile
application ecosystem, which includes:
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users
, especially those of younger age with modest
income, who constitute the majority of Chinas 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;
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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;
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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 to 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 other 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
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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 Maopao. 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.
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We share sales proceeds from Maopao with handset companies,
content providers and payment service providers, which we
believe help align the interest of these industry participants
with ours, motivate them to provide better products and services
to users and foster a long term mutually beneficial relationship
with us.
We have achieved substantial growth since we launched Maopao in
2006. There were approximately 32.3 million,
379.6 million, 1,613.9 million downloads of
applications and content titles from Maopao in the fiscal years
ended March 31, 2008, 2009 and 2010, respectively, and
approximately 559.2 million and 1,554.6 million in the
six-month periods ended September 30, 2009 and 2010,
respectively.
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On our Maopao Community, our registered members can create their
virtual profiles, befriend others who share similar ideas,
interests or activities, and view the profiles or track the
status of their friends through blogs, pictures, instant
messages and other functions. One of the most popular features
of the Maopao Community is mobile social games, where our
registered members interact with each other in the wireless game
world. We operate these mobile social games on our own server
network through advanced cloud computing technology to ensure
the best user experience. As of September 30, 2010, our
Maopao Community attracted 44.6 million registered members
and our peak concurrent users reached approximately 233,000. We
offer our own virtual currency, K Currency, for members of
our Maopao Community to purchase virtual items in our social
network applications and mobile social games.
Our revenues grew from RMB18.6 million in the fiscal year
ended March 31, 2008 to RMB544.3 million
($81.4 million) in the fiscal year ended March 31,
2010, representing a CAGR of 441.0%. Our revenues increased by
40.2% to RMB336.7 million ($50.3 million) in the
six-month periods ended September 30, 2010 from
RMB240.1 million in the six-month period ended
September 30, 2009. We incurred a loss from operations of
RMB5.3 million in the fiscal year ended March 31, 2008
and achieved profit from operations of RMB37.6 million,
RMB124.0 million ($18.5 million), RMB65.3 million
and RMB12.8 million in the fiscal years ended
March 31, 2009 and 2010 and the six-month periods ended
September 30, 2009 and 2010, respectively.
Our
Competitive Strengths
We believe the following strengths enable us to compete
effectively and capture opportunities in the rapidly growing
mobile applications market in China:
Leading
Mobile Application Store and Fast-Growing Mobile Community in
China
We provide and operate the largest mobile application store in
China, according to the Analysys Report which estimates that our
revenues accounted for approximately one half of all revenues
generated from mobile application stores in China in 2009. We
believe our proprietary MRP format, designed for developing
applications on Maopao, has become a standard software
development format for mobile content and a preferred choice for
handset companies in China, as a result of our dominant market
position. As of September 30, 2010, we had developed
collaborative relationships with over 440 handset companies
and 230 content providers and had entered into agreements with
approximately 100 mobile service providers and 10 payment
processing agents. From January 1, 2007 to
September 30, 2010, Maopao had approximately
479 million cumulative users.
We also operate the Maopao Community, a fast-growing mobile
social network community in China. The number of registered
members of our Maopao Community grew approximately 30 times,
from approximately 1.5 million members as of March 31,
2009 to approximately 44.6 million members as of
September 30, 2010. As our user base grows, the resulting
network effect in turn attracts more content providers and
handset companies to utilize Maopao, creating an increasingly
high entry barrier.
Innovative
Business Model and a Central Position in the Mobile Application
Ecosystem
We believe we are a pioneer in creating and popularizing a
mobile application store in China that enables a rich variety of
mobile applications to effectively run on handsets with a wide
range of hardware and operating systems. We believe Maopao is
centrally positioned in the mobile application ecosystem. Our
standardized application interface enables hundreds of millions
of handsets, regardless of hardware and operating system
configuration, to download and operate applications and other
content available on Maopao. This allows third-party content
providers to reach a large number of mobile phone users, without
the need to customize their applications and content for the
specifications of a specific handset model. We also provide
these content providers and handset companies with an effective
monetization solution through our cooperation with mobile
service providers and other payment processing agents.
Maopao enables handset companies, content providers, mobile
service providers and payment processing agents to focus on
their respective core competencies, which we believe generates
higher economic return and delivers better user experience. We
enter into sales proceeds sharing arrangements with these
industry participants
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to provide them with financial incentives. We believe our
central position in the mobile application ecosystem enables us
to best capture future growth opportunities in Chinas
large and fast-growing mobile application market.
Diverse
Portfolio of Popular and High-quality Content
We offer one of the most diverse and comprehensive portfolios of
mobile applications and content in China. Rather than focusing
on quantity, we put emphasis on quality of the applications and
content. We aim to offer applications and content catering to
user preferences in China, such as popular local card games,
music books and especially mobile social games, instant
messaging, dating-related applications and other mobile
applications and content with social network functions to
further integrate our Maopao Community. We believe our
understanding of user needs contributed to the popularity of the
applications and other contents on the Maopao application store
and user stickiness in the Maopao Community. In the six-month
period ended September 30, 2010, our average download per
single player game is over 1.2 million. Our first major
mobile social game, Fantasy of the Three Kingdoms, reached peak
concurrent users of approximately 46,000 in September 2010
within six months of launch.
We believe our content management process enables us to offer
high-quality applications and content, simplify user selection
experience and provide value to our users. We source mobile
applications and content primarily from a select number of
third-party content providers and from our in-house development.
Collecting and providing user feedback to content providers
helps improve the quality and popularity of applications and
content. Based on user preference, we typically display nine
popular applications for download on the first page of our menu,
and regularly update our offerings, promoting new applications
and content. In the month of September 2010 alone, we introduced
37 new applications and more than 3,000 content titles including
mobile music, books and videos.
Differentiated
User-oriented Operations Enabling Outstanding User
Experience
We strive to deliver a superior user experience. To ensure
service quality, we deliver substantially all applications and
operate all mobile social games from our own servers. For
example, we operate the Maopao Community from a network of
approximately 440 servers, which enables up to
450,000 players to play games and interact with each other
at the same time, greatly enhancing user experience. For most of
the applications and content on Maopao, we offer users a free
trial period, which we believe enhances user experience,
increases downloads and promotes user loyalty. For each category
of the applications and content on Maopao, we also offer certain
applications and content free of charge to enhance user
interest, familiarity and acceptance of Maopao and its content.
Our user experience is further enhanced by our integrated
customer support. We believe we are the only independent mobile
application store that operates a
24/7
in-house call center in addition to an outsourced call center.
Our dedicated customer service team collects user feedback,
answers user inquiries and resolves user complaints via phone,
email, short message services and instant message system. We
have established a proprietary database of statistical user
behavior data and user feedback, and systematically analyze such
information to actively manage and improve content offering on
Maopao.
Strong
Technological Expertise and Research and Development
Capabilities
We believe we have one of the largest and strongest research and
development teams in the mobile applications industry in China.
Approximately 50% of our total workforce is engaged in research
and development activities. Our technological expertise and
strong research and development capabilities are critical
factors contributing to handset companies and content
developers decisions to collaborate with us. For example,
we developed proprietary technologies that enable feature phone
handsets with limited memory to effectively run complex programs
such as mobile social games; we also developed technologies that
can connect multiple servers to increase the size of interactive
user community and enhance user interaction. We plan to
introduce SDK and API toolkits in 2011, which will allow content
providers across China to develop content based on our MRP
format more easily. We believe these proprietary technologies
enhance the users experience and contribute to the success
of the applications on Maopao, such as our mobile social games.
Our strong research and development capabilities have allowed us
to design a core Maopao engine to work across a diverse range of
mobile devices with different hardware systems and software
configurations, which,
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coupled with our experienced field engineers, have enabled us to
keep pace with the short handset model life cycles and deploy
our application store quickly, resulting in popularity of our
Maopao application store among handset companies. From
January 1, 2007 to September 30, 2010, Maopao had been
pre-installed on more than 5,600 handset models and all
major feature phone handset operating systems. In addition, in
April 2010 we launched a version of Maopao for smart phones
that runs on the Symbian operating system and plan to develop
more application stores for other smart phones such as Android
phones once the market for such phones reaches a critical mass
in China. We believe our strong technological expertise and
research and development capabilities have been and will
continue to be a foundation upon which we will build our
long-term success.
Experienced
Management Team with Proven Track Record
We have an experienced management team that has successfully led
our operations and increased our revenues through rapid organic
growth. Mr. Michael Tao Song, our founder, chairman and
chief executive officer, has over ten years of experience in the
telecommunications industry in China. Mr. Li Ou, our chief
technology officer, has over nine years of experience in the
telecommunications industry in China. Mr. Carl Yeung, our
chief financial officer, has over eight years of experience in
the accounting and finance fields. Leveraging their industry
experience and vision, our management team helped pioneer our
current business model in China and established core
technological expertise to capture opportunities in the mobile
applications market. We are thus able to popularize the
pre-installation of Maopao. We believe that the technical and
industry knowledge and the experience of our senior executives
in developing and operating Maopao is critical to our future
success and provide us with significant competitive advantages
in the fast growing mobile application industry.
Our
Strategies
Our objective is to grow profitably by building on our
leadership position in China and become a global dominant mobile
application store. The key elements of our strategy include:
Establish
a Strong Consumer Brand among Handset Users
Having established our brand among industry participants, we
intend to promote and enhance our brand recognition among users.
Our goal is for handset users to identify Maopao as
a popular consumer brand and consider the availability of Maopao
as a key criterion in making handset purchase decisions, thereby
further strengthening our market position and enhancing our
bargaining power. We plan to invest in advertising campaigns to
promote our Maopao brand, as well as to hold
promotional events in consumer electronic stores, hypermarkets
and other retail locations to increase consumer awareness of
Maopao. We plan to collaborate with selected mobile network
operators to promote our brand by associating it with certain
mobile entertainment content. We also plan to engage in
social-network
marketing activities by cultivating a group of elite users
within our user community, who can act as external promoters of
Maopao among consumers in social communities. We believe that
our branding efforts will increase consumer awareness of Maopao
while creating a more active and loyal user community that
associates the Maopao brand with high-quality and
diverse mobile applications offerings.
Further
Increase User Activity and Monetize Our Large User
Base
We plan to further transform our large user base into an
account-based interactive social network community, which we
believe will improve user interaction and enhance user loyalty.
We are in the process of converting several popular
single-player games into mobile social games, which we believe
will not only extend the product life cycle of the games, but
also introduce more users to the Maopao Community. In addition,
we are in the process of expanding the usage of our unified
account management system so that each of our users has a unique
passport on Maopao which will facilitate users access and
use of Maopao Community functions. For example, users with
similar interests may easily locate each other, share
information and recommend applications to each other through
Maopao. By doing so, we can better track and analyze individual
user behavior and preferences and offer more targeted and
personalized applications and content.
We intend to offer more applications with community features
such as mobile social games, which we believe generally attract
more user interest, generate higher spending per user and have
longer product lifespan than single-
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user applications. We also plan to enhance monetization by
introducing new products and content, such as mobile
advertisements.
Capitalize
on the Growth of the Smart Phone Market
We believe the smart phone market will achieve further growth in
the next several years in China. Smart phones are usually able
to easily run higher performance games, multimedia applications
and a rich variety of content as compared to feature phones.
Therefore, we believe that average user purchase of applications
and content from smart phones will be higher than that of
feature phones. We launched a new version of Maopao for smart
phones that runs on the Symbian operating system in April 2010,
because of the current large Symbian installed base in China. We
plan to develop more application stores for other smart phones
and vigorously promote our application stores to smart phone
users once the market for such smart phones reaches a critical
mass in China.
In particular, we intend to leverage Maopaos leadership
position in Chinas mobile application store market and our
established central position in the mobile application
ecosystem, and collaborate with handset companies to pre-install
Maopao on smart phones, particularly Android-based smart phones.
We believe the Android-based handset market in China is likely
to be highly fragmented, and our proven business model and
extensive relationships with handset companies, content
providers and payment service providers, our technological
strength and diverse application and content library will enable
us to penetrate the smart phone market in the same way we
penetrated the feature phone market. For example, we believe our
sharing of sales proceeds with handset companies will provide a
strong incentive for them to pre-install Maopao in their smart
phones.
In addition, our large established user base as well as
registered user community will provide further support to our
expansion into the smart phone market. We believe our users, who
are familiar with our applications, services and community,
would welcome Maopao in smart phones should they choose to
switch to such phones in the future, and our backend
cloud-computing based unified account management system would
enable users to keep their personal data in the Maopao
Community, such as game status, virtual items and social
relationships, enabling users to continue enjoying their
established virtual identity.
Increase
Usage of Third-party Payment and Collection System
We are actively seeking to further expand the number and usage
of third-party payment channels available to our users. In
addition to our existing payment cooperation arrangements, we
plan to expand our payment channels to include regular credit
cards. These third-party payment channels and our K Currency,
which we introduced in late 2008, can currently only be used by
our Maopao Community members. We plan to extend the availability
of these third-party payment channels to all our users for all
applications and content, in the form of a branded billing
gateway, the Easy Mobile Pay System. We believe that building a
direct billing relationship with our users will enable us to
provide a better user experience, track user behavior and engage
in cross-selling.
As overall costs related to third-party payment channels are
lower than costs associated to mobile service providers,
increased usage will enable us to better manage our payment
related costs as percentage of revenues and potentially increase
our profitability. We plan to encourage usage of these
third-party payment channels through educational and promotional
activities.
Further
Increase the Installed Base of Maopao
We plan to further increase the potential user base of Maopao by
maintaining our cooperative relationships with handset companies
and expanding the number of handset companies we work with and
number of pre-installations of Maopao. According to the Analysys
Report, the feature phone segment will maintain approximately
60.0% market share of the total mobile handset installed base in
China at the end of 2013. Given the relatively low entry barrier
of the feature phone market, we believe the feature phone market
will continue to be fragmented and there will be more handset
companies entering into this segment. On the strength of our
Maopaos dominant position in the feature phone segment, we
will continue to maintain and increase the installed base of
Maopao by closely working with existing and new handset
companies.
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Maintain
and Extend Technological Leadership
Technological leadership is critical to our success as the
leader in Chinas rapidly-changing mobile application
industry. We will continue to devote substantial resources to
our research and development efforts to increase the performance
and functionality of Maopao, enhance user experience and
optimize the utilization of mobile handset and network
capabilities. In particular, our research and development
efforts will focus on the following areas:
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Improve our hardware infrastructure to support a larger number
of users concurrently accessing Maopao for an increasingly broad
range of applications and digital media content, including video
chat and video streaming, while minimizing download errors or
system malfunctions;
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Develop additional solutions for community-based applications,
including a unified user account management system and solutions
that allow users to interact on a real-time basis with each
other while running other applications simultaneously;
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Develop new versions of Maopao which can be downloaded directly
by users over the air and installed on smart phones such as
those using the Symbian operating systems; and
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Continue to advance the capabilities and functionalities of
Maopao while enabling users with older versions of Maopao to
easily access newly developed applications.
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Expand
Overseas User Base to Strengthen Our Business and
Revenue
Handsets made by the handset companies we work with are shipped
all over the world, and we believe Maopao and our business model
also have significant potential in overseas markets. Initially,
we plan to focus on certain emerging markets, such as Indonesia
and India, both having sizable and growing mobile user bases and
are major export markets for Chinese-made handsets. We plan to
leverage our relationship with the handset companies we work
with to have Maopao installed onto their exported handsets. We
have established a dedicated sales team covering each of our
target overseas markets and we have translated the user
interface of many of our single-player games and other
applications into local languages, including English, Hindi and
Thai. In India and Indonesia, we have identified key industry
participants, including local mobile operators, mobile service
providers, content providers and handset manufacturers, and will
promote our business model to them. We may seek to form
strategic relationships
and/or
joint
ventures with mobile operators, content providers, handset
companies and other major industry participants in selected
overseas markets, including Southeast Asia and South America, to
operate our mobile application store in those markets and to
source localized content.
Maopao
Application Store
Maopao is the largest mobile application store in China as
measured by revenues in 2009, according to the Analysys Report.
Maopao enables:
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handset companies to pre-install Maopao and applications and
content onto mobile handsets to enhance handset features. With
Maopao, mobile phones can expand the portfolios of mobile
applications and content available to their users, thus
enhancing the attractiveness of handsets;
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content providers to gain access to a large number of users and
potential users without extensively customizing content for
different handset models. They can focus on developing new
content without concerns of compatibility with the hardware,
software and operating systems of different mobile handsets;
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users to conveniently browse, download and purchase mobile
applications and content from our mobile application store by
wirelessly downloading applications or accessing content on
their handsets;
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us and other industry participants to collect payments from
users through payment service providers including mobile service
providers and independent payment processing agents. The
availability of these user-friendly payment channels allows us
to incentivize other industry participants and align their
interest with us via sharing of sales proceeds.
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We believe our innovative and sustainable business model has
fueled our growth. From January 1, 2007 to
September 30, 2010, Maopao had approximately
479 million cumulative users. In the period from
January 1, 2007
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to September 30, 2010, we offered over
770 applications and 61,000 content titles on Maopao and
the cumulative number of downloads had reached 3.6 billion.
Our
Users
Maopao had approximately 479 million cumulative users from
January 1, 2007 to September 30, 2010. Most users
access our applications and content offerings primarily through
the pre-installed Maopao application store on their mobile
handsets. Users can also download applications or content
available through Maopao
over-the-air.
We also offer users the option of downloading certain
applications from our website, 51mrp.com. Furthermore, we have
designed versions of Maopao which can be easily downloaded to
mobile handsets that have not pre-installed Maopao.
The number of registered members of our Maopao Community network
has grown approximately 30 times, from approximately
1.5 million members as of March 31, 2009 to
approximately 44.6 million members as of September 30,
2010. In the six-month period ended September 30, 2010, we
had 60,853 average concurrent users on the Maopao Community
network, compared to 31,547 average concurrent users in the
fiscal year ended March 31, 2010. On the strength of this
large user base, we have accumulated valuable statistical usage
data. We utilize such data to better understand and predict user
demand for our offerings and their price sensitivity, which help
us launch and price new applications. We also utilize user
feedback to upgrade existing applications and content available
on Maopao and improve user experience.
The following table sets forth our selected quarterly Maopao
Community operating data for the periods indicated:
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For the Three-Month Period Ended
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December 31,
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March 31,
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June 30,
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September 30,
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2009
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2010
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2010
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2010
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(In millions)
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Number of active members
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3.4
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5.5
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7.7
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9.4
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Number of member log-ins
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264.4
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380.6
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447.9
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622.5
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Applications
and Content Available Through Maopao
The main categories of mobile applications and content available
through Maopao include:
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community-based applications and content, including mobile
social games and social network applications; and
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single-user applications and content, including single-player
games, multimedia applications and other single-user content.
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We have significantly increased application and content
offerings on Maopao. In the fiscal years ended March 31,
2008, 2009 and 2010 and six-month period ended
September 30, 2010, our total number of single-user
applications and content titles offered on Maopao was 174,
2,433, 30,342 and 55,079, respectively. In the three-month
periods ended December 31, 2009, and March 31,
June 30 and September 30, 2010, our total number of
mobile social games and social network applications offered on
Maopao Community was 14, 33, 40 and 50, respectively.
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We have sole control of the availability and placement of
content on Maopao, which we update periodically based on user
demand and the availability of newly developed applications and
content. For each category of applications and content on
Maopao, we offer a certain percentage of free applications to
enhance user interest in Maopao as well as user familiarity with
and acceptance of applications and content on Maopao. The
following table sets forth the categories, number of application
and content titles offered and number of downloads in the six
month period ended September 30, 2010.
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Applications/Content
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Downloads
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Titles Offered for the Six-Month Period
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in the Six-Month Period
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Ended September 30, 2010
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Ended September 30, 2010
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(In millions)
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Maopao Community-based Applications
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Mobile Social Games and Social Network Applications
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50 Applications
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36.0
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Single-user Applications and Content Titles
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Single-Player Games
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591 Applications
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712.2
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Multimedia Applications and Content Titles
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Mobile Books
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One Application and 29,008 Content Titles
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125.7
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Mobile Music
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Three Applications and 9,263 Content Titles
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105.7
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Mobile Video
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One Application and 5,425 Content Titles
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57.5
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Pictures and Wallpapers
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One Application and 10,246 Content Titles
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26.0
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Other Single-User Applications and Content Titles
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113 Applications and 377 Content Titles
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491.4
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Total Single-User Application and Content Titles Downloads
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1,518.6
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Mobile
Social Games and Social Network Functions
We offer a variety of mobile social games and social network
functions, such as instant messaging, blogging, personal
profiling, content sharing and virtual gifting, on our Maopao
Community. There were 9.4 million active members and
622.5 million member log-ins on the Maopao Community in the
three-month period ended September 30, 2010, compared to
7.7 million active members and 264.4 million in the
three-month period ended December 31, 2009. Some of our
mobile social games, such as Fantasy of the Three Kingdoms, are
mobile versions of popular Internet based games, which require
players to have game-specific applications installed to enable
access to game servers. We also offer mobile social versions of
popular card games and strategic games.
Many of our mobile social games adopt an item-based revenue
model. Mobile users can download the game and play the basic
functions for free. We charge mobile users when they purchase
in-game items, such as performance-enhancement skills, weapons
and accessories. For example, there are more than a hundred
in-game items available for download in the Fantasy of the Three
Kingdoms, and each item typically costs RMB1 to RMB3.
We have a wide selection of social network tools on Maopao,
including the mobile versions of popular Internet applications
in China, such as QQ instant messenger and Sina Microblog, as
well as our own Maopao Community social network. The Maopao
Community had approximately 44.6 million registered members
as of September 30, 2010 and offers instant messaging,
blogs and other mobile applications and content enabling user
interaction on our Maopao Community. We offer most social
network tools for free, but may charge for virtual gifts and
other items usually at RMB0.5 to RMB20 per item.
Single-Player
Games
Single-player games involve a single player and usually
relatively simple rules, such as card games, simple strategic
games and action games. We offered approximately 590
single-player games through Maopao during the six months ended
September 30, 2010 and there were approximately
712.2 million downloads of our single-player
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games in the six-month period ended September 30, 2010,
compared to 230.0 million and 851.0 million in the
fiscal years ended March 31, 2009 and 2010, respectively.
Our most popular single-player games include Happy Dou Di Zhu, a
card game, and the Legend of Sky and Swordsman, a role-playing
game.
We offer a number of free single-player games on Maopao. Once
users are familiar with our free games and choose to pay for a
more sophisticated version of the game, they can download each
single-player game usually for approximately RMB4 per game. In
addition, we usually charge users approximately RMB2 for
purchasing an in-game item, such as performance-enhancement
skills, weapons and accessories. We also offer periodical
promotions in which mobile phone users can download a package of
single-player games for a special price. For some single-player
games, we charge a one-time subscription fee to allow users to
play these games for an unlimited number of times over a period
of time, typically less than one month. We record revenues from
these subscriptions at the time of download given
(i) we have no substantive ongoing performance
obligation and (ii) the short subscription period.
Multimedia
Applications
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Mobile music players.
Our mobile music
applications offer access to mainstream music content providers
such as Ai Ting Bar. Users can stream music directly to their
handsets or download songs to be stored in their handsets or
used as ringtones. Users may stream music for free, and pay
approximately RMB2 to download a song or lyrics. Users can also
choose an unlimited download package for RMB8 per month.
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Mobile book reader.
Users can subscribe to our
proprietary
e-book
application, Kaiyue, and download books for approximately
RMB2 per book, or choose an unlimited download package for
RMB12 per month.
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Mobile video players.
Users can download video
clips to be stored in their mobile phones for approximately RMB2
per clip or choose an unlimited download package for RMB10 per
month.
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Pictures and wallpapers.
Users can download
images to be stored in their mobile phones or used as wallpapers
for approximately RMB2 per set of six to ten images, or
approximately RMB6 for a package of six sets of images.
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Other
Single-User Mobile Applications
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E-Commerce.
Mobile
users can purchase lottery tickets and recharge the balance on
their pay-as-you-go mobile phones through applications on Maopao.
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WAP Internet access.
We offer WAP Internet
access to websites preapproved by us through the Maopao browser,
our proprietary WAP browser.
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Other Applications.
Users can access a broad
range of other applications through Maopao. Some of the most
popular applications include instant maps, real-time stock
quotes and analysis, 139 mailbox, weather, network clock and
electronic dictionary. We offer most of these applications for
free.
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Content
Sourcing and Management
The popularity and success of our application store depend on
the quality of applications and content on Maopao. We
effectively manage the applications and content on Maopao to
offer high-quality applications and content, simplify user
selection experience and provide value to our users. Leveraging
our statistical user behavior data and user feedback, we provide
our in-house development team and content providers with
suggestions and guidance on applications and content that meet
user needs, and periodically set development focus for them.
We strive to maintain close relationships with creative
third-party content providers and continuously motivate them to
introduce appealing applications through Maopao. Maopao provides
content providers with access to a large user base, enabling
them to design content that can be delivered to handsets with a
myriad of hardware and operation system configurations, without
extensive customization work. Furthermore, we believe our
extensive mobile user base and our ability and efforts to
restrict piracy activities on Maopao enhance the attractiveness
of our sales proceeds sharing mechanism compared with that of
some of our competitors. We selectively collaborate with content
providers and have entered into agreements with over
230 content providers as of September 30, 2010. Our
content providers include some of the most popular Internet
companies in China, such as Baidu, and also many
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independent content development companies. Mobile service
providers also sell their mobile applications and content to
mobile phone users through Maopao. We select content providers
based on reputation, track record and the needs of mobile users
and handset companies. Therefore, we currently do not work with
individual developers. We also have a standardized process to
assist content providers development and launch of
applications and content.
While a substantial majority of the applications and content
titles available through Maopao are developed by or sourced from
third parties, we also have our in-house programming capability
to develop certain popular applications such as mobile book
reader, mobile music players, single-player games and social
network applications in order to maximize our ability to capture
value in the content supply chain.
In our Maopao application store, we update the user interface on
a weekly basis to prioritize new and popular content offerings.
We usually display nine popular applications on the first page
of Maopao. We are able to actively position our content
offerings on Maopao based on our analysis of statistical user
behavior data and user preference. We try to ensure that our
content offerings are not duplicative and eliminate internal
competition among the applications and content offered in the
Maopao application store.
Contractual
Terms with Content Providers
We pay content providers a percentage of the proceeds we receive
from payment channels. To incentivize developers
investment in certain applications that may require more
resources and a longer time commitment to develop than simple
applications, such as mobile social games, we sometimes pay
content developers a minimum guaranteed amount to cover part of
their development costs in addition to sharing the sales
proceeds generated from such applications from mobile users. For
certain simple applications such as card games, we may make a
one-time payment to the content developers for all rights
associated with a particular application. For mobile social
games, we usually negotiate for exclusivity licensing terms of
two years with one year automatic renewal.
Support
to Content Providers
We emphasize fostering our cooperation with content providers.
The Maopao application store offers content providers with ease
of development. We license our standard software development
kits and related tool suites for free to our selected developers
for them to develop content in our proprietary format. Our
standard software development kits and related tool suites have
been designed with modularized functions to allow content
providers to focus on content creation and improvements without
being slowed by concerns over compatibility with handset
hardware and software as well as network environment. This
greatly simplifies content providers work process and
shortens their
time-to-market
period.
Our specialized content provider support team helps content
providers better utilize our development tools and speed up
their development process. Our field engineers, some of whom are
stationed at the offices of content providers for a period of
time, assist content providers with project management and other
technical aspects of developing applications. We also work with
developers to test the content before launching it on Maopao.
After launching the content, we give suggestions to content
providers to improve and upgrade their applications and content
based on user feedback available to us. From time to time, we
provide training to content providers for them to better
understand our technical tools. We believe these efforts help
facilitate the development process and enhance content
providers relationship with us.
Furthermore, we also host events for fostering the content
developer community, such as the 3G Application Software Forum
we held in Hangzhou in February 2010. We provide guidance and
technical support to content providers on developing content
designed for 3G network environment, which we believe will help
enrich the applications available on Maopao following the
popularization of 3G network. We believe that on the strength of
our close collaboration with content providers, we are well
positioned to offer creative and well-integrated digital
lifestyle solutions to our users.
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Operation
of Maopao
We pre-install certain applications and other content onto
Maopao, and the applications and content menu on Maopao is
periodically updated. Our operation team consists of
approximately 99 employees as of September 30, 2010,
and is responsible for managing the operation of applications
and other mobile content available on Maopao.
We operate substantially all of the applications and content on
Maopao, such as mobile social games, on our network
infrastructure comprised of over 400 computer servers. Our
network infrastructure automatically reports any detected
malfunctioning on a real-time basis to our network control
center. This allows us to quickly respond to and resolve network
malfunction issues to ensure stability and security of our
network.
Our operation team supervises the operation environments of
applications available on Maopao, including complex applications
such as mobile social games. They ensure the proper functioning
of wireless connection and data transmission systems and
application features, initiate remediation process once bugs or
other defects are detected, and provide application updates for
users to download.
Our operation team also polices against rampant piracy
activities in China, which allow users to bypass the mobile
application store, decrease revenues of store operators, content
providers and other industry participants, and damage store
operators reputation and credibility among users and
industry participants. We regularly analyze the download and
billing records of handsets using Maopao in order to detect
piracy activities.
User
Account Management
Users of our Maopao Community applications and content need to
register an account with Maopao. Once registered, they will have
a user name and password for them to log in. Such account
management system provides us with each individual users
behavioral history. With respect to users of our single-user
applications and content, we currently only have statistical
user information. We are in the process of introducing a unified
account management system, similar to our Maopao Community
registration system, to all users of Maopao, which will enable
us to track and analyze each individual users behavior and
preferences. Utilizing such information, we can better serve our
users by introducing personalized offerings according to each
users preference and taste. To facilitate users
transition from the current system, where no log-in is required,
to our new account management system, we are introducing a
default registration system, under which an existing user will
be assigned a default user name and password. Such user is
encouraged to customize his or her user name and password, and
voluntarily provide us with optional personal information such
as his or her gender, age, birthday and location. With each user
having his or her own identification, users can better interact
with each other. For example, users with similar hobbies may
easily locate each other, share information and recommend
applications to each other via Maopao. We believe this account
management system will enhance users stickiness to Maopao
and create additional demand for the applications and content on
Maopao.
Customer
Service
We believe our emphasis on customer service enhances our brand
image and user loyalty. We have a call center and a website
forum that provide real-time assistance to users of Maopao as
well as all of the applications available in our mobile
application store. We believe that we are the only independent
mobile application store operator in China that provides
customer service via an in-house call center 24 hours a
day, seven days a week, in addition to an outsourced call
center. Maopao also displays the customer service contact number
and provides a link to our website. Our customer service
representatives are well trained to address user inquires,
educate users and potential users about Maopao and applications
and promptly resolve user complaints. We also monitor user
complaint and give feedback to content providers to identify
potential issues that may need to be addressed. We were granted
the China Contact Center Award by China Electronic
Chamber of Commerce in 2009.
We ensure service quality by placing emphasis on personnel
selection and regularly monitoring the performance of our
representatives. Each representative has to complete monthly
mandatory training, conducted by experienced managers on product
knowledge, service attitude, complaint handling and
communication skills, among others.
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Cooperation
with Handset Companies
Having Maopao and applications embedded in mobile handsets is an
important channel to promote Maopao and content. Mobile network
operators in China have very limited control over handset sales.
End mobile users can choose from hundreds of different brands
and thousands of different models of handsets. Against the
backdrop of a highly fragmented and competitive handset market
in China, the ability to pre-install an application store onto
handsets before they reach mobile users is key to a mobile
application stores success.
We have formed strong collaboration relationships with handset
companies to embed our mobile application store for different
types of mobile baseband, chipsets and reference designs, e.g.
MTK, Spreadtrum, Qualcomm and STMicroelectronics. We have
cooperated with over 440 handset companies. Our
collaborators include branded handset companies such as Aux,
Gionee, Haier,
K-Touch
and
Lenovo, as well as independent design houses such as Longcheer,
Hua Qin and Tian Long. We select handset companies based on
their reputation, market share and the strength of their
research and development capabilities. Our agreements with
handset companies are generally for terms of two years and
usually contain automatic renewal provisions.
Contractual
Terms
We generally pay handset companies a percentage of the proceeds
we receive from payment channels. In addition to monetary
benefits, pre-installing Maopao enhances the features and user
experience of mobile handsets and thus helps promote the sales
of handset companies. Given our economy of scale, working with
us helps reduce handset companies cost of negotiating with
individual content providers and payment processing agents,
whereas such costs may be substantially higher in the case of
using their own or a third-partys mobile application store
with a smaller user base. Handset companies also generally trust
our content selection based on our analysis of statistical data
of an extensive user base and our prediction of market trend and
user preference. We work closely with handset companies to
develop new handset functions and optimize the operating
environment of individual handset models. Our knowledge about
their handset design and functions in turn helps us to develop
Maopao and applications to better utilize the hardware and
software resources of mobile handsets. We believe we have built
up a reputation among handset companies on the strength of our
value proposition to them and our track record in bringing them
tangible benefits.
Payment
Channels
Cooperation
with Mobile Service Providers
In the three fiscal years ended March 31, 2010 and the
six-month periods ended September 30, 2009 and 2010, most
of our revenues were collected through the billing channels of
mobile service providers. After a mobile user confirms that he
or she is ready to purchase the mobile application or content,
Maopao will prompt the user to send an SMS to a specified
number. Then a mobile service provider selected by us will send
the user a confirmation SMS with transaction details and also
send a simultaneous message to the mobile network operator. When
selecting mobile service providers, we usually consider mobile
service providers cooperation history with us, including
their service quality or timeliness of payment. After confirming
the transactions have been effected based on the SMS, the mobile
network operator will record the transactions and bills the
user, along with other mobile services.
Our relationships with mobile service providers are critical for
us to collect proceeds under the payment process described
above. As of September 30, 2010, we had entered into
agreements with approximately 100 mobile service providers, who
have access to payment channels provided by mobile network
operators pursuant to their respective agreements. Key service
providers we work with include Tom.com, Kongzhong and Sina. We
select mobile service providers based on the coverage of network
to which they have access, proceeds sharing arrangements and
their track record of revenue collection. Our agreements with
mobile service providers are generally for terms of one to three
years without automatic renewal provisions. Certain mobile
service providers, such as Sina, also provide content to Maopao
and rely on our distribution channels to promote such content,
which further enhances our relationships with them.
We generally share with mobile service providers a percentage of
the proceeds collected by mobile service providers, which are
net of the fees mobile service providers pay to mobile network
operators. We usually receive
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settlement 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.
We rely primarily on mobile service providers for revenue
collection 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. See Risk Factors Risks Related to Our
Business and Our Industry We depend on mobile
service providers, and ultimately mobile network operators for
the collection of a substantial majority all 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.
When mobile service providers sell their applications and
content through Maopao, we usually charge a commission at a
fixed percentage of the sales proceeds that the mobile service
providers received from mobile phone users with respect to such
applications and content.
K
Currency and Third-party Payment Channels
In addition to mobile service providers billing channels,
we offer our own virtual currency and a variety of third-party
payment options to mobile handset users. We launched our own
form of virtual payment, K Currency, in April 2009, to
enable users to purchase virtual items in our social network
applications and mobile social games in Maopao Community.
K Currency is the primary form of payment allowed for
purchases in the Maopao Community, while purchases of
single-user applications and other content are mostly transacted
through SMS. Users can purchase K Currency using game cards
of third-party companies such as Giant Interactive, Netease,
Perfect World and Shanda, other prepaid cards, bank remittance,
China Post, and virtual money such as QQ Currency, among
others. For these payment channels, we usually collect through
independent payment processing agents and pay a percentage of
proceeds to such agents, which is usually lower than the
percentage we pay mobile service providers. Our agreements with
the independent payment processing agents are generally for
terms of one year with automatic renewal provisions.
Our Maopao Community revenues generated from K Currency has
grown significantly, from RMB1.2 million in the three
months ended December 31, 2009 to RMB13.9 million
($2.1 million) in the three months ended September 30,
2010, accounting for 0.8% and 8.0% of our total revenues,
respectively.
Sales and
Marketing
Brand
Awareness
We plan to launch our new branding program focusing on raising
the awareness of Maopao and recognition of our
Maopao brand by 2011. We believe our existing track
record and cooperation with handset companies, content
providers, payment channels and mobile network operators have
earned us a good reputation among these industry participants.
With our new branding program and our efforts to implement
unified account management system to cover all our users, we
strive to further enhance market recognition of our image and
user experience associated with our brand.
Handset
Users
Leveraging our existing large user base, we aim to increase our
sales by introducing appealing content to our users, enhancing
users purchasing frequency and average transaction amount.
Our market research team keeps abreast with the latest market
trend and user preference by collecting information from handset
companies and analyzing our user statistical data. They give, on
a real-time basis, suggestions for developing new content to our
in-house development team and our third-party content
collaborators. We implement innovative marketing and promotion
strategies that are specifically designed for our application
store and for each of the main applications we provide. We
market and promote Maopao and applications and other content to
handset users through the following channels.
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Affiliate marketing.
We jointly promote Maopao
and content available thereon with several well-known mobile
service providers, which is generally more cost-effective and
wide reaching than our own promotion
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through traditional advertising. Mobile service providers with
their own Internet-based content may promote the applications on
their websites. We have also entered into cooperation agreements
with several mobile service providers and provincial
subsidiaries of the key mobile network operators to
collaboratively promote mobile applications and other content.
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Cross-selling.
We promote the cross-selling of
the applications and content on Maopao application store by
periodically introducing sales events based on certain themes
and group similar applications and content into packages. On
Maopao, we also notify users of the applications or content that
their friends or contacts use. After users download applications
or content, we send information to users about similar
applications and content that may interest them.
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Advertising and promotional events.
We have
implemented a Talented User program, under which some of our
users who are familiar with Maopao and applications and content
thereon are selected to recommend and promote the applications
and content on Maopao to other users in forums that discuss
frequently asked questions about Maopao or applications and
content thereon.
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Prior to launching new applications and content, we usually
conduct test marketing by offering the content to selected users
on a small scale. We gather and analyze user purchasing results
and feedback, focusing on estimated sources of demand, growth
potential and acceptable selling prices of the applications and
content on Maopao application store. We will adjust our launch
and marketing plan based on test marketing results, to enhance
our marketing efficiency.
Promotion
to Handset Companies
Pre-installing the Maopao application store onto mobile handsets
is an important channel for us to increase our user base. We
believe we were one of the first companies to provide mobile
applications to handset companies for free, which helped
establish a critical user mass for Maopao. We continue to
emphasize maintaining close relationships with handset companies
to increase the number of mobile handsets with Maopao
application store pre-installed. We are also developing
relationships with additional handset companies to further
extend our reach to potential users.
International
Expansion
We believe we are well equipped to expand into overseas markets
where there are a large number of users of China-manufactured
mobile handsets, such as India, Indonesia and other emerging
market countries in Southeast Asia and South America. We have
already initiated our expansion efforts in these markets. We
have a dedicated sales team covering each of our major overseas
market and we have translated the user interface of many of our
single-player games and other applications into local languages,
including English, Hindi and Thai. In India and Indonesia, we
have identified key mobile market participants, including local
mobile operators, content providers and handset manufacturers,
and will promote our business model to them. We also plan to
continue to leverage our relationship with China-based handset
companies to have Maopao pre-installed onto their handsets for
export.
Our
Technologies
Our technologies help us seamlessly connect the various
resources of the mobile application ecosystem and deliver
superior experience to our users. Our users only need to deal
with the standardized and user-friendly interface of Maopao to
search, purchase and use the applications and content on Maopao
without concerns of complicity during the interaction among
telecommunication networks, mobile handsets and mobile content.
We believe Maopao and related technologies provide practical
solutions to a series of problems facing mobile application
stores operating in China.
Compatibility
with Mobile Handsets
Chinas mobile handset market is characterized by the
fragmentation of handset hardware, ranging from low-end handsets
designed for basic telecommunication functions to
top-of-the-line
latest models. A successful mobile
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application store is required to be compatible with not only
such diversified hardware, but also a myriad of operating
systems and other software available on handsets in China.
Maopao is designed to be compatible with all mainstream handset
development hardware such as MTK, Spreadtrum, Qualcomm and
STMicroelectronics, and software such as Brew, TI and Linux,
among others, and facilitates the operation of individual
applications on various mobile operating systems. With our
knowledge about various handset models in China accumulated from
our cooperation with handset design houses and our involvement
in the handset design process, we have insight in the advantages
and shortcomings of many popular handset models. Maopao and
applications and content thereon are designed to better utilize
the resources of these popular handset models hardware and
software and bypass their system bottlenecks, thus enhancing the
performance of the applications and content on Maopao in the
actual operation environment.
Compared to a typical Java format mobile application, an
application in our proprietary MRP format requires much smaller
storage space, roughly one-third of the size of a Java based
file for a similar game or application, and takes only one-sixth
of the handset memory space a Java application would take when
playing. This makes Maopao and applications and content thereon
more appropriate to run in the operating environment of mobile
handsets. In order to run smoothly, many of todays
sophisticated mobile applications, especially mobile social
games, generally require expensive
top-of-the-line
hardware for the high computational power and extensive memory
space, the lack of which would render it difficult to achieve
satisfactory performance. In contrast, Maopao and applications
are designed to be flexible to allow for effective game play and
other user experience even on lower-end handsets. We believe
such flexible requirement for handset hardware and software
provides us with competitive advantage and allows us to access a
broad range of users in China.
