MOBI Sky-Mobi Limited ADS (MM)

We have derived our selected consolidated statement of profit or loss and other comprehensive income data for the fiscal years ended March 31, 2012, 2013 and 2014 and the selected consolidated statement of financial position data as of March 31, 2012, 2013 and 2014 from our audited consolidated financial statements included in this annual report. Our selected consolidated statement of profit or loss and other comprehensive income data for the fiscal years ended March 31, 2010 and 2011 and the selected consolidated statement of financial position data as of March 31, 2010 and 2011 have been derived from our audited consolidated financial statements not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

You should read the selected consolidated financial data set forth below in conjunction with the related notes and “Item 5. Operating and Financial Review and Prospects.”

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

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Exchange Rate Information

Our business is primarily conducted in China and almost all of our revenues are denominated in RMB. This annual report contains translations of RMB amounts into U.S. dollars based on the noon buying rate on March 31, 2014, as set forth in H.10 statistical release of the Federal Reserve Board. For your convenience, this annual report contains translations of some RMB or U.S. dollar amounts for the fiscal year ended March 31, 2014 at US$1.00: RMB6.2164, which was the noon buying rate in effect as of March 31, 2014. The prevailing rate on July 25, 2013 was US$1.00: RMB6.1913. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, 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 currency and through restrictions on foreign exchange activities.

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 annual report or will use in the preparation of our other periodic reports or any other information to be provided to you. The source of these rates is H.10 statistical release of the Federal Reserve Board.

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Not Applicable.

Not Applicable.

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 App Store for feature phones and smartphones in December 2006 and May 2012, respectively. As such, we have a limited operating history for you to evaluate our business, financial performance and prospects, particularly in connection with our smartphone business. Evolved from our feature phone business, our smartphone business is relatively new in the fast growing mobile application industry in China.

Our revenue has been declining in recent years due to our shift of strategic focus from the feature phone business to the smartphone business, and we may not be able to achieve revenue growth in future periods. Our business model may become obsolete due to the development of other business models or 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 market in China. In addition, we have since 2012 gradually shifted the strategic focus of our business from feature phones to smartphones by launching a portfolio of Maopao platform products for smartphones. Although our Maopao platform products for smartphones are rapidly gaining popularity across China, sustainability of user demand and the continued growth of these smartphone products are subject to uncertainty. If our smartphone business does not grow as expected or at all for any reason, the trading price of our ADSs may decline and the value of your investment may be materially and adversely affected.

We generated net profit in the fiscal years ended March 31, 2012, 2013 and 2014. Our ability to maintain profitability depends on, among other factors, the growth of the mobile applications industry in China, the continued acceptance of Maopao platform by smartphone users, our ability to provide new applications and other content to meet the changing demands of our users, our ability to maintain good relationships with industry participants and to control our costs and expenses. We may not be able to sustain 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 practices of mobile network operators or the PRC government with respect to mobile applications and other content may result in lower revenues or additional costs for us and materially adversely affect our business operations, financial condition and results of operations.

PRC mobile network operators may change their policies, guidelines or business practices which affect all mobile service providers and companies using their networks. Because we rely on mobile network operators directly or through mobile service providers who in turn utilize mobile network operators’ billing channels for the collection of a substantial portion of our sales proceeds, a significant change in mobile network operators’ policies or guidelines may cause our revenues to decrease or operating costs to increase. Furthermore, our mobile service providers and us are subject to review by mobile network operators from time to time and may be denied access to mobile network operators’ billing channels should we or our mobile service providers fail such reviews. As a result, our financial condition and results of operations may be materially adversely affected by policy or guideline changes by PRC mobile network operators.

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For example, in January 2010, China Mobile, the largest mobile network operator in China, implemented a series of measures to improve the user experience for mobile handset embedded services. Under these measures, mobile applications and other content embedded in handsets are required to contain additional notices and confirmations to users during their purchases of in-app virtual items, premium features and other content. In addition, services based on SMS short codes are required to be more tailored to the specific mobile applications and content offerings or service providers. These measures made it more burdensome for our users to make purchases, causing certain users to decrease or cease purchasing from us. Furthermore, since September 2010, China Mobile has applied a set of measures that require users to send triple confirmation SMSs before a transaction can be effected. The foregoing developments resulted in increased channel costs and transaction failures and adversely affected our revenues. If the government or mobile network operators impose similar or more stringent measures, our results of operations may be materially adversely affected.

PRC mobile network operators or the PRC government could impose additional requirements with respect to the subscription or download of applications and other content offered on Maopao platform, billing notifications or other consumer-protection measures or adopt other policies that may require significant changes in how we promote and sell the applications and content on Maopao platform, which could materially adversely affect our financial condition and results of operations.

Our failure to maintain cooperative relationships with handset companies to pre-install our applications onto mobile handsets or to cooperate with additional handset companies would result in a decrease in our market share.