Connectivity
with Mobile Network
Chinas network environment also presents challenges to
mobile application store operators. Each of the three dominant
mobile network operators has dozens of provincial subsidiaries
usually running a local network in their respective regions.
Therefore, there are effectively scores of different network
operating environments that a national mobile application store
operator must deal with. Leveraging our core development
teams experience in telecommunication networking area, we
have a good grasp of the actual network operating environments
in different regions in China, including their actual
connectivity, interconnection among different networks as well
as their respective effective fee standards. Equipped with such
insight, we design Maopao to make best use of network resources,
accommodating the actual network operating conditions. For
example, when users use the applications and content on Maopao,
it can automatically detect local network conditions, list
network connection alternatives and select the optimized
connection solution. When connecting to a local wireless network
that has unique data transmission problems, built-in algorithm
on Maopao will be triggered to minimize data error during
transmission.
Digital
Rights Management
Maopao is designed to tackle piracy activities. Different from
other application stores that rely on open source software like
Java based programs, our proprietary MRP format has built-in
encryption features for content-protection and secured billing.
Each mobile handset utilizing Maopao has an individual computing
method for its billing records. Thus even if a handset is
attacked by hackers, the impact is usually limited to that
specific handset.
Scalable
Hardware Infrastructure
All the physical servers on our infrastructure network function
as a virtualized central server, which supports simultaneous
mobile application access by approximately one million mobile
users. We utilize this technological foundation for mass
computing and operational stability, supporting most
sophisticated applications such as mobile social games and
complicated social network functions.
Single
Socket Solution and Easy Upgrade Process
We implement a single socket solution, which significantly
improves wireless data transmission speed and application
stability. Different from certain other mobile application
stores which require users to open a socket for each
application, our single-socket approach saves users the time and
resources needed for opening and closing
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different sockets and switching among sockets. Maopao and the
cloud computing at our server end allow the operation of several
functions concurrently through one socket on a given handset.
Maopao also shortens the application upgrade process, which is
common for mobile social games. Users generally have to reload
the entire application for such upgrades, which drastically
slows down the application and usually frustrates mobile users.
Maopao simplifies the upgrade process by requiring reloading
only the upgraded part of the applications, thus cutting down
processing time significantly.
Research
and Development
We have an experienced team of engineers. As of
September 30, 2010, our research and development staff
consisted of 260 software, hardware and system engineers. We
recruit our engineers throughout China and have established
various recruiting and training programs with leading
universities in China.
Our senior management team heads our research and development
efforts and sets out strategic directions for the advancement of
our offerings. Mr. Li Ou, Mr. Yan Tang and
Mr. Wenjie Wu are experienced engineers with a successful
track record of developing Maopao. Under their guidance, our
research and development plans currently focus on the following
areas:
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Improving our hardware infrastructure and computational
capability. As of September 30, 2010, peak concurrent users
of our Maopao Community reached approximately 233,000. On
average, there are over one billion user visits to the Maopao
application store every month in 2010. In order to prevent
system malfunction and downtime that may result from our
expanding user base, we focus on investing in our hardware
infrastructure and computational capability to support more
mobile users concurrently accessing more diversified
applications and content and interacting with each other through
Maopao Community.
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Development of systematic solutions for community-based
applications. We are fine tuning our unified user account
management system which will facilitate our efforts to provide
personalized experience to individual mobile users and enhance
their interaction. Recognizing users need to interact on a
real-time basis with each other while running other applications
and potential market opportunities in this area, we are
developing a systematic approach to realize concurrent
operations of multiple applications and content on mobile
handsets.
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Develop new versions of Maopao which can be downloaded directly
by users and installed on smart phone using the Symbian
operating system, which will help expand our user base and
facilitate the interaction among users of these handsets and our
existing users.
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Continue to advance the capabilities and functionalities of
Maopao while enabling users with older versions of Maopao to
easily access newly developed applications. We believe our
efforts in this respect will enable us to further enrich the
applications available on Maopao and capitalize on the market
growth following the popularization of 3G network. We will
continue to leverage in-house and third-party development
capabilities to diversify our content portfolio, particularly
video chat and video streaming related applications.
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We believe that the continuous improvement of our technology is
vital to maintaining our long-term competitiveness. We
established laboratories for advanced mobile user experience
testing, mobile applications testing and system simulation.
Competition
The mobile application store market in China is competitive. The
market is characterized by 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, price
sensitivity on the part of users and sometimes aggressive price
cutting by competitors with resulting downward pressure on gross
margins. We compete directly with:
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other independent application store operators which offer mobile
application stores similar to ours, such as Shenzhen Shenxunhe
Technology Co., Ltd., Shanghai Snowfish Tech.
Co., Ltd. and Shanghai Coolbar Co., Ltd.
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handset companies that have developed their own proprietary
application stores, such as iTunes App Store on iPhones from
Apple Inc. or the Ovi Store on Nokia handsets;
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mobile software providers, such as Guangzhou Ucfly Company,
which has developed UCWeb, a mobile handset browser;
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emerging mobile operating systems which have their own
application stores, such as Symbian;
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mobile network operators that provide their own application
stores, such as Monternet Mobile Market from China Mobile and
the UNI-Info Platform from China Unicom; and
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large Chinese Internet companies that may develop and operate
their own mobile application stores, such as Tencent and Baidu.
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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. We compete primarily on the basis of user
base, relationships with content developer, handset companies,
mobile service providers, key technologies as well as research
and development capabilities. For a discussion of risks relating
to competition, see Risk Factors Risks Related
to Our Business and Our Industry We may face
increasing competition, which could reduce our market share and
materially and adversely affect our results of operations.
Intellectual
Property
We regard our copyrights, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on
trademark and copyright law, trade secret protection and
confidentiality
and/or
license agreements with our employees, suppliers and others to
protect our proprietary rights. All of our research and
development personnel have entered into confidentiality and
proprietary information agreements or clauses with us. These
agreements address intellectual property protection issues and
require our employees to assign to us all of the inventions,
designs, and technologies they develop during their employment
with us.
Licenses
from Third Parties
While we develop original applications, a majority of the
applications and content offered by Maopao are developed by
third parties and contain intellectual properties, including
copyrights and trademarks, owned by third parties. We enter into
agreements with intellectual property owners or their authorized
sub-licensors
to obtain licenses to use such intellectual property in our
business, such as applications and content launched on Maopao.
Under the license agreements, we usually pay ongoing license
fees in the form of sales proceeds sharing arrangements. We
sometimes pay content developers a minimum guaranteed amount to
cover part of their development costs in addition to sharing the
sales proceeds. For certain simple applications such as card
games, we may make a one-time payment to the content developers
for licensing all rights associated with a particular
application.
Trademarks,
Trade Name, Copyrights and Domain Names
We have applied for the registration of
![(LOGO)](http://content.edgar-online.com/edgar_conv_img/2010/12/10/0000950123-10-112702_H04425B4H0442509.GIF)
and
![(LOGO)](http://content.edgar-online.com/edgar_conv_img/2010/12/10/0000950123-10-112702_H04425B4H0442510.GIF)
trademarks in China.
We have obtained 21 copyright registrations for software we
developed, including development tools of our MRP format as well
as applications offered on Maopao. In addition, we have
registered 28 domain names, including sky-mobi.com and
51mrp.com, our primary operation websites.
While we actively take steps to protect our proprietary rights,
such steps may not be adequate to prevent the infringement or
misappropriation of our intellectual property. This is
particularly the case in China where the laws may not protect
our proprietary rights as fully as in the United States.
Infringement or misappropriation of our intellectual property
could materially harm our business. In addition, many parties
are actively developing and seeking patent protection for
wireless services-related technologies. We expect these parties
to continue to take steps to protect these technologies,
including seeking patent protection. There may be patents issued
or pending that
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are held by others and that cover significant parts of our
technology or business methods. Disputes over rights to these
technologies are likely to arise in the future. We cannot be
certain that our offerings do not or will not infringe valid
patents, copyrights or other intellectual property rights held
by third parties. We may be subject to legal proceedings and
claims from time to time relating to the intellectual property
of others, as discussed in Risk Factors Risks
Related to Our Business and Our Industry Our results
of operations, financial performance and business may be
adversely affected by potential intellectual property rights
infringement claims against us.
Employees
We had 80, 187, 331, and 552 full-time employees as of
March 31, 2008, 2009, 2010 and September 30, 2010,
respectively. The following table sets forth the number of our
employees categorized by areas of operations as of
September 30, 2010:
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Number of
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Percentage
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Function
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Employees
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of Total
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Research and development
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260
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47.1
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%
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Sales and marketing (including customer service)
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128
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23.2
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Operations
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99
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17.9
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General and administration
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65
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11.8
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Total
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552
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100
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%
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Our success depends on our ability to attract, retain and
motivate qualified personnel. We believe we offer our employees
competitive compensation packages, and we have generally been
able to attract and retain qualified personnel and maintain a
stable core management team. We believe that we maintain a good
working relationship with our employees and we have not
experienced any significant labor disputes. For a description of
the employment agreement we signed with some members of our
senior management, see Management Employment
Agreements.
Substantially all of our employees are based in the PRC. In
accordance with PRC laws, our full-time employees in China
participate in various employee benefit plans including pension,
medical benefit plans, unemployment insurance, work-related
injury insurance and childbirth insurance.
Compensation for our full-time employees typically consists of
base salary, seniority pay and other subsidies. In addition,
based on our results of operations, we may award bonuses to our
employees solely at our discretion. Our employees are also
eligible for equity incentives. For more information on the
terms of our share incentive plan, see
Management Share Incentive Plan.
We hire a portion of our employees through on-campus recruiting
programs at various universities, including Zhejiang University,
Zhejiang Sci-Tech University, Nanjing University, Nanjing
University of Science and Technology, Huazhong University of
Science and Technology, Wuhan University of Zhejiang University
of Technology, Northwest Hangzhou Electronics University, and
Xian Jiaotong University.
Seasonality
In the future, our results of operations may be affected by
seasonal trends caused by user behavior and demand for our
applications and content offerings. We expect our revenues to
be higher during holiday periods, when users make more purchases
of applications and other content through our mobile application
store. Such seasonality may appear less prominent in recent
periods when we achieved significant revenue growth, but may
become more prominent in the future.
Facilities
Our principal executive offices are located at 10/F,
Building B, United Mansion, No. 2, Zijinhua Road,
Hangzhou, Zhejiang 310013, Peoples Republic of China.
We also maintain offices at other addresses in Beijing,
Shanghai, and Shenzhen under leases with terms ranging from one
year to less than three years. In aggregate, we
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maintained a total of approximately 8,000 square meters for
our offices as of September 30, 2010. We lease our
facilities from independent third-parties and do not own any
real property.
The following table sets forth a summary of the material leased
properties as of September 30, 2010:
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Location
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Space
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Usage of Property
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Expiration
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(In square meters)
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Hangzhou
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3,112
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Principal Executive Office
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September 2011
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3,112
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Office
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May 2012
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Beijing
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600
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Office
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May 2012
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Shanghai
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347
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Office
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August 2011
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We believe that our leased facilities are adequate to meet our
needs for the foreseeable future, and that we will be able to
obtain adequate facilities, principally through leasing of
additional properties, to accommodate our future expansions.
Insurance
We do not maintain any property insurance other than insurance
for our transaction vehicles. Consistent with customary industry
practice in China, we do not maintain business interruption
insurance or key employee insurance for our executive officers.
Uninsured damage to any of our equipment or buildings or a
significant product liability claim could have a material
adverse effect on our results of operations. See Risk
Factors Risks Related to Our Business and Our
Industry We have a limited insurance coverage which
could expose us to significant costs and business
disruption.
Legal and
Administrative Proceedings
We are currently not a party to, and we are not aware of any
threat of, any legal, arbitral or administrative proceedings,
which, in the opinion of our management, is likely to have a
material and adverse effect on our business, financial condition
or results of operations. We may from time to time become a
party to various legal, arbitral or administrative proceedings
arising in the ordinary course of our business.
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REGULATION
This section summarizes the principal PRC laws and regulations
relevant to our business and operations.
Regulation
on Telecommunications Industry
Telecommunications
Services
On September 25, 2000, the State Council of the PRC, or the
State Council, issued the Regulations on Telecommunications of
the PRC, or the Regulations on Telecommunications, which
regulate the telecommunications industry and other related
activities and services in the PRC. The MIIT (formerly the
Ministry of Information Industry or the MII) regulate the
telecommunications industry on a national level and the relevant
provincial-level communications administrative bureaus, or the
CABs, supervise and regulate the telecommunications industry in
their respective administrative regions. The Regulations on
Telecommunications classify telecommunications services into two
main categories: (1) basic telecommunications services and
(2) telecommunications value-added services, and further
divide each main category into several
sub-categories.
According to the Catalog for Classification of
Telecommunications Businesses, which became effective on
April 1, 2003, our business constitutes provision of
information services through mobile networks and the Internet,
and is classified in the category of telecommunications
value-added services.
The provision of telecommunications value-added services in the
PRC is subject to the examination and approval of, and requires
a license issued by, the MIIT or the relevant CABs. On
March 1, 2009, the MIIT issued the Administrative Measures
for the Licensing of Telecommunications Business Operations
which set forth the basic requirements that an applicant has to
satisfy when applying for a license to provide
telecommunications value-added services in the PRC, and such
requirements mainly include the following:
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the applicant is a duly incorporated company;
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the applicant has necessary funds and professional staff
suitable for its business activities;
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the applicant has the reputation or capability of providing
customers with long-term services;
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to operate telecommunications value-added services business
across two or more provinces, autonomous regions or centrally
administered municipalities, the applicant should have a minimum
registered capital of RMB10,000,000; to operate
telecommunications value-added services business within one
province, autonomous region or centrally administered
municipality only, the applicant should have a minimum
registered capital of RMB1,000,000;
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the applicant has necessary premises, facilities and technical
scheme; and
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the applicant and its major capital contributors and business
managers have no record of violating rules on the
telecommunication supervision and administration during the past
three years.
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Provision of telecommunications value-added services across two
or more provinces, autonomous regions or centrally administered
municipalities requires the approval of the MIIT and a
Trans-regional Telecommunications Value-added Services Operation
License issued by the MIIT. When the provision of such services
is limited to one province, autonomous region or centrally
administered municipality, only the approval of the relevant CAB
is required and a Telecommunications Value-added Services
Operation License will be issued by the relevant CAB. We provide
our telecommunications services from Zhejiang province only and
we do not have subsidiaries or servers in other parts of China,
and as such, we only need the approval of Zhejiang CAB. Each of
our controlled SPEs, namely Hangzhou Sky, Mijia and Fanyi has
been granted a Telecommunications Value-added Services Operation
License by Zhejiang CAB.
On March 13, 2005, the MII issued the Specifications for
Telecommunications Services specifying the telecommunications
service qualities to which all telecommunications service
providers in the PRC should conform. It also requires all
telecommunications services providers to establish a sound
service quality management system and make periodical reports to
the relevant telecommunications authorities.
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Foreign
Investments in the Telecommunications Value-added Services
Industry
Foreign direct investment in the telecommunications services
industry in China is regulated by the Regulations on the
Administration of Foreign-Invested Telecommunications
Enterprises, or the FITE Regulations, issued by the State
Council on December 11, 2001 and amended by the State
Council on September 10, 2008. According to the FITE
Regulations, foreign investors ultimate equity interests
in any entity providing telecommunications value-added services
in the PRC may not exceed 50% and a foreign investor wishing to
acquire any equity interest in a telecommunications value-added
services business in the PRC must demonstrate a good track
record and prior experience in providing telecommunications
value-added services outside the PRC.
On July 13, 2006, the MII issued the Notice Regarding
Strengthening Administration of Foreign Investment in Operating
Telecommunications Value-Added Businesses, or the MII Notice,
which prohibits holders of telecommunications value-added
services operation licenses, including Trans-regional
Telecommunications Value-added Services Operation Licenses and
Telecommunications Value-added Services Operation Licenses, from
leasing, transferring or selling their licenses to any foreign
investors in any manner, or providing any resources, premises or
facilities to any foreign investors for illegal operation of
telecommunications services businesses in the PRC. The MII
Notice also requires that, (1) holders of
telecommunications value-added services operation licenses or
their shareholders must directly own the domain names and
trademarks used by such license holders in their daily
operations; (2) each license holder must have necessary
facilities for its approved business operations and maintain
such facilities in the regions covered by its license; and
(3) all value-added telecommunications service providers
are required to maintain network and Internet security in
accordance with the standards set forth in relevant PRC
regulations. If a license holder fails to comply with the
requirements in the MII Notice and fails to remedy such
non-compliance within a designated period, the MIIT or relevant
CABs may take administrative actions against such license
holders, including revoking their telecommunications
valued-added services operation licenses. We provide our
services through our controlled SPEs that own Telecommunications
Value-added Services Operation Licenses.
Regulations
on Software Development Industry
Software
Development
On October 16, 2000, the MII, Ministry of Education,
Ministry of Science and Technology and the SAT, promulgated the
Certifying Standards and Administrative Measures for Software
Enterprises (Proposed), which specify the certifying standards
of software enterprises, including,
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the applicant shall be an enterprise established in PRC which
engages in the business of computer software development and
production, system integration, application service, among
others;
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the enterprise develops one or more software products or
possesses intellectual property rights of the products, or
provides technical services such as computer information system
integration that has passed qualification and grade
certification;
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the proportion of technical staff in the work of software
development and technical service shall not be lower than 50% of
the total staff in the enterprise;
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the development fund for software technique and products shall
be above 8% of the enterprises annual income from
software; and
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the annual sale income of software shall be over 35% of the
total annual income of the enterprise, with the income of
self-developed software above 50% of the software sales income.
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Enterprises that are qualified as software
enterprises are entitled to certain preferential policies
in the PRC. According to the Circular on Relevant Policies for
Encouraging the Development of the Software and Integrate
Circuit Industries (No. 25 (2002)) by the Ministry of
Finance and the SAT, newly-established software development
enterprises (i.e. those established after July 1,
2001) may be exempted from income tax in the first two
years of profitability and pay income taxes at half the standard
rate for the next three years. On February 22, 2008, the
Ministry of Finance and SAT promulgated the Notice on Several
Preferential Policies in Respect of Enterprise Income Tax, or
Notice No. 1 2008, reiterating the policy that a software
enterprise newly established within China may, upon
determination, be exempted from income taxes for its first two
profit-making years and shall be subject to
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the income tax at half the standard rate for the next three
years. On April 24, 2009, the Ministry of Finance and SAT
promulgated the Notice on Several Issues Relevant to the
Implementation of the Preferential Policies on Enterprise Income
Tax, which states that, the software enterprises and the
integrated circuit production enterprises established prior to
the end of 2007 may, upon certification, enjoy the
preferential policies on the EIT reductions and exemptions
within specified periods as provided in the Notice No. 1
2008. An enterprise which had made profits in 2007 or in the
years preceding 2007 and had started enjoying the EIT reductions
and exemptions within specified periods may continue to enjoy
the relevant preferential policies from 2008 till the expiry of
the specified periods.
The software development enterprise certification is subject to
annual examination. Hangzhou Sky was granted a software
enterprises certification on December 14, 2007, and passed
the annual inspection for 2008 and 2009. It enjoyed the
preferential income tax policy, i.e., income tax exemption for
the first two profit-making years i.e. 2008 and 2009, and
reduced rate for the next three years.
On March 5, 2009, the MIIT issued the Administrative
Measures for Software Products, or the Measures for Software
Products, to regulate the development, production, sale and
import of software products, including computer software,
software embedded in information systems and equipment, and
computer software provided in conjunction with other information
or technology services. The Measures for Software Products
forbid the development, production, sale and import of software
products which infringe intellectual property rights of third
parties, contain computer viruses, harm computer system security
or contain contents prohibited by PRC laws. To that end, the
Measures for Software Products require registration and filing
of software products with provincial level software registration
institutions authorized to accept and review software products
registration applications. Once accepted for review, the
software product registration application will be publicly
announced, and if no objection is received within a
seven-working-day publication period, a software registration
number and a software product registration certificate will be
granted. The software registration certificate will be valid for
five years and may be renewed upon expiration.
Foreign
Investments in Software Development Industry
According to the Catalogue of Industries for Guiding Foreign
Investment, amended in 2007, foreign investment is encouraged in
the sector of development and production of software. As such,
there are no restrictions on foreign investment in the software
development industry in the PRC aside from business licenses and
other permits that every software developer in the PRC must
obtain.
Regulations
on Intellectual Property Rights
Trademarks
Registered trademarks in the PRC are protected by the Trademark
Law of the PRC which came into effect in 1982 and was revised in
1993 and 2001. A trademark can be registered in the PRC with the
Trademark Office under the State Administration for Industry and
Commerce. The protection period for a registered trademark in
the PRC is ten years starting from the date of registration and
may be renewed if an application for renewal is filed within six
months prior to expiration.
Copyright
Copyright in the PRC is protected by the Copyright Law of the
PRC which was promulgated in 1990 and revised in 2001 and
February 2010. Under the revised Copyright Law, copyright
protections have been extended to information network and
products transmitted on information network. Copyrights are
reserved by the author, unless specified by the laws otherwise.
According to Article 16 of the Copyright Law, if a work
constitutes work for hire, the employer, instead of
the employee, is considered the legal author of the work and
will enjoy the copyrights of such work for hire
other than rights of authorship. Works for hire
include, (1) drawings of engineering designs and product
designs, maps, computer software and other works for hire, which
are created mainly with the materials and technical resources of
the legal entity or organization with responsibilities being
assumed by such legal entity or organization; (2) those
works the copyrights of which are, in accordance with the laws
or administrative regulations or under contractual arrangements,
enjoyed by a legal entity or organization. The actual creator
may enjoy the rights of authorship of such work for
hire.
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A copyright owner may transfer its copyrights to others or
permit others to use its copyrighted works. Use of copyrighted
works of others generally requires a license contract with the
copyright owner. The protection period for copyrights in the PRC
varies, with 50 years as the minimum period of protection.
The protection period for a work for hire where a
legal entity or organization owns the copyright (except for the
right of authorship) is 50 years, expiring on December 31
of the fiftieth year after the first publication of such work.
Regulation
on the Internet
Internet
domain name
Internet domain names in the PRC are regulated by the
Administrative Measures on the PRC Internet Domain Name, which
were promulgated by the MII and came into effect on
December 20, 2004, and the Implementation Rules of
Registration of Domain Name, which was promulgated by PRCs
domain name registrar, CNNIC, and came into effect on
December 1, 2002. Domain name service organizations accept
applications for network domain names and domain name
registration applicants become holder of the registered domain
name after registration. A holder needs to pay operation fees on
time to keep its registered domain name and otherwise the domain
name registrar may revoke the domain name. In case there is any
change to the registration information of a domain name, the
holder shall file to the changes with the domain name registrar
within 30 days after such changes. The CNNIC is responsible
for the administration of .cn domain names and Chinese domain
names. Disputes in respect of domain names are regulated by the
Measures on Resolution of Disputes regarding Domain Names which
was issued by CNNIC and revised on February 14, 2006, and
such disputes shall be settled by organizations approved by the
CNNIC.
Provision
of Internet Information Service
Provision of Internet information services in the PRC is
regulated by the Administrative Measures on Internet Information
Services adopted by the State Council on September 20,
2000. According to these measures, provision of Internet
information services regarding news, publication, education,
medical and health care, pharmacy and medical appliances is
subject to examination, approval and regulation by relevant
authorities responsible for regulating these sectors. Electronic
bulletin services also require special application and filing in
accordance with relevant regulations (as described below).
Internet content providers are not allowed to provide services
beyond the scope of the content that has been licensed or
registered. The measures also provide a list of prohibited
content on the Internet. Internet information service providers
are required to monitor and censor the information on by their
websites, and when prohibited content is found, they should
terminate the transmission immediately, keep the relevant record
and report immediately to relevant authorities.
According to these measures, commercial Internet information
service providers must obtain a License for Internet Content
Providers, or ICP license, in order to engage in such business.
Moreover, provision of ICP services in multiple provinces,
autonomous regions and centrally administered municipalities may
require a trans-regional ICP license.
On May 10, 2003, the MOC issued the Provisional Regulations
for the Administration of Internet Culture, or the Internet
Culture Regulations, which became effective on July 1, 2003
and was amended on June 2, 2004. Pursuant to the Internet
Culture Regulations, Internet cultural products mean the
cultural products produced, such as audio and video, games,
shows, works of art, cartoons and other cultural products,
disseminated and circulated through the Internet. Business
entities are required to apply to the relevant local branch of
the MOC for an Internet Culture Operating Permit if they engage
in any of the following types of activities:
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the production, duplication, importation, wholesale, retail,
leasing or broadcasting of Internet cultural products;
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the dissemination of Internet cultural products on the Internet
or transmission thereof to computers, fixed-line or mobile
phones, radios, television sets or gaming consoles for the
purpose of browsing, reading, using or downloading such
products; or
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the exhibition or holding of contests related to Internet
cultural products.
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Online
Games
On June 3, 2010, 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. 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. Online game operators shall
formulate instructions to users and necessary warnings according
to content, functions and targeted players of online games, and
display them conspicuously on their website and in the games.
Online games targeting minors shall not include any content
which allures minors to imitate behaviors undermining public
morality or instigate crimes, or any content which is harmful to
minors health, such as content of terror or cruelty.
Online game operators shall take technical measures to prevent
minors from access to unsuitable games or game functions,
restrict minors playing time and prevent minors from
becoming addicted to online games. Online game operators shall
require Internet users to go through a real-name registration
process with valid identifications and the online game operators
shall keep such registration information. In addition, the Rule
on Online Games prohibits providers of virtual currency
transaction service to offer service to minors.
Dividend
Distribution
The principal regulations governing distribution of dividends of
wholly foreign-owned enterprises include the Foreign-invested
Enterprise Law promulgated by the Standing Committee of the
National Peoples Congress, as amended on October 31,
2000, and the Implementation Rules of the Foreign-invested
Enterprise Law issued by the State Council, as amended on
April 12, 2001.
Under these laws and regulations, foreign-invested enterprises
in China may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, foreign-invested
enterprises in China are required to allocate at least 10% of
their respective net profits each year, if any, to fund certain
reserve funds unless these reserves have reached 50% of the
registered capital of the enterprises. Foreign-invested
enterprises are not allowed to distribute profits until deficits
of previous fiscal years have been made up.
Foreign
Currency Exchange
The principal regulations governing foreign currency exchange in
the PRC are the Foreign Exchange Administration Regulations
promulgated by the State Council, as amended on August 5,
2008, or the Foreign Exchange Regulations. Under the Foreign
Exchange Regulations, the RMB is freely convertible for current
account items, as long as true and lawful transaction basis is
provided, but not for capital account items, such as capital
transfer, direct investments, loans, repatriation of
investments, investments in securities and derivatives outside
of the PRC, unless the prior approval of the State
Administration of Foreign Exchange, or the SAFE, is obtained and
prior registration with the SAFE is made.
On December 25, 2006, the Peoples Bank of China
issued the Administration Measures on Individual Foreign
Exchange Control and its Implementation Rules were issued by the
SAFE on January 5, 2007, both of which became effective on
February 1, 2007. Under these regulations, all foreign
exchange matters involved in the employee stock ownership plan,
stock option plan and other similar plans, participated by
onshore individuals must be transacted upon approval from the
SAFE or its authorized branch. On March 28, 2007, the SAFE
promulgated the Operating Procedures for Administration of
Domestic Individuals Participating in the Employee Stock Option
Plan or Stock Option Plan of An Overseas Listed Company, or
Circular 78. Under Circular 78, PRC citizens who participate in
stock incentive plans or equity compensation plans by an
overseas publicly listed company are required, through a PRC
agent or PRC subsidiaries of such overseas publicly-listed
company, to complete certain foreign exchange registration
procedures with respect to the plans upon the examination by,
and approval of, the SAFE.
123
Offshore
Financing
On October 21, 2005, the SAFE issued Relevant Issues
Concerning Foreign Exchange Control on Domestic Residents
Corporate Financing and Roundtrip Investment Through Offshore
Special Purpose Vehicles, or Circular 75, which became
effective as of November 1, 2005. Circular 75 requires 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 Circular 75.
We have requested our current shareholders
and/or
beneficial owners to disclose whether they or their shareholders
or beneficial owners fall within the ambit of Circular 75 and
urge those who are PRC residents to register with the local SAFE
branch as required under Circular 75. 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 Circular 75 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.
Overseas
Listing
On August 8, 2006, six PRC regulatory agencies, namely the
Ministry of Commerce, or the MOC, the State Assets Supervision
and Administration Commission, the SAT, the State Administration
for Industry and Commerce, the CSRC and the SAFE, jointly
adopted the M&A Rule, which became effective on
September 8, 2006. The M&A Rule, as amended on
June 22, 2009, require 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.
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. However, we cannot assure you that the
relevant PRC government agencies, including the CSRC, would
reach the same conclusion as our PRC counsel.
124
MANAGEMENT
Directors
and Executive Officers
The following table sets forth information regarding our
directors and executive officers as of the date of this
prospectus.
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Directors and Executive Officers
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Age
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Position/Title
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Michael Tao Song
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34
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Founder, Chairman and Chief Executive Officer
|
Li Ou
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32
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Director and Chief Technology Officer
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Kui Zhou
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42
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Director
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Wei Zhou
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32
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Independent Director
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Carl Yeung
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31
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Chief Financial Officer
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Yan Tang
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31
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Terminal Technology Director
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Steven Bin Li
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36
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Vice President
|
Xinyong Hu
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34
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Vice President
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Xing Fan
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34
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Vice President
|
Qing Yan
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28
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Vice President
|
Mr. Michael Tao Song
is our founder, chairman and
chief executive officer. Mr. Song was appointed as a
director by Xplane Ltd., a holder of our common shares.
Mr. Song has been instrumental in formulating our current
strategies which led to our rapid growth. Prior to founding our
company, Mr. Song worked as a product director at Eastcom
Communications Co., Ltd., a telecommunication technology company
listed on the Shanghai Stock Exchange, from 2000 to 2005.
Mr. Song received his bachelors degree in applied
mathematics from Tianjin University in 2000.
Mr. Li Ou
has been a director of our company since
June 2007 and our chief technology officer since November 2006.
Mr. Ou was appointed as a director by Xplane Ltd. Prior to
joining us, Mr. Ou worked as a software testing engineer at
Eastcom Communications Co., Ltd. from 2001 to 2006. Mr. Ou
received his bachelors degree in communication engineering
from Nanjing University of Posts and Telecommunications in 2001.
Mr. Kui Zhou
has been a director of our company
since August 2007. Mr. Zhou was appointed as a director by
Sequoia Capital China II, L.P., a holder of our Series A
preferred shares. Mr. Zhou has been a principal of Sequoia
Capital China since 2005 and a partner of Sequoia Capital China
since May 2007. He is also a director of VanceInfo Technologies
Inc., a China-based IT service provider listed on the New York
Stock Exchange, and a director of Xiamen Changelight Co.,Ltd., a
China-based LED and solar cell research and manufacturing
company listed on Growth Enterprises Market of the Shenzhen
Stock Exchange. He also serves on the board of several privately
held companies, including HDT Holding Technologies Inc., a
China-based online advertising and marketing company; Shanghai
Hintsoft Software Co., Ltd., a China-based Internet cafe
software provider; and Beijing Speedpay Technology Co., Ltd., a
high-tech company committed to wireless payment and mobile
e-commerce
business, all of which are invested by Sequoia Capital China.
Prior to joining Sequoia Capital China, Mr. Zhou served as
a senior vice president at Legend Capital from 2001 to 2005.
From 1999 to 2001, he served as a manager of corporate business
development department of Legend Holdings Ltd. Mr. Zhou
received his bachelors degree in electrical automation
from Wuhan Technology University in 1989 and his masters
of business administration degree from Tsinghua University in
2000.
Mr. Wei Zhou
has served as our independent director
since December 2010. Mr. Zhou has served as the chief
financial officer of Charm Communications Inc., a leading
domestic television advertising agency in China listed on the
Nasdaq Global Market, since November 2009. Mr. Zhou was the
chief financial officer of Zhaopin Limited, which operates a
China-based online recruitment website (www.zhaopin.com), from
June 2008 to October 2009. Mr. Zhou also served as Zhaopin
Limiteds director of strategic planning from July 2005 to
May 2007. Mr. Zhou served as an associate director with
Abax Global Capital, a Hong Kong based investment fund focusing
on direct investments in private and public-sector Chinese
companies, from June 2007 to May 2008. From 2001 to 2005,
125
Mr. Zhou worked in the Hong Kong office of Goldman Sachs in
the investment banking division and the Asian Special Situations
Group. Mr. Zhou received his bachelors degree from
Harvard University in 2001.
Mr. Carl Yeung
has been our chief financial officer
since February 2010. Prior to joining us, Mr. Yeung was the
chief financial officer of ATA Inc., a computer-based testing
and testing-related service provider based in China and listed
on the NASDAQ Global Market, from 2006 to 2010. From 2002 to
2006, Mr. Yeung worked as an analyst and associate at
Merrill Lynch (Asia Pacific) Limited. Mr. Yeung also served
as an independent non-executive director of China Natural Gas,
Inc., a NASDAQ-listed integrated natural gas operator in China,
from 2008 to November 2010. Mr. Yeung received his
bachelors degree in economics with concentrations in
finance and operations management from the Wharton School,
University of Pennsylvania, and his bachelors degree in
applied science with a concentration in systems engineering from
the School of Engineering and Applied Sciences, University of
Pennsylvania, in 2002.
Mr. Yan Tang
has been our terminal technology
director since June 2006. Prior to joining us, Mr. Tang
served as a software manager at Eastcom Communications Tianyu
Mobile Technology Co., Ltd., a subsidiary of Eastcom
Communications Co., Ltd. from 2004 to 2006. From 2003 to 2004,
Mr. Tang worked at the Terminal Research Institute of
Eastcom Communications Co., Ltd. with his last role as a manager
for telecommunication value-added service. Mr. Tang
received his bachelors degree in computer software from
Xidian University in 2001.
Mr. Steven Bin Li
has been our vice president of
finance since March 2010. Prior to joining us, Mr. Li was a
partner of Beijing Tuowei Business Consulting Co., Ltd., a
China-based business consulting company, from 2009 to 2010.
Prior to that, Mr. Li served as the financial director of
Longtop Financial Technologies Limited, a Chinese software
development and solutions provider listed on the New York Stock
Exchange, from 2007 to 2009. From 2002 to 2007, Mr. Li
served as the financial director of the Beijing Branch of
Ogilvy & Mather, an advertising, marketing and public
relations agency. Prior to that, Mr. Li worked for nearly
six years as an audit manager at PricewaterhouseCoopers Zhong
Tian CPAs Limited Company in Beijing and Singapore. Mr. Li
received his bachelors degree in auditing from Capital
University of Economics and Business in 1996 and studied at the
Guanghua School of Management of Peking University between 2002
and 2004.
Mr. Xinyong Hu
has been our vice president of
marketing since October 2008. Mr. Hu has over 10 years
of management experience in the mobile Internet industry. Prior
to joining us, from 2002 to 2008, Mr. Hu was first an
assistant to the CEO and then the deputy general manager of TOM
Group Limited, a
Chinese-language
media conglomerates listed on the Hong Kong Stock Exchange,
responsible for strategic planning, channel management and
E-commerce
business. From 2000 to 2002, Mr. Hu was a manager of
China.com Inc., a China-based mobile applications, Internet
service and online game company listed on the Hong Kong Stock
Exchange. From 1999 to 2000, Mr. Hu worked as a sales
manager at Beijing Green Technology Co., Ltd., a China-based
technology company. Mr. Hu received his bachelors
degree in industrial and commercial administration from Beijing
Institute of Machinery in 1999. Mr. Hu is pursuing his EMBA
degree from Cheung Kong Graduate School of Business.
Dr. Xing Fan
has been our vice president of
development & engineering since August 2008. Prior to
joining us, Dr. Fan worked at Net263 Co., Ltd., a Chinese
domestic internet service provider and value-added application
operator, with his last role as the vice general manager and
technology director of voice over internet protocol, or VoIP,
and video entertainment society business unit, from 2005 to
2008. From 2003 to 2005, Dr. Fan co-founded Hangzhou AETECO
Technology Co., Ltd., a Chinese domestic video communication
solution vendor and service provider, and served as the chief
technology officer and executive vice president. Prior to that,
Dr. Fan served as the technology director and chief
engineer of Hangzhou Holley Broadband Information Technology
Co., Ltd., a Chinese domestic broadband solution vendor and
metropolitan area network operator, from 2001. Dr. Fan
received his bachelors degree in information and
electronic engineering in 1999 and his Ph.D. in communication
and information system engineering in 2006, both from Zhejiang
University.
Mr. Qing Yan
has been our vice president in charge
of overseas business since September 2007. From 2005 to 2007,
Mr. Yan was a software engineering at Texas Instruments
(Shanghai) Co., Ltd., a semiconductor company. From 2001 to
2005, Mr. Yan worked at Eastcom Communications Co., Ltd.
with his last role as a software manager. Mr. Yan received
his bachelors degree in computer science and technology
from Huazhong University of Science and Technology in 2001.
126
Employment
Agreements
We have entered into a three-year employment agreement with each
of our executive officers. We may terminate an executive
officers employment for cause, at any time, without prior
notice or remuneration, for certain acts of the officer,
including, but not limited to, conviction of a crime, material
violation of our rules and regulations, or other misconduct that
cause material damage to us. Furthermore, an executive officer
may terminate the employment at any time upon prior written
notice to us. Each executive officer is entitled to severance
pay equal to a certain specified number of months of his base
salary, if we terminate his employment without any of the causes
specified above.
Each of our executive officers has agreed to hold in strict
confidence any trade secrets or confidential information of our
company or trade secrets of any third-party received by us. Each
executive officer has agreed that the intellectual property
rights related to all work products, inventions, computer
software, or other technological information which he has
developed while performing his duties at our company or through
mainly using our resources shall belong to us. Each executive
officer has agreed to assist us to obtain and exercise all such
intellectual property rights.
Board of
Directors
Our board of directors will consist of four members upon the
completion of this offering. A director is not required to hold
any shares in the company by way of qualification. A director
may vote with respect to any contract or transaction in which he
or she is materially interested provided the nature of the
interest is disclosed prior to its consideration and any vote on
such contract or transaction. The directors may exercise all the
powers of the company to borrow money, mortgage its undertaking,
property and uncalled capital, and issue debentures or other
securities whether outright or as security for any debt,
liability or obligation of the company or of any third-party.
None of our non-executive directors has a service contract with
us that provides for benefits upon termination of employment.
Committees
of the Board of Directors
Prior to the completion of this offering, we intend to establish
three committees under the board of directors: the audit
committee, the compensation committee and the corporate
governance and nominating committee, and adopt a charter for
each of the committees. Each committees members and
functions are described below.
Audit
Committee
Our audit committee will initially consist of Wei Zhou, Kui Zhou
and Michael Song. Wei Zhou satisfies the
independence requirements of Rule 5605 of the
Nasdaq Stock Market Marketplace Rules and
Rule 10A-3
under the Securities Exchange Act of 1934, as amended. Wei Zhou
will be the chairman of our audit committee and meets the
criteria of an audit committee financial expert as set forth
under the applicable rules of the SEC. The audit committee will
oversee our accounting and financial reporting processes and the
audits of the financial statements of our company. The audit
committee will be responsible for, among other things:
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selecting our independent registered public accounting firm and
pre-approving all auditing and non-auditing services permitted
to be performed by our independent registered public accounting
firm;
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reviewing with the independent registered public accounting firm
any audit problems or difficulties and managements
response;
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reviewing and approving all proposed related-party transactions,
as defined in Item 404 of
Regulation S-K
under the Securities Act;
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discussing the annual audited financial statements with
management and our independent registered public accounting firm;
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annually reviewing and reassessing the adequacy of our audit
committee charter;
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meeting separately and periodically with management and our
independent registered public accounting firms;
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127
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reporting regularly to the full board of directors; and
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such other matters that are specifically delegated to our audit
committee by our board of directors from time to time.
|
Compensation
Committee
Our compensation committee will initially consist of Wei Zhou
and Kui Zhou. Wei Zhou satisfies the independence
requirements of Rule 5605 of the Nasdaq Stock Market
Marketplace Rules. Our compensation committee will assist the
board of directors in reviewing and approving the compensation
structure of our directors and executive officers, including all
forms of compensation to be provided to our directors and
executive officers. Our chief executive officer may not be
present at any committee meeting during which his compensation
is deliberated. The compensation committee will be responsible
for, among other things:
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reviewing and recommending to the board with respect to the
total compensation package for our four most senior executives;
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approving and overseeing the total compensation package for our
executives other than the four most senior executives;
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reviewing and making recommendations to the board of directors
with respect to the compensation of our directors; and
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reviewing periodically and approving any long-term incentive
compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
|
Corporate
Governance and Nominating Committee
Our corporate governance and nominating committee will initially
consist of Michael Tao Song and Wei Zhou. Wei Zhou satisfies the
independence requirements of Rule 5605 of the
Nasdaq Stock Market Marketplace Rules. The corporate governance
and nominating committee will assist our board of directors in
identifying individuals qualified to become our directors and in
determining the composition of the board and its committees. The
corporate governance and nominating committee will be
responsible for, among other things:
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identifying and recommending nominees for election or
re-election to our board of directors, or for appointment to
fill any vacancy;
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reviewing annually with our board of directors its current
composition in light of the characteristics of independence,
age, skills, experience and availability of service to us;
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identifying and recommending to our board the directors to serve
as members of committees;
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advising the board periodically with respect to significant
developments in the law and practice of corporate governance as
well as our compliance with applicable laws and regulations, and
making recommendations to our board of directors on all matters
of corporate governance and on any corrective action to be
taken; and
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monitoring compliance with our code of business conduct and
ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance.