We rely on handset companies to pre-install our Maopao App Store, Maopao Game Center and other applications onto their mobile phones, which is the primary way we have developed our large user base. We had entered into cooperation agreements with over 250 smartphone and 800 feature phone handset companies as of March 31, 2014 to pre-install Maopao platform applications on their products. Our agreements with handset companies generally have one- to two-year terms and contain automatic renewal provisions, pursuant to which we share with them a percentage of revenues generated from user purchases or pay a fixed amount based on number of activations. Due to our reliance on handset companies to pre-install our Maopao platform products on mobile phones, any termination of or deterioration in our existing relationships with handset companies or our failure to cooperate with additional handset companies, particularly those with a substantial market share or growth potential, would decrease our user base and market share.

The handset companies we partner with face fierce competition in an industry characterized by evolving technological standards. Our handset company partners that have traditionally focused on feature phones have experienced market share declines in recent years, which has resulted in a decrease in our revenues. Furthermore, the amount paid to handset companies under revenue sharing arrangements constitutes a significant portion of our total cost of revenues in recent years. Unfavorable changes to our revenue 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 App Store or Maopao Game Center, which could adversely affect purchases from Maopao App Store or Maopao Game Center, causing our revenues to decrease. In addition, certain handset companies may consider developing their own mobile application store, which could adversely affect our relationships with them.

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

We primarily collaborate with handset companies to pre-install Maopao platform products on economic smartphones and feature phones. Our ability to increase the pre-installation of Maopao platform depends on many factors, some of which are beyond our control. Although we work with a large number of economic smartphone and feature phone manufacturers and brands that in aggregate hold a large market share in China, these handset companies may not be able to maintain their market shares. The mobile phone market in China is rapidly evolving. On the one hand, after years of high growth in feature phone sales in China, the feature phone market in China has declined since the second half of 2012, causing the market share of certain feature phone manufacturers we partner with to decline. On the other hand, although we have been increasing our collaboration with smartphone manufacturers in recent years, there is no guarantee that these companies will continue to occupy substantial market share in the future. If the operations of the handset companies we partner with deteriorate, our business could be materially and adversely affected.

In addition, mobile network carrier-subsidized handsets, most of which have other mobile application stores pre-installed, historically have had a relatively large market share in China, and their market share in China is continuously growing, which may adversely affect the pre-installation of Maopao platform products onto handsets, particularly economic handsets. Our failure to increase the installed base of our Maopao App Store and other Maopao platform products among economic handsets would adversely affect our market share and results of operations.

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

The mobile application market in China is fast evolving and highly competitive. The market is characterized by the frequent introduction of new products and services, short product life cycles, evolving industry standards, improved performance characteristics, rapid adoption of technological and product advancement, and price sensitivity on the part of users. We compete primarily with mobile application store operators and mobile game distributors. See “Item 4. Information on the Company — A. Business Overview — Competition.”

We may also face alliances between our existing and new competitors and emergence of new competitors. Mobile service providers, handset companies or other industry players 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.

Some of our competitors have significantly greater financial, technological and marketing resources, stronger relationships with industry participants and a larger portfolio of applications and content offerings than we do. Some of our competitors, especially major multinational application store operators, have greater development experience and resources than we have. If new competitors emerge or competition among existing competitors intensifies, we may be forced to provide more favorable revenue sharing arrangements to our business partners, which could adversely affect our profitability. If we fail to compete effectively, our market share would decrease and our results of operations would suffer.

We depend on mobile service providers, and ultimately mobile network operators, for the collection of a large portion of our revenues, and any termination of or deterioration in our relationships with mobile service providers, or a disruption in our mobile service providers’ relationships with mobile network operators, may result in severe disruptions to our operations.

For the fiscal years ended March 31, 2012, 2013 and 2014, we collected a large portion of our revenues through mobile service providers, who utilize mobile network operators’ billing channels pursuant to their agreements with mobile network operators to provide billing and payment collection services. As of March 31, 2014, we had entered into agreements with over 40 mobile service providers. Our agreements with mobile service providers generally have one- to three-year terms and sometimes include automatic renewal provisions. We cannot assure you that we could renew these agreements or enter into new ones when the existing agreements expire. Because we rely on mobile service providers to collect a substantial portion of the sales proceeds from our users, any termination of or deterioration in our relationships with mobile service providers may severely disrupt our operations and materially adversely affect our financial condition and results of operations.

Our mobile service providers rely on mobile network operators’ billing channels for the provision of payment collection services. Three mobile network operators, namely China Mobile, China Unicom and China Telecom, dominate the wireless telecommunications sector in China. A substantial portion of our sales proceeds were collected by mobile service companies through billing channels of China Mobile, who has the largest subscriber base in China. Any disruption or termination of our mobile service providers’ cooperation with the mobile network operators, particularly China Mobile, could render these billing channels unavailable, which could materially adversely affect our operations.