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Duties of
Directors
Under Cayman Islands law, our directors have a fiduciary duty to
act honestly, in good faith and with a view to our best
interests. Our directors also have a duty to exercise the skill
they actually possess and such care and diligence that a
reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our
directors must ensure compliance with our memorandum and
articles of association as may be amended from time to time.
Terms of
Directors and Officers
Pursuant to our amended and restated memorandum and articles of
incorporation to be adopted upon the completion of this
offering, our board of directors will be divided into three
classes, namely Class A directors,
128
Class B directors and Class C directors, who shall retire
from office and be eligible for re-election at the first, second
and third annual general meeting after this offering,
respectively. Mr. Michael Tao Song and Mr. Li Ou have been
designated as Class A directors. Mr. Kui Zhou and
Mr. Wei Zhou have been designated as Class B directors. Our
second independent director will be designated as a Class C
director. At each subsequent annual general meeting after the
third annual general meeting after this offering, the directors
of the class who have been longest in office shall retire and
shall be eligible for
re-election.
A director may only be removed by the shareholders. Officers are
elected by and serve at the discretion of the board of directors.
Compensation
of Directors and Executive Officers
For the fiscal year ended March 31, 2010 and the six-month
period ended September 30, 2010, we paid an aggregate of
approximately RMB1.6 million ($0.2 million) and
RMB1.6 million ($0.2 million), respectively, in cash
to our executive officers, and we did not pay any cash
compensation to our non-executive director. For options granted
to our executive officers, see Share Incentive
Plan.
We have not set aside or accrued any amount of cash to provide
pension, retirement or other similar benefits to our officers
and directors. Our PRC subsidiaries and SPEs are required by law
to make contributions equal to certain percentages of each
employees salary for his or her retirement benefit,
medical insurance benefits, housing funds, unemployment and
other statutory benefit. Our subsidiaries and the SPEs
contributed an aggregate of approximately RMB89,000 ($13,000)
and RMB20,000 ($3,000) for retirement and similar benefits for
our officers and directors in fiscal year 2010 and the six-month
period ended September 30, 2010.
Share
Incentive Plan
We have adopted our 2010 Share Incentive Plan, or the 2010
Plan, to motivate, attract, and retain employees, directors and
consultants, and promote the success of our business. The
maximum number of common shares which may be issued pursuant to
all awards under the 2010 Plan is 15,000,000, and an annual
increase to be added on the first business day of each calendar
year beginning in 2011 equal to the lesser of (x) one
percent of the number of common shares outstanding as of such
date, or (y) a lesser number of common shares determined by
the compensation committee; provided, however, that no more than
15,000,000 shares may be issued upon the exercise of
incentive options. As of the date of this prospectus, the
aggregate number of our common shares underlying our outstanding
options under the 2010 Plan is 11,149,400.
Types of Awards.
The types of awards we may
grant under the 2010 Plan include, among others, options,
restricted shares and restricted share units.
Plan Administration.
The compensation
committee of our board of directors will administer the 2010
Plan, and may delegate its administrative authority to a
committee of one or more members of our board or one or more of
our officers, subject to certain restrictions. The compensation
committee will designate the eligible individuals who may
receive awards, and determine the types and number of awards to
be granted and terms and conditions of each award grant,
including, but not limited to, the exercise price, grant price
or purchase price, any reload provision, any restrictions or
limitations on the award, any schedule for vesting, lapse of
forfeiture restrictions or restrictions on the exercisability of
an award, and accelerations or waivers thereof, any provisions
related to non-competition and recapture of gain on an award,
based in each case on such considerations as the committee in
its sole discretion determines. The compensation committee has
the sole power and discretion to cancel, forfeit or surrender an
outstanding award.
Award Agreements.
Options and other awards
granted under the 2010 Plan are evidenced by a written award
agreement that sets forth the material terms and conditions for
each grant.
Eligibility.
We may grant awards to the
employees, consultants of a service recipient, which includes
our subsidiaries or any affiliated entities designated by our
board for purposes of the 2010 Plan, as well as our non-employee
directors.
Acceleration of Awards upon Corporate
Transactions.
The compensation committee may, in
its sole discretion, upon or in anticipation of a corporate
transaction, accelerate awards, purchase the awards from the
holder or replace the awards.
129
Vesting Schedule.
In general, the compensation
committee determines, or the relevant award agreement specifies
the vesting schedules.
Amendment and Termination.
The compensation
committee may at any time amend, modify or terminate the 2010
Plan. Amendments to the 2010 Plan are subject to shareholder
approval to the extent required by law, or security exchange
rules. Additionally, shareholder approval will be specifically
required to increase the number of shares available under the
2010 Plan, or to permit the compensation committee to extend the
term or the exercise period of an option beyond ten years, or if
amendments result in material increases in benefits or a change
in eligibility requirements. Any amendment, modification or
termination of the 2010 Plan must not impair any rights or
obligations under awards already granted without consent of the
holder of such awards. Unless terminated earlier, the 2010 Plan
will expire and no further awards may be granted after the tenth
anniversary of the shareholders approval of the 2010 Plan.
The following table summarizes, as of the date of this
prospectus, the outstanding options that we granted to several
of our executive officers and other individuals as a group under
the 2010 Plan.
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Common Shares
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Underlying
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Outstanding
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Exercise
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Expiration
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Name
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Options
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Price
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Grant Date
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Date
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($/Share)
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Carl Yeung
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*
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0.26
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March 1, 2010
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**
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*
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0.26
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September 15, 2010
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**
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Steven Bin Li
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*
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0.26
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March 1, 2010
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**
|
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*
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0.26
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September 15, 2010
|
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**
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Xinyong Hu
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*
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0.26
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March 1, 2010
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**
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Xing Fan
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*
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0.26
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March 1, 2010
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**
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Directors and Executive officers as a group
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2,800,000
|
|
|
|
0.26
|
|
|
|
March 1, 2010
|
|
|
|
**
|
|
|
|
|
500,000
|
|
|
|
0.26
|
|
|
|
September 15, 2010
|
|
|
|
**
|
|
Other individuals as a group
|
|
|
3,585,400
|
|
|
|
0.26
|
|
|
|
March 1, 2010
|
|
|
|
**
|
|
|
|
|
1,443,600
|
|
|
|
0.26
|
|
|
|
April 1, 2010
|
|
|
|
**
|
|
|
|
|
2,820,400
|
|
|
|
0.26
|
|
|
|
September 15, 2010
|
|
|
|
**
|
|
|
|
|
*
|
|
Less than 1% of our outstanding common shares.
|
|
**
|
|
Expiration date for the options will be the earlier of the tenth
anniversary of the grant date of such options or upon the
termination of the optionholders services by reason of
cause, or two years following the termination of the
optionholders services by reason of death or disability,
or 90 days following the termination of the
optionholders services for any reason other than death or
disability and not for cause.
|
Certain
Legal Proceedings
Mr. Carl Yeung, our chief financial officer, served as an
independent director and the chairman of the audit committee of
China Natural Gas, Inc., a Delaware corporation whose shares of
common stock are listed on the Nasdaq Global Market from 2008 to
November 2010. As of the date of this prospectus, two securities
class action litigations are pending in United States federal
courts against China Natural Gas, Inc. and certain of its
officers and directors including Mr. Carl Yeung:
(1) an action filed in United States District Court for the
District of Delaware on August 26, 2010
(
Vandevelde v. China Natural Gas, Inc., et al.
,
No. 10-cv-00728);
and (2) an action filed in the United States District Court
for the Southern District of New York on September 3, 2010
(
Baranowski v. China Natural Gas, Inc., et al.
,
No. 10-cv-06572),
alleging that China Natural Gas, Inc. failed to disclose and
properly account for a bank loan in the amount of
$17.7 million in its annual report on
Form 10-K
for the year ended December 31, 2009 and quarterly report
on
Form 10-Q
for the quarter ended March 31, 2010 and that the pledge to
secure the bank loan violated an indenture for senior notes and
warrants of the company, giving the holder of those notes and
warrants the right to declare a default under that indenture.
The complaints further allege that on August 20, 2010,
China Natural Gas, Inc. amended its annual report on
Form 10-K
for the year ended December 31, 2009 and quarterly report
on
Form 10-Q
for the quarter ended March 31, 2010 to disclose the bank
loan and restate its financial statements in light of the note
and warrant holders right to declare a default under the
indenture.
130
According to the plaintiffs, the price of China Natural
Gass shares declined by approximately 20% in response to
this news. Mr. Yeung could potentially be held individually
liable for civil damages in these actions. As of the date of
this prospectus, the defendants have not responded to these
complaints.
131
PRINCIPAL
AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our common shares, assuming the exercise
of all outstanding warrants to purchase our Series A
preferred shares and conversion of all of our Series A
preferred shares into common shares, as of the date of this
prospectus, by:
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each of our directors and executive officers;
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each person known to us to own beneficially more than 5% of our
common shares; and
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each selling shareholder.
|
The calculations in the table below assume there are 208,389,800
common shares outstanding as of the date of this prospectus,
including common shares issuable upon conversion of all
outstanding Series A preferred shares into common shares
and the exercise of all outstanding warrants to purchase our
Series A preferred shares and conversion of all of these
Series A preferred shares. The total number of common
shares outstanding after the completion of this offering will be
257,389,800 assuming the underwriters do not exercise their
over-allotment option.
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the securities. For each person and group included in the
following table, percentage of beneficial ownership is
calculated by dividing the number of shares beneficially owned
by such person or group (which includes common shares underlying
share options held by such person or group that are exercisable
within 60 days after the date of this prospectus) by the
sum of (i) the number of common shares outstanding as of
the date of this prospectus and (ii) the number of common
shares underlying share options held by such person or group
that are exercisable within 60 days after the date of this
prospectus.
Except as otherwise noted, the business address of each person
listed in the table is
c/o Sky-mobi
Limited,
10/F,
Building B, United Mansion, No. 2, Zijinhua Road,
Hangzhou, Zhejiang 310013, Peoples Republic of China.
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Common Shares
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Common Shares
|
|
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Beneficially Owned
|
|
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Beneficially Owned
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Common Shares Being
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Immediately After
|
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Prior to This Offering
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|
Sold in This Offering
|
|
This
Offering
(1)
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Number
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%
|
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Number
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%
|
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Number
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%
|
|
Directors and Executive Officers:
|
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|
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Michael Tao
Song
(2)
|
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150,000,000
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|
|
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72.0
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|
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150,000,000
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|
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58.3
|
|
Li Ou
(3)
|
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26,530,962
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12.7
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|
|
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26,530,962
|
|
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10.3
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Yan
Tang
(4)
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10,612,385
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5.1
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10,612,385
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4.1
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Kui
Zhou
(5)
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58,389,800
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28.0
|
|
|
|
9,000,000
|
|
|
|
4.3
|
|
|
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49,389,800
|
|
|
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19.2
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Wei
Zhou
(6)
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|
|
|
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Carl Yeung
|
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|
|
|
|
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Steven Bin Li
|
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Xinyong
Hu
(7)
|
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*
|
|
|
|
*
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|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Xing
Fan
(8)
|
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*
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|
|
|
*
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|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Qing
Yan
(9)
|
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2,901,824
|
|
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1.4
|
|
|
|
|
|
|
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2,901,824
|
|
|
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1.1
|
|
All Directors and Executive Officers as a
Group
(10)
|
|
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208,389,800
|
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|
|
100
|
|
|
|
9,000,000
|
|
|
|
4.3
|
|
|
|
199,389,800
|
|
|
|
77.5
|
|
Principal and Selling Shareholders:
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
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Xplane
Ltd.
(11)
|
|
|
150,000,000
|
|
|
|
72.0
|
|
|
|
|
|
|
|
|
|
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150,000,000
|
|
|
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58.3
|
|
Sequoia Capital China II,
L.P.
(12)
|
|
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48,948,200
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23.5
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7,544,704
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|
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3.6
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41,403,496
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|
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16.1
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|
Sequoia Capital China Principals Fund II,
L.P.
(13)
|
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8,221,400
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3.9
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|
|
|
1,267,216
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|
|
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0.6
|
|
|
|
6,954,184
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|
|
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2.7
|
|
Sequoia Capital China Partners Fund II,
L.P.
(14)
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1,220,200
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0.6
|
|
|
|
188,080
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|
|
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0.1
|
|
|
|
1,032,120
|
|
|
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0.4
|
|
132
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|
*
|
|
Less than 1%.
|
|
(1)
|
|
Assumes that the underwriters do not exercise the over-allotment
option.
|
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(2)
|
|
Represents 150,000,000 common shares held by Xplane Ltd., a
British Virgin Islands company controlled by Mr. Song and
his wife.
|
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(3)
|
|
Represents 26,530,962 common shares of the 150,000,000 common
shares held by Xplane Ltd. Mr. Ou holds a 17.687% interest
in Xplane Ltd. Mr. Ou disclaims beneficial ownership with
respect to the shares held by Xplane Ltd. except to the extent
of his pecuniary interest therein.
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(4)
|
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Represents 10,612,385 common shares of the
150,000,000 common shares held by Xplane Ltd. Mr. Tang
holds a 7.075% interest in Xplane Ltd. Mr. Tang disclaims
beneficial ownership with respect to the shares held by Xplane
Ltd. except to the extent of his pecuniary interest therein.
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(5)
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Represents 50,000,000 common shares issuable upon
conversion of 50,000,000 Series A preferred shares and
5,000,000 common shares held by the Sequoia Funds as well
as 3,389,800 common shares issuable upon exercise of the
warrants to purchase our Series A preferred shares held by
the Sequoia Funds. Mr. Zhou disclaims beneficial ownership
with respect to the shares held by the Sequoia Funds except to
the extent of his pecuniary interest therein. The business
address for Mr. Zhou is Room 3606, Tower 3, China
Central Place, No 77 Jianguo Road, Chaoyang District, Beijing
100025, Peoples Republic of China.
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(6)
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The business address for Mr. Zhou is 26/F, Tower A,
Oriental Media Center, 4 Guanghua Road, Chaoyang District,
Beijing 100026, Peoples Republic of China.
|
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(7)
|
|
Represents certain common shares of the 150,000,000 common
shares held by Xplane Ltd. and corresponds to the ownership held
in Xplane Ltd. by Mr. Hu. Mr. Hu disclaims beneficial
ownership with respect to the shares held by Xplane Ltd. except
to the extent of his pecuniary interest therein.
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(8)
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Represents certain common shares of the 150,000,000 common
shares held by Xplane Ltd. and corresponds to the ownership held
in Xplane Ltd. by Mr. Fan. Mr. Fan disclaims
beneficial ownership with respect to the shares held by Xplane
Ltd. except to the extent of his pecuniary interest therein.
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(9)
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Represents 2,901,824 common shares of the
150,000,000 common shares held by Xplane Ltd. and
corresponds to the ownership held in Xplane Ltd. by
Mr. Yan. Mr. Yan disclaims beneficial ownership with
respect to the shares held by Xplane Ltd. except to the extent
of his pecuniary interest therein.
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(10)
|
|
Represents common shares and common shares issuable upon
conversion of all preferred shares held by all of our directors
and executive officers as a group.
|
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(11)
|
|
Represents 150,000,000 common shares held by Xplane Ltd.
The registered address for Xplane Ltd. is Romasco Place,
Wickhams Cay 1, P. O. Box 3140, Road Town, Tortola, British
Virgin Islands, VG1110.
|
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|
(12)
|
|
Represents 4,191,600 common shares and
41,915,000 common shares issuable upon conversion of
41,915,000 Series A preferred shares held by Sequoia
Capital China II, L.P. as well as 2,841,600 common
shares issuable upon exercise of the warrants to purchase our
Series A preferred shares held by Sequoia Capital
China II, L.P. Each of the Sequoia Funds is a limited
partnership incorporated in Cayman Islands. The general partner
of each of the Sequoia Funds is Sequoia Capital China
Management II, L.P., whose general partner is SC China
Holding Limited, a company incorporated in the Cayman Islands.
SC China Holding Limited is wholly owned by Max Wealth
Enterprises Limited, a British Virgin Islands company wholly
owned by Neil Nanpeng Shen. Mr. Shen disclaims beneficial
ownership with respect to the shares held by each of the Sequoia
Funds except to the extent of his pecuniary interest therein.
Mr. Shen has voting and dispositive control over the shares
being offered by the Sequoia Funds. The address of each of the
Sequoia Funds is Suite 2215, Two Pacific Place,
88 Queensway, Hong Kong, PRC.
|
|
|
|
(13)
|
|
Represents 704,000 common shares and 7,040,000 common
shares issuable upon conversion of 7,040,000 Series A
preferred shares held by Sequoia Capital China Principals
Fund II, L.P. as well as 477,400 common shares
issuable upon exercise of the warrants to purchase our
Series A preferred shares held by Sequoia Capital China
Principals Fund II, L.P.
|
|
(14)
|
|
Represents 104,400 common shares and 1,045,000 common
shares issuable upon conversion of 1,045,000 Series A
preferred shares held by Sequoia Capital China Partners
Fund II, L.P. as well as
|
133
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|
|
70,800 common shares issuable upon exercise of the warrants
to purchase our Series A preferred shares held by Sequoia
Capital China Partners Fund II, L.P.
|
As of the date of this prospectus, none of our outstanding
common shares are held by record holders in the United States.
None of our existing shareholders has different voting rights
from other shareholders after the completion of this offering.
We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company.
134
RELATED
PARTY TRANSACTIONS
Contractual
Arrangements
PRC laws currently restrict foreign ownership of businesses
providing telecommunications value-added services. To comply
with PRC laws, we operate our mobile application store through
Diannengs contractual arrangements with Hangzhou Sky,
Mijia, Fanyi and their respective shareholders. See
Corporate History and Structure for a description of
these contractual arrangements.
Private
Placement and Warrants
In July 2007, we entered into a share and warrant purchase
agreement, which was amended in March 2010. Pursuant to the
purchase agreement and its amendment, we issued and sold to
Sequoia Capital China II, L.P. an aggregate of 50,000,000
Series A preferred shares at a price of $0.07 per share for
a consideration of $3.5 million. In March 2010, we further
agreed to issue and sell 4,191,600, 704,000 and 104,400 common
shares to Sequoia Capital China II, L.P., Sequoia Capital China
Principals Fund II, L.P., and Sequoia Capital China
Partners Fund II, L.P., respectively in consideration of
their agreement on modification of the Series A preferred
shares rights relating to our option issuance. We
subsequently issued these shares to them in July 2010.
In July 2007, we issued a warrant to purchase Series A
preferred shares and it was later amended in September 2008 and
further amended and restated in June 29, 2009. Under the
warrant to purchase Series A preferred shares and its
amendments, we granted each of Sequoia Capital China II, L.P.,
Sequoia Capital China Principals Fund II, L.P., and Sequoia
Capital China Partners Fund II, L.P., warrants to purchase
2,841,600, 477,400 and 70,800 of our Series A preferred
shares, respectively, at a price of $0.1475 per share, subject
to adjustment based on, among others, dividends declaration,
subdivision, combination, or reclassification of the
Series A preferred share. The warrants will expire if not
exercised on or before this offering.
Shareholders
Agreement
In connection with our sale of Series A preferred shares
and warrants, we and our then existing shareholders entered into
a shareholders agreement in August 2007. In September 2008 and
March 2010, this shareholders agreement was twice amended. Under
the current shareholders agreement, holders of our registrable
shares are entitled to certain registration rights, including
demand registration rights,
Form F-3
or
Form S-3
registration rights, deferral of registration, and piggyback
registration rights. For a more detailed description of these
registration rights, see Description of Share
Capital Registration Rights.
The current shareholders agreement also covers information and
inspection rights, preemptive rights and rights related to
appointment of directors by certain shareholders, all of which
rights will automatically terminate upon the closing of this
offering, which is deemed a qualified initial public offering
pursuant to consent by our Series A preferred shareholders.
Right of
First Refusal and Co-Sale Agreement
In August 2007, we entered into a right of first refusal and
co-sale agreement with our then existing shareholders in
connection with the issuance of our Series A preferred
shares. Under the first refusal and co-sale agreement, we and
each holder of our preferred shares have certain rights of first
refusal and co-sale rights with respect to any proposed share
transfers by certain of our common shareholders. Additionally,
the Sequoia Funds have certain drag-along rights with respect to
our common shareholders. The right of first refusal and co-sale
agreement will terminate upon the closing of this offering.
Share
Vesting Agreement
In August 2007, we entered into a Share Vesting Agreement with
Xplane Ltd. and each of the then individual shareholders of
Xplane Ltd., pursuant to which we have the right to repurchase,
from Xplane Ltd., up to 75,000,000 restricted shares, at
the par value of $0.00005 per share, in the event of voluntary
or involuntary termination of the individual sharholders
respective employment with us. These restricted shares shall be
released
135
from the restriction over a period of thirty-six months, with
one thirty-sixth (1/36) of the restricted shares being released
from the restriction at the end of each calendar month period on
a pro-rata basis.
Non-competition
and Non-solicitation Agreement
In August 2007, we entered into a non-competition and
non-solicitation agreement with all of the then individual
shareholders of Xplane Ltd. in connection with the issuance of
our Series A preferred shares. Under the non-competition
and non-solicitation agreement, each of the then individual
shareholders of Xplane Ltd., for a period until two years after
the last day such individual shareholder holds any equity
interest of us, shall not engage or participate in, or induce
any of our members to engage or participate in any business
activities anywhere in the world, directly or indirectly in
competition with us.
Confidential
Information Agreement
In August 2007, we entered into a confidential information
agreement with all of the then individual shareholders of Xplane
Ltd. in connection with the issuance of our Series A
preferred shares. Under the confidential information agreement,
each of the then individual shareholder of Xplane Ltd., for a
period until two years after the ending or termination of
employment or shareholding relationship with us, shall not use
or exploit, disclose, publish or otherwise disseminate any
confidential information.
Employment
Agreement
We have entered into employment agreements with each of our
management member and each of the individual shareholders of
Xplane Ltd. For the description of the employment agreement with
our management, see Management Employment
Agreements.
Transactions
with Certain Officers, Shareholders and Affiliates and Key
Management Personnel
In 2009 and 2010, we obtained licenses for certain mobile
contents from Zhang Xing Wu Xian Technologies (Beijing) Co.,
Ltd., or Zhang Xing, and Hangzhou Sibi Technologies Co., Ltd.,
or Sibi, two content providers. We hold 37% and 33% equity
interest in Zhang Xing and Sibi, respectively. The following
table sets forth the related cost of revenues we have recorded
for the periods indicated:
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For the
|
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Six Month
|
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|
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Period Ended
|
|
|
For the Fiscal Years Ended March 31,
|
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September 30,
|
Cost of Revenues
|
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2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
(In thousands)
|
|
Zhang Xing
|
|
|
|
|
|
|
21
|
|
|
|
468
|
|
|
|
70
|
|
|
|
|
|
|
|
888
|
|
|
|
133
|
|
Sibi
|
|
|
|
|
|
|
108
|
|
|
|
777
|
|
|
|
116
|
|
|
|
169
|
|
|
|
883
|
|
|
|
132
|
|
136
In addition, we have certain amounts due from the related
parties, namely Zhang Xing, Sibi, Mr. Michael Tao Song, our
chairman and chief executive officer, Shenzhen Feidong
Technologies Co., Ltd., a PRC company controlled by a family
member of Mr. Michael Tao Song, and the Sequoia Funds, our
preferred shareholders. The following table sets forth the
amounts due to and from those related parties for the periods
indicated:
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For the
|
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|
|
|
|
Six-Month
|
|
|
|
|
|
|
Period Ended
|
|
|
|
|
For the Fiscal Year Ended March 31,
|
|
September 30,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
|
|
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Amounts Due from Related Parties
|
|
Nature of Advances or Payment
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
Zhang Xing
|
|
Non-trading in nature, unsecured, interest-free advances and
repayable on demand
|
|
|
|
|
|
|
124
|
|
|
|
153
|
|
|
|
|
|
|
|
153
|
|
|
|
418
|
|
|
|
63
|
|
Mr. Michael Tao Song
|
|
Non-trade cash advance for his temporary liquidity needs
|
|
|
50
|
|
|
|
2,941
|
|
|
|
300
|
|
|
|
45
|
|
|
|
300
|
|
|
|
(1)
|
|
|
|
|
|
The Sequoia Funds
|
|
Non-trading in nature, unsecured, interest-free advances and
repayable on demand
|
|
|
|
|
|
|
|
|
|
|
2,250
|
|
|
|
336
|
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
336
|
|
Shenzhen Feidong Technologies Co., Ltd
|
|
Non-trading in nature, unsecured, interest-free advances and
repayable on demand
|
|
|
|
|
|
|
5,067
|
|
|
|
81
|
|
|
|
12
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
Amounts Due to Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang Xing
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|
Trading in nature, unsecured, non-interest bearing and repayable
on demand
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
45
|
|
|
|
300
|
|
|
|
394
|
|
|
|
59
|
|
Sibi
|
|
Trading in nature, unsecured, non-interest bearing and repayable
on demand
|
|
|
|
|
|
|
108
|
|
|
|
420
|
|
|
|
63
|
|
|
|
420
|
|
|
|
85
|
|
|
|
13
|
|
The Sequoia Funds
|
|
Non-trading in nature, unsecured, non-interest bearing and
repayable on demand
|
|
|
|
|
|
|
|
|
|
|
5,417
|
|
|
|
810
|
|
|
|
5,417
|
|
|
|
9,750
|
|
|
|
1,457
|
|
Lu Shi Lin
|
|
Non-trading in nature, unsecured and non-interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535
|
|
|
|
80
|
|
|
|
|
(1)
|
|
Mr. Song repaid the outstanding amount in September 2010.
|
The amounts due from the Sequoia Funds represent a capital
injection made by Fanyi on behalf of the Sequoia Funds for their
15% equity interest in Hangzhou Guanzhun Technologies Co., Ltd.,
or Guanzhun, one of our associates. The amounts due to the
Sequoia Funds represent the approved distribution payable to the
Sequoia Funds which has been recorded as finance cost.
From time to time, Beijing Speedpay Technology Co., Ltd., in
which our director Mr. Kui Zhou also serves as a board
member, provides payment processing service to us. The terms and
pricing of the transaction was determined on an
arms-length basis between the contractual parties and we
believe the terms are comparable to terms that could have been
obtained from independent third parties. In the three fiscal
years ended March 31, 2010 and the
six-month
period ended September 30, 2010, we paid a total of nil,
RMB128,000, RMB173,900 ($25,992) and RMB271,690 ($40,600),
respectively, to Beijing Speedpay Technology Co., Ltd.
Share
Incentive Plan
See Management Share Incentive Plan.
137
DESCRIPTION
OF SHARE CAPITAL
We are a Cayman Islands company and our affairs are governed by
our memorandum and articles of association and the Companies Law
of the Cayman Islands, which is referred to as the Companies Law
below.
All share and per share data have been adjusted to reflect a
100-for-1 share
split that became effective on August 2, 2007 and a further
200-for-1
share split that became effective on November 18, 2010.
As of the date hereof, our authorized share capital is
$1,000,000 consisting of 20,000,000,000 shares, comprised
of (i) 19,937,857,200 common shares with par value of
$0.00005 each, of which 155,000,000 shares are issued and
outstanding; (ii) 62,142,800 Series A preferred shares
with par value of $0.00005 each, of which 50,000,000 shares
are issued and outstanding. All of our issued and outstanding
Series A preferred shares will convert into 50,000,000
common shares automatically upon the completion of this
offering. We also granted each of Sequoia Capital China II,
L.P., Sequoia Capital China Principals Fund II, L.P., and
Sequoia Capital China Partners Fund II, L.P., warrants to
purchase 2,841,600, 477,400 and 70,800 of our Series A
preferred shares, respectively, at a price of $0.1475 per share,
subject to adjustment based on, among others, dividends
declaration, subdivision, combination, or reclassification of
the Series A preferred share. The warrants will expire if
not exercised on or before this offering.
Upon the completion of this offering, we will adopt an amended
and restated memorandum and articles of association, which will
replace the current memorandum and articles of association in
its entirety. The following are summaries of material provisions
of our proposed amended and restated memorandum and articles of
association and the Companies Law insofar as they relate to the
material terms of our common shares that we expect will become
effective upon the completion of this offering.
Common
shares
General.
All of our outstanding common shares
are fully paid and non-assessable. Certificates representing the
common shares are issued in registered form. Our shareholders
who are nonresidents of the Cayman Islands may freely hold and
vote their shares.
Dividends.
The holders of our common shares
are entitled to such dividends as may be declared by our board
of directors subject to the Companies Law and to the amended and
restated articles of association.
Voting Rights.
Each common share is entitled
to one vote on all matters upon which the common shares are
entitled to vote. Voting at any shareholders meeting is by
show of hands unless a poll is demanded. A poll may be demanded
by our chairman or any shareholder, present in person or by
proxy.
A quorum required for a meeting of shareholders consists of at
least two shareholders present in person or by proxy or, if a
corporation or other non-natural person, by its duly authorized
representative, who hold not less than one-third of our voting
share capital. An annual general meeting shall be held in each
year other than the year in which the amended and restated
articles of association was adopted. Extraordinary general
meetings may be held at such times as may be determined by our
board of directors and may be convened by a majority of our
board of directors or the chairman of the board on its/his own
initiative. Advance notice of at least 10 clear days is required
for the convening of our annual general meeting and other
shareholders meetings.
An ordinary resolution to be passed by the shareholders requires
the affirmative vote of a simple majority of the votes attaching
to the common shares cast in a general meeting, while a special
resolution requires the affirmative vote of no less than
two-thirds of the votes cast attaching to the common shares. A
special resolution is required for important matters such as a
change of name. Holders of the common shares may effect certain
changes by ordinary resolution, including alter the amount of
our authorized share capital, consolidate and divide all or any
of our share capital into shares of larger amount than our
existing share capital, and cancel any unissued shares.
Transfer of Shares.
Subject to the
restrictions of our amended and restated memorandum and articles
of association, as applicable, any of our shareholders may
transfer all or any of his or her common shares by an instrument
of transfer in the usual or common form or any other form
approved by our board.
138
Our board of directors may, in its sole discretion, decline to
register any transfer of any common share which is not fully
paid up or on which we have a lien. Our directors may also
decline to register any transfer of any common share unless
(a) the instrument of transfer is lodged with us,
accompanied by the certificate for the common shares to which it
relates and such other evidence as our board of directors may
reasonably require to show the right of the transferor to make
the transfer; (b) the instrument of transfer is in respect
of only one class of common shares; (c) the instrument of
transfer is properly stamped, if required; (d) in the case
of a transfer to joint holders, the number of joint holders to
whom the common share is to be transferred does not exceed four;
(e) the shares concerned are free of any lien in favor of
us; or (f) a fee of such maximum sum as the NASDAQ Global
Market may determine to be payable, or such lesser sum as our
board of directors may from time to time require, is paid to us
in respect thereof.
If our directors refuse to register a transfer they shall,
within two months after the date on which the instrument of
transfer was lodged, send to each of the transferor and the
transferee notice of such refusal. The registration of transfers
may, on notice being given by advertisement in such one or more
newspapers or by electronic means, be suspended and the register
closed at such times and for such periods as our board of
directors may from time to time determine, provided, however,
that the registration of transfers shall not be suspended nor
the register closed for more than 30 days in any year.
Liquidation.
On a return of capital on winding
up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the
holders of common shares shall be distributed among the holders
of the common shares on a pro rata basis.
Calls on Shares and Forfeiture of Shares.
Our
board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their shares in a notice
served to such shareholders at least 14 clear days prior to the
specified time and place of payment. The shares that have been
called upon and remain unpaid on the specified time are subject
to forfeiture.
Redemption of Shares.
Subject to the
provisions of the Companies Law, we may issue shares on terms
that are subject to redemption, at our option or at the option
of the holders, on such terms and in such manner, including out
of capital, as may, before the issue of such shares, be
determined by our board of directors.
Variations of Rights of Shares.
All or any of
the special rights attached to any class of shares may, subject
to the provisions of the Companies Law, be varied either with
the written consent of the holders of a majority of the issued
shares of that class or with the sanction of a special
resolution passed at a general meeting of the holders of the
shares of that class.
Inspection of Books and Records.
Holders of
our common shares will have no general right under Cayman
Islands law to inspect or obtain copies of our list of
shareholders or our corporate records. However, we will provide
our shareholders with annual audited financial statements. See
Where You Can Find Additional Information.
Changes in Capital.
We may from time to time
by ordinary resolutions:
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increase the share capital by such sum, to be divided into
shares of such classes and amount, as the resolution shall
prescribe;
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consolidate and divide all or any of our share capital into
shares of a larger amount than our existing shares;
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sub-divide
our existing shares, or any of them into shares of a smaller
amount; and
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cancel any shares that, at the date of the passing of the
resolution, have not been taken or agreed to be taken by any
person and diminish the amount of our share capital by the
amount of the shares so cancelled.
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Subject to the Companies Law and our amended and restated
memorandum and articles of association with respect to matters
to be dealt with by ordinary resolution, we may, by special
resolution, reduce our share capital and any capital redemption
reserve in any manner authorized by law.
Issuance of Additional Shares.
Our amended and
restated memorandum and articles of association authorizes our
board of directors to issue additional common shares from time
to time as our board of directors shall determine, to the extent
there are available authorized but unissued shares.
139
Our amended and restated memorandum and articles of association
authorizes our board of directors to establish from time to time
one or more series of preferred shares and to determine, with
respect to any series of preferred shares, the terms and rights
of that series, including:
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designation of the series;
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the number of shares of the series;
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the dividend rights, conversion rights and voting
rights; and
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|
the rights and terms of redemption and liquidation preferences.
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The issuance of preferred shares may be used as an anti-takeover
device without further action on the part of the shareholders.
Issuance of these shares may dilute the voting power of holders
of common shares.
Differences
in Corporate Law
The Companies Law is modeled after that of England and Wales but
does not follow recent statutory enactments in England. In
addition, the Companies Law differs from laws applicable to
United States corporations and their shareholders. Set forth
below is a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements.
A merger of
two or more constituent companies under Cayman Islands law
requires a plan of merger or consolidation to be approved by the
directors of each constituent company and authorization by
(a) a majority in number representing seventy-five percent
(75%) in value of the shareholders voting together as one class
and (b) if the shares to be issued to each shareholder in
the surviving company are to have the same rights and economic
value as the shares held in the constituent company, a special
resolution of the shareholders voting together as one class.
A merger between a Cayman parent company and its Cayman
subsidiary or subsidiaries does not require authorization by a
resolution of shareholders. For this purpose a subsidiary is a
company of which at least ninety percent (90%) of the issued
shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security
interest over a constituent company is required unless this
requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a
Cayman constituent company is entitled to payment of the fair
value of his shares upon dissenting to a merger or
consolidation. The exercise of appraisal rights will preclude
the exercise of any other rights save for the right to seek
relief on the grounds that the merger or consolidation is void
or unlawful.
In addition, there are statutory provisions that facilitate the
reconstruction and amalgamation of companies, provided that the
arrangement is approved by a majority in number of each class of
shareholders and creditors (representing 75% by value) with whom
the arrangement is to be made, and who must, in addition,
represent three-fourths in value of each such class of
shareholders or creditors, as the case may be, that are present
and voting either in person or by proxy at a meeting, or
meetings, convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by
the Grand Court of the Cayman Islands. While a dissenting
shareholder has the right to express to the court the view that
the transaction ought not to be approved, the court can be
expected to approve the arrangement if it determines that:
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the statutory provisions as to the required majority vote have
been met;
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|
the shareholders have been fairly represented at the meeting in
question and the statutory majority are acting bona fide without
coercion of the minority to promote interests adverse to those
of the class;
|
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the arrangement is such that may be reasonably approved by an
intelligent and honest man of that class acting in respect of
his interest; and
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the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
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140
When a take-over offer is made and accepted by holders of 90.0%
of the shares within four months, the offeror may, within a
two-month period commencing on the expiration of such four month
period, require the holders of the remaining shares to transfer
such shares on the terms of the offer. An objection can be made
to the Grand Court of the Cayman Islands but this is unlikely to
succeed in the case of an offer which has been so approved
unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the
dissenting shareholder would have no rights comparable to
appraisal rights, which would otherwise ordinarily be available
to dissenting shareholders of Delaware corporations, providing
rights to receive payment in cash for the judicially determined
value of the shares.
Shareholders Suits.
In principle, we
will normally be the proper plaintiff and as a general rule a
derivative action may not be brought by a minority shareholder.
However, based on English authorities, which would in all
likelihood be of persuasive authority in the Cayman Islands,
there are exceptions to the foregoing principle, including when:
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a company acts or proposes to act illegally or
ultra
vires;
|
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the act complained of, although not
ultra vires,
could
only be effected duly if authorized by more than a simple
majority vote that has not been obtained; and
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those who control the company are perpetrating a fraud on
the minority.
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Indemnification of Directors and Executive Officers and
Limitation of Liability.
Cayman Islands law does
not limit the extent to which a companys memorandum and
articles of association may provide for indemnification of
officers and directors, except to the extent any such provision
may be held by the Cayman Islands courts to be contrary to
public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime.
Our amended and restated memorandum and articles of association
permit indemnification of officers and directors for losses,
damages costs and expenses incurred in their capacities as such
unless such losses or damages arise from dishonesty or fraud
which may attach to such directors or officers. This standard of
conduct is generally the same as permitted under the Delaware
General Corporation Law for a Delaware corporation. In addition,
we intend to enter into indemnification agreements with our
directors and senior executive officers that will provide such
persons with additional indemnification beyond that provided in
our amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or
persons controlling us under the foregoing provisions, we have
been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Directors Fiduciary Duties.
Under
Delaware corporate law, a director of a Delaware corporation has
a fiduciary duty to the corporation and its shareholders. This
duty has two components: the duty of care and the duty of
loyalty. The duty of care requires that a director act in good
faith, with the care that an ordinarily prudent person would
exercise under similar circumstances. Under this duty, a
director must inform himself of, and disclose to shareholders,
all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a
director act in a manner he or she reasonably believes to be in
the best interests of the corporation. He or she must not use
his or her corporate position for personal gain or advantage.
This duty prohibits self-dealing by a director and mandates that
the best interest of the corporation and its shareholders take
precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the shareholders
generally. In general, actions of a director are presumed to
have been made on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of
the corporation. However, this presumption may be rebutted by
evidence of a breach of one of the fiduciary duties. Should such
evidence be presented concerning a transaction by a director, a
director must prove the procedural fairness of the transaction,
and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman
Islands company is in the position of a fiduciary with respect
to the company and therefore it is considered that he owes the
following duties to the company a duty to act bona
fide in the best interests of the company, a duty not to make a
profit based on his or her position as
141
director (unless the company permits him to do so) and a duty
not to put himself in a position where the interests of the
company conflict with his or her personal interest or his or her
duty to a third party. A director of a Cayman Islands company
owes to the company a duty to act with skill and care. It was
previously considered that a director need not exhibit in the
performance of his or her duties a greater degree of skill than
may reasonably be expected from a person of his or her knowledge
and experience. However, English and Commonwealth courts have
moved towards an objective standard with regard to the required
skill and care and these authorities are likely to be followed
in the Cayman Islands.
Shareholder Action by Written Consent.
Under
the Delaware General Corporation Law, a corporation may
eliminate the right of shareholders to act by written consent by
amendment to its certificate of incorporation. Similarly, our
amended and restated articles of association provide that any
action required or permitted to be taken at any annual or
extraordinary general meetings of the Company may be taken only
upon the vote of the members at an annual or extraordinary
general meeting duly noticed and convened in accordance with our
amended and restated articles of association and the law and may
not be taken by a written resolution of members without a
meeting.
Shareholder Proposals.
Under the Delaware
General Corporation Law, a shareholder has the right to put any
proposal before the annual meeting of shareholders, provided it
complies with the notice provisions in the governing documents.
A special meeting may be called by the board of directors or any
other person authorized to do so in the governing documents, but
shareholders may be precluded from calling special meetings.
Our amended and restated articles of association allow any
shareholder holding 25% or more of our paid up capital to
requisition a shareholders meeting. As an exempted Cayman
Islands company, we are not obliged by law to call
shareholders annual general meetings. However, our amended
and restated articles of association require us to call such
meetings.
Cumulative Voting.
Under the Delaware General
Corporation Law, cumulative voting for elections of directors is
not permitted unless the corporations certificate of
incorporation specifically provides for it. Cumulative voting
potentially facilitates the representation of minority
shareholders on a board of directors since it permits the
minority shareholder to cast all the votes to which the
shareholder is entitled on a single director, which increases
the shareholders voting power with respect to electing
such director. As permitted under Cayman Islands law, our
amended and restated articles of association do not provide for
cumulative voting. As a result, our shareholders are not
afforded any less protections or rights on this issue than
shareholders of a Delaware corporation.
Removal of Directors.
Under the Delaware
General Corporation Law, a director of a corporation with a
classified board may be removed only for cause with the approval
of a majority of the outstanding shares entitled to vote, unless
the certificate of incorporation provides otherwise. Under our
amended and restated articles of association, directors may be
removed by ordinary resolution.
Transactions with Interested Shareholders.
The
Delaware General Corporation Law contains a business combination
statute applicable to Delaware corporations whereby, unless the
corporation has specifically elected not to be governed by such
statute by amendment to its certificate of incorporation, it is
prohibited from engaging in certain business combinations with
an interested shareholder for three years following
the date that such person becomes an interested shareholder. An
interested shareholder generally is a person or a group who or
which owns or owned 15% or more of the targets outstanding
voting stock within the past three years. This has the effect of
limiting the ability of a potential acquirer to make a
two-tiered bid for the target in which all shareholders would
not be treated equally. The statute does not apply if, among
other things, prior to the date on which such shareholder
becomes an interested shareholder, the board of directors
approves either the business combination or the transaction
which resulted in the person becoming an interested shareholder.
This encourages any potential acquirer of a Delaware corporation
to negotiate the terms of any acquisition transaction with the
targets board of directors.
Cayman Islands law has no comparable statute. As a result, we
cannot avail ourselves of the types of protections afforded by
the Delaware business combination statute. However, although
Cayman Islands law does not regulate transactions between a
company and its significant shareholders, it does provide that
such transactions
142
must be entered into bona fide in the best interests of the
company for a proper corporate purpose and not with the effect
of constituting a fraud on the minority shareholders.
Dissolution; Winding up.
Under the Delaware
General Corporation Law, unless the board of directors approves
the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initiated by the board
of directors may it be approved by a simple majority of the
corporations outstanding shares. Delaware law allows a
Delaware corporation to include in its certificate of
incorporation a supermajority voting requirement in connection
with dissolutions initiated by the board. Under Cayman Islands
law, a company may be wound up by either an order of the courts
of the Cayman Islands or by a special resolution of its members
or, if the company is unable to pay its debts as they fall due,
by an ordinary resolution of its members. The court has
authority to order winding up in a number of specified
circumstances including where it is, in the opinion of the
court, just and equitable to do so.
Under the Companies Law of the Cayman Islands and our amended
and restated articles of association, our company may be
dissolved, liquidated or wound up by the vote of holders of
two-thirds of our shares voting at a meeting or the unanimous
written resolution of all shareholders.
Variation of Rights of Shares.
Under the
Delaware General Corporation Law, a corporation may vary the
rights of a class of shares with the approval of a majority of
the outstanding shares of such class, unless the certificate of
incorporation provides otherwise. Under Cayman Islands law and
our amended and restated articles of association, if our share
capital is divided into more than one class of shares, we may
vary the rights attached to any class only with a special
resolution passed at a general meeting of the holders of the
shares of that class.
Amendment of Governing Documents.
Under the
Delaware General Corporation Law, a corporations governing
documents may be amended with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of
incorporation provides otherwise. As permitted by Cayman Islands
law, our amended and restated memorandum and articles of
association may only be amended by special resolution.
Inspection of Books and Records.
Under the
Delaware General Corporation Law, any shareholder of a
corporation may for any proper purpose inspect or make copies of
the corporations stock ledger, list of shareholders and
other books and records.
Holders of our shares will have no general right under Cayman
Islands law to inspect or obtain copies of our list of
shareholders or our corporate records. However, we intend to
provide our shareholders with annual reports containing audited
financial statements.
Anti-takeover Provisions in Our Memorandum and Articles of
Association.
Some provisions of our amended and
restated memorandum and articles of association may discourage,
delay or prevent a change of control of our company or
management that shareholders may consider favorable, including a
provision that authorizes our board of directors to issue
preference shares in one or more series and to designate the
price, rights, preferences, privileges and restrictions of such
preference shares without any further vote or action by our
shareholders.
Such 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 these preference 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.
However, under Cayman Islands law, our directors may only
exercise the rights and powers granted to them under our amended
and restated memorandum and articles of association for a proper
purpose and for what they believe in good faith to be in the
best interests of our company.
Rights of Non-resident or Foreign
Shareholders.
There are no limitations imposed by
our amended and restated memorandum and articles of association
on the rights of non-resident or foreign shareholders to hold or
exercise voting rights on our shares. In addition, there are no
provisions in our amended and restated memorandum
143
and articles of association governing the ownership threshold
above which shareholder ownership must be disclosed.
History
of Securities Issuances
The following is a summary of our securities issuances since our
incorporation on April 20, 2007.
Common Shares.
On April 20, 2007, we
issued one common share (without taking into account the
100-for-1 share
split effected on August 2, 2007 and the further
200-for-1
share split that became effective on November 18,
2010) to N.D. Nominees Ltd. for nominal consideration. On
August 2, 2007, we issued an aggregate of 149,980,000
common shares to Xplane Ltd. for a purchase price of $7,499. In
March 2010, we agreed to issue 4,191,600, 704,400 and 104,400
common shares to Sequoia Capital China II, L.P., Sequoia Capital
China Principals Fund II, L.P., and Sequoia Capital China
Partners Fund II, L.P., respectively, for nominal
consideration in consideration of their agreement on
modification of the Series A preferred shares rights
relating to our option issuance. We subsequently issued these
shares to them in July 2010.
Preferred Shares.
On August 2, 2007, we
issued in a private placement an aggregate of 50,000,000
Series A preferred shares for an aggregate purchase price
of $3.5 million to Sequoia Capital China II L.P.
Warrants.
On June 29, 2009, we issued
warrants to all holders of our Series A preferred shares,
namely Sequoia Capital China II, L.P., Sequoia Capital China
Principals Fund II, L.P., and Sequoia Capital China
Partners Fund II, L.P., to purchase up to 2,841,600,
477,400, and 70,800 Series A preferred shares,
respectively, at an exercise price of $0.1475 per share, subject
to adjustment based on, among others, dividends declaration,
subdivision, combination, or reclassification of the
Series A preferred share. The warrants will expire if not
exercised on or before this public offering.
Options.
We have granted to certain of our
directors, executive officers and employees options to purchase
our common shares. As of the date of this prospectus, the
aggregate number of our common shares underlying our outstanding
options is 11,149,400. See Management Share
Incentive Plan.
Registration
Rights
Pursuant to our shareholders agreement entered into in August
2007, as amended and restated, we have granted certain
registration rights to holders of our registrable securities,
which include our common shares issued or issuable upon
conversion of our preferred shares, including preferred shares
issuable upon exercise of our warrants. Set forth below is a
description of the registration rights granted under the
agreement.
Demand Registration Rights.
Holders of at
least 50% of the registrable securities then outstanding have
the right to demand that we file a registration statement for at
least 20% of the registrable securities then held by such
holders (or any lesser percentage if the anticipated gross
proceeds from the offering exceed $5,000,000). We, however, are
not obliged to effect a demand registration if we have already
effected two registrations.
Form F-3
or
Form S-3
Registration Rights.
At any time after the
closing of this offering, when we are eligible for registration
on
Form F-3
or
Form S-3,
holders of our registrable securities then outstanding have the
right to request that we file a registration statement under
Form F-3
or
Form S-3.
We, however, are not obliged to effect any such registration if
we have already effected two registrations on
Form F-3
or
Form S-3
for the holders within the
12-month
period preceding the date of request.
Deferral of Registration.
We are not obligated
to effect the above demand registration or
Form F-3
or
Form S-3
registration (i) if we intend to effect the filing for our
own account of a registration statement of common shares within
60 days of receipt of a request, and we are actively
employing in good faith our reasonable best efforts to cause
such registration statement to become effective within
60 days of initial filing, or (ii) during the period
starting with the date of filing by us of, and ending six months
following the effective date of, any registration statement
pertaining to our common shares, provided that in either case,
the holders of registrable securities are entitled to join such
registration under the piggyback registration rights described
below. Furthermore, we have the right to defer filing of a
registration statement for up to 90 days under demand
registration rights or up to 60 days under
Form F-3
or
Form S-3
registration rights, if we provide the requesting holders a
certificate signed by our chief
144
executive officer stating that in the good faith judgment of the
board of directors that filing of a registration statement will
be detrimental to us and our shareholders, but we cannot
exercise the deferral right more than once in any
12-month
period.
Piggyback Registration Rights.
If we propose
to file a registration statement for a public offering of our
securities other than pursuant to a demand registration right or
an F-3 or
S-3
registration statement, or relating to an employee benefit plan
or a corporate reorganization, then we must offer holders of
registrable securities an opportunity to include in this
registration all or any part of their registrable securities.
Expenses of Registration.
All registration
expenses incurred in connection with any demand, piggyback or
F-3
or
S-3 registration,
other than any underwriting discounts and selling commissions,
shall be borne by us.
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DESCRIPTION
OF AMERICAN DEPOSITARY SHARES
Citibank, N.A. has agreed to act as the depositary for the
American Depositary Shares. Citibanks depositary offices
are located at 388 Greenwich Street, New York, New York 10013.
American Depositary Shares are frequently referred to as
ADSs and represent ownership interests in securities
that are on deposit with the depositary. ADSs may be represented
by certificates that are commonly known as American
Depositary Receipts or ADRs. The depositary
typically appoints a custodian to safekeep the securities on
deposit. In this case, the custodian is Citibank,
N.A. Hong Kong, located at 10/F, Harbour Front (II),
22, Tak Fung Street, Hung Hom, Kowloon, Hong Kong.
We appoint Citibank as depositary pursuant to a deposit
agreement. A copy of the deposit agreement is on file with the
SEC under cover of a Registration Statement on
Form F-6.
You may obtain a copy of the deposit agreement from the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549 and from the SECs
website (
www.sec.gov
).
We are providing you with a summary description of the material
terms of the ADSs and of your material rights as an owner of
ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that the rights and
obligations of an owner of ADSs will be determined by reference
to the terms of the deposit agreement and not by this summary.
We urge you to review the deposit agreement in its entirety.
Each ADS represents the right to receive eight ordinary shares
on deposit with the custodian. An ADS also represents the right
to receive any other property received by the depositary or the
custodian on behalf of the owner of the ADS but that has not
been distributed to the owners of ADSs because of legal
restrictions or practical considerations.
If you become an owner of ADSs, you will become a party to the
deposit agreement and therefore will be bound to its terms and
to the terms of any ADR that represents your ADSs. The deposit
agreement and the ADR specify our rights and obligations as well
as your rights and obligations as owner of ADSs and those of the
depositary. As an ADS holder you appoint the depositary to act
on your behalf in certain circumstances. The deposit agreement
and the ADRs are governed by New York law. However, our
obligations to the holders of ordinary shares will continue to
be governed by the laws of the Cayman Islands, which may be
different from the laws in the United States.
In addition, applicable laws and regulations may require you to
satisfy reporting requirements and obtain regulatory approvals
in certain circumstances. You are solely responsible for
complying with such reporting requirements and obtaining such
approvals. Neither the depositary, the custodian, us or any of
their or our respective agents or affiliates shall be required
to take any actions whatsoever on behalf of you to satisfy such
reporting requirements or obtain such regulatory approvals under
applicable laws and regulations.
As an owner of ADSs, you may hold your ADSs either by means of
an ADR registered in your name, through a brokerage or
safekeeping account, or through an account established by the
depositary in your name reflecting the registration of
uncertificated ADSs directly on the books of the depositary
(commonly referred to as the direct registration
system or DRS). The direct registration system
reflects the uncertificated (book-entry) registration of
ownership of ADSs by the depositary. Under the direct
registration system, ownership of ADSs is evidenced by periodic
statements issued by the depositary to the holders of the ADSs.
The direct registration system includes automated transfers
between the depositary and The Depository Trust Company
(DTC), the central book-entry clearing and
settlement system for equity securities in the United States. If
you decide to hold your ADSs through your brokerage or
safekeeping account, you must rely on the procedures of your
broker or bank to assert your rights as ADS owner. Banks and
brokers typically hold securities such as the ADSs through
clearing and settlement systems such as DTC. The procedures of
such clearing and settlement systems may limit your ability to
exercise your rights as an owner of ADSs. Please consult with
your broker or bank if you have any questions concerning these
limitations and procedures. All ADSs held through DTC will be
registered in the name of a nominee of DTC. This summary
description assumes you have opted to own the ADSs directly by
means of an ADS registered in your name and, as such, we will
refer to you as the holder. When we refer to
you, we assume the reader owns ADSs and will own
ADSs at the relevant time.
146
Dividends
and Distributions
As a holder, you generally have the right to receive the
distributions we make on the securities deposited with the
custodian bank. Your receipt of these distributions may be
limited, however, by practical considerations and legal
limitations. Holders will receive such distributions under the
terms of the deposit agreement in proportion to the number of
ADSs held as of a specified record date.
Distributions
of Cash
Whenever we make a cash distribution for the securities on
deposit with the custodian, we will deposit the funds with the
custodian. Upon receipt of confirmation of the deposit of the
requisite funds, the depositary will arrange for the funds to be
converted into U.S. dollars and for the distribution of the
U.S. dollars to the holders, subject to the Cayman Islands
laws and regulations.
The conversion into U.S. dollars will take place only if
practicable and if the U.S. dollars are transferable to the
United States. The amounts distributed to holders will be net of
the fees, expenses, taxes and governmental charges payable by
holders under the terms of the deposit agreement. The depositary
will apply the same method for distributing the proceeds of the
sale of any property (such as undistributed rights) held by the
custodian in respect of securities on deposit.
The distribution of cash will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the
terms of the deposit agreement.
Distributions
of Shares
Whenever we make a free distribution of ordinary shares for the
securities on deposit with the custodian, we will deposit the
applicable number of ordinary shares with the custodian. Upon
receipt of confirmation of such deposit, the depositary will
either distribute to holders new ADSs representing the ordinary
shares deposited or modify the
ADS-to-ordinary
shares ratio, in which case each ADS you hold will represent
rights and interests in the additional ordinary shares so
deposited. Only whole new ADSs will be distributed. Fractional
entitlements will be sold and the proceeds of such sale will be
distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the
ADS-to-ordinary
shares ratio upon a distribution of ordinary shares will be made
net of the fees, expenses, taxes and governmental charges
payable by holders under the terms of the deposit agreement. In
order to pay such taxes or governmental charges, the depositary
may sell all or a portion of the new ordinary shares so
distributed.
No such distribution of new ADSs will be made if it would
violate a law (i.e. the U.S. securities laws) or if it is
not operationally practicable. If the depositary does not
distribute new ADSs as described above, it may sell the ordinary
shares received upon the terms described in the deposit
agreement and will distribute the proceeds of the sale as in the
case of a distribution of cash.
Distributions
of Rights
Whenever we intend to distribute rights to purchase additional
ordinary shares, we will give prior notice to the depositary and
we will assist the depositary in determining whether it is
lawful and reasonably practicable to distribute rights to
purchase additional ADSs to holders.
The depositary will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable such holders
to exercise such rights if it is lawful and reasonably
practicable to make the rights available to holders of ADSs, and
if we provide all of the documentation contemplated in the
deposit agreement (such as opinions to address the lawfulness of
the transaction). You may have to pay fees, expenses, taxes and
other governmental charges to subscribe for the new ADSs upon
the exercise of your rights. The depositary is not obligated to
establish procedures to facilitate the distribution and exercise
by holders of rights to purchase new ordinary shares other than
in the form of ADSs.
147
The depositary will not distribute the rights to you if:
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We do not timely request that the rights be distributed to you
or we request that the rights not be distributed to you; or
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We fail to deliver satisfactory documents to the
depositary; or
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It is not reasonably practicable to distribute the rights.
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The depositary will sell the rights that are not exercised or
not distributed if such sale is lawful and reasonably
practicable. The proceeds of such sale will be distributed to
holders as in the case of a cash distribution. If the depositary
is unable to sell the rights, it will allow the rights to lapse.
Elective
Distributions
Whenever we intend to distribute a dividend payable at the
election of shareholders either in cash or in additional shares,
we will give prior notice thereof to the depositary and will
indicate whether we wish the elective distribution to be made
available to you. In such case, we will assist the depositary in
determining whether such distribution is lawful and reasonably
practicable.
The depositary will make the election available to you only if
it is reasonably practicable and if we have provided all of the
documentation contemplated in the deposit agreement. In such
case, the depositary will establish procedures to enable you to
elect to receive either cash or additional ADSs, in each case as
described in the deposit agreement.
If the election is not made available to you, you will receive
either cash or additional ADSs, depending on what a holder of
ordinary shares would receive upon failing to make an election,
as more fully described in the deposit agreement.
Other
Distributions
Whenever we intend to distribute property other than cash,
ordinary shares or rights to purchase additional ordinary
shares, we will notify the depositary in advance and will
indicate whether we wish such distribution to be made to you. If
so, we will assist the depositary in determining whether such
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to
you and if we provide all of the documentation contemplated in
the deposit agreement, the depositary will distribute the
property to the holders in a manner it deems practicable.
The distribution will be made net of fees, expenses, taxes and
governmental charges payable by holders under the terms of the
deposit agreement. In order to pay such taxes and governmental
charges, the depositary may sell all or a portion of the
property received.
The depositary will
not
distribute the property to you
and will sell the property if:
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We do not request that the property be distributed to you or if
we ask that the property not be distributed to you; or
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We do not deliver satisfactory documents to the
depositary; or
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The depositary determines that all or a portion of the
distribution to you is not reasonably practicable.
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The proceeds of such a sale will be distributed to holders as in
the case of a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit
with the custodian, we will notify the depositary in advance. If
it is reasonably practicable and if we provide all of the
documentation contemplated in the deposit agreement, the
depositary will provide notice of the redemption to the holders.
148
The custodian will be instructed to surrender the shares being
redeemed against payment of the applicable redemption price. The
depositary will convert the redemption funds received into
U.S. dollars upon the terms of the deposit agreement and
will establish procedures to enable holders to receive the net
proceeds from the redemption upon surrender of their ADSs to the
depositary. You may have to pay fees, expenses, taxes and other
governmental charges upon the redemption of your ADSs. If less
than all ADSs are being redeemed, the ADSs to be retired will be
selected by lot or on a
pro rata
basis, as the depositary
may determine.
Changes
Affecting ordinary shares
The ordinary shares held on deposit for your ADSs may change
from time to time. For example, there may be a change in nominal
or par value, a
split-up,
cancellation, consolidation or reclassification of such ordinary
shares or a recapitalization, reorganization, merger,
consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent
permitted by law, represent the right to receive the property
received or exchanged in respect of the ordinary shares held on
deposit. The depositary may in such circumstances deliver new
ADSs to you, amend the deposit agreement, the ADRs and the
applicable Registration Statement(s) on
Form F-6,
call for the exchange of your existing ADSs for new ADSs and
take any other actions that are appropriate to reflect as to the
ADSs the change affecting the Shares. If the depositary may not
lawfully distribute such property to you, the depositary may
sell such property and distribute the net proceeds to you as in
the case of a cash distribution.
Issuance
of ADSs upon Deposit of ordinary shares
The depositary may create ADSs on your behalf if you or your
broker deposit ordinary shares with the custodian. The
depositary will deliver these ADSs to the person you indicate
only after you pay any applicable issuance fees and any charges
and taxes payable for the transfer of the ordinary shares to the
custodian. Your ability to deposit ordinary shares and receive
ADSs may be limited by U.S. and the Cayman Islands legal
considerations applicable at the time of deposit.
The issuance of ADSs may be delayed until the depositary or the
custodian receives confirmation that all required approvals have
been given and that the ordinary shares have been duly
transferred to the custodian. The depositary will only issue
ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be
responsible for transferring good and valid title to the
depositary. As such, you will be deemed to represent and warrant
that:
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The ordinary shares are duly authorized, validly issued, fully
paid, non-assessable and legally obtained.
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All preemptive (and similar) rights, if any, with respect to
such ordinary shares have been validly waived or exercised.
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You are duly authorized to deposit the ordinary shares.
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The ordinary shares presented for deposit are free and clear of
any lien, encumbrance, security interest, charge, mortgage or
adverse claim, and are not, and the ADSs issuable upon such
deposit will not be, restricted securities (as
defined in the deposit agreement).
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The ordinary shares presented for deposit have not been stripped
of any rights or entitlements.
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If any of the representations or warranties are incorrect in any
way, we and the depositary may, at your cost and expense, take
any and all actions necessary to correct the consequences of the
misrepresentations.
Transfer,
Combination and Split Up of ADRs
As an ADR holder, you will be entitled to transfer, combine or
split up your ADRs and the ADSs evidenced thereby. For transfers
of ADRs, you will have to surrender the ADRs to be transferred
to the depositary and also must:
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ensure that the surrendered ADR certificate is properly endorsed
or otherwise in proper form for transfer;
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provide such proof of identity and genuineness of signatures as
the depositary deems appropriate;
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provide any transfer stamps required by the State of New York or
the United States; and
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pay all applicable fees, charges, expenses, taxes and other
government charges payable by ADR holders pursuant to the terms
of the deposit agreement, upon the transfer of ADRs.
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To have your ADRs either combined or split up, you must
surrender the ADRs in question to the depositary with your
request to have them combined or split up, and you must pay all
applicable fees, charges and expenses payable by ADR holders,
pursuant to the terms of the deposit agreement, upon a
combination or split up of ADRs.
Withdrawal
of Shares Upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the
depositary for cancellation and then receive the corresponding
number of underlying ordinary shares at the custodians
offices. Your ability to withdraw the ordinary shares may be
limited by U.S. and Cayman Islands legal considerations
applicable at the time of withdrawal. In order to withdraw the
ordinary shares represented by your ADSs, you will be required
to pay to the depositary the fees for cancellation of ADSs and
any charges and taxes payable upon the transfer of the ordinary
shares being withdrawn. You assume the risk for delivery of all
funds and securities upon withdrawal. Once canceled, the ADSs
will not have any rights under the deposit agreement.
If you hold ADSs registered in your name, the depositary may ask
you to provide proof of identity and genuineness of any
signature and such other documents as the depositary may deem
appropriate before it will cancel your ADSs. The withdrawal of
the ordinary shares represented by your ADSs may be delayed
until the depositary receives satisfactory evidence of
compliance with all applicable laws and regulations. Please keep
in mind that the depositary will only accept ADSs for
cancellation that represent a whole number of securities on
deposit.
You will have the right to withdraw the securities represented
by your ADSs at any time except for:
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Temporary delays that may arise because (i) the transfer
books for the ordinary shares or ADSs are closed, or
(ii) ordinary shares are immobilized on account of a
shareholders meeting or a payment of dividends.
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Obligations to pay fees, taxes and similar charges.
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Restrictions imposed because of laws or regulations applicable
to ADSs or the withdrawal of securities on deposit.
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The deposit agreement may not be modified to impair your right
to withdraw the securities represented by your ADSs except to
comply with mandatory provisions of law.
Voting
Rights
As a holder, you generally have the right under the deposit
agreement to instruct the depositary to exercise the voting
rights for the ordinary shares represented by your ADSs. The
voting rights of holders of ordinary shares are described in the
Section entitled Description of Share Capital Common
shares Voting Rights.
At our request, the depositary will distribute to you any notice
of shareholders meeting received from us together with
information explaining how to instruct the depositary to
exercise the voting rights of the securities represented by ADSs.
Voting at our shareholders meetings is by show of hands
unless a poll is demanded. A poll may be demanded by the
chairman of our board of directors or any shareholder present in
person or by proxy. If the depositary bank timely receives
voting instructions from a holder of ADSs, the depositary bank
will endeavor to cause the ordinary shares on deposit to be
voted as follows: (a) in the event voting takes place at a
shareholders meeting by show of hands, the depositary bank
will instruct the custodian to vote, directly or by proxy, all
ordinary shares on deposit in accordance with the voting
instructions received from a majority of the holders of ADSs who
provided voting instructions; or (b) in the event voting
takes place at a shareholders meeting by poll, the
depositary bank will instruct the custodian to vote, directly or
by proxy, the ordinary shares on deposit in accordance with the
voting instructions received from holders of ADSs.
150
In the event of voting by poll, holders of ADSs in respect of
which no timely voting instructions have been received shall be
deemed to have instructed the depositary to give a discretionary
proxy to a person designated by us to vote the ordinary shares
represented by such holders ADSs; provided, that no such
instruction shall be deemed given and no such discretionary
proxy shall be given with respect to any matter as to which we
inform the depositary that we do not wish such proxy to be
given; provided, further, that no such discretionary proxy shall
be given (x) with respect to any matter as to which we
inform the depositary that (i) there exists substantial
opposition, or (ii) the rights of holders of ADSs or the
shareholders of the Company will be adversely affected and
(y) in the event that the vote is on a show of hands.
Please note that the ability of the depositary to carry out
voting instructions may be limited by practical and legal
limitations and the terms of the securities on deposit. We
cannot assure you that you will receive voting materials in time
to enable you to return voting instructions to the depositary in
a timely manner.
In order to give you a reasonable opportunity to instruct the
depositary as to the exercise of voting rights relating to
deposited securities, if we request the depositary to act,
pursuant to the deposit agreement, we will give the depositary
notice of any such meeting and details concerning the matters to
be voted upon at least 30 days in advance of the meeting
date, although our amended and restated memorandum and articles
of association, which will become effective upon the completion
of this offering, only otherwise require an advance notice of at
least 10 clear days.
Fees and
Charges
As an ADS holder, you will be required to pay the following
service fees to the depositary:
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Service
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Fees
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Issuance of ADSs
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Up to $5¢ per ADS issued
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Cancellation of ADSs
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Up to $5¢ per ADS canceled
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Distribution of cash dividends or other
cash distributions
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Up to $5¢ per ADS held
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Distribution of ADSs pursuant to stock
dividends, free stock distributions or exercise of rights
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Up to $5¢ per ADS held
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Distribution of securities other than
ADSs or rights to purchase additional ADSs
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Up to $5¢ per ADS held
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Depositary Services
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Up to $5¢ per ADS held on the applicable record date(s)
established by the Depositary
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Transfer of ADRs
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$1.50 per certificate presented for transfer
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As an ADS holder you will also be responsible to pay certain
fees and expenses incurred by the depositary and certain taxes
and governmental charges such as:
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Fees for the transfer and registration of ordinary shares
charged by the registrar and transfer agent for the ordinary
shares in the Cayman Islands (
i.e.
upon deposit and
withdrawal of ordinary shares).
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Expenses incurred for converting foreign currency into
U.S. dollars.
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Expenses for cable, telex and fax transmissions and for delivery
of securities.
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Taxes and duties upon the transfer of securities (
i.e.
when ordinary shares are deposited or withdrawn from deposit).
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Fees and expenses incurred in connection with the delivery or
servicing of ordinary shares on deposit.
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Depositary fees payable upon the issuance and cancellation of
ADSs are typically paid to the depositary bank by the brokers
(on behalf of their clients) receiving the newly issued ADSs
from the depositary bank and by the brokers (on behalf of their
clients) delivering the ADSs to the depositary bank for
cancellation. The brokers in turn charge these fees to their
clients. Depositary fees payable in connection with
distributions of cash or securities to
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ADS holders and the depositary services fee are charged by the
depositary bank to the holders of record of ADSs as of the
applicable ADS record date.
The Depositary fees payable for cash distributions are generally
deducted from the cash being distributed. In the case of
distributions other than cash (
i.e.
stock dividend,
rights), the depositary bank charges the applicable fee to the
ADS record date holders concurrent with the distribution. In the
case of ADSs registered in the name of the investor (whether
certificated or uncertificated in direct registration), the
depositary bank sends invoices to the applicable record date ADS
holders. In the case of ADSs held in brokerage and custodian
accounts (via DTC), the depositary bank generally collects its
fees through the systems provided by DTC (whose nominee is the
registered holder of the ADSs held in DTC) from the brokers and
custodians holding ADSs in their DTC accounts. The brokers and
custodians who hold their clients ADSs in DTC accounts in
turn charge their clients accounts the amount of the fees
paid to the depositary banks.
In the event of refusal to pay the depositary fees, the
depositary bank may, under the terms of the deposit agreement,
refuse the requested service until payment is received or may
set off the amount of the depositary fees from any distribution
to be made to the ADS holder.
Note that the fees and charges you may be required to pay may
vary over time and may be changed by us and by the depositary.
You will receive prior notice of such changes.
The depositary bank may reimburse us for certain expenses
incurred by us in respect of the ADR program established
pursuant to the deposit agreement, by making available a portion
of the depositary fees charged in respect of the ADR program or
otherwise, upon such terms and conditions as the Company and the
Depositary may agree from time to time.
Amendments
and Termination
We may agree with the depositary to modify the deposit agreement
at any time without your consent. We undertake to give holders
30 days prior notice of any modifications that would
materially prejudice any of their substantial rights under the
deposit agreement. We will not consider to be materially
prejudicial to your substantial rights any modifications or
supplements that are reasonably necessary for the ADSs to be
registered under the Securities Act or to be eligible for
book-entry settlement, in each case without imposing or
increasing the fees and charges you are required to pay. In
addition, we may not be able to provide you with prior notice of
any modifications or supplements that are required to
accommodate compliance with applicable provisions of law.
You will be bound by the modifications to the deposit agreement
if you continue to hold your ADSs after the modifications to the
deposit agreement become effective. The deposit agreement cannot
be amended to prevent you from withdrawing the ordinary shares
represented by your ADSs (except as permitted by law).
We have the right to direct the depositary to terminate the
deposit agreement. Similarly, the depositary may in certain
circumstances on its own initiative terminate the deposit
agreement. In either case, the depositary must give notice to
the holders at least 30 days before termination. Until
termination, your rights under the deposit agreement will be
unaffected.
After termination, the depositary will continue to collect
distributions received (but will not distribute any such
property until you request the cancellation of your ADSs) and
may sell the securities held on deposit. After the sale, the
depositary will hold the proceeds from such sale and any other
funds then held for the holders of ADSs in a non-interest
bearing account. At that point, the depositary will have no
further obligations to holders other than to account for the
funds then held for the holders of ADSs still outstanding (after
deduction of applicable fees, taxes and expenses).
Books of
Depositary
The depositary will maintain ADS holder records at its
depositary office. You may inspect such records at such office
during regular business hours but solely for the purpose of
communicating with other holders in the interest of business
matters relating to the ADSs and the deposit agreement.
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The depositary will maintain in New York facilities to record
and process the issuance, cancellation, combination,
split-up
and
transfer of ADSs. These facilities may be closed from time to
time, to the extent not prohibited by law.
Limitations
on Obligations and Liabilities
The deposit agreement limits our obligations and the
depositarys obligations to you. Please note the following:
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We and the depositary are obligated only to take the actions
specifically stated in the deposit agreement without negligence
or bad faith.
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The depositary disclaims any liability for any failure to carry
out voting instructions, for any manner in which a vote is cast
or for the effect of any vote, provided it acts in good faith
and in accordance with the terms of the deposit agreement.
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The depositary disclaims any liability for any failure to
determine the lawfulness or practicality of any action, for the
content of any document forwarded to you on our behalf or for
the accuracy of any translation of such a document, for the
investment risks associated with investing in ordinary shares,
for the validity or worth of the ordinary shares, for any tax
consequences that result from the ownership of ADSs, for the
credit-worthiness of any third party, for allowing any rights to
lapse under the terms of the deposit agreement, for the
timeliness of any of our notices or for our failure to give
notice.
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We and the depositary will not be obligated to perform any act
that is inconsistent with the terms of the deposit agreement.
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We and the depositary disclaim any liability if we or the
depositary are prevented or forbidden from or subject to any
civil or criminal penalty or restraint on account of, or delayed
in, doing or performing any act or thing required by the terms
of the deposit agreement, by reason of any provision, present or
future of any law or regulation, or by reason of present or
future provision of any provision of our memorandum and articles
of association, or any provision of or governing the securities
on deposit, or by reason of any act of God or war or other
circumstances beyond our control.
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We and the depositary disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided for
the deposit agreement or in our memorandum and articles of
association or in any provisions of or governing the securities
on deposit.
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We and the depositary further disclaim any liability for any
action or inaction in reliance on the advice or information
received from legal counsel, accountants, any person presenting
Shares for deposit, any holder of ADSs or authorized
representatives thereof, or any other person believed by either
of us in good faith to be competent to give such advice or
information.
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We and the depositary also disclaim liability for the inability
by a holder to benefit from any distribution, offering, right or
other benefit which is made available to holders of ordinary
shares but is not, under the terms of the deposit agreement,
made available to you.
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We and the depositary may rely without any liability upon any
written notice, request or other document believed to be genuine
and to have been signed or presented by the proper parties.
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We and the depositary also disclaim liability for any
consequential or punitive damages for any breach of the terms of
the deposit agreement.
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Pre-Release
Transactions
Subject to the terms and conditions of the deposit agreement,
the depositary may issue to broker/dealers ADSs before receiving
a deposit of ordinary shares or release ordinary shares to
broker/dealers before receiving ADSs for cancellation. These
transactions are commonly referred to as pre-release
transactions, and are entered into between the depositary
and the applicable broker/dealer. The deposit agreement limits
the aggregate size of pre-release transactions (not to exceed
30% of the shares or deposit in the aggregate) and imposes a
number of
153
conditions on such transactions (i.e. the need to receive
collateral, the type of collateral required, the representations
required from brokers, etc.). The depositary may retain the
compensation received from the pre-release transactions.
Taxes
You will be responsible for the taxes and other governmental
charges payable on the ADSs and the securities represented by
the ADSs. We, the depositary and the custodian may deduct from
any distribution the taxes and governmental charges payable by
holders and may sell any and all property on deposit to pay the
taxes and governmental charges payable by holders. You will be
liable for any deficiency if the sale proceeds do not cover the
taxes that are due.
The depositary may refuse to issue ADSs, to deliver, transfer,
split and combine ADRs or to release securities on deposit until
all taxes and charges are paid by the applicable holder. The
depositary and the custodian may take reasonable administrative
actions to obtain tax refunds and reduced tax withholding for
any distributions on your behalf. However, you may be required
to provide to the depositary and to the custodian proof of
taxpayer status and residence and such other information as the
depositary and the custodian may require to fulfill legal
obligations. You are required to indemnify us, the depositary
and the custodian for any claims with respect to taxes based on
any tax benefit obtained for you.
Foreign
Currency Conversion
The depositary will arrange for the conversion of all foreign
currency received into U.S. dollars if such conversion is
practical, and it will distribute the U.S. dollars in
accordance with the terms of the deposit agreement. You may have
to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with
currency exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or
lawful, or if any required approvals are denied or not
obtainable at a reasonable cost or within a reasonable period,
the depositary may take the following actions in its discretion:
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Convert the foreign currency to the extent practical and lawful
and distribute the U.S. dollars to the holders for whom the
conversion and distribution is lawful and practical.
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Distribute the foreign currency to holders for whom the
distribution is lawful and practical.
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Hold the foreign currency (without liability for interest) for
the applicable holders.
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SHARES ELIGIBLE
FOR FUTURE SALE
Upon completion of this offering, assuming no exercise of the
underwriters option to purchase additional ADSs, we will
have 7,250,000 outstanding ADSs representing approximately 22.5%
of our common shares in issue. All of the ADSs sold in this
offering will be freely transferable by persons other than our
affiliates (as that term is defined in Rule 144
under the Securities Act) without restriction or further
registration under the Securities Act. Sales of substantial
amounts of our ADSs in the public market could materially and
adversely affect prevailing market prices of our ADSs. Prior to
this offering, there has been no public market for our common
shares or the ADSs, and while we have received approval to list
the ADSs on the NASDAQ Global Market, we cannot assure you that
a regular trading market will develop in the ADSs. We do not
expect that a trading market will develop for our common shares
not represented by the ADSs.
Lock-Up
Agreements
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the SEC a registration statement under the Securities Act
relating to, any ADSs or common shares or securities convertible
into or exchangeable or exercisable for any ADSs or common
shares, or publicly disclose the intention to make any offer,
sale, pledge, disposition or filing, without the prior written
consent of the underwriters for a period of 180 days after
the date of this prospectus. The foregoing restrictions do not
apply to (i) the issuance of common shares represented by the
ADSs to be sold in this offering and the sale of such ADSs,
(ii) the grants of equity-based awards pursuant to the
terms of our existing share incentive plan and the issuance of
common shares upon exercise of options or vesting of restricted
shares that have been previously granted and are outstanding as
of the date of this prospectus, and (iii) the filing of a
registration statement on
Form S-8
in connection with the registration of common shares issuable
under our existing share incentive plan.
All of our officers, directors, existing shareholders and
certain of our option holders have agreed that, with certain
limited exceptions, they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any ADSs
or common shares or securities convertible into or exchangeable
or exercisable for any ADSs or common shares, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our ADSs
or common shares, whether any of these transactions are to be
settled by delivery of our ADSs, common shares or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of the
underwriters for a period of 180 days after the date of
this prospectus. After the expiration of the
180-day
period, the common shares or ADSs held by our directors,
executive officers or shareholders may be sold subject to the
restrictions under Rule 144 under the Securities Act or by
means of registered public offerings.
The
180-day
lock-up
period is subject to adjustment under certain circumstances. If
in the event that either (1) during the last 17 days
of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the
16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless the underwriters waive, in writing, such an
extension.
Rule 144
All of our common shares outstanding prior to this offering and
common shares to be issued upon automatic conversion of our
Series A preferred shares upon the completion of this
offering are restricted shares as that term is
defined in Rule 144 under the Securities Act and may be
sold publicly in the United States only if they are subject to
an effective registration statement under the Securities Act or
pursuant to an exemption from the registration requirement such
as those provided by Rule 144 and Rule 701 promulgated
under the Securities Act. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of
this prospectus a person (or persons whose shares are
aggregated) who has beneficially owned our restricted shares for
at least six months, is entitled to sell the restricted
securities without registration under the Securities Act,
subject to certain restrictions. Persons who are our
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affiliates may sell within any three-month period a number of
restricted shares that does not exceed the greater of the
following:
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1% of our then total outstanding common shares, in the form of
ADSs or otherwise, which will equal approximately 2,573,898
common shares immediately after this offering; or
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the average weekly trading volume of our common shares in the
form of ADSs or otherwise, during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
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Sales under Rule 144 must be made through unsolicited
transactions. They are also subject to other manner of sale
provisions, notice requirements and the availability of current
public information about us. Persons who are not our affiliates
and have beneficially owned our restricted shares for more than
six months but not more than one year may sell the restricted
shares without registration under the Securities Act, subject to
the availability of current public information about us. Persons
who are not our affiliates and have beneficially owned our
restricted shares for more than one year may freely sell the
restricted shares without registration under the Securities Act.
However, these shares would remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, each of our employees, consultants or
advisors who purchases our common shares from us in connection
with a compensatory stock or option plan or other written
agreement relating to compensation is eligible to resell such
common shares 90 days after we became a reporting company
under the Exchange Act in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding
period, contained in Rule 144. However, these shares would
remain subject to
lock-up
arrangements and would only become eligible for sale when the
lock-up
period expires.
Registration
Rights
Upon completion of this offering, holders of our registrable
securities will be entitled to request that we register their
shares under the Securities Act, following the expiration of the
lock-up
agreements described above. See Description of Share
Capital Registration Rights.
156
TAXATION
The following summary of the material Cayman Islands, PRC and
U.S. federal income tax consequences of an investment in our
ADSs or common shares is based upon laws and relevant
interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an
investment in our ADSs or common shares, such as the tax
consequences under state, local and other tax laws not addressed
herein. To the extent that the discussion relates to matters of
Cayman Islands tax law, it represents the opinion of Conyers
Dill & Pearman, our Cayman Islands counsel. To the
extent that the discussion relates to matters of PRC tax law, it
represents the opinion of Jincheng Tongda & Neal Law
Firm, our PRC counsel. Based on the facts and subject to the
limitations set forth herein, the statements of law or legal
conclusions under the caption United States
Federal Income Taxation constitute the opinion of
Latham & Watkins LLP, our U.S. counsel, as to the
material U.S. federal income tax consequences to U.S. Holders
(as defined below) under current law of an investment in the
ADSs or common shares.
Cayman
Islands Taxation
The Cayman Islands currently levies no taxes on individuals or
corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or
estate duty or withholding tax applicable to us or to any holder
of our ADSs and common shares. There are no other taxes likely
to be material to us levied by the Government of the Cayman
Islands except for stamp duties which may be applicable on
instruments executed in, or after execution brought within the
jurisdiction of the Cayman Islands. No stamp duty is payable in
the Cayman Islands on transfers of shares of Cayman Islands
companies, except those which hold interests in land in the
Cayman Islands. The Cayman Islands is not party to any double
tax treaties. There are no exchange control regulations or
currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions Law (1999
Revision) of the Cayman Islands, we have obtained an undertaking
from the
Governor-in-Council:
(1) that no law which is enacted in the Cayman Islands
imposing any tax to be levied on profits or income or gains or
appreciation shall apply to us or our operations; and
(2) that the aforesaid tax or any tax in the nature of
estate duty or inheritance tax shall not be payable on our
shares, debentures or other obligations.
The undertaking for us is for a period of twenty years from
August 10, 2010.
Peoples
Republic of China Taxation
If the PRC tax authorities determine that our Cayman Islands
holding company is a resident enterprise for PRC
enterprise income tax purposes, a withholding tax of 10% for our
non-PRC enterprise shareholders or potentially 20% for non-PRC
individual shareholders may be imposed on dividends they receive
from us and on gains they recognize from transferring our shares
or ADSs. See Risk Factors Risks Related to
Doing Business in China 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.
United
States Federal Income Taxation
The following discussion describes the material
U.S. federal income tax consequences to U.S. Holders
(as defined below) under present law of an investment in the
ADSs or common shares. This discussion applies only to
U.S. Holders that hold the ADSs or common shares as capital
assets (generally, property held for investment) and that have
the U.S. dollar as their functional currency. This
discussion is based on the tax laws of the United States as of
the date of this prospectus and U.S. Treasury regulations
in effect or, in some cases, proposed, as of the date of this
prospectus, as well as judicial and administrative
interpretations thereof available on or before such date. All of
the foregoing authorities are subject to change, which change
could apply retroactively and could affect the tax consequences
described below.