If we fail to maintain cooperative relationships with mobile network operators, our revenues and growth prospects may be adversely affected.

We cooperate with mobile network operators in various aspects of our business, including the provision of customized software services at their physical stores, distribution and promotion of applications and mobile content and payment collection. As of the date of this annual report, we have entered into strategic cooperation with China Mobile, China Unicom and China Telecom, the three dominate mobile network operators in China. For example, China Mobile, the largest mobile network operator in China, has granted us access to their payment channels since 2012, which enables us to collect a portion of our sales proceeds through China Mobile directly from users without using mobile service providers as intermediaries. In March 2012, we entered into a partnership agreement with China Mobile, pursuant to which we offer its mobile games and mobile reading application on Maopao platform and share a percentage of revenue based on user purchases of China Mobile’s in-game virtual items, premium features and reading content from Maopao platform. In March 2014, we entered into a strategic partnership with the Wo Store of China Unicom, the official application store of China’s second largest mobile network operator. Under this partnership, China Unicom designated us as an official business partner to provide customized software services through its extensive network of physical stores. See “Item 4. Information on the Company — A. Business Overview — Cooperation with Mobile Network Operators.”

We plan to deepen our cooperation with the mobile network operators to enlarge our user base, benefit from lower payment channel costs and faster payment collection and supplement our mobile application and content offerings. If we fail to maintain our relationships with any of the mobile network operators, we may not be able to find replacement operators in a timely manner or at all, and our business and prospects may be adversely affected. Furthermore, mobile network operators monitor our operations and may impose sanctions if we fail to comply with their policies or guidelines, including denying us access to their billing channels, which could adversely affect our financial condition and results of operations.

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

We depend on mobile network operators, either directly or through mobile service companies, to maintain accurate records of payments by users and collect such payments. We receive periodic statements from mobile network operators and mobile service providers that indicate the aggregate amount of fees charged to users for purchases of in-app virtual items, premium features and other content. While we conduct independent sampling tests to verify information provided to us, our sampling is on a relatively small scale and the inaccuracies identified 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 our sales proceeds.

We have been collecting a portion of our revenues directly through China Mobile’s billing channels since 2012. We depend on China Mobile to maintain accurate records of payments by users and collect payments. However, China Mobile may change its policies or business practices which could affect our results of operations. For example, in 2012, China Mobile began implementing more stringent billing and collection practices. Under these measures, if China Mobile detects abnormal data transmissions in billing, the underlying transaction will be considered suspicious and the proceeds associated with such transaction will be written off. China Mobile may implement further changes to its billing and collection practices in the future, which could materially adversely affect our financial condition and results of operations.

We generally grant our mobile service providers and mobile network operators credit terms ranging from 60 to 90 days. Receivables from our top ten mobile service providers accounted for approximately 38.4% and 21.4% of our total trade receivables as of March 31, 2013 and 2014, respectively. Receivables from the three major mobile network operators accounted for 63.3% of our total trade receivables as of March 31, 2014. Failure to timely collect our receivables from mobile service providers or mobile network operators may adversely affect our cash flows. Our mobile service providers may from time to time experience cash flow difficulties and consequently delay their payments to us. Any delay in payment or inability of mobile service providers to pay us may adversely affect our operations and cash flows.

Our revenues and cost of revenues are affected by billing and transmission failures that are often beyond our control. Failure to accurately record billing and transmission failures in a timely manner could harm the credibility of our system and our relationships with industry participants.

After a mobile user confirms a purchase of in-app virtual items, premium features or other content, the mobile service provider sends the user a confirmation SMS with transaction details and a simultaneous message to the mobile network operator, which we refer to as a message original, or MO. We also record such MO data on Maopao platform. Upon receipt of the MO data, the mobile network operator verifies the execution of a transaction. If the transaction has been effected, the mobile network operator usually receives, from the user’s mobile phone, a confirmation message, which we refer to as a message received, or MR. Based on MR data, the mobile network operator records the transaction and bills the user.

The MR data are usually lower than the MO data due to billing and transaction failures, which are caused by various reasons, including:

As a result of these billing and transaction failures, in the fiscal year ended March 31, 2014, the monthly MR amounts we received from mobile network operators were approximately 10% to 20% lower than the monthly MO amounts recorded on Maopao platform.

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 is purchased through which handset model. Consequently, revenue sharing based on MO data may not accurately reflect content providers’ and handset companies’ contribution to transactions. Recognizing the difference between MO and MR data, we apply discount ratios to our MO data to account for billing and transmission failures. If we fail to accurately reward our content providers and handset companies pursuant to our revenue sharing arrangement with them due to billing and transmission failures, our relationship with them could be materially and adversely affected, which may in turn materially and adversely affect our business and results of operations.