157
The following discussion neither deals with the tax consequences
to any particular investor nor describes all of the tax
consequences applicable to persons in special tax situations
such as:
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banks;
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certain financial institutions;
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insurance companies;
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regulated investment companies;
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real estate investment trusts;
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broker-dealers;
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traders that elect to mark to market;
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U.S. expatriates;
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tax-exempt entities;
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persons liable for alternative minimum tax;
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persons holding ADSs or common shares as part of a straddle,
hedging, conversion or integrated transaction;
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persons that actually or constructively own 10% or more of the
total combined voting power of all classes of our voting stock;
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persons who acquired ADSs or common shares pursuant to the
exercise of any employee share option or otherwise as
compensation; or
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partnerships or pass-through entities, or persons holding ADSs
or common shares through such entities.
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If a partnership holds our ADSs or common shares, the tax
treatment of a partner will generally depend on the status of
the partner and the activities of the partnership. If you are a
partner of a partnership holding ADSs or our common shares, you
should consult your tax advisors.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO
THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL,
NON-U.S. AND
OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF ADSs OR COMMON SHARES.
The discussion below of the U.S. federal income tax
consequences to U.S. Holders will apply to you
if you are the beneficial owner of ADSs or common shares and you
are, for U.S. federal income tax purposes,
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for
U.S. federal income tax purposes) created or organized in
the United States or under the laws of the United States, any
State thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust that (1) is subject to the primary supervision of a
court within the United States and the control of one or more
U.S. persons for all substantial decisions or (2) has
a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
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The discussion below assumes that the representations contained
in the deposit agreement are true and that the obligations in
the deposit agreement and any related agreement have been and
will be complied with in accordance with their terms. If you own
ADSs, you should be treated as the owner of the underlying
common shares represented by those ADSs for U.S. federal
income tax purposes. Accordingly, deposits or withdrawals of
common shares for ADSs will not be subject to U.S. federal
income tax.
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The U.S. Treasury has expressed concerns that
intermediaries in the chain of ownership between the holder of
an ADS and the issuer of the security underlying the ADS may be
taking actions that are inconsistent with the beneficial
ownership of the underlying security (which may include, for
example, pre-releasing ADSs to persons that do not have the
beneficial ownership of the securities underlying the ADSs).
Accordingly, the creditability of any PRC taxes and the
availability of the reduced tax rate for any dividends received
by certain non-corporate U.S. Holders, including individual
U.S. Holders (as discussed below), could be affected by
actions taken by intermediaries in the chain of ownership
between the holders of ADSs and our company if as a result of
such actions the holders of ADSs are not properly treated as
beneficial owners of underlying common shares.
Taxation
of Dividends and Other Distributions on the ADSs or Common
Shares
Subject to the PFIC rules discussed below, the gross amount of
any distributions we make to you with respect to the ADSs or
common shares (including amounts withheld to reflect PRC
withholding taxes, if any, as described below) generally will be
includible in your gross income as dividend income on the date
of receipt by the depositary, in the case of ADSs, or on the
date of receipt by you, in the case of common shares, but only
to the extent that the distribution is paid out of our current
or accumulated earnings and profits (as determined under
U.S. federal income tax principles). Any such dividends
will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from
other U.S. corporations. To the extent that the amount of
the distribution exceeds our current and accumulated earnings
and profits (as determined under U.S. federal income tax
principles), such excess amount will be treated first as a
tax-free return of your tax basis in your ADSs or common shares,
and then, to the extent such excess amount exceeds your tax
basis in your ADSs or common shares, as capital gain. We
currently do not, and we do not intend to, calculate our
earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. Holder should expect that any
distribution will generally be reported as a dividend even if
that distribution would otherwise be treated as a non-taxable
return of capital or as capital gain under the rules described
above.
With respect to certain non-corporate U.S. Holders,
including individual U.S. Holders, for taxable years
beginning before January 1, 2011, any dividends may be
taxed at the lower capital gains rate applicable to
qualified dividend income, provided that
(1) either (a) the ADSs or common shares, as
applicable, are readily tradable on an established securities
market in the United States or (b) we are eligible for the
benefits of a qualifying income tax treaty with the United
States that includes an exchange of information program,
(2) we are neither a PFIC nor treated as such with respect
to you (as discussed below) for the taxable year in which the
dividend was paid and the preceding taxable year, and
(3) certain holding period requirements are met. Under
U.S. Internal Revenue Service authority, ADSs will be
considered for purposes of clause (1) above to be readily
tradable on an established securities market in the United
States if they are listed on the NASDAQ Global Market, as our
ADSs are expected to be. However, based on existing guidance, it
is not entirely clear whether any dividends that you receive
with respect to the common shares will be taxed as qualified
dividend income, because the common shares will not be listed on
a U.S. exchange. If we are treated as a resident
enterprise for PRC tax purposes under the PRC Corporate
Income Tax Law, we may be eligible for the benefits of the
income tax treaty between the United States and the PRC. You
should consult your tax advisors regarding the availability of
the lower capital gains rate applicable to qualified dividend
income for any dividends paid with respect to our ADSs or common
shares.
Any dividends will constitute foreign source income for foreign
tax credit limitation purposes. If the dividends are taxed as
qualified dividend income (as discussed above), the amount of
the dividend taken into account for purposes of calculating the
foreign tax credit limitation will in general be limited to the
gross amount of the dividend, multiplied by the reduced tax rate
applicable to qualified dividend income and divided by the
highest tax rate normally applicable to dividends. The
limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to the ADSs or
common shares will generally constitute passive category
income but could, in the case of certain
U.S. Holders, constitute general category
income.
If PRC withholding taxes apply to any dividends paid to you with
respect to our ADSs or common shares, the amount of the dividend
would include the withheld PRC taxes and, subject to certain
conditions and limitations, such PRC withholding taxes generally
will be treated as foreign taxes eligible for credit against
your U.S. federal income tax liability. The rules relating
to the determination of the foreign tax credit are complex and
you should
159
consult your tax advisors regarding the availability of a
foreign tax credit in your particular circumstances, including
the effects of any applicable income tax treaties.
Taxation
of Disposition of ADSs or Common Shares
Subject to the PFIC rules discussed below, you will recognize
taxable gain or loss on any sale, exchange or other taxable
disposition of ADSs or common shares equal to the difference
between the amount realized for the ADSs or common shares and
your tax basis in the ADSs or common shares. The gain or loss
generally will be capital gain or loss. If you are a
non-corporate U.S. Holder, including an individual
U.S. Holder, that has held the ADSs or common shares for
more than one year, you may be eligible for reduced tax rates.
The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of ADSs or
common shares will generally be treated as U.S. source
income or loss for foreign tax credit limitation purposes.
However, if we are treated as a resident enterprise
for PRC tax purposes, we may be eligible for the benefits of the
income tax treaty between the United States and the PRC. In such
event, if PRC tax were to be imposed on any gain from the
disposition of the ADSs or common shares, a U.S. Holder
that is eligible for the benefits of the income tax treaty
between the United States and the PRC may elect to treat the
gain as PRC source income for foreign tax credit purposes. You
should consult your tax advisors regarding the proper treatment
of gain or loss in your particular circumstances, including the
effects of any applicable income tax treaties.
Passive
Foreign Investment Company
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 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. Furthermore, because PFIC status is a factual
determination based on actual results for the entire taxable
year, our U.S. counsel expresses no opinion with respect to
our PFIC status and expresses no opinion with respect to our
expectations contained in this paragraph. A
non-U.S. corporation
will be a PFIC for U.S. federal income tax purposes for any
taxable year if either:
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at least 75% of its gross income for such year is passive
income; or
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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.
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For this purpose, passive income generally includes dividends,
interest, royalties and rents (other than royalties and rents
derived in the active conduct of a trade or business and not
derived from a related person). In addition, we will be treated
as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in
which we own, directly or indirectly, more than 25% (by value)
of the stock. In applying this rule, while it is not clear, we
believe that the contractual arrangements between us and our
affiliated entities should be treated as ownership of stock.
A separate determination must be made 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 you hold ADSs
or common shares, we generally will continue to be treated as a
PFIC with respect to you for all succeeding years during which
you hold ADSs or common shares, unless we cease to be a PFIC and
you make a deemed sale election with respect to the
ADSs or common shares. If such election is made, you will be
deemed to have sold ADSs or common shares you hold at their fair
market value on the last day of the last taxable year in which
we qualified as a PFIC and any gain from such deemed sale would
be subject to the consequences described in the following two
paragraphs. After the deemed sale election, your ADSs or common
shares with respect to which the deemed sale election was made
will not be treated as shares in a PFIC unless we subsequently
become a PFIC.
160
For each taxable year that we are treated as a PFIC with respect
to you, you will be subject to special tax rules with respect to
any excess distribution that you receive and any
gain you recognize from a sale or other disposition (including a
pledge) of the ADSs or common shares, unless you make a
mark-to-market
election as discussed below. Distributions you receive in a
taxable year that are greater than 125% of the average annual
distributions you received during the shorter of the three
preceding taxable years or your holding period for the ADSs or
common shares will be treated as an excess distribution. Under
these special tax rules:
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the excess distribution or recognized gain will be allocated
ratably over your holding period for the ADSs or common shares;
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the amount allocated to the current taxable year, and any
taxable years in your holding period prior to the first taxable
year in which we were a PFIC, will be treated as ordinary
income; and
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the amount allocated to each other taxable year will be subject
to the highest tax rate in effect for individuals or
corporations, as applicable, for each such year and the interest
charge generally applicable to underpayments of tax will be
imposed on the resulting tax attributable to each such year.
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The tax liability for amounts allocated to taxable years prior
to the year of disposition or excess distribution cannot be
offset by any net operating losses for such years, and gains
(but not losses) realized on the sale or other disposition of
the ADSs or common shares cannot be treated as capital, even if
you hold the ADSs or common shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable
year, to the extent any of our subsidiaries are also PFICs or we
make direct or indirect equity investments in other entities
that are PFICs, you may be deemed to own shares in such
lower-tier PFICs that are directly or indirectly owned by
us in that proportion which the value of the ADSs or common
shares you own bears to the value of all of our ADSs or common
shares, and you may be subject to the adverse tax consequences
described in the preceding two paragraphs with respect to the
shares of such lower-tier PFICs that you would be deemed to
own. You should consult your tax advisors regarding the
application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of marketable stock (as defined
below) in a PFIC may make a
mark-to-market
election for such stock to elect out of the PFIC rules described
above regarding excess distributions and recognized gains. If
you make a
mark-to-market
election for the ADSs or common shares, you will include in
income for each year that we are a PFIC an amount equal to the
excess, if any, of the fair market value of the ADSs or common
shares as of the close of your taxable year over your adjusted
basis in such ADSs or common shares. You will be allowed an
ordinary deduction for the excess, if any, of the adjusted basis
of the ADSs or common shares over their fair market value as of
the close of the taxable year. However, deductions will be
allowable only to the extent of any net
mark-to-market
gains on the ADSs or common shares included in your income for
prior taxable years. Amounts included in your income under a
mark-to-market
election, as well as gain on the actual sale or other
disposition of the ADSs or common shares, will be treated as
ordinary income. Ordinary loss treatment will also apply to the
deductible portion of any
mark-to-market
loss on the ADSs or common shares, as well as to any loss
realized on the actual sale or other disposition of the ADSs or
common shares, to the extent that the amount of such loss does
not exceed the net
mark-to-market
gains previously included for such ADSs or common shares. Your
basis in the ADSs or common shares will be adjusted to reflect
any such income or loss amounts. If you make a
mark-to-market
election, any distributions that we make would generally be
subject to the rules discussed above under
Taxation of Dividends and Other Distributions
on the ADSs or Common Shares, except that the lower tax
rate applicable to qualified dividend income would not apply.
The
mark-to-market
election is available only for marketable stock,
which is stock that is regularly traded on a qualified exchange
or other market, as defined in applicable U.S. Treasury
regulations. We expect that our ADSs, but not our common shares,
will be listed on the NASDAQ Global Market, which is a qualified
exchange or other market for these purposes. Consequently, if
the ADSs are listed on the NASDAQ Global Market and are
regularly traded, and you are a holder of ADSs, we expect that
the
mark-to-market
election would be available to you if we were to become a PFIC.
Because a
mark-to-market
election cannot be made for equity interests in any
lower-tier PFICs that we own, a U.S. Holder may
continue to be subject to the PFIC rules with respect to its
indirect interest in any investments held by us that are treated
as an equity interest in a PFIC for U.S. federal income tax
161
purposes. You should consult your tax advisors as to the
availability and desirability of a
mark-to-market
election, as well as the impact of such election on interests in
any lower-tier PFICs.
Alternatively, if a
non-U.S. corporation
is a PFIC, a holder of shares in that corporation may avoid
taxation under the PFIC rules described above regarding excess
distributions and recognized gains by making a qualified
electing fund election to include in income its share of
the corporations income on a current basis. However, you
may make a qualified electing fund election with respect to your
ADSs or common shares only if we agree to furnish you annually
with certain tax information, and we currently do not intend to
prepare or provide such information.
Under newly enacted legislation, unless otherwise provided by
the U.S. Treasury, each U.S. Holder of a PFIC is
required to file an annual report containing such information as
the U.S. Treasury may require. If we are or become a PFIC,
you should consult your tax advisor regarding any reporting
requirements that may apply to you.
You are strongly urged to consult your tax advisor regarding the
application of the PFIC rules to your investment in ADSs or
common shares.
Information
Reporting and Backup Withholding
Any dividend payments with respect to ADSs or common shares and
proceeds from the sale, exchange or redemption of ADSs or common
shares may be subject to information reporting to the
U.S. Internal Revenue Service and possible U.S. backup
withholding. Backup withholding will not apply, however, to a
U.S. Holder that furnishes a correct taxpayer
identification number and makes any other required certification
or that is otherwise exempt from backup withholding.
U.S. Holders that are required to establish their exempt
status generally must provide such certification on
U.S. Internal Revenue Service
Form W-9.
Under newly enacted legislation, certain individuals holding
ADSs or common shares other than in an account at a financial
institution may be subject to additional information reporting
requirements. U.S. Holders should consult their tax
advisors regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against your
U.S. federal income tax liability, and you may obtain a
refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund
with the U.S. Internal Revenue Service and furnishing any
required information in a timely manner.
162
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below have severally agreed to purchase, and
we and the selling shareholders have agreed to sell to them,
severally, the number of ADSs indicated below:
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Number of
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Name
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ADSs
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Citigroup Global Markets Inc.
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5,582,500
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Piper Jaffray & Co.
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906,250
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Oppenheimer & Co. Inc.
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725,000
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Rodman & Renshaw, LLC
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36,250
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Total
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7,250,000
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Citigroup Global Markets Inc. is serving as the representative
of the underwriters. The address of Citigroup Global
Markets Inc. is 388 Greenwich Street, New York, New York 10013.
The underwriters are offering the ADSs subject to their
acceptance of the ADSs from us and the selling shareholders and
subject to prior sale. The underwriting agreement provides that
the obligations of the several underwriters to pay for and
accept delivery of the ADSs offered by this prospectus are
subject to the approval of certain legal matters by their
counsel and to certain other conditions, including but not
limited to the absence of any material adverse change in our
business and the receipt of certain certificates, opinions and
letters from us, our counsel and the independent accountants.
The underwriters are obligated, severally and not jointly, to
take and pay for all of the ADSs offered by this prospectus if
any such ADSs are taken. The underwriters are not required,
however, to take or pay for the ADSs covered by the
underwriters over-allotment option described below.
The underwriters initially propose to offer part of the ADSs
directly to the public at the initial public offering price
listed on the cover page of this prospectus and part to certain
dealers at a price that represents a concession not in excess of
$0.336 per ADS under the initial public offering price.
After the initial offering of the ADSs, the offering price and
other selling terms may from time to time be varied by the
underwriters.
We and the selling shareholders have granted to the underwriters
an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of additional ADSs at
the initial public offering price listed on the cover page of
this prospectus less underwriting discounts and commissions. Of
the additional 1,087,500 ADSs subject to the option, up to an
aggregate of 918,750 additional ADSs would be sold by us and up
to an aggregate of 168,750 additional ADSs would be sold by the
selling shareholders. The underwriters may exercise this option
solely for the purpose of covering over-allotments, if any, made
in connection with the offering of the ADSs offered by this
prospectus. To the extent the option is exercised, each
underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the
additional ADSs as the number listed next to the
underwriters name in the preceding table bears to the
total number of ADSs listed in the preceding table.
The following table shows the per ADS and total public offering
price, underwriting discounts and commissions, and proceeds
before expenses to us and the selling shareholders. These
amounts are shown assuming both no exercise and full exercise of
the underwriters option to purchase up to an aggregate of
1,087,500 additional ADSs.
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Total
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No
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Full
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Per ADS
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Exercise
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Exercise
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Public offering price
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$
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8.00
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$
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58,000,000
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$
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66,700,000
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Underwriting discounts and commissions to be paid by
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Us
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$
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0.56
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$
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3,430,000
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$
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3,944,500
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The selling shareholders
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$
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0.56
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$
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630,000
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$
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724,500
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Proceeds, before expenses, to us
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$
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7.44
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$
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45,570,000
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$
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52,405,500
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Proceeds, before expenses, to the selling shareholders
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$
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7.44
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$
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8,370,000
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$
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9,625,500
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163
The estimated expenses of the offering payable by us, excluding
underwriting discounts and commissions, are approximately
$4.2 million. Expenses include the SEC and the Financial
Industry Regulatory Authority, or FINRA, filing fees, the NASDAQ
listing fee, and printing, legal, accounting and miscellaneous
expenses.
We have agreed to reimburse the underwriters for their incurred
expenses in connection with this offering in an aggregate amount
not exceeding $150,000 including $25,000 for legal expenses.
Such reimbursements are deemed underwriting compensation by
FINRA.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
ADSs offered by them.
We have received approval for listing the ADSs on the NASDAQ
Global Market under the symbol MOBI.
We, all of our directors, executive officers, existing
shareholders and certain holders of our share options have
agreed, with certain limited exceptions, that we and they will
not, without the prior written consent of the underwriters,
during the period ending 180 days after the date of this
prospectus:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any
common shares or ADSs or any securities convertible into or
exercisable or exchangeable for common shares or ADSs;
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common shares or ADSs;
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file any registration statement with the SEC relating to the
offering of any common shares, ADSs or any securities
convertible into or exercisable or exchangeable for common
shares or ADSs (other than a registration statement on
Form S-8); or
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make any demand for, or exercise any right with respect to, the
registration of any common shares, ADSs or any security
convertible into or exercisable or exchangeable for common
shares or ADSs.
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whether any such transaction described above is to be settled by
delivery of common shares, ADSs, or such other securities, in
cash or otherwise.
The
180-day
restricted period described in the preceding paragraphs will be
extended if:
(1) during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs; or
(2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
restricted period;
in which case the restrictions described in the preceding
paragraphs will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
To facilitate this offering of the ADSs, the underwriters may
engage in transactions that stabilize, maintain or otherwise
affect the price of the ADSs. Specifically, the underwriters may
sell more ADSs than they are obligated to purchase under the
underwriting agreement, creating a short position. A short sale
is covered if the short position is no greater than the number
of ADSs available for purchase by the underwriters under the
over- allotment option. The underwriters can close out a covered
short sale by exercising the over-allotment option or purchasing
ADSs in the open market. In determining the source of ADSs to
close out a covered short sale, the underwriters will consider,
among other things, the open market price of ADSs compared to
the price available under the over-allotment option. The
underwriters may also sell ADSs in excess of the over-allotment
option, creating a naked short position. The underwriters must
close out any naked short position by purchasing ADSs in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the ADSs in the open market after
pricing that could adversely affect investors who purchase in
this offering. In addition, to stabilize the price of the ADSs,
the underwriters may bid for, and purchase, ADSs in the open
market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a
164
dealer for distributing the ADSs in this offering, if the
syndicate repurchases previously distributed ADSs to cover
syndicate short positions or to stabilize the price of the ADSs.
These activities may raise or maintain the market price of the
ADSs above independent market levels or prevent or retard a
decline in the market price of the ADSs. The underwriters are
not required to engage in these activities and may end any of
these activities at any time.
From time to time, certain of the underwriters
and/or
their
respective affiliates may have provided, and may continue to
provide, commercial banking, investment banking, financial
advisory and other services to us, our officers or our directors
and our affiliates in the ordinary course of business for which
they have received or will receive customary fees and
commissions. In addition, from time to time, certain of the
underwriters and their affiliates may effect transactions for
their own account or the account of customers, and hold on
behalf of themselves or their customers, long or short positions
in our debt or equity securities or loans, and may do so in the
future.
We and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities incurred in connection
with the directed share program referred to below. If we or the
selling shareholders are unable to provide this indemnification,
we and the selling shareholders will contribute to payments that
the underwriters may be required to make for these liabilities.
At our request, the underwriters have reserved for sale, at the
initial public offering price, up to 10% of the ADSs offered by
this prospectus to our directors, officers, employees, business
associates and related persons. We will pay all fees and
disbursements of counsel incurred by the underwriters in
connection with offering the ADSs to such persons. Any sales to
these persons will be made by Piper Jaffray & Co. through a
directed share program. The number of ADSs available for sale to
the general public will be reduced to the extent such persons
purchase such reserved ADSs. Any reserved ADSs not so purchased
will be offered by the underwriters to the general public on the
same basis as the other ADSs offered by this prospectus.
Electronic
Offer, Sale and Distribution of ADSs
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering.
The underwriters may agree to allocate a number of ADSs to
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the underwriters
that may make Internet distributions on the same basis as other
allocations. In addition, ADSs may be sold by the underwriters
to securities dealers who resell ADSs to online brokerage
account holders. Other than the prospectus in electronic format,
the information on any underwriters or selling group
members website and any information contained in any other
website maintained by any underwriter or selling group member is
not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
Pricing
of the Offering
Prior to this offering, there has been no public market for the
common shares or ADSs. The initial public offering price is
determined by negotiations among us, the selling shareholders
and the underwriters. Among the factors considered in
determining the initial public offering price are our future
prospects and those of our industry in general, our sales,
earnings and certain other financial and operating information
in recent periods; and the price-earnings ratios, price-sales
ratios and market prices of securities and certain financial and
operating information of companies engaged in activities similar
to ours. Neither we nor the underwriters can assure investors
that an active trading market will develop for our ADSs or
common shares, or that the ADSs will trade in the public market
at or above the initial public offering price.
Selling
Restrictions
No action has been taken in any jurisdiction (except in the
United States) that would permit a public offering of the ADSs,
or the possession, circulation or distribution of this
prospectus or any other material relating to us or the ADSs in
any jurisdiction where action for that purpose is required.
Accordingly, the ADSs may not be offered or sold, directly or
indirectly, and neither this prospectus nor any other offering
material or advertisements in
165
connection with the ADSs may be distributed or published, in or
from any country or jurisdiction except in compliance with any
applicable rules and regulations of any such country or
jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any
restrictions relating to the offering and the distribution of
this prospectus.
European Economic Area.
In relation to each
Member State of the European Economic Area which has implemented
the Prospectus Directive, or a Relevant Member State, from and
including the date on which the Prospectus Directive is
implemented in that Relevant Member State, or the Relevant
Implementation Date, an offer of the ADSs to the public may not
be made in that Relevant Member State prior to the publication
of a prospectus in relation to the ADSs which has been approved
by the competent authority in that Relevant Member State or,
where appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the Relevant
Implementation Date, make an offer of the ADS to the public in
that Relevant Member State at any time,
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive
subject to obtaining the prior consent of the underwriters for
any such offer; or
(d) in any other circumstances which do not require the
publication by the company of a prospectus pursuant to
Article 3 of the Prospectus Directive;
provided that no such offer of ADSs shall result in a
requirement for the publication by the company of a prospectus
pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of ADSs to the public in relation to any ADSs
in any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and the ADSs to be offered so as to enable an investor to
decide to purchase or subscribe the ADSs, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
United Kingdom.
An offer of the ADSs may not
be made to the public in the United Kingdom within the meaning
of Section 102B of the Financial Services and Markets Act
2000, as amended, or the FSMA, except to legal entities which
are authorized or regulated to operate in the financial markets
or, if not so authorized or regulated, whose corporate purpose
is solely to invest in securities or otherwise in circumstances
which do not require the publication by the company of a
prospectus pursuant to the Prospectus Rules of the Financial
Services Authority, or the FSA.
An invitation or inducement to engage in investment activity
(within the meaning of Section 21 of FSMA) may only be
communicated to persons who have professional experience in
matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 or in circumstances in
which Section 21 of FSMA does not apply to the company.
All applicable provisions of the FSMA with respect to anything
done by the underwriters in relation to the ADSs must be
complied with in, from or otherwise involving the United Kingdom.
Japan.
The underwriters will not offer or sell
any of our ADSs directly or indirectly in Japan or to, or for
the benefit of any Japanese person or to others, for re-offering
or re-sale directly or indirectly in Japan or to any Japanese
person, except in each case pursuant to an exemption from the
registration requirements of, and otherwise in compliance with,
the Securities and Exchange Law of Japan and any other
applicable laws and regulations of Japan. For purposes of this
paragraph, Japanese person means any person resident
in Japan, including any corporation or other entity organized
under the laws of Japan.
166
Hong Kong.
Our ADSs may not be offered or sold
in Hong Kong, by means of any document, other than (a) to
professional investors as defined in the Securities
and Futures Ordinance (Cap. 571) of Hong Kong and any rules
made under that Ordinance or (b) in other circumstances
which do not result in the document being a
prospectus as defined in the Companies Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer
to the public within the meaning of that Ordinance. No
advertisement, invitation or document relating to our ADSs may
be issued, whether in Hong Kong or elsewhere, which is directed
at, or the contents of which are likely to be read by, the
public in Hong Kong (except if permitted to do so under the laws
of Hong Kong) other than with respect to our ADSs which are or
are intended to be disposed of only to persons outside Hong Kong
or only to professional investors as defined in the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
or any rules made under that Ordinance. The contents of this
prospectus have not been reviewed by any regulatory authority in
Hong Kong. You are advised to exercise caution in relation to
the offer. If you are in any doubt about any of the contents of
this prospectus, you should obtain independent professional
advice.
Singapore.
This prospectus has not been
registered as a prospectus with the Monetary Authority of
Singapore. Accordingly, this prospectus and any other document
or material in connection with the offer or sale, or invitation
for subscription or purchase, of the ADSs may not be circulated
or distributed, nor may the ADSs be offered or sold, or be made
the subject of an invitation for subscription or purchase,
whether directly or indirectly, to persons in Singapore other
than (i) to an institutional investor under
Section 274 of the Securities and Futures Act,
Chapter 289 of Singapore, or the SFA; (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA; or (iii) otherwise pursuant
to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the ADSs are subscribed or purchased under
Section 275 by a relevant person which is:
(a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each
of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited
investor) whose sole purpose is to hold investments and each
beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for six months after that
corporation or that trust has acquired the ADSs under
Section 275 except:
(1) to an institutional investor (for corporations, under
274 of the SFA) or to a relevant person defined in
Section 275(2) of the SFA, or to any person pursuant to an
offer that is made on terms that such shares, debentures and
units of shares and debentures of that corporation or such
rights and interest in that trust are acquired at a
consideration of not less than S$200,000 (or its equivalent in a
foreign currency) for each transaction, whether such amount is
to be paid for in cash or by exchange of securities or other
assets, and further for corporations, in accordance with the
conditions specified in Section 275 of the SFA;
(2) where no consideration is or will be given for the
transfer; or
(3) where the transfer is by operation of law.
Cayman Islands.
This prospectus does not
constitute a public offer of the ADSs or common shares, whether
by way of sale or subscription, in the Cayman Islands. Each
underwriter has represented and agreed that it has not offered
or sold, and will not offer or sell, directly or indirectly, any
ADSs or common shares to any member of the public in the Cayman
Islands.
Peoples Republic of China.
This
prospectus may not be circulated or distributed in the PRC and
the ADSs may not be offered or sold, and will not offer or sell
to any person for re-offering or resale directly or indirectly
to any resident of the PRC except pursuant to applicable laws
and regulations of the PRC. For the purpose of this paragraph,
PRC does not include Taiwan and the special administrative
regions of Hong Kong and Macau.
167
EXPENSES
RELATING TO THIS OFFERING
The following table sets forth the main estimated expenses in
connection with this offering, other than the underwriting
discounts and commissions:
|
|
|
|
|
U.S. Securities and Exchange Commission registration fee
|
|
$
|
5,989
|
|
NASDAQ Global Market Listing Fee
|
|
|
125,000
|
|
Financial Industry Regulatory Authority (FINRA) Filing Fee
|
|
|
15,500
|
|
Printing Expenses
|
|
|
350,000
|
|
Legal Fees and Expenses
|
|
|
2,050,000
|
|
Accounting Fees and Expenses
|
|
|
700,000
|
|
Miscellaneous
|
|
|
964,706
|
|
|
|
|
|
|
Total
|
|
$
|
4,211,195
|
|
|
|
|
|
|
168
LEGAL
MATTERS
The validity of the ADSs and certain other legal matters in
connection with this offering will be passed upon for us by
Latham & Watkins. Certain legal matters as to the
United States federal and New York law in connection with this
offering will be passed upon for the underwriters by Simpson
Thacher & Bartlett LLP. The validity of the common
shares represented by the ADSs offered in this offering and
certain other legal matters as to Cayman Islands law will be
passed upon for us by Conyers Dill & Pearman. Legal
matters as to PRC law will be passed upon for us by Jincheng
Tongda & Neal Law Firm and for the underwriters by
King & Wood. Latham & Watkins may rely upon
Conyers Dill & Pearman with respect to matters
governed by Cayman Islands law and Jincheng
Tongda & Neal Law Firm with respect to matters
governed by PRC law. Simpson Thacher & Bartlett LLP
may rely upon King & Wood with respect to matters
governed by PRC law.
EXPERTS
The financial statements and the related financial statement
schedule included in this prospectus have been audited by
Deloitte Touche Tohmatsu CPA Ltd., an independent registered
public accounting firm, as stated in their report appearing
herein. Such financial statements and financial statement
schedule are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The offices of Deloitte Touche Tohmatsu CPA Ltd. are located at
30th Floor, Bund Center, 222 Yan An Road East, Shanghai
200002, Peoples Republic of China.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form F-1,
including relevant exhibits and schedules under the Securities
Act with respect to underlying common shares represented by the
ADSs, to be sold in this offering. We have also filed with the
SEC a related registration statement on
Form F-6
to register the ADSs. This prospectus, which constitutes a part
of the registration statement, does not contain all of the
information contained in the registration statement. You should
read the registration statements on
Form F-1
and
Form F-6
and their exhibits and schedules for further information with
respect to us and our ADSs.
Immediately upon completion of this offering we will become
subject to periodic reporting and other informational
requirements of the Exchange Act as applicable to foreign
private issuers. Accordingly, we will be required to file
reports, including annual reports on
Form 20-F,
and other information with the SEC. All information filed with
the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. You can request copies of
these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. You may also obtain additional information over the
Internet at the SECs website at www.sec.gov.
As a foreign private issuer, we are exempt under the Exchange
Act from, among other things, the rules prescribing the
furnishing and content of proxy statements to shareholders, and
our executive officers, directors and principal shareholders are
exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In
addition, we will not be required under the Exchange Act to file
periodic reports and financial statements with the SEC as
frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we
intend to furnish the depositary with our annual reports, which
will include a review of operations and annual audited
consolidated financial statements prepared in conformity with
IFRS, and all notices of shareholders meeting and other
reports and communications that are made generally available to
our shareholders. The depositary will make such notices, reports
and communications available to holders of ADSs and, upon our
written request, will mail to all record holders of ADSs the
information contained in any notice of a shareholders
meeting received by the depositary from us.
169
SKY-MOBI
LIMITED
|
|
|
|
|
|
|
PAGE(S)
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
|
|
|
F-39
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of
Sky-mobi Limited:
We have audited the accompanying consolidated statements of
financial position of Sky-mobi Limited and subsidiaries (the
Group) as of March 31, 2008, 2009 and 2010 and
the related consolidated statements of comprehensive income,
equity, and cash flows for each of the three years in the period
ended March 31, 2010 and the related financial statement
schedule. These financial statements and financial statement
schedule are the responsibility of the Groups management.
Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Group is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Groups internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Sky-mobi Limited and subsidiaries as of March 31, 2008,
2009 and 2010, and the results of their operations and their
cash flows for each of the three years in the period ended
March 31, 2010, in conformity with International Financial
Reporting Standards as issued by the International Accounting
Standards Board. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as whole, present fairly in all
material respects the information set forth therein.
Our audits also comprehended the translation of Renminbi amounts
into United States dollar amounts and, in our opinion, such
translation has been made in conformity with the basis stated in
Note 2. Such United States dollar amounts are presented
solely for the convenience of readers in the United States of
America.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Shanghai, China
November 19, 2010
F-2
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
NOTES
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
Revenues
|
|
6
|
|
|
18,594
|
|
|
|
207,239
|
|
|
|
544,258
|
|
|
|
81,348
|
|
Cost of revenues
|
|
|
|
|
(9,681
|
)
|
|
|
(134,687
|
)
|
|
|
(354,351
|
)
|
|
|
(52,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
8,913
|
|
|
|
72,552
|
|
|
|
189,907
|
|
|
|
28,385
|
|
Research and development expenses
|
|
|
|
|
(1,283
|
)
|
|
|
(12,902
|
)
|
|
|
(26,900
|
)
|
|
|
(4,021
|
)
|
Sales and marketing expenses
|
|
|
|
|
(800
|
)
|
|
|
(5,293
|
)
|
|
|
(21,511
|
)
|
|
|
(3,215
|
)
|
General and administration expenses
|
|
|
|
|
(12,123
|
)
|
|
|
(16,725
|
)
|
|
|
(17,507
|
)
|
|
|
(2,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) from operations
|
|
|
|
|
(5,293
|
)
|
|
|
37,632
|
|
|
|
123,989
|
|
|
|
18,532
|
|
Other gains
|
|
7
|
|
|
417
|
|
|
|
857
|
|
|
|
3,531
|
|
|
|
528
|
|
Finance costs
|
|
11 & 19
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
(810
|
)
|
Share of results of associates
|
|
17
|
|
|
|
|
|
|
(83
|
)
|
|
|
(1,255
|
)
|
|
|
(188
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
19
|
|
|
(4,156
|
)
|
|
|
(134,616
|
)
|
|
|
(290,135
|
)
|
|
|
(43,365
|
)
|
Loss on changes in fair value of warrants
|
|
19
|
|
|
(239
|
)
|
|
|
(18,423
|
)
|
|
|
(7,548
|
)
|
|
|
(1,128
|
)
|
Loss on modification of convertible redeemable preferred shares
|
|
19
|
|
|
|
|
|
|
|
|
|
|
(44,439
|
)
|
|
|
(6,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
8
|
|
|
(10,600
|
)
|
|
|
(114,633
|
)
|
|
|
(221,274
|
)
|
|
|
(33,073
|
)
|
Income tax benefit (expense)
|
|
9
|
|
|
|
|
|
|
1,180
|
|
|
|
(8,528
|
)
|
|
|
(1,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss for the year
|
|
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
|
|
(34,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10
|
|
|
(0.07
|
)
|
|
|
(0.76
|
)
|
|
|
(1.53
|
)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
10
|
|
|
(0.07
|
)
|
|
|
(0.76
|
)
|
|
|
(1.53
|
)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10
|
|
|
|
|
|
|
|
|
|
|
0.78
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
10
|
|
|
|
|
|
|
|
|
|
|
0.78
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-3
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
NOTES
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
12
|
|
|
23,825
|
|
|
|
27,618
|
|
|
|
75,105
|
|
|
|
11,226
|
|
Term deposits
|
|
12
|
|
|
|
|
|
|
15,000
|
|
|
|
50,000
|
|
|
|
7,473
|
|
Investment at fair value through profit or loss
|
|
13
|
|
|
|
|
|
|
|
|
|
|
15,442
|
|
|
|
2,308
|
|
Loan receivable
|
|
14
|
|
|
|
|
|
|
|
|
|
|
25,785
|
|
|
|
3,854
|
|
Trade and other receivables
|
|
15
|
|
|
5,827
|
|
|
|
47,421
|
|
|
|
76,110
|
|
|
|
11,376
|
|
Amounts due from related parties
|
|
22
|
|
|
50
|
|
|
|
8,132
|
|
|
|
2,784
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
29,702
|
|
|
|
98,171
|
|
|
|
245,226
|
|
|
|
36,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
16
|
|
|
717
|
|
|
|
2,447
|
|
|
|
31,046
|
|
|
|
4,640
|
|
Investments in associates
|
|
17
|
|
|
|
|
|
|
517
|
|
|
|
11,772
|
|
|
|
1,759
|
|
Deferred tax assets
|
|
9
|
|
|
|
|
|
|
1,189
|
|
|
|
4,447
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
717
|
|
|
|
4,153
|
|
|
|
47,265
|
|
|
|
7,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
30,419
|
|
|
|
102,324
|
|
|
|
292,491
|
|
|
|
43,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
18
|
|
|
2,924
|
|
|
|
30,469
|
|
|
|
103,564
|
|
|
|
15,479
|
|
Income tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
3,318
|
|
|
|
496
|
|
Amounts due to related parties
|
|
22
|
|
|
|
|
|
|
108
|
|
|
|
6,137
|
|
|
|
917
|
|
Warrants
|
|
19
|
|
|
1,278
|
|
|
|
19,668
|
|
|
|
27,188
|
|
|
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
4,202
|
|
|
|
50,245
|
|
|
|
140,207
|
|
|
|
20,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred shares (liquidation value:
RMB23,892,000 (US$3,500,000) as of March 31, 2010)
|
|
19
|
|
|
27,690
|
|
|
|
161,584
|
|
|
|
451,491
|
|
|
|
67,482
|
|
Deferred tax liabilities
|
|
9
|
|
|
|
|
|
|
|
|
|
|
8,305
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
|
|
27,690
|
|
|
|
161,584
|
|
|
|
459,796
|
|
|
|
68,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
31,892
|
|
|
|
211,829
|
|
|
|
600,003
|
|
|
|
89,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital (US$0.00005 par value,
937,857,200 shares authorized; 150,000,000 shares
issued and outstanding as of March 31, 2008, 2009 and 2010)
|
|
20
|
|
|
57
|
|
|
|
57
|
|
|
|
57
|
|
|
|
9
|
|
Reserves
|
|
|
|
|
9,182
|
|
|
|
14,603
|
|
|
|
63,148
|
|
|
|
9,438
|
|
Retained earnings (deficit)
|
|
|
|
|
(10,712
|
)
|
|
|
(124,165
|
)
|
|
|
(370,717
|
)
|
|
|
(55,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
|
|
(1,473
|
)
|
|
|
(109,505
|
)
|
|
|
(307,512
|
)
|
|
|
(45,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity and liabilities
|
|
|
|
|
30,419
|
|
|
|
102,324
|
|
|
|
292,491
|
|
|
|
43,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
Reserves
|
|
|
reserve
|
|
|
Retained deficit
|
|
|
Total
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
Balance at April 1, 2007
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
106
|
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,600
|
)
|
|
|
(10,600
|
)
|
Shareholder contribution
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Share-based compensation
|
|
|
|
|
|
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
57
|
|
|
|
9,182
|
|
|
|
|
|
|
|
(10,712
|
)
|
|
|
(1,473
|
)
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,453
|
)
|
|
|
(113,453
|
)
|
Share-based compensation
|
|
|
|
|
|
|
5,421
|
|
|
|
|
|
|
|
|
|
|
|
5,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
57
|
|
|
|
14,603
|
|
|
|
|
|
|
|
(124,165
|
)
|
|
|
(109,505
|
)
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229,802
|
)
|
|
|
(229,802
|
)
|
Modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
44,439
|
|
|
|
|
|
|
|
|
|
|
|
44,439
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,250
|
)
|
|
|
(16,250
|
)
|
Transfer to statutory reserves
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
(500
|
)
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
57
|
|
|
|
62,648
|
|
|
|
500
|
|
|
|
(370,717
|
)
|
|
|
(307,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(10,600
|
)
|
|
|
(114,633
|
)
|
|
|
(221,274
|
)
|
|
|
(33,073
|
)
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of results of associates
|
|
|
|
|
|
|
83
|
|
|
|
1,255
|
|
|
|
188
|
|
Net foreign exchange loss
|
|
|
(274
|
)
|
|
|
(281
|
)
|
|
|
(250
|
)
|
|
|
(37
|
)
|
Interest income
|
|
|
(143
|
)
|
|
|
(221
|
)
|
|
|
(1,060
|
)
|
|
|
(158
|
)
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
8
|
|
Depreciation and amortization
|
|
|
83
|
|
|
|
597
|
|
|
|
2,452
|
|
|
|
366
|
|
Change in fair value of investment at FVTPL
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
|
|
(66
|
)
|
Income on loan receivable and other investment
|
|
|
|
|
|
|
|
|
|
|
(1,148
|
)
|
|
|
(172
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
4,156
|
|
|
|
134,616
|
|
|
|
290,135
|
|
|
|
43,365
|
|
Loss on changes in fair value of warrants
|
|
|
239
|
|
|
|
18,423
|
|
|
|
7,548
|
|
|
|
1,128
|
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
44,439
|
|
|
|
6,642
|
|
Share-based compensation
|
|
|
8,964
|
|
|
|
5,421
|
|
|
|
3,606
|
|
|
|
539
|
|
Finance costs
|
|
|
1,329
|
|
|
|
|
|
|
|
5,417
|
|
|
|
810
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in trade and other receivables
|
|
|
(5,754
|
)
|
|
|
(41,594
|
)
|
|
|
(28,689
|
)
|
|
|
(4,288
|
)
|
Increase in trade and other payables
|
|
|
2,769
|
|
|
|
27,545
|
|
|
|
58,012
|
|
|
|
8,671
|
|
Increase in amounts due to related parties
|
|
|
|
|
|
|
108
|
|
|
|
612
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash generated from operations
|
|
|
769
|
|
|
|
30,064
|
|
|
|
160,669
|
|
|
|
24,014
|
|
Income tax paid
|
|
|
|
|
|
|
(8
|
)
|
|
|
(163
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
769
|
|
|
|
30,056
|
|
|
|
160,506
|
|
|
|
23,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income received
|
|
|
143
|
|
|
|
221
|
|
|
|
1,060
|
|
|
|
159
|
|
Payment for term deposits
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
(35,000
|
)
|
|
|
(5,231
|
)
|
Purchases of property and equipment
|
|
|
(742
|
)
|
|
|
(2,327
|
)
|
|
|
(16,024
|
)
|
|
|
(2,395
|
)
|
Investments in associates
|
|
|
|
|
|
|
(600
|
)
|
|
|
(12,510
|
)
|
|
|
(1,870
|
)
|
Purchase of investment at FVTPL
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
(2,242
|
)
|
Payment for loan receivable
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
(3,737
|
)
|
Advance to related parties
|
|
|
(50
|
)
|
|
|
(8,082
|
)
|
|
|
(2,279
|
)
|
|
|
(340
|
)
|
Repayment from related parties
|
|
|
|
|
|
|
|
|
|
|
7,627
|
|
|
|
1,140
|
|
Investment income received
|
|
|
|
|
|
|
|
|
|
|
363
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(649
|
)
|
|
|
(25,788
|
)
|
|
|
(96,763
|
)
|
|
|
(14,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder contribution
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issue of convertible redeemable preferred
shares and warrants
|
|
|
26,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost for issuance of convertible redeemable preferred shares and
warrants
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(16,250
|
)
|
|
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
25,244
|
|
|
|
|
|
|
|
(16,250
|
)
|
|
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
Net increase in cash and cash equivalents
|
|
|
25,364
|
|
|
|
4,268
|
|
|
|
47,493
|
|
|
|
7,099
|
|
Cash and cash equivalents at beginning of year
|
|
|
130
|
|
|
|
23,825
|
|
|
|
27,618
|
|
|
|
4,128
|
|
Effect of foreign exchange rate changes
|
|
|
(1,669
|
)
|
|
|
(475
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
23,825
|
|
|
|
27,618
|
|
|
|
75,105
|
|
|
|
11,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
information of non-cash transaction:
During the year ended March 31, 2010, acquisition of
property and equipment amounted to approximately RMB15,083,000
were unsettled and included in other payables.