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Policy changes by PRC government authorities and mobile network operators may also augment billing and transmission failures. See “— Significant changes in the policies, guidelines or practices of mobile network operators or the PRC government with respect to mobile applications and other content may result in lower revenues or additional costs for us and materially adversely affect our business operations, financial condition and results of operations.”

If we fail to establish a substantial market presence in the rapidly growing smartphone market, our growth prospects could be materially adversely affected.

The mobile phone market in China has been transitioning from feature phones to smartphones in recent years. Smartphones are technologically advanced devices with personal computer-level versatility that operate advanced operating systems such as Android, Apple’s iOS, BlackBerry OS, Linux, Symbian and Windows Phone. Smartphones are becoming more affordable in China partly because of PRC government-subsidized programs. Smartphones are characterized by more powerful processors, larger screens and higher data storage capacity compared to feature phones, and are able to easily install and run high performance multimedia applications. To maintain our user base and pursue monetization opportunities in the ever growing smartphone market, we have since 2012 shifted the focus of our mobile application business from feature phones to smartphones. We have launched a portfolio of Maopao platform products for smartphones, including our Maopao App Store and Maopao Game Center.

Although we are actively pursuing strategic cooperation to pre-install Maopao platform products on an increasing number of smartphone models, we cannot assure you that we will be able to establish and maintain a substantial market presence in the smartphone market in China. If the feature phone market continues to decline, and we fail to capture the opportunities in the growing smartphone market, our results of operations and financial position could be materially adversely affected.

Our smartphone products operate mainly on Android-based operating systems. If Android fails to maintain market share in the smartphone segment, our smartphone business may be adversely affected.

Android is currently the dominant smartphone operating system in China, especially in the economic smartphone market. Our current smartphone products are developed for and operate solely on Android-based operating systems. Android may face competition from existing operating systems such as Apple’s iOS, Microsoft’s Windows Phone and Blackberry OS, as well as new entrants to the mobile phone operating system market. We cannot assure you that Android-based operating systems will continue to maintain or grow their market shares. If non Android-based smartphones begin capturing significant market share in the future, we will be prompted to spend substantial resources to develop and launch Maopao platform products for these operating systems. If we fail to develop products and services on new and emerging operating systems, our smartphone user base may decline and our growth prospects could be adversely affected.

If our smartphone products do not achieve wide market acceptance or if we fail to generate profits with respect to such products, our results of operations may be adversely affected.

In May 2012, we launched Maopao App Store for smartphones, in particular Android-based smartphones, which we believe will be one of the major smartphone operating systems in China. We have also launched a series of smartphone products, including Maopao Game Center and Maopao Browser. However, we are new entrants to the smartphone market and have limited development and operating experience in this emerging market, which has different characteristics than the feature phone market.

For example, the smartphone market employs open-source technologies by which our users can freely download our applications through alternative sources and without accessing our Maopao App Store. We cannot assure you that we can keep abreast of the technical developments of the smartphone market to provide quality smartphone products or that we can successfully establish relationships with smartphone companies in order to increase the pre-installation of our Maopao platform products on their handsets. In addition, many smartphone companies have developed their own application stores. If Maopao App Store is installed on these smartphones, it will compete with the application stores operated by these smartphone companies and smartphone users may not use our Maopao App Store as frequently as feature phone users.

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Revenues from mobile multi-player games and community-based applications offered in Maopao Community are expected to continue to account for a significant portion of our future revenues. Any adverse developments relating to Maopao Community may adversely affect our results of operations.

We expect revenues from mobile multi-player games and community-based applications offered in Maopao Community to continue to generate a significant amount of our revenues in the foreseeable future. For the fiscal years ended March 31, 2012, 2013 and 2014, Maopao Community revenues amounted to RMB110.5 million, RMB177.7 million and RMB144.0 million (US$23.2 million), respectively. Accordingly, any of the following could materially adversely affect our business, financial condition and results of operations:

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

We believe our future success depends on, among other things, continued market recognition and acceptance of our “Maopao” brand. We have been actively promoting our “Maopao” brand by implementing various marketing initiatives including pre-installation of our Maopao platform products on smartphones and feature phones by cooperating with handset companies and mobile network operators. If these marketing efforts turn out to be inadequate, our growth may be adversely affected.

In addition, negative publicity or disputes involving us, our brand, product offerings or management could materially adversely affect public perception of our brand. Many of the factors that affect our brand may be outside our control. Concerns over the quality of products and services of handset companies and content providers we partner with could also have a negative impact on our brand image and materially adversely affect our sales, profits and prospects.

Our ability to generate revenues could suffer if the mobile application market in China does not develop as anticipated.

The mobile application market in China has evolved rapidly in recent years, with the introduction of new business models, changing user preferences, the increasing popularity of smartphones over feature phones, new service and product offerings, new competitors and evolving strategies by existing competitors. We expect these trends to continue, and in turn must adapt our strategies to stay competitive in this market.

In particular, we are focused on offering a wide range of applications and other content on Maopao platform by cooperating with various industry participants including Chinese handset companies, content providers, mobile service providers and mobile network operators. As smartphones become increasingly popular in China, we have since 2012 shifted our strategic focus from feature phones to smartphones and have launched a portfolio of smartphone products, including our Maopao App Store and Maopao Game Center for smartphones.

However, it is difficult to accurately predict the user demand and future size, composition and growth of the mobile application market in China. Furthermore, given the limited history and rapidly evolving nature of this market, we cannot predict the price that users will be willing to pay for applications and content we offer or whether users will have concerns over security, reliability, cost and quality of customer service. If the mobile application market in China does not develop as anticipated, our results of operations could be materially adversely affected.

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Laws and regulations regulating online games in China are developing and may change. If we fail to obtain or maintain all applicable permits and approvals, our business and results of operations would be materially adversely affected.

Operating online games in China requires a series of permits and approvals. For example, we have obtained a license from the Ministry of Culture with respect to the operation of online games. In addition, the Internet publication of online games requires pre-approval from the General Administration of Press and Publication, or GAPP. Effective on March 22, 2013, GAPP and the State Administration of Radio, Film and Television merged into one entity, namely the State General Administration of Press, Publication, Radio, Film and Television, or SAPPRFT, which oversees the press, publication, radio, film and TV sectors in China. We operate a substantial majority of our online games in collaboration with third-party content providers, and such content providers are in charge of obtaining the approvals from SAPPRFT. For the remaining online games we operate, we are responsible for obtaining approvals from SAPPRFT. Because the requirement for SAPPRFT approval of online games was imposed in late 2009 and the approval process is lengthy, SAPPRFT has not yet approved any online games that we operate. With respect to the games that we operate alone, we have not submitted applications for SAPPRFT approval as we are first required to obtain an online publication license from SAPPRFT. We are in the process of obtaining the online publication license. We cannot assure you that we will be able to obtain such license in a timely manner or at all.

With respect to the online games that we operate in collaboration with third-party content providers, the third-party content providers have submitted applications for SAPPRFT approval for some of the games. We have requested content providers to submit applications to SAPPRFT for approval of the remaining games as soon as possible. In case we or such content providers fail to obtain SAPPRFT approval, we may be subject to various penalties, including fines and discontinuation of the relevant games. As online games are at an early stage of development in China, new laws and regulations may require additional licenses and permits. As a result, substantial uncertainties exist regarding the interpretation and implementation of PRC laws and regulations applicable to the operation of online games. We cannot assure you that we will be able to timely obtain required licenses or any other new license required, and we may be found in violation of 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 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 that plan to engage in the operation of online games, issue virtual currencies and provide virtual currency transaction services must obtain a license from the provincial counterpart of the MOC. This rule also regulates content review and other aspects of the operation of online games as well as virtual currency transaction services. In addition, the Rule on Online Games provides that all domestic online games must be filed with MOC, and all imported online games must be approved by the MOC. See “Item 4. Information on the Company — B. Business Overview — Regulations.”

In addition, the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games, or the Internet Cafés Notice, issued by the MOC in February 2007, directs the People’s Bank of China, or PBOC, to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game virtual items.

Our mobile games may be subject to government approval before placement on Maopao platform. A portion of our revenues from Maopao Community 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 purchased by an individual game player. The restrictions imposed by the above rules may result in lower sales of our virtual currency, and could adversely affect our Maopao Community revenues. If our operations or the applications and content on Maopao platform 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 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 platform.

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, such as our company, 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. When Internet content providers and Internet publishers find that information falling within the categories above is transmitted on their websites or platforms, they must terminate the transmission or delete such information immediately, maintain records of the violations and report the violations to the authorities.

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Failure to comply with these requirements could result in the revocation of required licenses and the closure of the websites or platforms involved. 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 such as China Mobile also have their own policies prohibiting or restricting the distribution of inappropriate content. Since December 2009, the Chinese government has been increasing its efforts to crack down on inappropriate content disseminated over the Internet and wireless networks.

On December 15, 2009, the Ministry of Industry and Information Technology of the PRC, or 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 and 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 obscene material on mobile handsets are subject to immediate suspension or termination of cooperation with mobile network operators, and a violation will be reported to the authorities. Mobile network operators and mobile service providers must examine all websites accessed through mobile handsets and conduct daily inspections 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 operate online games, issue virtual currency and provide virtual currency transaction services must 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. On January 30, 2013, the State Council issued the Decision of the State Council on Revising the “Regulations on the Protection of Right of Dissemination via Information Network” (“Order No. 634”). Order No. 634 became effective on March 1, 2013. According to Order No. 632, the fines against several infringement acts of right of dissemination via information network have been increased. A fine of five times of the illegal business revenue or RMB 250,000 may be imposed.