F-7
SKY-MOBI
LIMITED
|
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Sky-mobi Limited (the Company) was incorporated as
an exempted company with limited liability under the laws of the
Cayman Islands on April 20, 2007. The Company through its
subsidiaries (collectively referred to as the Group)
is principally engaged in the operation of a mobile application
platform embedded on mobile phones to provide mobile application
store and services in the Peoples Republic of China (the
PRC). Its parent is Xplane Ltd. which is
incorporated in the British Virgin Islands. The address of the
principle place of the Groups business is 10/F, Building
B, United Building, No. 2 Zijinhua Road, Hangzhou, Zhejiang
Province, PRC. The Companys registered office is located
at Cricket Square, Hutchins Drive, P.O. Box 2681,
Grand Cayman KY1-1111, Cayman Islands.
The consolidated financial statements of the Group are presented
in Renminbi (RMB), which is the functional currency
of the Company.
The Company holds its interests in its operating subsidiaries
through Pusida (Beijing) Technologies Co., Ltd
(Pusida) and Hangzhou Dianneng Technologies Co., Ltd
(Dianneng) which were established in the PRC on
June 12, 2007 and December 24, 2009, respectively. The
Company does not conduct any substantive operations of its own,
but conducts its primary business operation through Hangzhou Sky
Network Technologies Co., Ltd (Sky), and Hangzhou
Fanyi Technologies Co., Ltd. (Fanyi) (collectively
the PRC Operational Entities), which are controlled
by Pusida and Dianneng through certain contractual arrangements.
Through a series of contemplated transactions between June and
August 2007, including (i) the acquisition of Sky by
Hangzhou Mijia Technologies Co., Ltd. (Mijia),
(ii) the establishment of Pusida and (iii) the
contractual arrangements entered into between Pusida, Mijia and
Sky, as described below, Sky was acquired by the Company. As
Mr. Song Tao controlled both Sky and the Company, the
acquisition was accounted for as described in the Reorganization
discussion below.
On November 3, 2009, Mr. Song Tao acquired the equity
interest of Fanyi from its original owner at a price equal to
its net asset value of RMB100,000. Prior to this transaction,
Fanyi was a shell company and had not yet commenced its business
operations.
PRC laws and regulations restrict foreign ownership of
telecommunication businesses. To comply with these foreign
ownership restrictions, Pusida entered into certain exclusive
agreements with the equity holders of Mijia and Sky on
August 1, 2007 and Dianneng entered into certain exclusive
agreements with the equity holders of Fanyi on December 24,
2009. The exclusive agreements, namely, Exclusive Technical
Consulting and Services Agreements, Exclusive Purchase Option
Agreements, Equity Pledge Agreements and Exclusive Business
Cooperation Agreements, taken as a whole, permit the financial
results of the PRC Operational Entities and economic benefits of
their businesses to flow to the Company. In addition, all the
directors in each of the PRC Operational Entities shall be
assigned by the Company. Accordingly, the Company is able to
monitor, supervise and effectively control the PRC Operational
Entities businesses, operations and financial policies so
as to ensure and facilitate the implementation of these
exclusive agreements. In addition, through such agreements, the
Company is able to acquire the shareholding in the PRC
Operational Entities when permitted by PRC law.
Effective control over the PRC Operational Entities
businesses was transferred to the Company through the series of
contractual arrangements without transferring legal ownership in
the PRC Operational Entities (Reorganization). As a
result of these contractual arrangements, the Company has the
ability to approve decisions made by the PRC Operational
Entities and is entitled to substantially all of the associated
economic benefits. Accordingly, the Company consolidates the PRC
Operational Entities. Immediately before and after the
Reorganization, Mr. Song Tao controlled the PRC Operational
Entities. As such, the consolidated financial statements are
prepared as if the current group structure had been in existence
throughout the years, or since the respective date of
incorporation / establishment of the relevant entity,
where this is a shorter period. The net assets of the combining
entities were consolidated using the existing book values.
F-8
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At March 31, 2010, the Company had direct and indirect
interests in the following subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ownership
|
|
|
|
|
|
|
|
interest and
|
|
|
|
|
|
Place and date of
|
|
voting power held at
|
|
|
|
|
|
establishment
|
|
March 31,
|
|
|
|
Company name
|
|
and operation
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Principal activities
|
|
Hangzhou Sky Network Technologies Co., Ltd. (Sky)
|
|
PRC
November 21,
2005
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Development of mobile application software and provision of
mobile application services
|
Hangzhou Mijia
Technologies Co., Ltd. (Mijia)
|
|
PRC
January 12,
2007
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Provision of mobile application services
|
Pusida (Beijing)
Technologies Co., Ltd. (Pusida)
|
|
PRC
June 26,
2007
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Provision of management consultancy and technical services
|
Hangzhou Fanyi
Technologies Co., Ltd. (Fanyi)
|
|
PRC
July 13,
2009
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
100
|
%
|
|
Provision of mobile application services
|
Hangzhou Dianneng
Technologies Co., Ltd. (Dianneng)
|
|
PRC
December 24,
2009
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
100
|
%
|
|
Provision of management consultancy and technical services
|
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Statement
of compliance
The Groups consolidated financial statements comply with
International Financial Reporting Standards (IFRSs)
issued by the International Accounting Standards Board
(IASB).
Basis
of preparation
The Groups consolidated financial statements have been
prepared on the historical cost basis except for certain
financial instruments, which are measured at fair value as
explained in the accounting policies set out below.
Basis
of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and its entities, including special
purpose entities, controlled by the Company (collectively the
subsidiaries). Control is achieved where the Company
has the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the
year are included in the consolidated statement of comprehensive
income from the effective date of acquisition and up to the
effective date of disposal, as appropriate.
All intra-group transactions, balances, income and expenses are
eliminated on consolidation.
Investments
in associates
An associate is an entity over which the investor has
significant influence and that is neither a subsidiary nor an
interest in a joint venture. Significant influence is the power
to participate in the financial and operating policy decisions
of the investee but is not control or joint control over those
policies.
F-9
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results and assets and liabilities of associates are
incorporated in the consolidated financial statements using the
equity method of accounting. Under the equity method,
investments in associates are carried in the consolidated
statements of financial position at cost as adjusted for
post-acquisition changes in the Groups share of the net
assets of the associate, less any impairment in the value of the
investment. When the Groups share of the loss of an
associate equals or exceeds its interest in that associate, the
Group discontinues recognizing its share of further losses. An
additional share of losses is provided for and a liability is
recognized only to the extent that the Group has incurred legal
or constructive obligations or made payments on behalf of that
associate.
The difference between the cost of the investment in associates
and the amount of underlying equity in net assets of the
associates is included in the carrying amount of the investment.
The entire carrying amount of the investment is tested for
impairment as a whole. Any reversal of impairment loss is
recognized to the extent that the recoverable amount of the
investment subsequently increases.
Any excess of the Groups share of the net fair value of
the identifiable assets, liabilities and contingent liabilities
over the cost of acquisition is recognized immediately in profit
or loss.
When a group entity transacts with an associate of the Group,
profits and losses are eliminated to the extent of the
Groups interest in the relevant associate.
Revenue
recognition
Application
Store Revenues
Revenue is recognized when it is probable that the economic
benefits will flow to the Group, the revenue can be measured
reliably and collectability is reasonably assured.
The Group generates revenue principally from the sale of a wide
range of mobile applications and contents, such as single-player
games, mobile music and books, mobile social games, social
network functions and other contents, to mobile handset users.
Customers can download and purchase the mobile applications and
contents from the Groups application store, Maopao
Platform. The Group has cooperation agreements with handset
companies to pre-install the Maopao Platform on mobile handsets
before they reach users. The applications and contents are
predominantly delivered to customers through mobile network
operators in China. The Group contracts with mobile service
providers, who further contract with and utilize mobile network
operators billing channels, to collect payment from the
Groups customers on behalf of the Group. Mobile service
providers and mobile network operators, through the mobile
service providers, are entitled to commissions, which are a
percentage of the gross fees collected from the Groups
customers by the mobile network operators.
For application store revenues, the Group recognizes revenue on
a gross basis and recognizes the commissions retained by mobile
service providers and mobile network operators as a cost of
revenues in the consolidated statements of comprehensive income.
Maopao
Community Revenues through K Currency
As an alternative to utilizing mobile service providers, the
Group also contracts with independent payment processing agents
to process prepaid cards or online payment solutions into
customer accounts. Customer accounts are charged up with cash
credit, which may be converted into the Groups own virtual
currency, or K Currency. K Currency is mainly used to
purchase virtual items in mobile social games and pay for other
social network functions on the Groups Maopao Community.
The majority of Maopao Community revenues are collected through
K Currency.
The payment processing agents are entitled to a commission for
processing customer prepayments. Such transactions were
immaterial for all periods presented.
F-10
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Revenue
The Group also allows mobile service providers to sell their
mobile applications to mobile users through the Groups
Maopao Platform. The Group charges the mobile service provider a
commission based on a percentage of the revenue earned by the
mobile service providers. The Group recognizes revenue upon
receipt of monthly statements from the mobile service providers.
Cost
of revenues
Cost of revenues primarily includes commissions paid to mobile
service providers, content providers, handset companies and
independent payment processing agents. Cost of revenues also
includes staff salaries, utilities, depreciation of equipment
and office expenses directly related to the operation of the
Maopao Platform. The Group usually pays content providers a
percentage of the proceeds that are derived from their content.
For certain applications and content titles, the Group makes a
small one-time payment to the content provider to acquire all
associated rights, all of which are recorded as cost of revenues
at the time of payment because such applications and content
titles usually have short life cycles and the acquisition cost
for each application or content title is relatively low.
Leases
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
The Group
as lessee
Operating lease payments are recognized as expenses on a
straight-line basis over the lease term.
Foreign
currencies
In preparing the financial statements of each group entity,
transactions in currencies other than the functional currency,
which is the currency of the primary economic environment in
which the entity operates, of that entity, or foreign currency,
are recorded in the entities functional currency at the
rates of exchange prevailing on the dates of the transactions.
At the end of the reporting period, monetary items denominated
in foreign currencies are retranslated at the rates prevailing
at that date. Non-monetary items carried at fair value that are
denominated in foreign currencies are retranslated at the rates
prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost
in a foreign currency are not retranslated.
Exchange differences arising from the settlement of monetary
items, and the retranslation of monetary items and non-monetary
items carried at fair value are recognized in profit or loss in
the period in which they arise.
Government
grants
Government grants include cash subsidies received by the
Groups entities in the PRC from local governments for
general corporate purposes. Such subsidies allow the Group full
discretion in utilizing the funds and are generally provided as
incentives to local high-tech service companies. Cash subsidies
are recognized in profit or loss in the period when received and
when all conditions for their receipt have been satisfied.
Share-based
payments
The fair value of services received determined by reference to
the fair value of share options granted at the grant date is
expensed on a graded basis over the vesting period with a
corresponding increase in equity.
The Group reviews its estimate of the number of options that are
expected to ultimately vest. The impact of the revision of the
estimates, if any, is recognized in profit or loss, with a
corresponding adjustment to reserves.
F-11
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At the time when the share options are exercised, the amount
previously recognized in reserves will be transferred to share
premium. When the share options are forfeited after the vesting
date or are still not exercised at the expiry date, the amount
previously recognized in reserve will be transferred to retained
deficit.
Taxation
Income tax expense represents the sum of the tax currently
payable and deferred tax.
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from profit as reported in the
consolidated statements of comprehensive income because of items
of income or expense that are taxable or deductible in other
years and items that are never taxable or deductible. The
Groups liability for current tax is calculated using tax
rates that have been enacted or substantively enacted by the end
of the reporting period.
Deferred tax is recognized on temporary differences between the
carrying amounts of assets and liabilities in the consolidated
financial statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are
generally recognized for all taxable temporary differences.
Deferred tax assets are generally recognized for all deductible
temporary differences to the extent that it is probable that
taxable profits will be available against which those deductible
temporary differences can be utilized. Such deferred tax assets
and liabilities are not recognized if the temporary difference
arises from goodwill or from the initial recognition (other than
in a business combination) of other assets and liabilities in a
transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognized for taxable temporary
differences associated with investments in subsidiaries and
associates, except where the Group is able to control the
reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary
differences associated with such investments are only recognized
to the extent that it is probable that there will be sufficient
taxable profits against which to utilize the benefits of the
temporary differences and they are expected to reverse in the
foreseeable future.
The carrying amount of deferred tax assets is reviewed at the
end of the reporting period and reduced to the extent that it is
no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the period in which the
liability is settled or the asset realized, based on tax rates
(and tax laws) that have been enacted or substantively enacted
by the end of the reporting period. The measurement of deferred
tax liabilities and assets reflects the tax consequences that
would follow from the manner in which the Group expects, at the
end of the reporting period, to recover or settle the carrying
amount of its assets and liabilities.
Research
and development expenses
Expenditure on research activities is recognized as an expense
in the period in which it is incurred. An internally-generated
intangible asset arising from development, or from the
development phase of an internal project, is recognized if all
of the following have been demonstrated:
|
|
|
|
|
the technical feasibility of completing the intangible asset so
that it will be available for use or sale;
|
|
|
|
the intention to complete the intangible asset and use or sell
it;
|
|
|
|
the ability to use or sell the intangible asset;
|
|
|
|
how the intangible asset will generate probable future economic
benefits;
|
|
|
|
the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset; and
|
|
|
|
the ability to measure reliably the expenditure attributable to
the intangible asset during its development.
|
F-12
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amount initially recognized for an internally-generated
intangible asset is the sum of the expenditure incurred from the
date when the intangible asset first meets the recognition
criteria listed above.
Subsequent to initial recognition, an internally-generated
intangible asset is measured at cost less accumulated
amortization and accumulated impairment losses (if any), on the
same basis as intangible assets acquired separately.
The Group currently expenses internal and external development
costs when incurred as the Group is unable to identify the time
and expenses associated with its individual development projects.
Property
and equipment
Property, plant and equipment are stated at cost less subsequent
accumulated depreciation and accumulated impairment losses.
Depreciation is computed on a straight-line basis over the
following estimated useful lives:
|
|
|
Electronic equipment
|
|
3 years
|
Furniture
|
|
5 years
|
Office equipment
|
|
3 years
|
Leasehold improvements
|
|
the shorter of the lease term or 5 years
|
Motor vehicles
|
|
5 years
|
The useful lives of the property and equipment are evaluated
annually. An item of property, plant and equipment is
derecognized upon disposal or when no future economic benefits
are expected to arise from the continued use of the asset. Any
gain or loss arising on derecognition of the asset is included
in profit or loss in the period in which the item is
derecognized.
Impairment
of tangible assets
The Group reviews the carrying amounts of its tangible assets to
determine whether there is any indication that those assets have
suffered an impairment loss. If any such indicator exists, the
recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss, if any. Recoverable
amount is defined as the higher of an assets fair value,
less cost to sell, and its value in use. If the recoverable
amount of an asset is estimated to be less than its carrying
amount, the carrying amount of the asset is reduced to its
recoverable amount. An impairment loss is recognised as an
expense immediately.
Where an impairment loss subsequently reverses, the carrying
amount of the asset is increased to the revised estimate of its
recoverable amount, not to exceed the carrying amount that would
have been determined had no impairment loss been recognised for
the asset in prior periods. A reversal of an impairment loss is
recognised as income immediately.
Cash
and cash equivalents/Term deposits
Cash and cash equivalents include cash on hand and in banks and
other short-term highly liquid investments with original
maturities of three months or less which are not restricted as
to use. Term deposits represent bank deposits with original
maturities of over three months but less than one year when
purchased.
Financial
instruments
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of financial assets and
financial liabilities, other than financial assets or financial
liabilities at fair value through profit or loss, are added to
or deducted from the fair value of the financial assets or
financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the
F-13
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquisition of financial assets or financial liabilities at fair
value through profit or loss are recognized immediately in
profit or loss.
Financial
assets
The Groups financial assets are classified into loans and
receivables and financial assets at fair value through profit or
loss (FVTPL). Loans and receivables are
non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Loans and
receivables, including cash and cash equivalents, term deposits,
loan receivable, trade and other receivables and amounts due
from related parties, are carried at amortized cost using the
effective interest method, less any identified impairment,
unless the effect of discounting is not material, in which case
they are carried at cost, less any identified impairment.
A financial asset may be designated as FVTPL upon initial
recognition if:
|
|
|
|
|
such designation eliminates or significantly reduces a
measurement or recognition inconsistency that would otherwise
arise; or
|
|
|
|
the financial asset forms part of a group of financial assets or
financial liabilities or both, which is managed and its
performance is evaluated on a fair value basis, in accordance
with the Groups documented risk management or investment
strategy, and information about the grouping is provided
internally on that basis; or
|
|
|
|
it forms part of a contract containing one or more embedded
derivatives, and IAS 39 permits the entire combined contract
(asset or liability) to be designated as FVTPL.
|
Financial assets at FVTPL are measured at fair value, with
changes in fair value recognised directly in profit or loss. The
net gain or loss recognised in profit or loss excludes any
dividend or interest earned on the financial assets which is
included in other gains (losses) in the consolidated statements
of comprehensive income.
Impairment
of financial assets
Financial assets, other than those at FVTPL, are assessed for
indicators of impairment at the end of the reporting period or
when there is objective evidence that an impairment may exist.
Financial assets are impaired where there is objective evidence
that, as a result of one or more events that occurred after the
initial recognition of the financial asset, the estimated future
cash flows of the financial assets have been affected. Objective
evidence of impairment could include:
|
|
|
|
|
significant financial difficulty of the issuer or counterparty,
|
|
|
|
default or delinquency in interest or principal payments, or
|
|
|
|
it becoming probable that the borrower will enter bankruptcy or
financial reorganization.
|
For certain categories of financial assets, such as trade
receivables, assets that are assessed not to be impaired
individually are subsequently assessed for impairment on a
collective basis. Objective evidence of impairment for a
portfolio of receivables could include the Groups past
experience of collecting payments, an increase in the number of
delayed payments in the portfolio past the average credit period
of 90 days and observable changes in national or local
economic conditions that correlate with default on receivables.
For financial assets other than those at FVTPL, an impairment
loss is recognized in profit or loss and is measured as the
difference between the assets carrying amount and the
present value of the estimated future cash flows discounted at
the original effective interest rate.
The carrying amount of the financial asset is reduced by the
impairment loss directly for all financial assets with the
exception of trade receivables, where the carrying amount is
reduced through the use of an allowance account. Changes in the
carrying amount of the allowance account are recognized in
profit or loss. When a trade
F-14
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receivable is considered uncollectible, it is written off
against the allowance account. Subsequent recoveries of amounts
previously written off are credited to profit or loss.
For financial assets measured at amortized cost, if, in a
subsequent period, the amount of impairment loss decreases and
the decrease can be related objectively to an event occurring
after the impairment loss was recognized, the previously
recognized impairment loss is reversed through profit or loss to
the extent that the carrying amount of the asset at the date the
impairment is reversed does not exceed what the amortized cost
would have been had the impairment not been recognized.
Financial
liabilities and equity instrument
Financial liabilities and equity instruments issued by a group
entity are classified according to the substance of the
contractual arrangements entered into and the definitions of a
financial liability and an equity instrument.
An equity instrument is any contract that evidences a residual
interest in the assets of the Group after deducting all of its
liabilities. The Groups financial liabilities are
generally classified into financial liabilities at FVTPL and
other financial liabilities.
Effective
interest method
Interest expense is recognized on an effective interest basis
other than those financial liabilities classified at FVTPL, of
which the interest expense is included in change in fair value
of financial liabilities designated at FVTPL.
The effective interest method is a method of calculating the
amortized cost of a financial asset or financial liability and
of allocating interest income or interest expense over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts or payments
through the expected life of the financial asset or liability,
or, where appropriate, a shorter period.
Financial
liabilities at FVTPL
Financial liabilities at FVTPL are comprised of convertible
redeemable preferred shares and warrants, which are measured at
fair value, with changes in fair value recognized directly in
profit or loss.
Convertible redeemable preferred shares are redeemable and
convertible into common shares at the option of the holder or
automatically upon an initial public offering (see
note 19). The conversion option that will be settled other
than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the Companys own
equity instruments are considered as embedded derivatives not
closely related to the host contract. The Group has elected to
designate its convertible redeemable preferred shares with
embedded derivatives as financial liabilities at FVTPL on
initial recognition as the convertible redeemable preferred
shares contain one or more embedded derivatives.
Other
financial liabilities
Other financial liabilities, including trade and other payables
and amounts due to related parties, are subsequently measured at
amortized cost, using the effective interest method unless the
effect of discounting is not material, in which case, they are
carried at cost.
Derecognition
Financial assets are derecognized when the rights to receive
cash flows from the assets expire or, the financial assets are
transferred and the Group has transferred substantially all the
risks and rewards of ownership of the financial assets. On
derecognition of a financial asset, the difference between the
assets carrying amount and the
F-15
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sum of the consideration received and receivable and the
cumulative gain or loss that had been recognized in other
comprehensive income is recognized in profit or loss.
Financial liabilities are derecognized when the obligation is
discharged, cancelled or expires. The difference between the
carrying amount of the financial liability derecognized and the
consideration paid is recognized in profit or loss.
Unaudited
pro forma information
Pro forma basic and diluted net income per share is computed by
dividing net loss for the year, excluding a finance charge made
to preferred shareholders and losses on change in fair value of
convertible redeemable preferred shares, by the weighted average
number of common shares outstanding for the year plus (a)
the number of common shares resulting from the assumed
conversion of the outstanding convertible redeemable preferred
shares upon consummation of IPO and (b) the number of shares
whose proceeds would be necessary to pay the total cash
dividends of RMB29,250,000 (see Note 11 and Note 25).
Translation
into United States Dollars
The financial statements of the Group are stated in RMB.
Translations of amounts from RMB into U.S. dollars are
solely for the convenience of the reader and were calculated at
the rate of US$1.00 = RMB6.6905, on September 30, 2010,
representing the noon buying rate in the City of New York for
cable transfers of Renminbi, as certified for customs purposes
by the Federal Reserve Bank of New York. The translation is not
intended to imply that the RMB amounts could have been, or could
be, converted, realized or settled into U.S. dollars at
that rate on March 31, 2010, or at any other rate.
|
|
3.
|
APPLICATION
OF NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS
|
The Group has not early adopted the following new and revised
standards, amendments or interpretations that have been issued
but are not yet effective:
In 2008, the IASB issued IFRS 3 (revised), Business
Combinations (IFRS 3 (revised)), and IAS 27,
Consolidated and Separate Financial Statements
(IAS 27 (revised)), which include greater emphasis
on the use of fair value. The standards focus on changes in
control as a significant economic event and introduce
requirements to remeasure interests to fair value at the time
when control is achieved or lost, and recognize directly in
equity the impact of all transactions between controlling and
non-controlling shareholders not involving a loss of control.
The standards further focus on what is given to the seller as
consideration, rather than what is spent to achieve the
acquisition. IFRS 3 (revised) and IAS 27 (revised) are effective
for accounting periods beginning on or after July 1, 2009.
The Group is currently evaluating the impact of adoption on its
consolidated financial statements.
In November 2009, the IASB issued IFRS 9, Financial
Instruments, as the first step in its project to replace
IAS 39, Financial Instruments: Recognition and
Measurement. IFRS 9 introduces new requirements for the
classification and measurement of financial assets and requires
all recognized financial assets that are within the scope of IAS
39 to be measured at either amortized cost or fair value.
Specifically, debt investments that (i) are held within a
business model whose objective is to collect the contractual
cash flows and (ii) have contractual cash flows that are
solely payments of principal and interest on the principal
outstanding, are generally measured at amortized cost. All other
debt investments and equity investments are measured at fair
value. IFRS 9 will be effective from January 1, 2013, with
earlier application permitted. The Group is currently evaluating
the impact of adoption on its consolidated financial statements.
In 2009, the IASB issued Improvements to IFRSs, a
collection of amendments to twelve IFRSs, as part of its program
of annual improvements to its standards. IAS 1,
Presentation of Financial Statements, was amended to
provide clarification that the potential settlement of a
liability by the issue of equity is not relevant to its
classification as current or non-current. By amending the
definition of current liability, the amendment permits a
F-16
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liability to be classified as non-current, provided the entity
has an unconditional right to defer settlement by transfer of
cash or other assets for at least 12 months after the
accounting period, notwithstanding the fact that the entity
could be required by the counterparty to settle in shares at any
time. The amendment is effective for accounting periods
beginning on or after January 1, 2010. The Group is
currently evaluating the impact of adoption on its consolidated
financial statements.
In November 2009, IFRIC Interpretation 19, Extinguishing
Financial Liabilities with Equity Instruments (IFRIC
19), was issued. IFRIC 19 requires a gain or loss to be
recognized when a liability is settled through the issuance of
the entitys own equity instruments. The amount of the gain
or loss recognized in profit or loss will be the difference
between the carrying value of the financial liability and the
fair value of the equity instruments issued. If the fair value
of the equity instruments cannot be reliably measured then the
fair value of the existing financial liability is used to
measure the gain or loss. IFRIC 19 must be applied in annual
periods beginning on or after July 1, 2010. Earlier
application is permitted. It must be applied retrospectively
from the beginning of the earliest comparative period presented.
The Group will apply IFRIC 19 effective April 1, 2011. The
Group is currently evaluating the impact of adoption on its
consolidated financial statements.
On November 2008, IFRIC Interpretation 17, Distribution of
non-cash assets to owners (IFRIC 17), was
issued. IFRIC 17 provides guidance on accounting for
arrangements wherein an entity distributes non-cash assets to
shareholders either as a distribution of reserves or as
dividends. IFRS 5, Non-current assets held for sales and
discontinued operations, has also been amended to require
that assets are classified as held for distribution only when
they are available for distribution in their present condition
and the distribution is highly probable. IFRIC 17 is effective
for annual periods beginning on or after July 1, 2009. The
Group will apply IFRIC 17 effective April 1, 2010. The
Group is currently evaluating the impact of adoption on its
consolidated financial statements.
In November 2009, the IASB issued a revised version of IAS 24,
Related party disclosures. The amendment removes the
requirement for government-related entities to disclose details
of all transactions with the government and other
government-related entities, and clarifies and simplifies the
definition of a related party. The amended definition may
require entities to provide additional related party
disclosures. The revised standard is effective for annual
periods beginning on or after January 1, 2011, with earlier
application permitted. The Group is currently evaluating the
impact of adoption on its consolidated financial statements.
|
|
4.
|
KEY
SOURCES OF ESTIMATION UNCERTAINTY
|
In the application of the Groups accounting policies,
which are described in note 2, the Company is required to
make judgments, estimates and assumptions about the carrying
amounts of assets and liabilities that are not readily apparent
from other sources. The estimates and assumptions are based on
historical experience and other factors that are considered to
be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimate is revised if the revision
affects only that period or in the period of the revision and
future periods if the revision affects both current and future
periods.
Following are the key assumptions and other key sources of
estimation uncertainty at the end of the reporting period that
have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next
financial year.
Recognition
of deferred tax assets
As at March 31, 2008, 2009 and 2010, the carrying amount of
deferred tax assets of the Group are approximately nil,
RMB1,189,000 and RMB4,447,000, respectively.
No deferred tax asset has been recognized in respect of tax
losses of RMB1,187,000 as at March 31, 2010 due to the
unpredictability of future profit streams. The recognition of
deferred tax assets is based upon whether it is
F-17
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
more likely than not that sufficient taxable profits will be
available in the future, against which the reversal of temporary
differences can be deducted. Recognition, therefore, involves
judgment regarding the future financial performance of the
particular legal entity or tax group in which the deferred tax
asset has been recognized. In cases where the actual future
profits generated are less than expected, a material reversal of
deferred tax assets may arise, which would be recognized in
profit or loss for the period in which such a reversal takes
place.
Fair
value of convertible redeemable preferred shares and
warrants
The convertible redeemable preferred shares and warrants do not
have a quoted price in an active market. Determining the fair
value of common shares and convertible redeemable preferred
shares requires making complex and subjective judgments
regarding projected financial and operating results, the unique
business risks, the liquidity of the common shares and the
operating history and prospects at the time of issuance.
Therefore, these fair values are inherently uncertain and highly
subjective.
The Black-Scholes option pricing model was used in the valuation
of the warrants. In calculating the fair value of the warrants,
the Group uses multiple inputs, including the fair value of the
preferred shares, warrant exercise price, expected life, risk
free rate, dividend yield and expected volatility.
Management estimates and assumptions are reviewed periodically
and are adjusted if necessary. Changes to these estimates and
assumptions could result in significant change in the fair value
of the convertible redeemable preferred shares and warrants.
Share-based
compensation
The Group records share-based compensation based on the grant
date fair value of the option awards which is computed using the
Black-Scholes option pricing model. The Black-Scholes model
requires the input of highly subjective assumptions including
the expected stock price volatility, expected option terms,
risk-free interest rate and dividend yield.
Capital
risk management
The primary objective of the Groups capital management is
to safeguard the Groups ability to continue as a going
concern, so that it can provide an adequate return to
shareholders by pricing its services commensurately with the
level of risk. The Groups overall strategy remains
unchanged during the reporting periods.
The capital structure of the Group consists of convertible
redeemable preferred shares, cash and cash equivalents and
equity, which includes registered capital/share capital and
reserves.
The Group reviews the capital structure regularly and considers
the cost of capital and the risks associated with each class of
capital and, to the extent necessary, balances its overall
capital structure through the payment of dividends and issuance
of new shares.
F-18
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Categories
of financial instruments
The carrying amounts of financial assets and financial
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
29,408
|
|
|
|
97,744
|
|
|
|
226,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FVTPL
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at fair value through profit or loss
|
|
|
|
|
|
|
|
|
|
|
15,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
|
2,152
|
|
|
|
16,218
|
|
|
|
46,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FVTPL
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred shares
|
|
|
27,690
|
|
|
|
161,584
|
|
|
|
451,491
|
|
Warrants
|
|
|
1,278
|
|
|
|
19,668
|
|
|
|
27,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,968
|
|
|
|
181,252
|
|
|
|
478,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
risk management objectives and policies
Foreign
currency risk management
The Group mainly operates in the PRC with most of its
transactions settled in RMB. The foreign currency risk is mainly
attributable to the Groups U.S. dollar
(US$) bank account balances and US$ denominated
convertible redeemable preferred shares which are subject to
redemption at the greater of the purchase price or the fair
value of the preferred shares on or after August 2, 2011.
The carrying amount of the US$ bank account balances was
approximately RMB20,521,000, RMB2,816,000 and RMB2,812,000 as of
March 31, 2008, 2009 and 2010, respectively. The carrying
amount of the convertible redeemable preferred shares were
RMB27,690,000, RMB161,584,000 and RMB451,491,000 as of
March 31, 2008, 2009 and 2010, respectively. As the
Groups exposure to foreign currency rate risk is low, it
has not used any forward contracts, currency borrowings or other
means to hedge its exposure.
If the RMB exchange rate against the US$ had strengthened or
weakened by 5% with all other variables held constant, the
carrying value of bank accounts denominated in US$ would have
decreased or increased by RMB1,026,000, RMB140,000 and
RMB141,000 as of March 31, 2008, 2009 and 2010,
respectively, with a corresponding increase or decrease in net
loss for the respective years. If the RMB exchange rate against
the US$ had strengthened or weakened by 5%, with all other
variables held constant, the carrying value of the convertible
redeemable preferred shares, denominated in US$, would have
decreased or increased by RMB1,385,000, RMB8,079,000 and
RMB22,575,000 as of March 31, 2008, 2009 and 2010,
respectively with a corresponding decrease or increase in net
loss for the respective years.
Interest
rate risk management
The Group has exposure to cash flow interest rate risk due to
the fluctuation of the variable interest rates associated with
its cash and cash equivalents and loan receivable which are
based on prevailing market interest rates. Currently, the Group
does not have a specific policy to manage their interest rate
risk. The Group does not have significant exposure to cash flow
interest rate risk as at March 31, 2008, 2009 and 2010 as
the interest rates have not fluctuated significantly in recent
years.
F-19
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
risk management
The Groups maximum exposure to credit risks is equivalent
to the total carrying amount of loan receivable, trade and other
receivable, amounts due from related parties, cash and cash
equivalents, term deposits and investments at FVTPL of
RMB29,408,000, RMB97,744,000 and RMB241,991,000 as of
March 31, 2008, 2009 and 2010, respectively.
Collection of the Groups revenues is substantially done
through mobile service providers with whom the Group has
co-operative service agreements. The total carrying amount of
trade receivable from mobile service providers was RMB5,011,000,
RMB46,149,000 and RMB71,774,000, respectively. In order to
minimize the credit risk, the Group assesses the credit
worthiness of the mobile service providers prior to contracting
with them. In addition, the Group allocates revenue payments
among mobile service providers based on their payment history
and the assessment of their relationship with the wireless
carriers which will impact the mobile service providers
ability to pay. The Group further monitors the subsequent
performance of the mobile service providers in order to mitigate
collection risk going forward. In addition, the Group reviews
the recoverable amount of each individual trade receivable at
the end of each reporting period to determine if provision
should be made for uncollectible amounts.
The Group has concentration of credit risks with exposure
limited to certain mobile service providers. As at
March 31, 2008, 2009 and 2010, two, four and ten mobile
service providers accounted for approximately RMB3,074,000,
RMB21,947,000 and RMB61,803,000, or 61%, 48% and 86% of the
Groups trade receivables, respectively. The Group closely
monitors the subsequent settlement of trade receivables and does
not grant long credit periods to the counterparties.
The Groups cash and cash equivalents and term deposits are
held by large banks established in the PRC. In addition, the
Groups investment at FVTPL was also with a large bank in
China. The Group does not expect any losses arising from
non-performance of these financial institutions.
Liquidity
risk
The Group monitors and attempts to maintain a level of cash and
cash equivalents adequate to finance the Groups operations
and mitigate the effects of fluctuations in cash flows.
F-20
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present the maturities of the Groups
financial liabilities based upon the undiscounted cash flows of
financial liabilities assuming payment on the earliest date on
which the Group can be required to pay. The table includes both
interest, if any, and principal cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
|
|
|
|
|
|
|
|
Total
|
|
|
demand or
|
|
|
|
|
|
|
|
undiscounted
|
|
|
less than
|
|
1-3
|
|
3 months
|
|
over
|
|
cash flow and
|
|
|
1 month
|
|
months
|
|
to 1 year
|
|
1 year
|
|
carrying amount
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,924
|
|
Convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,690
|
|
|
|
27,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
27,690
|
|
|
|
30,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
|
30,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,469
|
|
Amounts due to related parties
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
Convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,584
|
|
|
|
161,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,577
|
|
|
|
|
|
|
|
|
|
|
|
161,584
|
|
|
|
192,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
|
103,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,564
|
|
Amounts due to related companies
|
|
|
6,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,137
|
|
Convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451,491
|
|
|
|
451,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,701
|
|
|
|
|
|
|
|
|
|
|
|
451,491
|
|
|
|
561,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
Convertible
redeemable preferred shares (Series A Shares)
and common shares
The Group uses generally accepted valuation methodologies,
including the discounted cash flow approach and the guideline
companys approach, which incorporates certain assumptions
including the market performance of comparable listed companies,
projected financial results and growth trends of the Company,
weighted average cost of capital (WACC), terminal
growth rate to derive the total equity value of the Company.
The fair value of the convertible redeemable preferred shares is
determined using an option pricing model. The residual value is
then allocated to the common shares. The option pricing model
considers the convertible redeemable preferred shares as call
options on the Companys equity value, with strike prices
based on the liquidation preference of the convertible
redeemable preferred shares. The main inputs to this model
include equity value of the Company, probability of occurrence
of a redemption, QIPO or liquidation event, expected volatility,
expected time to expiration and risk free interest rate. Since
issuance, the probability of occurrence of a redemption or IPO
event has increased with a corresponding decrease in the
probability of a liquidation event occurring. The expected
option life is determined as the time between the valuation date
and the redemption date. The risk free interest rate is based on
the yield of U.S. treasury bond with a duration
approximating the expected time to expiration of the option.
Volatility is based on the daily trading price of comparable
companies for a period corresponding to the expected term of the
option.
The Company used a WACC of 31%, 23% and 19% as of March 31,
2008, 2009 and 2010, respectively. If WACC was 1% higher,
assuming all the other variables were held constant, the fair
value of the Series A Shares would decrease by
approximately RMB474,000, RMB7,844,000 and RMB27,083,000 as at
March 31, 2008, 2009 and 2010, respectively.
F-21
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
The Black-Scholes option pricing model was used in the valuation
of the warrants. In calculating the fair value of the warrants,
the Group uses multiple inputs, including the fair value of the
preferred shares, warrant exercise price, expected life, risk
free rate, dividend yield and expected volatility. The following
assumptions were used to estimate the fair value of the warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Risk free rate
|
|
|
1.5%
|
|
|
|
0.2%
|
|
|
|
0.3%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected term
|
|
|
1.29
|
|
|
|
0.29
|
|
|
|
0.59
|
|
Expected volatility
|
|
|
61%
|
|
|
|
75%
|
|
|
|
61%
|
|
The risk free rate is based on the yield to maturity of US
treasury bond yield curve as of the valuation date, while the
expected volatility is calculated based on the daily trading
price of comparable companies for a period corresponding to the
expected term of the warrants.
Investment
at FVTPL
The fair value of the investment at FVTPL was derived from
discounted cash flows based on the terms of the contract and
certain inputs, such as forward and spot exchange rates of US$
and Euro and interest rates at March 31, 2010.
The carrying amounts of all other financial assets and financial
liabilities are recorded at amortized cost, using the effective
interest method unless the effect of discounting is not
material, in which case, they are carried at cost. Such amounts
approximate their fair value.
Fair
value measurement recognized in the statements of financial
position
Financial instrument that are measured at fair value are grouped
into Levels 1 to 3 based on the degree to which the fair
value is observable.
Level 1 fair value measurements are those derived from
quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2 fair value measurements are those derived from
inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or
liability that are not based on observable market data
(unobservable inputs).
The convertible redeemable preferred shares and warrants of the
Group are measured at fair value at the end of each reporting
period and are categorized as Level 3 based on the degree
to which the fair value is observable. There were no transfers
between Level 1 and 2 in the period. A reconciliation from
the beginning balance to the ending balance of Level 3 fair
value measurements of financial liabilities is presented in
Note 19.
F-22
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, the investment at FVTPL is also measured at fair
value at the end of each reporting period and is categorized as
Level 3. A reconciliation of Level 3 fair value
measurements of financial assets is as follows:
|
|
|
|
|
|
|
Investments
|
|
|
RMB000
|
|
At April 1, 2009
|
|
|
|
|
Purchase
|
|
|
15,000
|
|
Total gain included in profit or loss
|
|
|
442
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
15,422
|
|
|
|
|
|
|
|
|
6.
|
REVENUES
AND SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Application store revenues
|
|
|
14,799
|
|
|
|
196,308
|
|
|
|
515,768
|
|
Maopao Community revenues through K currency
|
|
|
|
|
|
|
|
|
|
|
3,578
|
|
Other revenues
|
|
|
3,795
|
|
|
|
10,931
|
|
|
|
24,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,594
|
|
|
|
207,239
|
|
|
|
544,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
information
The Group operates and manages its business as a single segment.