As these regulations are subject to interpretation by the authorities, we may not be able to determine the type of content that could result in liability as a mobile application store operator. Although we may determine that the mobile applications and content provided on Maopao platform comply 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 platform, despite our attempt to monitor such content. For example, many industry participants we partner with, such as handset companies and content providers, have access to our technology. Personnel who have access to our technology may develop malware and other inappropriate content.

Although we strive to closely monitor the content displayed on Maopao platform, a distributor of malware or other inappropriate content developed in our proprietary format could disseminate such content directly through the Internet without accessing our server and users may download such content onto their mobile handsets. To the extent that regulatory authorities find any of the applications and content on Maopao platform objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail such content on Maopao platform, which may reduce our user traffic.

We may be subject to significant penalties for violations of regulations arising from information displayed on, retrieved from or linked to Maopao platform, 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 our cooperative relationships with other industry participants and/or claims for monetary damages, and our financial condition and results of operations would be materially adversely affected.

We rely on third-party content providers for a majority of the applications and content available on Maopao platform. Our failure to license or otherwise obtain applications or content that meet user demand would materially adversely affect our business.

We contract with third-party content providers to distribute their mobile applications and other content through Maopao platform. We typically enter into exclusive/non-exclusive licensing agreements for a term of one to three years with third-party content providers, majority of which do not contain automatic renewal provisions. If we fail to renew or enter into new licensing agreements with our content providers upon expiration of the existing agreements at commercially acceptable terms, our operations may be negatively impacted. In addition, some third-party content providers may introduce competing mobile applications and content, which could make it more difficult or impossible for us to license their mobile applications and content in the future.

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There is no assurance that our content providers will continue to develop and launch applications and other content for Maopao platform on a timely basis or at all. If we fail to offer a wide variety of mobile applications and content at reasonable prices, our financial condition and operating results may be materially adversely affected.

Furthermore, we develop certain applications and content available on Maopao platform in-house, such as our card game center. Such applications and content may compete with those of our content providers and may discourage our content providers from developing and upgrading similar applications or content for Maopao platform. If our collaboration with content providers deteriorates or terminates, the availability and quality of applications for Maopao platform may suffer.

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

Our success largely depends on our ability to anticipate and timely and effectively respond to changing user tastes and preferences and technological advances. To further increase our user base and revenues, we are prompted to develop, license, launch and operate mobile games and other popular application and content to replace our existing ones as they reach the end of their useful economic lives.

We are developing applications and other content in-house as well as licensing mobile applications and other content from third-party content providers. We cannot assure you that we will be able to license from third-party content providers or develop in-house a sufficient number of mobile games and other applications and content on commercial acceptable terms or at all, nor can we assure you that they will be well received among users. If we fail to develop, license or acquire mobile applications and other content that are commercially successful and appeal to users, our profitability and growth prospects will decline.

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

The mobile applications industry is developing rapidly. We invest in our proprietary Maopao platform and related technologies, including standard software development kits and tool suites that are critical to our success. We need to anticipate the emergence of new technologies and keep abreast of technological advances in order to make our technologies, product offerings and development capabilities competitive in the market. We have been devoting significant financial resources in research, development and operations to penetrate the emerging smartphone market in China.

However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our products. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace mobile application store technology has developed, we may not be able to timely improve Maopao platform and related technologies in a cost-effective manner, or at all. In addition, new technologies in the mobile application industry in China could render the technologies and product offerings we are developing or expect to develop obsolete or less competitive, decreasing our revenues and market share.

Undetected programming errors or flaws in our Maopao platform products and applications available through Maopao platform could harm our reputation or decrease market acceptance of Maopao platform.

Our Maopao platform products and applications available through our Maopao platform, such as multi-player games, which are subject to frequent improvement and update, may contain errors or flaws. As we launch new features and updates under tight time constraint, these errors or flaws may not become apparent until the updated features or version are accessed by users. As a result, we mostly rely on our users to inform us of programming flaws compromising their experience. If we fail to promptly resolve programming errors or flaws, we may lose users and our operating results, brand name and the market acceptance of Maopao platform products may suffer. 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 our programming error or flaw inadvertently charges users without their consent, we may be subject to administrative penalties and fines.

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

Customer service is critical to retaining current users and attracting potential users. If Maopao platform or the mobile applications and other content offered through Maopao platform contains errors or other flaws, or if we otherwise fail to provide quality customer service, our users may be less inclined to use or recommend Maopao platform products to other potential users, and may switch to our competitors’ products.

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Some China-based Internet companies have experienced group complaints, sometimes organized by their competitors or people attempting to profit from such complaints. We may not be able to timely and effectively address such complaints. Unsatisfactory customer service may disrupt our operations, compromise user experience, harm our reputation, cause the number of our users to decline, and negatively affect market acceptance of Maopao platform products, any of which could materially adversely affect our results of operations.

Unexpected network interruptions, data loss, security breaches, computer virus attacks or other risks relating to the operation of Maopao platform could materially adversely affect our business, financial condition and results of operations.

Any failure to maintain the satisfactory performance, reliability, security and availability of Maopao platform products may harm our reputation and market share. Major risks include, among others, any breakdowns or system failures in our network infrastructure resulting in a prolonged shutdown of all or a material portion of our servers, including failures attributable to sustained power outages or unauthorized attempts to access our systems.

Our critical servers and backup servers are placed at different locations in Hangzhou. As a result, our network systems are vulnerable to natural disasters or accidents affecting Hangzhou and its surrounding areas, such as fire, flood, power outage, telecommunications failures, computer viruses, hacking and other similar occurrences. Any interruptions in the availability of our product offerings could reduce user satisfaction and our competitiveness.

In addition, any security breach caused by hacking, which involves unauthorized attempts to access our 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 materially adversely affect our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our systems, nor do we carry 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 businesses is the secure transmission of confidential information over the mobile network. 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 names and passwords. While we have not experienced any material breach of our security measures to date, technology advancements, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we use 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 or resolve such security breaches. Concerns over the security and privacy of user information may have a material and adverse effect on our operations. To the extent that our activities involve proprietary information, security breaches could damage our reputation and expose us to risks of loss or litigation. There can be no assurance that our security measures will be sufficient to prevent security breaches, and failure to prevent security breaches may materially adversely affect our business, prospects, financial condition and results of operations.

We could be liable for breaches of security of payment processing agents, which may materially adversely affect our reputation and business.

In addition to collection through mobile service providers, we collect a small portion of our revenues through payment processing agents, which assist us in collecting sales proceeds through third-party payment channels such as game cards and other prepaid cards, bank remittances, China Post and virtual currency, such as QQ Currency. In 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 mobile 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 these security measures will be adequate in light of our expected increased usage of their payment channels. Security breaches in these payment channels could expose us to litigation and possible liability for failure to secure customer transaction data and could harm our reputation and user experience and discourage users to pay through these third-party payment channels.

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

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

Our financial condition and operating results could be significantly affected by these and other risks associated with international operations. Although we have implemented policies and procedures designed to facilitate compliance with laws and regulations in foreign jurisdictions applicable to us, our employees or business partners could violate such laws and regulations or our policies. Any such violations could materially adversely affect our financial condition and operating results.

Our business could suffer if we do not successfully manage our growth.

We have experienced a period of rapid growth and expansion that has placed a strain on our management personnel, systems and resources. To accommodate our growth, 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 will also need 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 additional costs. We cannot assure you that we will be able to effectively implement our growth strategies and manage the growth of our operations, and any failure to do so may hamper our business strategy.

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

Trademarks, trade secrets, copyrights and other intellectual property 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 intellectual property and acquire licenses to use and distribute the intellectual property of others for our business. Our 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 revenues and 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 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 developed countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend our patents 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 could result in substantial costs and divert resources and management attention, which could harm our business and competitive position.

Our results of operations, financial performance and business may suffer from intellectual property rights infringement claims against us.

We may be subject to claims alleging that we are improperly using intellectual property owned by others or otherwise infringing their intellectual property rights. We license a substantial portion of the applications and content available on Maopao platform from third-party content providers, including multi-player games, mobile music and book titles. Although we implement measures to ensure that the licensors are the rightful owners of intellectual property rights with respect to the licensed content, we may be subject to infringement claims regarding such licensed content.

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Regardless of the validity of such claims, we could incur costs defending or settling any intellectual property infringement disputes. Intellectual property litigation could force us to, among other things, cease offering certain mobile applications or content, develop alternatives or obtain licenses from the owners of the infringed intellectual property. We may not be successful in developing alternatives or in obtaining licenses on commercially acceptable terms or at all, materially adversely affecting our results of operations, financial performance and business.

We substantially depend on 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 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 and Mr. John Bi, our chief financial officer. If one or more of our senior management or other key personnel were unable or unwilling to continue their employment with us, we may not be able to replace them easily or at all. Our business, financial condition and results of operations may suffer, and we may incur additional expenses to recruit, train and retain personnel.

If any of our management or key personnel joins a competitor or forms a competing company, we may lose business partners, know-how, key professionals and staff members. Each of our executive officers has entered into an employment agreement which contains confidentiality clauses and certain confidentiality agreements with us. However, if any dispute arises with our officers, 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 grounds that we have not provided adequate compensation to these executive officers for their non-competition obligations as required under PRC law.