The Groups chief operating decision maker has been
identified as the Chief Executive Officer, who reviews the
revenue analysis by application store revenues, Maopao Community
revenue through K currency and other revenue and the profit
before fair value changes and income tax of the Group as a whole
when making decisions about allocating resources and assessing
performance of the Group.
Geographical
information
All of the Groups revenue is derived from customers based
in the PRC and all of the Groups non-current assets are
also located in the PRC.
Information
about major customers
During the three years ended March 31, 2008, 2009 and 2010,
there was no customer that individually accounts for over 10% of
the Groups total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Interest income
|
|
|
143
|
|
|
|
221
|
|
|
|
1,060
|
|
Change in fair value of investment at FVTPL
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Income on loan receivable and other investment
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
Government grant
|
|
|
|
|
|
|
355
|
|
|
|
631
|
|
Exchange gain
|
|
|
274
|
|
|
|
281
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
417
|
|
|
|
857
|
|
|
|
3,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Loss before tax has been arrived at after charging:
|
|
|
|
|
|
|
|
|
|
|
|
|
Staff salary and other benefits
|
|
|
1,813
|
|
|
|
18,608
|
|
|
|
48,739
|
|
Retirement benefit scheme contributions
|
|
|
|
|
|
|
402
|
|
|
|
892
|
|
Share-based payments (note 21)
|
|
|
8,964
|
|
|
|
5,421
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total staff costs
|
|
|
10,777
|
|
|
|
24,431
|
|
|
|
53,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
83
|
|
|
|
597
|
|
|
|
2,452
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Operating lease rentals in respect of rented premises
|
|
|
256
|
|
|
|
1,463
|
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cayman
Islands
Under the current laws of the Cayman Islands, the Company is not
subject to income tax.
PRC
Prior to January 1, 2008, the Companys PRC
subsidiaries were governed by the Enterprise Income Tax Law and
the Income Tax Law of the Peoples Republic of China
concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws (collectively the
Previous PRC Income Tax Laws). Pursuant to the
Previous PRC Income Tax Laws, domestic enterprises and foreign
invested enterprises were subject to Enterprise Income Tax
(EIT) at the statutory rate of 33% (30% of state
income tax plus 3% local income tax).
On January 1, 2008, a new Enterprise Income Tax Law (the
New EIT Law) in China took effect. The New EIT Law
applies a uniform 25% enterprise income tax rate to both foreign
invested and domestic enterprises. Pusida and Mijia were
effectively subject to tax at the statutory rate of 33%, 25%,
25% and 25% for calendar year 2007, 2008, 2009 and 2010,
respectively. Dianneng and Fanyi were established in 2009 and
were subject to a tax rate of 25% in both calendar year 2009 and
2010.
In 2007, Sky was granted the status of Software Enterprise under
the PRC tax laws that entitled it to a preferential EIT rate of
two-year EIT exemption from its first year of profitable
operation, after offsetting prior years tax losses, and a
50% reduction of its applicable EIT rate for the succeeding
three years. On April 24, 2009, the PRC government
promulgated the Notice on Several Issues Relevant to the
Implementation of the Preferential Policies on EIT which allows
Software Enterprises to continue to enjoy their unexpired tax
holiday under the old EIT Law. The first profit-making year of
Sky was 2008. As a result, Skys EIT rates are 33%, 0%, 0%
and 12.5% for the calendar year 2007, 2008, 2009 and 2010,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC enterprise income tax (EIT)
|
|
|
|
|
|
|
9
|
|
|
|
3,481
|
|
Deferred tax
|
|
|
|
|
|
|
(1,189
|
)
|
|
|
5,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
(1,180
|
)
|
|
|
8,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax charge (credit) can be reconciled to the loss per the
consolidated statements of comprehensive income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Loss before tax
|
|
|
(10,600
|
)
|
|
|
(114,633
|
)
|
|
|
(221,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense at PRC tax rate of 25%(i)
|
|
|
(2,650
|
)
|
|
|
(28,658
|
)
|
|
|
(55,319
|
)
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on changes in fair value of convertible redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred shares and warrants that are not deductible for tax
|
|
|
|
|
|
|
|
|
|
|
|
|
purpose
|
|
|
613
|
|
|
|
38,071
|
|
|
|
74,357
|
|
Loss on modification of convertible redeemable Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
|
|
|
|
|
|
|
|
|
|
|
11,110
|
|
Other non-deductible expenses
|
|
|
2,249
|
|
|
|
1,484
|
|
|
|
3,285
|
|
Tax exemption/adjustment to a PRC subsidiary
|
|
|
(881
|
)
|
|
|
(12,212
|
)
|
|
|
(33,141
|
)
|
Unused tax losses not recognized as deferred tax asset
|
|
|
360
|
|
|
|
100
|
|
|
|
|
|
Withholding income tax provision on dividend from PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
8,305
|
|
Others
|
|
|
309
|
|
|
|
35
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense (credit) for the year
|
|
|
|
|
|
|
(1,180
|
)
|
|
|
8,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
The applicable PRC statutory income tax rate is used since the
Groups taxable income is generated in the PRC. The
applicable PRC income tax rate of 25% was used in the above
computation for all reporting periods since taxable income in
calendar year 2007 was immaterial.
|
F-25
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reflects the movements in deferred tax
assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withholding tax
|
|
|
|
|
|
|
|
|
on undistributed
|
|
Accrued
|
|
|
|
|
|
|
earnings
|
|
expenses
|
|
Tax losses
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Balance at March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to profit or loss during the year
|
|
|
|
|
|
|
1,032
|
|
|
|
157
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
|
|
|
|
1,032
|
|
|
|
157
|
|
|
|
1,189
|
|
Credit (charge) to profit or loss during the year
|
|
|
(8,305
|
)
|
|
|
3,415
|
|
|
|
(157
|
)
|
|
|
(5,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
(8,305
|
)
|
|
|
4,447
|
|
|
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is the analysis of the deferred tax balances for
financial reporting purposes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Deferred tax assets
|
|
|
|
|
|
|
1,189
|
|
|
|
4,447
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
(8,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1,189
|
|
|
|
(3,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the New EIT Law and implementation rules, PRC withholding
income tax at the rate of 10% is applicable to dividends payable
from the profits generated after calendar year 2007 to investors
that are non-PRC tax resident enterprises, which do
not have an establishment or place of business in the PRC, or
which have such establishment or place of business but the
relevant income is not effectively connected with the
establishment or place of business, to the extent such interest
or dividends have their sources within the PRC, unless such
immediate holding companys jurisdiction of incorporation
has a tax treaty with China that provides for a more favorable
withholding arrangement. Therefore, dividends distributed from
the subsidiaries to the Company are subject to the withholding
tax of 10%, or a lower treaty rate, if applicable.
The Group declared and paid a dividend in March 2010 and has no
plan to declare dividends in the foreseeable future other than
the expected dividend payment as of March 31, 2010 (see
Note 25). There were undistributed earnings of the subsidiaries
of approximately nil, RMB27,018,000 and RMB125,296,000 at
March 31, 2008, 2009 and 2010, respectively. Other than
deferred tax liability associated with the expected dividend
payment of RMB8,305,000 being provided as at March 31,
2010, deferred tax liability has not been provided on the
remaining undistributed earnings as the Group is able to control
the timing of the reversal of the temporary differences and it
is probable that the temporary difference will not reverse in
the foreseeable future.
F-26
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Holders of the Groups Restricted Shares (see
Note 21) are entitled to participate in dividends on
an equal basis with holders of the Groups unrestricted
common shares. As such dividends are not subject to restriction
as to use, the Restricted Shares are considered participating
and basic loss per share has been computed using the two-class
method as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
Loss for the year (RMB000)
|
|
|
(10,600
|
)
|
|
|
(113,453
|
)
|
|
|
(229,802
|
)
|
Less: amount allocated to restricted shares (RMB000)
|
|
|
4,907
|
|
|
|
34,666
|
|
|
|
31,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year basic and diluted
|
|
|
(5,693
|
)
|
|
|
(78,787
|
)
|
|
|
(197,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
|
80,555,600
|
|
|
|
104,166,600
|
|
|
|
129,166,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
(0.07
|
)
|
|
|
(0.76
|
)
|
|
|
(1.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31, 2008, 2009 and 2010, the
computation of diluted loss per share did not include the
potential common shares arising from the companys share
option, warrants and convertible redeemable preferred shares, as
it would result in a decrease in loss per share.
Pro
forma earnings per share (unaudited):
Pro forma earnings per share for the year ended March 31,
2010 is computed as follows:
|
|
|
|
|
|
|
RMB000
|
|
Loss for the year basic and diluted
|
|
|
(197,885
|
)
|
Plus: loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
290,135
|
|
Plus: finance charge to preferred shareholders (Note 11)
|
|
|
5,417
|
|
Plus: loss on modification of convertible redeemable preferred
shares
|
|
|
44,439
|
|
|
|
|
|
|
Pro forma net income basic and diluted
|
|
|
142,106
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
129,166,600
|
|
Plus: Convertible redeemable preferred shares
|
|
|
50,000,000
|
|
Plus: Shares necessary to pay cash dividends
|
|
|
2,116,154
|
|
Pro forma weighted-average common shares outstanding
basic and diluted
|
|
|
181,282,754
|
|
|
|
|
|
|
Pro forma net income per share basic and diluted
|
|
|
0.78
|
|
In March 2010, the Company declared and paid dividends of
RMB16,250,000 (RMB0.11 per share) to its common
shareholders. The Company also approved a payment to its
preferred shareholders, who has participating rights, in the
amount of RMB 5,417,000, which has been recorded as a finance
cost in the consolidated statements of comprehensive income.
F-27
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
CASH AND
CASH EQUIVALENTS / TERM DEPOSITS
|
Cash and cash equivalents of the Group are mainly denominated in
RMB and US$. The cash balances carried an average interest rate
of 0.36%, 0.36%, 1.17%, 1.17% per annum as of March 31,
2008, 2009 and 2010, respectively.
Term deposits had an average stated interest rate of 3.30% and
2.25% per annum at March 31, 2009 and 2010, respectively.
In May 2009, the Group invested RMB15,000,000 in a
principal-protected deposit with a commercial bank in China
having a one-year term expiring in May 2010. The investment
guarantees a rate of return ranging from 2.25% to 6%, which
varies based on an exchange rate of US$ against Euro during the
contract period. This investment was designated as FVTPL upon
initial recognition as the contract contains foreign currency
embedded derivative and was stated at fair value at
March 31, 2010 (See Note 5).
Under the existing PRC law, loans between legal entities,
including both profit and
not-for-profit
entities, must be arranged through a PRC registered financial
institution. As such, in May 2009, the Group entered into a loan
agreement with a PRC bank under which the Group paid a principal
amount of RMB25,000,000 to the bank who then loaned the money to
the Traffic Bureau of the Province of Hei Long Jiang, a
government agency. The loan has a one-year term expiring in May
2010 with a stated rate of return equivalent to the current
market interest rate for current deposits. The loan principal
and rate of return were not guaranteed by the bank. The carrying
amount approximates the fair value of the financial asset due to
its short term nature and the variable interest rate. The
principal and the related interest were collected upon the
expiration of the term in May 2010.
|
|
15.
|
TRADE AND
OTHER RECEIVABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Trade receivables
|
|
|
5,011
|
|
|
|
46,149
|
|
|
|
71,774
|
|
Deposits and other receivables
|
|
|
522
|
|
|
|
845
|
|
|
|
1,101
|
|
Prepaid expenses
|
|
|
294
|
|
|
|
427
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,827
|
|
|
|
47,421
|
|
|
|
76,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group normally grants credit for a period of 90 days to
its mobile service providers. The trade receivable balances past
due but not impaired are nil, nil and RMB 2,282,000 as of
March 31, 2008, 2009 and 2010, respectively. The Group has
not recognized an allowance for doubtful receivables because
there has not been a significant change in credit quality and
the amounts are still considered recoverable. The Group does not
hold any collateral or other credit enhancements over these
balances. The Group has not had any write-off of trade
receivables during the period presented.
F-28
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
|
|
|
|
Office
|
|
Leasehold
|
|
Motor
|
|
|
|
|
equipment
|
|
Furniture
|
|
equipment
|
|
improvement
|
|
vehicles
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 1, 2007
|
|
|
67
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Additions
|
|
|
625
|
|
|
|
29
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
692
|
|
|
|
32
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
819
|
|
Additions
|
|
|
2,122
|
|
|
|
18
|
|
|
|
38
|
|
|
|
149
|
|
|
|
|
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
2,814
|
|
|
|
50
|
|
|
|
133
|
|
|
|
149
|
|
|
|
|
|
|
|
3,146
|
|
Additions
|
|
|
27,545
|
|
|
|
733
|
|
|
|
587
|
|
|
|
1,968
|
|
|
|
274
|
|
|
|
31,107
|
|
Disposals
|
|
|
(80
|
)
|
|
|
(18
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
30,279
|
|
|
|
765
|
|
|
|
683
|
|
|
|
2,117
|
|
|
|
274
|
|
|
|
34,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 1, 2007
|
|
|
(17
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
Charge for the year
|
|
|
(67
|
)
|
|
|
(4
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
(84
|
)
|
|
|
(4
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
Charge for the year
|
|
|
(538
|
)
|
|
|
(10
|
)
|
|
|
(37
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
(622
|
)
|
|
|
(14
|
)
|
|
|
(51
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
(699
|
)
|
Charge for the year
|
|
|
(2,097
|
)
|
|
|
(13
|
)
|
|
|
(62
|
)
|
|
|
(204
|
)
|
|
|
(76
|
)
|
|
|
(2,452
|
)
|
Eliminated on disposals
|
|
|
50
|
|
|
|
7
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
(2,669
|
)
|
|
|
(20
|
)
|
|
|
(91
|
)
|
|
|
(216
|
)
|
|
|
(76
|
)
|
|
|
(3,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
608
|
|
|
|
28
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
2,192
|
|
|
|
36
|
|
|
|
82
|
|
|
|
137
|
|
|
|
|
|
|
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
27,610
|
|
|
|
745
|
|
|
|
592
|
|
|
|
1,901
|
|
|
|
198
|
|
|
|
31,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
INVESTMENTS
IN ASSOCIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Cumulative cost of investments in associates
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
13,110
|
|
Cumulative share of results of associates
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
517
|
|
|
|
11,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Particulars of the Groups investments in associates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of
|
|
|
|
|
|
|
|
|
|
registered capital
|
|
|
|
|
|
|
Issued and
|
|
|
held by the Group
|
|
|
|
|
|
|
paid up capital
|
|
|
March 31,
|
|
|
Principal
|
|
Name of associates
|
|
RMB
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
activities
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
Zhang Xing Wu Xian
|
|
|
500,000
|
|
|
|
Nil
|
|
|
|
37
|
%
|
|
|
37
|
%
|
|
|
Mobile application
|
|
Technologies (Beijing) Co. Ltd (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and content provider
|
|
Hangzhou Sibi
|
|
|
300,000
|
|
|
|
Nil
|
|
|
|
33.3
|
%
|
|
|
33.3
|
%
|
|
|
Mobile application
|
|
Technologies Co. Ltd (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and content provider
|
|
Hangzhou Guanzhun
|
|
|
15,000,000
|
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
45
|
%
|
|
|
Development of mobile
|
|
Technologies Co. Ltd (Guanzhun) (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
application software
|
|
(a) In March 2009, the Group acquired 37% of the equity
interest in Zhang Xing Wu Xian Technologies (Beijing) Co. Ltd
for cash consideration of RMB500,000.
(b) In February 2009, Mijia, together with another two
individuals independent from the entities within the Group,
established Hangzhou Sibi Technologies Co., Ltd
(Sibi). Mijia invested RMB100,000 and obtained a
33.3% equity interest in Sibi.
(c) In September 2009, Sky, together with the holder of the
convertible redeemable preferred shares and a group of
individuals independent from the entities within the Group,
established Guanzhun. Sky contributed RMB 12,510,000 and
obtained a 45% equity interest in Guanzhun.
A summary of financial information in respect of the
Groups associates is set out below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
687
|
|
|
|
14,058
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
1,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
|
|
|
|
|
|
|
|
366
|
|
|
|
12,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Groups share of net assets of associates
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
5,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
191
|
|
|
|
1,587
|
|
Loss for the year
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
3,375
|
|
Groups share of loss of associates
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
1,255
|
|
F-30
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
TRADE AND
OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Trade payable
|
|
|
2,014
|
|
|
|
16,046
|
|
|
|
29,832
|
|
Accrued payroll and employee welfare
|
|
|
320
|
|
|
|
3,719
|
|
|
|
13,011
|
|
Other taxes payable
|
|
|
388
|
|
|
|
1,451
|
|
|
|
7,997
|
|
Payable for acquisition of property and equipment
|
|
|
|
|
|
|
|
|
|
|
15,083
|
|
Accrued commission
|
|
|
|
|
|
|
8,255
|
|
|
|
35,576
|
|
Accrued expenses and other payables
|
|
|
202
|
|
|
|
998
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,924
|
|
|
|
30,469
|
|
|
|
103,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
CONVERTIBLE
REDEEMABLE PREFERRED SHARES AND WARRANTS
|
Series A
Convertible Redeemable Preferred Shares
In August 2007, the Company issued 50,000,000 Series A
Convertible Redeemable Preferred Shares (Series A
Shares), with a par value of US$0.00005 per share, at an
initial price of US$0.07 per share for gross proceeds of
approximately RMB 26,516,000 (US$3,500,000). The Company paid
RMB1,329,000 in issuance costs that have been recorded as
finance cost.
Purchase
price adjustment:
The arrangement provided that the total purchase price would
increase to US$5 million if the Groups audited
revenues for the year ended June 30, 2008 reach RMB
70 million (the Triggering Event). The
Triggering Event was not met.
Dividends:
Subject to the provisions of Cayman Law, no cash dividends shall
be declared or paid on the common shares, unless and until a
dividend-in-like
amount is declared or paid on each outstanding Series A
Share on an as-if-converted basis.
Each Series A shareholder shall be entitled to receive,
annually and when, as and if declared by the board,
preferential, non-cumulative dividends at the rate equal to the
greater of (1) 8% of its total investment amount and
(2) the dividend that would be paid on an as-converted
basis. All accrued but unpaid dividends shall be paid in cash
upon the closing of a qualified initial public offering
resulting in gross proceeds to the Company of at least
US$ 50 million (prior to any underwriters
commissions and expenses) that reflects a market valuation of
the Company of not less than US$200 million
(Qualified IPO).
Conversion:
Each Series A Share is convertible at the option of the
holder into common shares on a
one-for-one
basis at any time. The conversion ratios of the Series A
Shares are subject to anti-dilution adjustments in the event of
issuances by the Company of additional securities at a price per
share lower than the respective issuance price of the
Series A Shares.
The Series A Shares will automatically convert into common
shares upon (i) a Qualified IPO; or (ii) the vote of
at least 75% of the then-outstanding Series A Shares.
F-31
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Voting:
The Series A shareholders are entitled to vote on an
as-converted basis.
Liquidation:
The holders of Series A Shares have preference over holders
of common shares with respect to distributions in the event of
any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary.
Before any distribution shall be made to the common
shareholders, each Series A shareholder shall be entitled
to receive a pro rata amount equal to 150% of the total actual
Series A purchase price per share then held (adjusted for
share splits, share dividends, recapitalizations, and similar
transactions), plus all dividends accrued and unpaid thereon, as
adjusted. If upon any such liquidation, distribution, or winding
up, the assets of the Company shall be insufficient to permit
payment to the Series A shareholders the full amount to
which they shall be entitled, such assets shall be distributed
solely among the Series A shareholders ratably in
proportion to the full amounts to which they would otherwise be
entitled.
After paying in full the amounts due to the Series A
shareholders, the remaining assets available for distribution to
the common shareholders shall be distributed pro rata among the
Series A shareholders and the common shareholders on an
as-converted basis.
Redemption:
Beginning on or after August 2, 2011, the Series A
shareholders may require, upon written notice, that the Company
redeem in cash all or a portion of the then-outstanding
Series A Shares at a price that is equal to the greater of
(i) the actual Series A purchase price, plus all
accrued and unpaid dividends, and (ii) the fair market
value of the Series A Shares (the
Redemption Price).
ESOP
anti-dilutive clause:
With respect to any share options granted under the Groups
ESOP plan within one year after the closing of Series A
financing, the Company is required to repurchase 25% of the
common shares issued from the stock option plan at the market
price and issue an equivalent number of Series A Shares to
the Series A shareholders at the same price that the
Company paid to repurchase the shares
On March 1, 2010, the Company and the Series A Shares
entered into an amendment agreement (the Amendment),
whereby (i) the Company shall sell 5,000,000 common shares
to the Series A shareholders at par value of US$0.00005 per
share for total cash consideration of US$250 and (ii) the
Series A shareholders shall waive their right to the share
option anti-dilution clause. The Group recorded the intrinsic
value of the 5,000,000 shares of RMB 44,439,000
(US$6,519,000), equal to the fair value of the common shares on
March 1, 2010 less the exercise price of $250, as a loss on
modification of convertible redeemable preferred shares in the
consolidated statements of comprehensive income with a
corresponding increase in share-settled reserves.
Warrants
In conjunction with the issuance of Series A Shares, the
Company also issued warrants to purchase up to
(i) 7,142,800 Series A Shares at an exercise price of
US$0.07 per share if the Triggering Event does not occur, or
(ii) 5,000,000 Series A Shares at an exercise price of
US$0.1 per share if the Triggering Event occurs. The warrants
may be exercised at any time within 24 months after the
closing date. If the warrants are exercised before the
occurrence of the Triggering Event, (i) the holders of the
warrants shall be entitled to purchase up to a total of
5,000,000 Series A Shares at an exercise price of US$0.1
per share, and (ii) if the Triggering Event does not occur,
the exercise price shall be adjusted to US$0.07 per share, and
the Company shall issue an additional 2,142,800 Series A
Shares at no additional cost.
F-32
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2009, the terms of the warrants were modified to extend
the exercise period to the date of a Qualified IPO and to reduce
the number of outstanding warrants to 3,389,800 at an exercise
price of US$0.15 per share.
The Company has designated the Series A Shares as financial
liabilities carried at FVTPL. (see note 5). The change in
fair value of the Series A Shares and warrants is charged
to profit or loss. The movement of the Preferred Shares and
warrants is set out below:
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
Shares
|
|
Warrants
|
|
|
RMB000
|
|
RMB000
|
|
At April 1, 2007
|
|
|
|
|
|
|
|
|
Issues
|
|
|
25,401
|
|
|
|
1,115
|
|
Change of fair value included in profit or loss
|
|
|
4,156
|
|
|
|
239
|
|
Exchange gain
|
|
|
(1,867
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
27,690
|
|
|
|
1,278
|
|
Change of fair value included in profit or loss
|
|
|
134,616
|
|
|
|
18,423
|
|
Exchange gain
|
|
|
(722
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
161,584
|
|
|
|
19,668
|
|
Change of fair value included in profit or loss
|
|
|
290,135
|
|
|
|
7,548
|
|
Exchange gain
|
|
|
(228
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
451,491
|
|
|
|
27,188
|
|
|
|
|
|
|
|
|
|
|
The fair value attributable to the change in its credit risk is
considered immaterial. There is no difference between the
carrying amount and the amount payable at its redemption.
F-33
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
|
Legal
|
|
|
|
|
number of
|
|
|
|
Number of
|
|
|
|
|
|
|
shares
|
|
|
|
shares
|
|
Amount
|
|
Amount
|
|
|
|
|
|
|
|
|
US$
|
|
RMB000
|
|
Common shares of US$0.01 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated and classified on July 20, 2007 and at
March 31, 2008, 2009 and 2010
|
|
|
937,857,200
|
|
|
|
(i
|
)
|
|
|
4,689,286
|
|
|
|
46,893
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At earliest financial statement period presented (April 1,
2007)
|
|
|
75,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At date of incorporation (April 20, 2007) of US$1
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
7
|
|
Increase by subdivision of 1 share of US$1 each into
100 shares of US$0.01 each
|
|
|
|
|
|
|
(i
|
)
|
|
|
99
|
|
|
|
|
|
|
|
|
|
Issuance on August 2, 2007
|
|
|
|
|
|
|
(ii
|
)
|
|
|
749,900
|
|
|
|
7,499
|
|
|
|
50
|
|
Restricted share vested
|
|
|
16,666,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
91,666,600
|
|
|
|
|
|
|
|
750,000
|
|
|
|
7,500
|
|
|
|
57
|
|
Restricted share vested
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
116,666,600
|
|
|
|
|
|
|
|
750,000
|
|
|
|
7,500
|
|
|
|
57
|
|
Restricted share vested
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
141,666,600
|
|
|
|
|
|
|
|
750,000
|
|
|
|
7,500
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares of US$0.01 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated and classified on July 20, 2007 and at
March 31, 2008, 2009 and 2010
|
|
|
62,142,800
|
|
|
|
(i
|
)
|
|
|
310,714
|
|
|
|
3,107
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance on August 2, 2007
|
|
|
50,000,000
|
|
|
|
(ii
|
)
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, 2009 and 2010
|
|
|
50,000,000
|
|
|
|
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
Sky-mobi Limited was incorporated on April 20, 2007. The
authorized share capital of Sky-mobi is approximately RMB
360,000 (US$50,000) divided into 50,000 shares (par value
of US$1 per share). On July 20, 2007, the issued and
unissued share of US$1 each in the capital of Sky-mobi is
sub-divided
into 100 shares of par value of US$0.01, and designate the
shares into 310,714 series A preferred shares and
4,689,286 common shares.
|
|
(ii)
|
|
On August 2, 2007, the Company issued 749,900 common
shares at par value of US$0.01 each to the existing common
shareholders at a total consideration of RMB57,000 (US$7,499).
On the same date, the Company issued 250,000 preferred
shares at par value of US$0.01.
|
F-34
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employee
Share Option Plan (the Plan)
On March 1, 2010, the Company approved an ownership-based
compensation scheme for executives and senior employees under
which the Company could grant up to 15,000,000 options to
purchase its shares. In accordance with the terms of the Plan,
executives and senior employees may be granted options to
purchase common shares at an exercise price approved by the
shareholders that should be no less than US$0.07 per common
share of the Company. The option holders are not entitled to
dividends nor do they have voting rights. The number of options
granted is calculated and approved by shareholders. Options have
a life of 10 years from the date of grant.
During the years ended March 31, 2008 and 2009, the Company
did not grant any share options under the Plan.
On March 1, 2010, the Company granted an aggregate of
6,385,400 share options under the Plan to executive
officers and other employees. These options have an exercise
price of RMB 1.775 (US$0.26) and vest ratably over the
four-years following the grant date.
The fair value of the common shares underlying the options was
determined as described in Note 5.
The Group used the Black-Scholes option pricing model to
estimate the fair value of the stock options on the date of
grant using the following assumptions:
|
|
|
Risk-free interest rate
|
|
1.34%-2.69%
|
Expected volatility
|
|
62%-67%
|
Dividend yield
|
|
0%
|
Expected life
|
|
3-6 years
|
The risk-free interest rate was based on the US treasury bond
yield curve as of the valuation date for a period commensurate
with the expected life. The expected volatility was estimated
based on the historical daily share price volatility of
comparable companies over a historical period commensurate with
the expected life of the options. The Group does not expect to
declare dividends in the future, except for the expected
dividend payment as of March 31, 2010 (see note 25). The
expected life is estimated based on the Groups estimates
of the exercise period.
A summary of the option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
average
|
|
|
Number
|
|
average
|
|
remaining
|
|
|
of options
|
|
exercise prices
|
|
contractual Life
|
|
|
|
|
RMB
|
|
|
|
Outstanding on April 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted on March 1, 2010
|
|
|
6,385,400
|
|
|
|
1.775
|
|
|
|
9.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on March 31, 2010
|
|
|
6,385,400
|
|
|
|
1.775
|
|
|
|
9.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total grant date fair value of options was approximately RMB
47,581,000. During the year ended March 31, 2010,
RMB1,702,000 was recognized as compensation expense. None of
this outstanding share options are exercisable as of
March 31, 2010.
Restricted
shares
On August 2, 2007, concurrent with the issuance of the
Series A Shares, certain founders of the Company, who are
also employees of the Group, entered into an arrangement whereby
75,000,000 of their 150,000,000 common shares became subject to
repurchase (Restricted Shares). The Restricted
Shares may be repurchased by the Company in the event of the
voluntary or involuntary termination of the employment at a
purchase price equal to the par value of the Restricted Shares.
The repurchase right terminates in 36 equal monthly
installments. The founders
F-35
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
retain the voting and dividend rights of, but are restricted to
sell, such non-vested restricted shares. This arrangement has
been accounted for as a reverse stock split followed by the
grant of a restricted stock award under a performance-based plan
as the founders are employees of the Group. Accordingly, the
Group measured the fair value of the Restricted Shares as of
August 2, 2007, or RMB0.22 (US$0.03) per share, and is
recognizing the total amount of approximately RMB16,420,000 as
compensation expense over the three year deemed service, or
vesting, period. During the years ended March 31, 2008,
2009 and 2010, the Group recognized RMB8,964,000, RMB5,421,000
and RMB1,904,000 as compensation expense, respectively.
|
|
22.
|
RELATED
PARTY TRANSACTIONS
|
(a) Related party balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Amounts due from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due from an associate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing) Co.,
Ltd
|
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
153
|
|
Amount due from shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SONG Tao
|
|
|
|
|
|
|
50
|
|
|
|
2,941
|
|
|
|
300
|
|
Preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,250
|
|
Amount due from company controlled by close family member of
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenzhen Feidong Technologies Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
5,067
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
8,132
|
|
|
|
2,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts due from related parties represent payments to fund
operations, except for the amount receivable from preferred
shareholders, which represents a capital injection made by Fanyi
on behalf of the preferred shareholders for their 15% equity
interest in Guanzhun. The balances are unsecured, non-interest
bearing and repayable on demand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Amounts due to related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to associates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing)
Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
Hangzhou Sibi Technologies Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
420
|
|
Non-trade balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shareholders (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
6,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts due to associates are trading in nature. The related
party balances are unsecured, non-interest bearing and repayable
on demand.
F-36
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(b) Related party transactions
During the years ended March 31, 2008, 2009 and 2010,
significant related party transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Cost of revenues (for content)
|
|
|
|
|
|
|
|
|
|
|
|
|
Associates
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing) Co., Ltd
|
|
|
|
|
|
|
21
|
|
|
|
468
|
|
Hangzhou Sibi Technologies Co., Ltd
|
|
|
|
|
|
|
108
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Key management compensation
The compensation of directors and other key management during
the years was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Salary and other benefits
|
|
|
60
|
|
|
|
862
|
|
|
|
1,608
|
|
Retirement benefit contribution
|
|
|
|
|
|
|
15
|
|
|
|
89
|
|
Share-based payments
|
|
|
8,964
|
|
|
|
5,421
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,024
|
|
|
|
6,298
|
|
|
|
5,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group has operating lease agreements principally for its
office properties in the PRC with lease terms of between one to
two years. These leases are renewable upon negotiation.
The Groups commitments for future minimum lease payments
under non-cancelable operating lease agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Within one year
|
|
|
604
|
|
|
|
1,261
|
|
|
|
7,278
|
|
In the second to fifth years, inclusive
|
|
|
472
|
|
|
|
137
|
|
|
|
6,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,076
|
|
|
|
1,398
|
|
|
|
13,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the relevant laws and regulations in the PRC
applicable to foreign-investment corporations, the Groups
PRC subsidiaries are required to maintain a statutory reserve
which is non-distributable. They are required to transfer 10% of
their profit after taxation, as determined on a calendar year
basis and in accordance with PRC GAAP, if any, to the statutory
reserve until the balance reaches 50% of their registered
capital. The amount of this statutory reserve is the same under
both PRC GAAP and IFRS and is reflected as statutory reserve in
the consolidated statements of changes in equity. These reserves
are not distributable as cash dividends. The difference between
the net profit, as determined under PRC GAAP, and the amount
allocated to statutory reserve, for each of PRC subsidiaries
represents amounts that are free of restriction. Such amounts
differ from subsidiary equity less statutory reserve as
determined IFRS due to accounting differences between PRC GAAP
and IFRS.
F-37
SKY-MOBI
LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At their discretion, the PRC subsidiaries may allocate a portion
of their after-tax profits based on PRC accounting standards to
staff welfare and bonus funds. PRC regulations currently permit
payment of dividends only out of the Groups PRC
subsidiaries accumulated profits as determined in
accordance with PRC accounting standards and regulations. The
statutory reserve amounted to nil, nil and RMB500,000 as of
March 31, 2008, 2009 and 2010, respectively. During the
fiscal year ended March 31, 2010, one of the Companys
PRC subsidiaries, Hangzhou Sky, set aside RMB500,000 to the
statutory reserve, reflecting 10% of its earnings for calendar
year 2009, with a cap of RMB500,000 representing 50% of its
registered capital of RMB1,000,000. The Companys two other
PRC subsidiaries, Mijia and Fanyi, had not generated profit
under PRC GAAP as of December 31, 2009. The Groups
PRC subsidiaries have not allocated any of its after-tax profits
to the staff welfare and bonus funds for any period presented.
In addition, the registered capital of the Companys PRC
subsidiaries of RMB34,754,000 as of March 31, 2010 was
considered restricted due to restrictions on the distribution of
registered share capital.
As a result of these PRC laws and regulations, the
Companys PRC subsidiaries are restricted in their ability
to transfer a portion of their net assets, either in the form of
dividends, loans or advances. Such restricted portion amounted
to RMB16,600,000, RMB70,458 and RMB159,276,000 as of
March 31, 2008, 2009 and 2010, respectively.
|
|
25.
|
EVENTS
AFTER THE REPORTING PERIOD
|
(i) On April 1, 2010, Xplane Ltd. awarded
2,467 restricted shares to the employees of the Group. On
the same day, the Group also granted 1,443,600 share
options to its employees. The total estimated compensation cost
is approximately RMB 73 million.
(ii) In May 2010, the Group declared and paid dividends of
RMB13,000,000 to its common shareholders.
The Company also approved a payment to its preferred
shareholders, who have participating rights, in the amount of
approximately RMB4,333,000.
(iii) In May 2010, the Group and another independent
venture established Shenzhen Heisha Technologies Co., Ltd
(Heisha). The Group invested RMB2.9 million and
obtained a 65% equity interest in Heisha. Heisha cooperates with
overseas parties to provide mobile payment processing agent
services in overseas markets, such as India, Thailand and the
Philippines.
(iv) In November 2010, the Company approved a 200-for-1
share split on both its common and preferred shares. Subsequent
to the split, the Company had authorized 937,857,200 common
shares with a par value of US$0.00005 per share and
62,142,800 Series A Shares with a par value of
US$0.00005 per share. All share and per share data has been
retroactively restated to reflect this split.
|
|
26.
|
APPROVAL
OF FINANCIAL STATEMENTS
|
The financial statements were approved by the board of directors
and authorized for issue on November 18, 2010.
* * * * *
F-38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
|
NOTES
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,250
|
|
|
|
2,429
|
|
Finance costs
|
|
|
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
(810
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
|
|
|
|
(4,156
|
)
|
|
|
(134,616
|
)
|
|
|
(290,135
|
)
|
|
|
(43,365
|
)
|
Loss on changes in fair value of warrants
|
|
|
|
|
|
|
(239
|
)
|
|
|
(18,423
|
)
|
|
|
(7,548
|
)
|
|
|
(1,128
|
)
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,439
|
)
|
|
|
(6,642
|
)
|
Exchange gain
|
|
|
|
|
|
|
1,784
|
|
|
|
694
|
|
|
|
251
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
(152,345
|
)
|
|
|
(331,038
|
)
|
|
|
(49,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss for the year
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
(152,345
|
)
|
|
|
(331,038
|
)
|
|
|
(49,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
ADDITIONAL
INFORMATION FINANCIAL STATEMENT SCHEDULE I
SKY-MOBI
LIMITED
FINANCIAL
INFORMATION OF PARENT COMPANY
STATEMENTS
OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,278
|
|
|
|
2,219
|
|
|
|
2,215
|
|
|
|
331
|
|
Other receivables
|
|
|
53
|
|
|
|
51
|
|
|
|
50
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,331
|
|
|
|
2,270
|
|
|
|
2,265
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in a subsidiary
|
|
|
31,718
|
|
|
|
37,139
|
|
|
|
40,745
|
|
|
|
6,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
34,049
|
|
|
|
39,409
|
|
|
|
43,010
|
|
|
|
6,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payable
|
|
|
|
|
|
|
|
|
|
|
5,417
|
|
|
|
810
|
|
Warrants
|
|
|
1,278
|
|
|
|
19,668
|
|
|
|
27,188
|
|
|
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,278
|
|
|
|
19,668
|
|
|
|
32,605
|
|
|
|
4,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred shares (liquidation value:
RMB23,892,000 (US$3,500,000) as of March 31, 2010)
|
|
|
27,690
|
|
|
|
161,584
|
|
|
|
451,491
|
|
|
|
67,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,968
|
|
|
|
181,252
|
|
|
|
484,096
|
|
|
|
72,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered/Share capital (US$0.00005 par value,
937,857,200 Shares authorized; 150,000,000 shares
issued and outstanding as of March 31, 2008, 2009 and 2010)
|
|
|
57
|
|
|
|
57
|
|
|
|
57
|
|
|
|
8
|
|
Reserves
|
|
|
8,964
|
|
|
|
14,385
|
|
|
|
62,430
|
|
|
|
9,331
|
|
Retained deficit
|
|
|
(3,940
|
)
|
|
|
(156,285
|
)
|
|
|
(503,573
|
)
|
|
|
(75,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
5,081
|
|
|
|
(141,843
|
)
|
|
|
(441,086
|
)
|
|
|
(65,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity and liabilities
|
|
|
34,049
|
|
|
|
39,409
|
|
|
|
43,010
|
|
|
|
6,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
ADDITIONAL
INFORMATION FINANCIAL STATEMENT SCHEDULE I
SKY-MOBI
LIMITED
FINANCIAL
INFORMATION OF PARENT COMPANY
STATEMENTS
OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
Reserves
|
|
Retained deficit
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Balance at April 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
(3,940
|
)
|
Shareholder contribution
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Share-based compensation
|
|
|
|
|
|
|
8,964
|
|
|
|
|
|
|
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
57
|
|
|
|
8,964
|
|
|
|
(3,940
|
)
|
|
|
5,081
|
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
(152,345
|
)
|
|
|
(152,345
|
)
|
Share-based compensation
|
|
|
|
|
|
|
5,421
|
|
|
|
|
|
|
|
5,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
57
|
|
|
|
14,385
|
|
|
|
(156,285
|
)
|
|
|
(141,843
|
)
|
Loss and total comprehensive loss for the year
|
|
|
|
|
|
|
|
|
|
|
(331,038
|
)
|
|
|
(331,038
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
(16,250
|
)
|
|
|
(16,250
|
)
|
Modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
44,439
|
|
|
|
|
|
|
|
44,439
|
|
Share-based compensation
|
|
|
|
|
|
|
3,606
|
|
|
|
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
57
|
|
|
|
62,430
|
|
|
|
(503,573
|
)
|
|
|
(441,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
SKY-MOBI
LIMITED
FINANCIAL
INFORMATION OF PARENT COMPANY
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the year
|
|
|
3,940
|
|
|
|
152,345
|
|
|
|
331,038
|
|
|
|
49,479
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign exchange loss
|
|
|
1,784
|
|
|
|
694
|
|
|
|
251
|
|
|
|
37
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
16,250
|
|
|
|
2,429
|
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
(4,156
|
)
|
|
|
(134,616
|
)
|
|
|
(290,135
|
)
|
|
|
(43,365
|
)
|
Loss on changes in fair value of warrants
|
|
|
(239
|
)
|
|
|
(18,423
|
)
|
|
|
(7,548
|
)
|
|
|
(1,128
|
)
|
Loss on modification of convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
(44,439
|
)
|
|
|
(6,642
|
)
|
Finance costs
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
(810
|
)
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other receivables
|
|
|
(53
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(53
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution to a subsidiary
|
|
|
(22,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder contribution
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issue of convertible redeemable preferred
shares and warrants
|
|
|
26,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost for issuance of convertible redeemable preferred shares and
warrants
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
25,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,437
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
2,278
|
|
|
|
2,219
|
|
|
|
332
|
|
Effect of foreign exchange rate changes
|
|
|
(159
|
)
|
|
|
(61
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
2,278
|
|
|
|
2,219
|
|
|
|
2,215
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of non-cash transaction:
During the year ended March 31, 2010, the Companys
subsidiary made a dividend payment of RMB16,250,000 to the
Companys common shareholders on the Companys behalf.
The payment was recorded as reduction of dividends receivable
from the subsidiary.
F-42
NOTES TO
FINANCIAL STATEMENT SCHEDULE I OF SKY-MOBI
LIMITED
1. Schedule 1 has been provided pursuant to the
requirements of
Rules 12-04(a)
and 4-08(e)(3) of SEC
Regulation S-X,
which require condensed financial information as to financial
position, changes in financial position and results of
operations of a parent company as of the same dates and for the
same periods for which audited consolidated financial statements
have been presented when the restricted net assets of
consolidated and unconsolidated subsidiaries together exceed
25 percent of consolidated net assets as of the end of the
most recently completed fiscal year.
Basis
of Presentation
For the purposes of the presentation of the parent company only
financial information, the Company records its investment in
subsidiaries under the cost method of accounting. Such
investment is presented on the statements of financial position
as Investment in a subsidiary at cost less any
identified impairment loss.
The condensed financial information of the parent company have
been presented as if the Reorganization occurred on
April 1, 2007.
2. As of March 31, 2008 and 2009 and 2010, there were
no material contingencies, significant provisions of long-term
obligations, mandatory dividend or redemption requirements of
redeemable stocks or guarantees of the Company, except for those
which have been separately disclosed in the Consolidated
Financial Statements, if any.
3. For years ended March 31, 2008, 2009 and 2010, cash
dividends of Nil, Nil and RMB16,250,000 were declared to the
Company by its consolidated subsidiaries or associates,
respectively.
F-43
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
NOTES
|
|
2009
|
|
2010
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
Revenues
|
|
3
|
|
|
240,139
|
|
|
|
336,681
|
|
|
|
50,322
|
|
Cost of revenues
|
|
|
|
|
(150,242
|
)
|
|
|
(236,221
|
)
|
|
|
(35,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
89,897
|
|
|
|
100,460
|
|
|
|
15,015
|
|
Research and development expenses
|
|
|
|
|
(11,103
|
)
|
|
|
(24,831
|
)
|
|
|
(3,711
|
)
|
Sales and marketing expenses
|
|
|
|
|
(7,433
|
)
|
|
|
(19,677
|
)
|
|
|
(2,941
|
)
|
General and administration expenses
|
|
|
|
|
(6,110
|
)
|
|
|
(43,142
|
)
|
|
|
(6,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit from operations
|
|
|
|
|
65,251
|
|
|
|
12,810
|
|
|
|
1,915
|
|
Other gains
|
|
4
|
|
|
804
|
|
|
|
10,180
|
|
|
|
1,522
|
|
Finance costs
|
|
8
|
|
|
|
|
|
|
(4,333
|
)
|
|
|
(648
|
)
|
Share of results of associates
|
|
13
|
|
|
|
|
|
|
(2,735
|
)
|
|
|
(409
|
)
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
15
|
|
|
(160,913
|
)
|
|
|
(59,620
|
)
|
|
|
(8,911
|
)
|
Gain (loss) on changes in fair value of warrants
|
|
15
|
|
|
1,176
|
|
|
|
(4,051
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
5
|
|
|
(93,682
|
)
|
|
|
(47,749
|
)
|
|
|
(7,136
|
)
|
Income tax benefit (expense)
|
|
6
|
|
|
1,722
|
|
|
|
(5,817
|
)
|
|
|
(869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
|
|
|
(91,960
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive profit and loss for the period
|
|
|
|
|
(91,960
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and total comprehensive loss attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners of the Company
|
|
|
|
|
(91,960
|
)
|
|
|
(53,191
|
)
|
|
|
(7,950
|
)
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91.960
|
)
|
|
|
(53,566
|
)
|
|
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
7
|
|
|
(0.61
|
)
|
|
|
(0.35
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
7
|
|
|
(0.61
|
)
|
|
|
(0.35
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
7
|
|
|
|
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
7
|
|
|
|
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
NOTES
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
(pro forma
|
|
(pro forma
|
|
|
|
|
|
|
|
|
|
|
Note 2)
|
|
Note 2)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
75,105
|
|
|
|
158,123
|
|
|
|
23,634
|
|
|
|
158,123
|
|
|
|
23,634
|
|
Term deposits
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
7,473
|
|
|
|
50,000
|
|
|
|
7,473
|
|
Investment at fair value through profit or loss
|
|
9
|
|
|
15,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivable
|
|
10
|
|
|
25,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
11
|
|
|
76,110
|
|
|
|
74,115
|
|
|
|
11,077
|
|
|
|
74,115
|
|
|
|
11,077
|
|
Amounts due from related parties
|
|
18
|
|
|
2,784
|
|
|
|
2,668
|
|
|
|
399
|
|
|
|
2,668
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
245,226
|
|
|
|
284,906
|
|
|
|
42,583
|
|
|
|
284,906
|
|
|
|
42,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
12
|
|
|
31,046
|
|
|
|
50,412
|
|
|
|
7,535
|
|
|
|
50,412
|
|
|
|
7,535
|
|
Investments in associates
|
|
13
|
|
|
11,772
|
|
|
|
9,037
|
|
|
|
1,351
|
|
|
|
9,037
|
|
|
|
1,351
|
|
Deferred tax assets
|
|
6
|
|
|
4,447
|
|
|
|
4,351
|
|
|
|
650
|
|
|
|
4,351
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
|
|
47,265
|
|
|
|
63,800
|
|
|
|
9,536
|
|
|
|
63,800
|
|
|
|
9,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
292,491
|
|
|
|
348,706
|
|
|
|
52,119
|
|
|
|
348,706
|
|
|
|
52,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
14
|
|
|
103,564
|
|
|
|
132,504
|
|
|
|
19,804
|
|
|
|
132,504
|
|
|
|
19,804
|
|
Income tax liabilities
|
|
|
|
|
3,318
|
|
|
|
8,929
|
|
|
|
1,335
|
|
|
|
8,929
|
|
|
|
1,335
|
|
Amounts due to related parties
|
|
18
|
|
|
6,137
|
|
|
|
10,764
|
|
|
|
1,609
|
|
|
|
10,764
|
|
|
|
1,609
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
4,857
|
|
|
|
726
|
|
|
|
4,857
|
|
|
|
726
|
|
Warrants
|
|
15
|
|
|
27,188
|
|
|
|
30,681
|
|
|
|
4,585
|
|
|
|
30,681
|
|
|
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
140,207
|
|
|
|
187,735
|
|
|
|
28,059
|
|
|
|
187,735
|
|
|
|
28,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible redeemable preferred shares (liquidation value:
RMB23,417,000 (US$3,500,000) as of September 30, 2010)
|
|
15
|
|
|
451,491
|
|
|
|
501,903
|
|
|
|
75,017
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
6
|
|
|
8,305
|
|
|
|
8,305
|
|
|
|
1,242
|
|
|
|
8,305
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
|
|
459,796
|
|
|
|
510,208
|
|
|
|
76,259
|
|
|
|
8,305
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
600,003
|
|
|
|
697,943
|
|
|
|
104,318
|
|
|
|
196,040
|
|
|
|
29,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital (US$0.00005 par value,
937,857,200 shares authorized; 150,000,000 shares and
155,000,000 shares issued and outstanding as of
March 31, 2010 and September 30, 2010, respectively;
205,000,000 shares issued and outstanding as of
September 30, 2010 on a pro forma basis)
|
|
16
|
|
|
57
|
|
|
|
59
|
|
|
|
9
|
|
|
|
76
|
|
|
|
11
|
|
Share premium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,886
|
|
|
|
75,015
|
|
Reserves
|
|
|
|
|
63,148
|
|
|
|
86,937
|
|
|
|
12,994
|
|
|
|
86,937
|
|
|
|
12,994
|
|
Retained deficit
|
|
|
|
|
(370,717
|
)
|
|
|
(436,908
|
)
|
|
|
(65,303
|
)
|
|
|
(436,908
|
)
|
|
|
(65,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deficit) Equity attributable to owners of the Company
|
|
|
|
|
(307,512
|
)
|
|
|
(349,912
|
)
|
|
|
(52,300
|
)
|
|
|
151,991
|
|
|
|
22,717
|
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
675
|
|
|
|
101
|
|
|
|
675
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity (deficit)
|
|
|
|
|
(307,512
|
)
|
|
|
(349,237
|
)
|
|
|
(52,199
|
)
|
|
|
152,666
|
|
|
|
22,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity and liabilities
|
|
|
|
|
292,491
|
|
|
|
348,706
|
|
|
|
52,119
|
|
|
|
348,706
|
|
|
|
52,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to
|
|
|
|
|
|
|
Share
|
|
|
|
Statutory
|
|
Retained
|
|
owners of
|
|
Non-controlling
|
|
|
|
|
capital
|
|
Reserves
|
|
reserve
|
|
deficit
|
|
the Company
|
|
interests
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Balance at April 1, 2009
|
|
|
57
|
|
|
|
14,603
|
|
|
|
|
|
|
|
(124,165
|
)
|
|
|
(109,505
|
)
|
|
|
|
|
|
|
(109,505
|
)
|
Loss and total comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,960
|
)
|
|
|
(91,960
|
)
|
|
|
|
|
|
|
(91,960
|
)
|
Share-based compensation
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
57
|
|
|
|
15,875
|
|
|
|
|
|
|
|
(216,125
|
)
|
|
|
(200,193
|
)
|
|
|
|
|
|
|
(200,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2010
|
|
|
57
|
|
|
|
62,648
|
|
|
|
500
|
|
|
|
(370,717
|
)
|
|
|
(307,512
|
)
|
|
|
|
|
|
|
(307,512
|
)
|
Capital injection from non-controlling shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050
|
|
|
|
1,050
|
|
Issuance of shares
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Loss and total comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,191
|
)
|
|
|
(53,191
|
)
|
|
|
(375
|
)
|
|
|
(53,566
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,000
|
)
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
Share-based compensation
|
|
|
|
|
|
|
23,789
|
|
|
|
|
|
|
|
|
|
|
|
23,789
|
|
|
|
|
|
|
|
23,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
59
|
|
|
|
86,437
|
|
|
|
500
|
|
|
|
(436,908
|
)
|
|
|
(349,912
|
)
|
|
|
675
|
|
|
|
(349,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
2009
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
(Note 2)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(93,682
|
)
|
|
|
(47,749
|
)
|
|
|
(7,136
|
)
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of results of associates
|
|
|
|
|
|
|
2,735
|
|
|
|
409
|
|
Net foreign exchange loss
|
|
|
(387
|
)
|
|
|
(9,487
|
)
|
|
|
(1,418
|
)
|
Interest income
|
|
|
(120
|
)
|
|
|
(1,120
|
)
|
|
|
(167
|
)
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
15
|
|
|
|
2
|
|
Depreciation and amortization
|
|
|
650
|
|
|
|
6,193
|
|
|
|
925
|
|
Loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
160,913
|
|
|
|
59,620
|
|
|
|
8,911
|
|
(Gain) loss on changes in fair value of warrants
|
|
|
(1,176
|
)
|
|
|
4,051
|
|
|
|
605
|
|
Change in fair value of investment at FVTPL
|
|
|
(314
|
)
|
|
|
(102
|
)
|
|
|
(15
|
)
|
Income on loan receivable and other investment
|
|
|
(178
|
)
|
|
|
(91
|
)
|
|
|
(14
|
)
|
Share-based compensation
|
|
|
1,272
|
|
|
|
23,789
|
|
|
|
3,555
|
|
Finance costs
|
|
|
|
|
|
|
4,333
|
|
|
|
648
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in amounts due from related parties:
|
|
|
6,675
|
|
|
|
116
|
|
|
|
17
|
|
(Increase) decrease in trade and other receivables
|
|
|
(24,425
|
)
|
|
|
1,995
|
|
|
|
299
|
|
Increase in trade and other payables
|
|
|
22,341
|
|
|
|
38,234
|
|
|
|
5,714
|
|
Increase in deferred revenue
|
|
|
|
|
|
|
4,857
|
|
|
|
726
|
|
Increase (decrease) in amounts due to related parties
|
|
|
134
|
|
|
|
294
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash generated from operations
|
|
|
71,703
|
|
|
|
87,683
|
|
|
|
13,105
|
|
Income tax paid
|
|
|
|
|
|
|
(110
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
71,703
|
|
|
|
87,573
|
|
|
|
13,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income received
|
|
|
120
|
|
|
|
1,996
|
|
|
|
298
|
|
Purchases of property and equipment
|
|
|
(3,134
|
)
|
|
|
(34,867
|
)
|
|
|
(5,211
|
)
|
(Purchase) redemption of investment at FVTPL
|
|
|
(15,000
|
)
|
|
|
15,544
|
|
|
|
2,323
|
|
Receipt (payment) of loan receivable
|
|
|
(25,000
|
)
|
|
|
25,000
|
|
|
|
3,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) from investing activities
|
|
|
(43,014
|
)
|
|
|
7,673
|
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceed from share issuance
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
Capital contribution from non-controlling shareholder
|
|
|
|
|
|
|
1,050
|
|
|
|
157
|
|
Dividends paid
|
|
|
|
|
|
|
(13,000
|
)
|
|
|
(1,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
(11,948
|
)
|
|
|
(1,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
28,689
|
|
|
|
83,298
|
|
|
|
12,450
|
|
Cash and cash equivalents at beginning of period
|
|
|
27,618
|
|
|
|
75,105
|
|
|
|
11,226
|
|
Effect of foreign exchange rate changes
|
|
|
193
|
|
|
|
(280
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
56,500
|
|
|
|
158,123
|
|
|
|
23,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of non-cash transaction:
During the six months ended September 30, 2010,
acquisitions of property and equipment amounting to
approximately RMB5,789,000 were unsettled and included in other
payables.
F-47
SKY-MOBI
LIMITED
|
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Sky-Mobi Limited (the Company) was incorporated as
an exempted company with limited liability under the laws of the
Cayman Islands on April 20, 2007. The Company through its
subsidiaries (collectively referred to as the Group)
is principally engaged in the operation of a mobile application
platform embedded on mobile phones to provide mobile application
store and services in the Peoples Republic of China (the
PRC).
At September 30, 2010, the Company had direct and indirect
interests in the following subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of
|
|
|
|
|
|
|
|
ownership
|
|
|
|
|
|
|
|
interest and
|
|
|
|
|
|
|
|
voting power
|
|
|
|
|
|
Place and date of
|
|
held at
|
|
|
|
|
|
establishment
|
|
September 30,
|
|
|
|
Company name
|
|
and operation
|
|
2009
|
|
|
2010
|
|
|
Principal activities
|
|
Hangzhou Sky Network Technologies Co., Ltd. (Sky)
|
|
PRC
November 21,
2005
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Development of mobile application software and provision of
mobile application services
|
Hangzhou Mijia
Technologies Co., Ltd. (Mijia)
|
|
PRC
January 12,
2007
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Provision of mobile application services
|
Pusida (Beijing)
Technologies Co., Ltd. (Pusida)
|
|
PRC
June 26,
2007
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Provision of management consultancy and technical services
|
Hangzhou Fanyi
Technologies Co., Ltd. (Fanyi)
|
|
PRC
July 13,
2009
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Provision of mobile application services
|
Hangzhou Dianneng
Technologies Co., Ltd. (Dianneng)
|
|
PRC
December 24,
2009
|
|
|
Nil
|
|
|
|
100
|
%
|
|
Provision of management consultancy and technical services
|
Profit Star Software
(Hong Kong) Limited (Profit Star HK)
|
|
Hong Kong
May 25,
2010
|
|
|
Nil
|
|
|
|
100
|
%
|
|
Intermediary investment holding
|
Shenzhen Heisha
Technologies Co., Ltd. (Heisha)
|
|
PRC
May 27,
2010
|
|
|
Nil
|
|
|
|
65
|
%
|
|
Provision of mobile application services
|
Sky Global Network
Technologies Limited Hong Kong (Sky Global)
|
|
Hong Kong
July 13,
2010
|
|
|
Nil
|
|
|
|
100
|
%
|
|
Provision of mobile application services
|
In May 2010, the Group and another independent venture
established Heisha in PRC. The Group invested
RMB2.9 million and obtained 65% equity interest in Heisha.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The condensed consolidated financial statements have been
prepared in accordance with International Accounting Standard 34
(IAS 34), Interim Financial Reporting
issued by International Accounting Standard Board
(IASB).
The unaudited condensed consolidated interim financial
statements should be read in conjunction with the consolidated
financial statements for the years ended March 31, 2008,
2009 and 2010, which have been prepared in accordance with
International Financial Reporting Standards (IFRS),
as issued by the IASB. The accounting policies used in the
condensed consolidated financial statements are consistent with
those followed in the
F-48
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
preparation of the Groups consolidated financial
statements for the years ended March 31, 2008, 2009 and
2010, except as described below.
The Group applies IFRS 3 (Revised), Business
Combinations, prospectively to business combinations for
which the acquisition date is on or after April 1, 2010.
The requirements in IAS 27 (Revised), Consolidated and
Separate Financial Statements, in relation to accounting
for changes in ownership interests in a subsidiary after control
is obtained and for loss of control of a subsidiary are also
applied prospectively by the Group on or after March 1,
2010.
As there was no transaction during the current interim period in
which IFRS 3 (Revised) and IAS 27 (Revised) are applicable, the
application of IFRS 3 (Revised), IAS 27 (Revised) and the
consequential amendments to other IFRSs had no effect on the
condensed consolidated financial statements of the Group for the
current or prior accounting periods.
Results of the Group in future periods may be affected by future
transactions for which IFRS 3 (Revised), IAS 27 (Revised)
and the consequential amendments to the other IFRSs are
applicable.
The application of the other new and revised IFRSs had no effect
on the condensed consolidated financial statements of the Group
for the current or prior accounting periods.
Application
of new International Financial Reporting Standards
On October 28, 2010, the IASB issued amendments to IFRS 9
Financial Instruments. The amendments address the
accounting for financial liabilities, specifically volatility in
the income statement arising from measuring debt at fair value.
With the new requirements, an entity choosing to measure a
liability at fair value will present the portion of the change
in its fair value due to changes in the entitys own credit
risk in the other comprehensive income section of the income
statement, rather than within profit or loss. IFRS 9 is
effective for financial statements in annual periods beginning
on or after January 1, 2013. Early adoption of the
amendments is permitted; however, entities that elect early
adoption must also apply the financial asset requirements in
IFRS 9. The Group is currently evaluating the impact of adoption
on its consolidated financial statements.
Revenue
recognition
Maopao Community revenues through K Currency are derived from
the purchase of virtual items having an unlimited life. Such
revenues are initially deferred and are subsequently recognized
in future periods based on historical customer retention rates,
which is the rate users remain active in the Maopao Community,
ranging from one to twelve months.
Unaudited
pro forma information
The unaudited pro forma statement of financial position
information as of September 30, 2010 assumes the conversion
upon completion of the initial public offering of all
convertible redeemable preferred shares outstanding as of
September 30, 2010 into common shares.
Pro forma basic and diluted net income per share is computed by
dividing net loss for the period, excluding a finance charge
made to preferred shareholders and losses on change in fair
value of convertible redeemable preferred shares, by the
weighted average number of common shares outstanding for the
period plus (a) the number of common shares resulting from
the assumed conversion of the outstanding convertible redeemable
preferred shares upon consummation of IPO and (b) the
number of shares whose proceeds would be necessary to pay the
total dividends of RMB16,250,000 paid in March 2010 and
RMB13,000,000 paid in May 2010.
F-49
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
Translation
into United States Dollars
The financial statements of the Group are stated in RMB.
Translations of amounts from RMB into U.S. dollars are
solely for the convenience of the reader and were calculated at
the rate of US$1.00 = RMB6.6905, on September 30, 2010,
representing the noon buying rate in the City of New York for
cable transfers of Renminbi, as certified for customs purposes
by the Federal Reserve Bank of New York. The translation is not
intended to imply that the RMB amounts could have been, or could
be, converted, realized or settled into U.S. dollars at
that rate on September 30, 2010, or at any other rate.
|
|
3.
|
REVENUES
AND SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Application store revenues
|
|
|
223,670
|
|
|
|
312,790
|
|
Maopao Community revenues through K currency
|
|
|
|
|
|
|
19,549
|
|
Other revenues
|
|
|
16,469
|
|
|
|
4,342
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
240,139
|
|
|
|
336,681
|
|
|
|
|
|
|
|
|
|
|
Information
about major customers
During the six months ended September 30, 2009 and 2010,
there was no customer that individually accounted for over 10%
of the Groups total revenue.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Interest income
|
|
|
120
|
|
|
|
1,120
|
|
Change in fair value of investment at fair value through Profit
or loss (FVTPL)
|
|
|
314
|
|
|
|
102
|
|
Income on loan receivable and other investment
|
|
|
176
|
|
|
|
91
|
|
Donation
|
|
|
|
|
|
|
(203
|
)
|
Government grant
|
|
|
40
|
|
|
|
100
|
|
Exchange gain (Note 15)
|
|
|
193
|
|
|
|
9,502
|
|
Others
|
|
|
(39
|
)
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
804
|
|
|
|
10,180
|
|
|
|
|
|
|
|
|
|
|
F-50
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Loss before tax has been arrived at after charging:
|
|
|
|
|
|
|
|
|
Staff salary and other benefits
|
|
|
15,652
|
|
|
|
32,852
|
|
Retirement benefit scheme contributions
|
|
|
304
|
|
|
|
597
|
|
Share-based payments (note 17)
|
|
|
1,272
|
|
|
|
23,789
|
|
|
|
|
|
|
|
|
|
|
Total staff costs
|
|
|
17,228
|
|
|
|
57,238
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
650
|
|
|
|
6,193
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
15
|
|
Operating lease rentals in respect of rented premises
|
|
|
995
|
|
|
|
4,158
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
PRC enterprise income tax (EIT)
|
|
|
79
|
|
|
|
5,721
|
|
Deferred tax
|
|
|
(1,801
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,722
|
)
|
|
|
5,817
|
|
|
|
|
|
|
|
|
|
|
The income tax expense is recognized based on managements
best estimate of the weighted average annual income tax rate
expected for the full fiscal year. The estimated weighted
average annual tax rate used is −2.1% and 19% for the six
months ended September 30, 2009 and 2010, respectively.
The following table reflects the movements in deferred tax
assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withholding tax
|
|
|
|
|
|
|
|
|
On undistributed
|
|
Accrued
|
|
|
|
|
|
|
earnings
|
|
expenses
|
|
Tax losses
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
Balance at April 1, 2010
|
|
|
(8,305
|
)
|
|
|
4,447
|
|
|
|
|
|
|
|
(3,858
|
)
|
Charge to profit or loss during the period
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
(8,305
|
)
|
|
|
4,351
|
|
|
|
|
|
|
|
(3,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is the analysis of the deferred tax balances for
financial reporting purposes
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Deferred tax assets
|
|
|
4,447
|
|
|
|
4,351
|
|
Deferred tax liabilities
|
|
|
(8,305
|
)
|
|
|
(8,305
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(3,858
|
)
|
|
|
(3,954
|
)
|
|
|
|
|
|
|
|
|
|
F-51
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
The Group declared and paid a dividend in March 2010 and May
2010 and has no plan to declare dividends in the foreseeable
future. There were undistributed earnings of the subsidiaries of
approximately RMB125,296,000 and RMB111,170,000 at
March 31, 2010 and September 30, 2010, respectively.
Other than a deferred tax liability associated with the expected
dividend payment of RMB8,305,000 being provided as at
March 31, 2010 and September 30, 2010, a deferred tax
liability has not been provided on the remaining undistributed
earnings as the Group is able to control the timing of the
reversal of the temporary differences and it is probable that
the temporary difference will not reverse in the foreseeable
future.
Holders of the Companys restricted shares (see
Note 16) are entitled to participate in dividends on
an equal basis with holders of the Companys unrestricted
common shares. As such dividends are not subject to restriction
as to use, the restricted shares are considered participating
and basic loss per share has been computed using the two-class
method as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
Loss attributable to the owners of Company for the period
(RMB000)
|
|
|
(91,960
|
)
|
|
|
(53,191
|
)
|
Less: amount allocated to restricted shares (RMB000)
|
|
|
16,604
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
Loss for the period basic and diluted
|
|
|
(75,356
|
)
|
|
|
(52,217
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
122,916,800
|
|
|
|
148,998,200
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
(0.61
|
)
|
|
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
For the six months ended September 30, 2009 and 2010, the
computation of diluted loss per share did not include the
potential common shares arising from the Companys share
option, warrants and convertible redeemable preferred shares, as
it would result in a decrease in loss per share.
Pro
forma earnings per share:
Pro forma earnings per share for the six months ended
September 30, 2010 is computed as follows:
|
|
|
|
|
|
|
RMB000
|
|
Loss for the period basic and diluted
|
|
|
(53,191
|
)
|
Plus: loss on changes in fair value of convertible redeemable
preferred shares
|
|
|
59,620
|
|
Plus: finance charge to preferred shareholders (Note 8)
|
|
|
4,333
|
|
|
|
|
|
|
Pro forma net income basic and diluted
|
|
|
10,762
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
148,998,200
|
|
Plus: Convertible redeemable preferred shares
|
|
|
50,000,000
|
|
Plus: Shares necessary to pay cash dividends
|
|
|
1,727,159
|
|
Pro forma weighted-average common shares outstanding
basic and diluted
|
|
|
200,725,359
|
|
|
|
|
|
|
Pro forma net income per share basic and diluted
|
|
|
0.05
|
|
F-52
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
In May 2010, the Company declared and paid dividends of RMB
13,000,000 (RMB 0.09 per share) to its common shareholders.
The Company also approved a payment to its preferred
shareholders, who have participating rights, in the amount of
RMB 4,333,000, which has been recorded as a finance cost in the
condensed consolidated statements of comprehensive income.
In May 2009, the Group invested RMB15,000,000 in a
principal-protected deposit with a commercial bank in China
having a one-year term expiring in May 2010. The investment
guaranteed a rate of return ranging from 2.25% to 6%, which
varied based on an exchange rate of US$ against Euro during the
contract period. This investment was designated as FVTPL upon
initial recognition as the contract contains foreign currency
embedded derivative and the principal and the related interest
were collected upon the expiration of the term in May 2010.
Under the existing PRC law, loans between legal entities,
including both profit and
not-for-profit
entities, must be arranged through a PRC registered financial
institution. As such, in May 2009, the Group entered into a loan
agreement with a PRC bank under which the Group paid a principal
amount of RMB25,000,000 to the bank who then loaned the money to
the Traffic Bureau of the Province of Hei Long Jiang, a
government agency. The loan had a one-year term expiring in May
2010 with a stated rate of return equivalent to the current
market interest rate for current deposits. The loan principal
and rate of return were not guaranteed by the bank. The carrying
amount approximated the fair value of the financial asset due to
its short term nature and the variable interest rate. The
principal and the related interest were collected upon the
expiration of the term in May 2010.
|
|
11.
|
TRADE AND
OTHER RECEIVABLES
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Trade receivables
|
|
|
71,774
|
|
|
|
58,298
|
|
Deposits and other receivables
|
|
|
1,101
|
|
|
|
11,767
|
|
Prepaid expenses
|
|
|
3,235
|
|
|
|
4,050
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
76,110
|
|
|
|
74,115
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
PROPERTY
AND EQUIPMENT
|
During the six months ended September 30, 2010, the Group
spent approximately RMB20,937,000 and RMB 4,636,000 on
electronic equipment and other property and equipment,
respectively, in order to enlarge its business operation scale.
During the six months ended September 30, 2009, the Group
spent approximately RMB1,991,000 and RMB1,143,000 on electronic
equipment and other property and equipment, respectively, in
order to enlarge its business operation scale.
F-53
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
INVESTMENTS
IN ASSOCIATES
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Cumulative cost of investments in associates
|
|
|
13,110
|
|
|
|
13,110
|
|
Cumulative share of results of associates
|
|
|
(1,338
|
)
|
|
|
(4,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
11,772
|
|
|
|
9,037
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
14,058
|
|
|
|
16,003
|
|
Total liabilities
|
|
|
1,427
|
|
|
|
8,499
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
12,631
|
|
|
|
7,504
|
|
|
|
|
|
|
|
|
|
|
Groups share of net assets of associates
|
|
|
5,901
|
|
|
|
3,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Total revenue
|
|
|
|
|
|
|
71
|
|
Loss for the period
|
|
|
|
|
|
|
(5,278
|
)
|
Groups share of loss of associates
|
|
|
|
|
|
|
(2,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
TRADE AND
OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Trade payable
|
|
|
29,832
|
|
|
|
48,515
|
|
Accrued payroll and employee welfare
|
|
|
13,011
|
|
|
|
23,681
|
|
Other taxes payable
|
|
|
7,997
|
|
|
|
9,326
|
|
Payable for acquisition of property and equipment
|
|
|
15,083
|
|
|
|
5,789
|
|
Accrued commission
|
|
|
35,576
|
|
|
|
34,808
|
|
Accrued expenses and other payables
|
|
|
2,065
|
|
|
|
10,385
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
103,564
|
|
|
|
132,504
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
CONVERTIBLE
REDEEMABLE PREFERRED SHARES AND WARRANTS
|
Series A
Convertible Redeemable Preferred Shares
In August 2007, the Company issued 50,000,000 Series A
Convertible Redeemable Preferred Shares (Series A
Shares), with a par value of US$0.00005 per share, at
an initial price of US$0.07 per share for gross proceeds of
approximately RMB 26,516,000 (US$3,500,000). The Company paid
RMB1,329,000 in issuance costs that have been recorded as
finance cost.
Warrants
In conjunction with the issuance of Series A Shares, the
Company also issued warrants to purchase up to
(i) 7,142,800 Series A Shares at an exercise
price of US$0.07 per share if the Triggering Event does not
occur, or (ii) 5,000,000 Series A Shares at an
exercise price of US$0.1 per share if the Triggering Event
occurs. The warrants
F-54
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
may be exercised at any time within 24 months after the
closing date. If the warrants are exercised before the
occurrence of the Triggering Event, (i) the holders of the
warrants shall be entitled to purchase up to a total of
5,000,000 Series A Shares at an exercise price of
US$0.1 per share, and (ii) if the Triggering Event
does not occur, the exercise price shall be adjusted to
US$0.07 per share, and the Company shall issue an
additional 2,142,800 Series A Shares at no additional
cost.
In June 2009, the terms of the warrants were modified to extend
the exercise period to the date of a qualified initial public
offer and to reduce the number of outstanding warrants to
3,389,800 at an exercise price of US$0.15 per share.
The Company has designated the Series A Shares as financial
liabilities carried at FVTPL. The change in fair value of the
Series A Shares and warrants is charged to profit or loss.
The movement of the Series A Shares and warrants is set out
below:
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
Shares
|
|
|
Warrants
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
At April 1, 2009
|
|
|
161,584
|
|
|
|
19,668
|
|
Change of fair value included in profit or loss
|
|
|
160,913
|
|
|
|
(1,176
|
)
|
Exchange gain
|
|
|
(178
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
322,319
|
|
|
|
18,476
|
|
|
|
|
|
|
|
|
|
|
At April, 2010
|
|
|
451,491
|
|
|
|
27,188
|
|
Change of fair value included in profit or loss
|
|
|
59,620
|
|
|
|
4,051
|
|
Exchange gain
|
|
|
(9,208
|
)
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
501,903
|
|
|
|
30,681
|
|
|
|
|
|
|
|
|
|
|
The Group uses certain assumptions in the valuation model to
derive the total equity value of the Company which underlies the
fair value of the Series A Shares. The Company used a
weighted average cost of capital of 18% as of September 30,
2010.
The Black-Scholes option pricing model was used in the valuation
of the warrants. In calculating the fair value of the warrants,
the Group uses multiple inputs, including the fair value of the
preferred shares, warrant exercise price, expected life, risk
free rate, dividend yield and expected volatility. The following
assumptions were used to estimate the fair value of the warrants
as of September 30, 2010:
|
|
|
|
|
Risk free rate
|
|
|
0.1
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term
|
|
|
0.21 years
|
|
Expected volatility
|
|
|
51.3
|
%
|
F-55
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
Legal
|
|
|
|
|
number of
|
|
Number of
|
|
|
|
|
|
|
shares
|
|
shares
|
|
Amount
|
|
Amount
|
|
|
|
|
|
|
US$
|
|
RMB000
|
|
Common shares of US$0.01 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 1, 2010
|
|
|
141,666,600
|
|
|
|
750,000
|
|
|
|
7,500
|
|
|
|
57
|
|
Issuance of new shares
|
|
|
5,000,000
|
|
|
|
25,000
|
|
|
|
250
|
|
|
|
2
|
|
Restricted share vested
|
|
|
8,333,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
155,000,000
|
|
|
|
775,000
|
|
|
|
7,750
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares of US$0.01 each
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 1, 2009, March 31, 2010 and
September 30, 2010
|
|
|
50,000,000
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to an agreement entered between the Company and holders
of the Series A Shares, on March 1, 2010, the Company
sell 5,000,000 common shares to the Series A
shareholders at par value of US$0.00005 per share for total cash
consideration of US$250 in return for the waive of the rights to
the share option anti-dilution clause.
In March 2010, the Group recorded the intrinsic value of the
5,000,000 shares of RMB44,439,000 (US$6,519,000), equal to
the fair value of the common shares on March 1, 2010 less
the exercise price of $250, as a loss on modification of
convertible redeemable preferred shares in the consolidated
statements of comprehensive income with a corresponding increase
in share-settled reserves. During the six months ended
September 30, 2010, the Company issued the
5,000,000 shares and received the cash consideration of
RMB2,000 (US$250).
Employee
Share Option Plan (the Plan)
On April 1, 2010, the Company granted an aggregate of
1,443,600 share options under the Plan to executive
officers and other employees. These options have an exercise
price of RMB 1.775 (US$0.26) and vest ratably over the
four-years following the grant date.
On September 15, 2010, the Company granted an aggregate of
3,320,400 share options under the Plan to executive
officers and other employees. These options have an exercise
price of RMB 1.775 (US$0.26) and vest ratably over the
four-years following the grant date.
The Group used the Black-Scholes option pricing model to
estimate the fair value of the stock options granted on
April 1, 2010 and September 15, 2010 using the
following assumptions:
|
|
|
|
|
|
|
April 1, 2010
|
|
September 15, 2010
|
|
Risk-free interest rate
|
|
2.14% - 2.93%
|
|
1.13%-1.81%
|
Expected volatility
|
|
62% - 64%
|
|
61%-65%
|
Dividend yield
|
|
0%
|
|
0%
|
Expected life
|
|
4-6 years
|
|
4-6 years
|
The risk-free interest rate was based on the US treasury bond
yield curve as of the valuation date for a period commensurate
with the expected life. The expected volatility was estimated
based on the historical daily share price
F-56
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
volatility of comparable companies over a historical period
commensurate with the expected life of the options. The Group
does not expect to declare dividends in the future. The expected
life is estimated based on the Groups estimates of the
exercise period.
A summary of the option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
average
|
|
|
Number
|
|
average
|
|
remaining
|
|
|
of options
|
|
exercise prices
|
|
contractual Life
|
|
|
|
|
RMB
|
|
|
|
Outstanding on April 1, 2010
|
|
|
6,385,400
|
|
|
|
1.775
|
|
|
|
9.4 years
|
|
Granted on April 1, 2010
|
|
|
1,443,600
|
|
|
|
1.775
|
|
|
|
9.5 years
|
|
Granted on September 15, 2010
|
|
|
3,320,400
|
|
|
|
1.775
|
|
|
|
9.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on September 30, 2010
|
|
|
11,149,400
|
|
|
|
1.775
|
|
|
|
9.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total grant date fair value of options granted on April 1,
2010 and September 15, 2010 was approximately RMB
10,796,000 and RMB28,306,000, respectively.
During the six months ended September 30, 2010, RMB
12,538,000 was recognized as compensation expense. None of this
outstanding share options are exercisable as of
September 30, 2010.
Restricted
shares
On April 1, 2010, Xplane Ltd.(Xplane), the
Companys parent company, issued 2,467 of its
restricted shares to its shareholders, who are also employees of
the Group. Forty percent (40%) of the shares vest on the second
anniversary of the grant date and twenty percent (20%) of the
shares vest on the third, fourth and fifth anniversaries of the
grant date, respectively. The Group measured the fair value of
the restricted shares of Xplane based on the fair value of the
Companys shares, as Xplane has no other assets except for
its investment in the Group. The fair value of the restricted
shares as of April 1, 2010 was RMB25,710 (US$3,702) per
share. The Group recognizes the total amount of approximately
RMB62,351,000 as compensation expense over the five year deemed
service, or vesting, period with a corresponding increase in
reserve on the statement of changes in equity.
During the six months ended September 30, 2009 and 2010,
the Group recognized RMB1,271,000 and RMB11,251,000 as
compensation expense, respectively.
F-57
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
RELATED
PARTY TRANSACTIONS
|
(a) Related party balances
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Amounts due from related parties
|
|
|
|
|
|
|
|
|
Amount due from an associate
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing) Co.,
Ltd.
|
|
|
153
|
|
|
|
418
|
|
Amount due from shareholders
|
|
|
|
|
|
|
|
|
SONG Tao
|
|
|
300
|
|
|
|
|
|
Preferred shareholders
|
|
|
2,250
|
|
|
|
2,250
|
|
Amount due from company controlled by close family member of
shareholders
|
|
|
|
|
|
|
|
|
Shenzhen Feidong Technologies Co., Ltd.
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784
|
|
|
|
2,668
|
|
|
|
|
|
|
|
|
|
|
The amounts due from related parties represent payments to fund
operations, except for the amount receivable from preferred
shareholders, which represents a capital injection made by Fanyi
on behalf of the preferred shareholders for their 15% equity
interest in an associate of the Group. The balances are
unsecured, non-interest bearing and repayable on demand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Amounts due to related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade balances
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to associates
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing) Co.,
Ltd.
|
|
|
|
|
|
|
300
|
|
|
|
394
|
|
Hangzhou Sibi Technologies Co., Ltd.
|
|
|
|
|
|
|
420
|
|
|
|
85
|
|
Non-trade balances
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shareholders (Note 8)
|
|
|
|
|
|
|
5,417
|
|
|
|
9,750
|
|
Lu Shi Lin, son of Lu Xiu Xiang, the non-controlling
shareholder of Heisha
|
|
|
|
|
|
|
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,137
|
|
|
|
10,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts due to associates are trading in nature. The related
party balances are unsecured, non-interest bearing and repayable
on demand.
F-58
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
(b) Related party transactions
During the six months ended September 30, 2009 and 2010,
significant related party transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Cost of revenues (for content)
|
|
|
|
|
|
|
|
|
Associates
|
|
|
|
|
|
|
|
|
Zhang Xing Wu Xian Technologies (Beijing) Co., Ltd
|
|
|
|
|
|
|
888
|
|
Hangzhou Sibi Technologies Co., Ltd.
|
|
|
169
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
1,771
|
|
|
|
|
|
|
|
|
|
|
(c) Key management compensation
The compensation of directors and other key management during
the six months ended September 30, 2009 and 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Salary and other benefits
|
|
|
1,225
|
|
|
|
1,550
|
|
Retirement benefit contribution
|
|
|
19
|
|
|
|
20
|
|
Share-based payments
|
|
|
811
|
|
|
|
5,536
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,055
|
|
|
|
7,106
|
|
|
|
|
|
|
|
|
|
|
The Group has operating lease agreements principally for its
office properties in the PRC with lease terms of between one to
two years. These leases are renewable upon negotiation.
The Groups commitments for future minimum lease payments
under non-cancelable operating lease agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At September 30,
|
|
|
2010
|
|
2010
|
|
|
RMB000
|
|
RMB000
|
|
Within one year
|
|
|
7,278
|
|
|
|
12,596
|
|
In the second to fifth years, inclusive
|
|
|
6,080
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,358
|
|
|
|
13,904
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the relevant laws and regulations in the PRC
applicable to foreign-investment corporations, the Group is
required to maintain a statutory reserve which is
non-distributable. The Groups PRC subsidiaries are
required to transfer 10% of their profit after taxation, as
determined on a calendar year basis and in accordance with PRC
GAAP, if any, to the statutory reserve until the balance reaches
50% of their registered capital. The amount of this statutory
reserve is the same under both PRC GAAP and IFRS and is
reflected as statutory reserve in the
F-59
SKY-MOBI
LIMITED
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS (Continued)
consolidated statements of changes in equity. These reserves are
not distributable as cash dividends. The difference between the
net profit, as determined under PRC GAAP, and the amount
allocated to statutory reserve, for each of PRC subsidiaries
represents amounts that are free of restriction. Such amounts
differ from subsidiary equity less statutory reserve as
determined IFRS due to accounting differences between PRC GAAP
and IFRS. At their discretion, the PRC subsidiaries may allocate
a portion of their after-tax profits based on PRC accounting
standards to staff welfare and bonus funds. PRC regulations
currently permit payment of dividends only out of the
Groups PRC subsidiaries accumulated profits as
determined in accordance with PRC accounting standards and
regulations. The statutory reserve amounted to RMB500,000 as of
March 31, 2010 and September 30, 2010. The Group has
not allocated any of its after-tax profits to the staff welfare
and bonus funds for any period presented.
In addition, the registered capital of the Companys PRC
subsidiaries of RMB39,119,000 as of September 30, 2010 was
considered restricted due to restrictions on the distribution of
registered share capital.
As a result of these PRC laws and regulations, the
Companys PRC subsidiaries are restricted in their ability
to transfer a portion of their net assets, either in the form of
dividends, loans or advances. Such restricted portion amounted
to RMB 159,276,000 and RMB150,788,791 as of March 31, 2010
and September 30, 2010, respectively.
* * * * *
|
|
21.
|
EVENT
AFTER THE REPORTING PERIOD
|
In November 2010, the Company approved a 200-for-1 share split
on both its common and preferred shares. Subsequent to the
split, the Company had authorized 937,857,200 common shares
with a par value of US$0.00005 per share and
62,142,800 Series A Shares with a par value of
US$0.00005 per share. All share and per share data has been
retroactively restated to reflect this split.
F-60
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