We may not be successful in attracting and retaining qualified personnel.

Hiring and retaining additional qualified employees are critical to our operations and planned expansion. The mobile application industry in China is characterized by high demand and intense competition for talent, and we may need to offer higher compensation and other benefits in order to attract and retain key personnel, particularly considering our location in Hangzhou, a region less attractive to some potential employees compared to cities such as Beijing or Shanghai. We cannot assure you that we will be able to attract or retain a sufficient number of qualified personnel 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 shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other holders of our common shares and ADSs.

Our principal shareholders, Xplane Ltd., a British Virgin Islands company, and Mr. Michael Tao Song, our chief executive officer and chairman, held 29.1% and 30.8% (including 9.8% held by Ms. Qinyi Zhu, wife of Mr. Song, through Xplane Ltd.) of our outstanding share capital as of March 31, 2014, respectively. Accordingly, Xplane Ltd. and Mr. Song have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, the 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 our other shareholders oppose such a transaction.

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

Other than insurance for some of our 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, explosion, flood or a wide range of other natural disasters or accidents or business interruption, our financial condition and results of operations could be materially adversely affected.

The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and as such investors may be deprived of the benefits of such inspection

Our independent registered public accounting firm that issues the audit reports included in this annual report filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

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Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese affiliates of the “big four” accounting firms (including our auditors) and also against Dahua (the former BDO affiliate in China). The Rule 102(e) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission, or CSRC. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an Initial Decision that the “big four” accounting firms should be barred from practicing before the SEC for six months. However, it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a Petition for Review of the Initial Decision and pending that review the effect of the Initial Decision is suspended. The SEC commissioners will review the Initial Decision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on these audit firms. Once such an order was made, the accounting firms would have a further right to appeal to the U.S. Federal courts, and the effect of the order might be further stayed pending the outcome of that appeal.

Depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, adversely affecting investor confidence and the market price of our ADSs.

As a public company in the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules, or Section 404, require us to include a management report which contains management’s assessment of the effectiveness of our internal controls over financial reporting in our annual report.

Our management has concluded that our internal control over financial reporting is effective as of March 31, 2014. See “Item 15. Controls and Procedures.” Our independent registered public accounting firm has issued an attestation report on our internal control over financial report, which concludes that our internal control over financial reporting is effective in all material aspects.

If we fail to maintain the adequacy of our internal control over financial reporting, we may not be able to conclude that we have effective internal control over financial reporting and our financial statements could become unreliable, which could result in material misstatements in our financial statements. In addition, if we fail to meet our reporting obligations, investors may lose confidence in our reported financial information. Any of these events could limit our access to capital markets, harm our results of operations, and decrease the trading price of our ADSs.

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Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could materially adversely affect 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. Acquisitions, 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 acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.

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

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

Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products in which the acquired companies specialize and the loss of key personnel and users. If we do not realize the benefits envisioned from such acquisitions, joint ventures or other strategic alliances, our overall profitability and growth plans may suffer.

We may not realize gains from our equity investments.

We have made capital investments in a number of start-up companies in the mobile network and mobile games industry. As of March 31, 2014, our equity investments included RMB76.6 million (US$12.3 million) in 21 private companies primarily engaged in wireless technology development and related applications in the PRC. We have also invested in one private equity fund targeting the mobile and technology space to achieve long term returns. Our equity investments may fail to appreciate or decline in value and our ability to recover our investments will depend on the success of the companies in which we invest.

Equity investments involve significant risks. Any equity investment we make in a company could be subject to dilution as a result of the issuance of additional equity interests. In addition, equity interests are subordinate to indebtedness in the event that the issuer cannot meet its obligations or files for bankruptcy. In addition, if a company in which we invest requires additional capital and is unable to obtain it, we may not recover our investment.

We may not recover our equity investments if the companies in which we invest do not perform well and we could incur impairment losses, which could materially and adversely affect our results of operations. For example, we recognized a RMB1.4 million impairment of our investment in Beijing DigiMobi Studio Co., Ltd., or DigiMobi, during the fiscal year ended March 31, 2013, a RMB0.8 million (US$0.1 million) impairment of our investment in Mokee Technologies (Shanghai) Co., Ltd., or Mokee, and a RMB0.7 million (US$0.1 million) impairment of our investment in Beijing Dream Sky Technology Ltd., or Dream Sky, during the fiscal year ended March 31, 2014, due to the continuing underperformance and negative cash flow forecast of these entities.

We may be unable to secure additional funding 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 growth or other future developments, including investments or acquisitions. The amount and timing of such additional financing needs will vary principally depending on the timing of new product or service launches, investments or acquisitions, and cash flow from our operations.

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If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or securities convertible into our common shares could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations.

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

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

We may experience fluctuations in quarterly operating results.

Our quarterly operating results have experienced fluctuations due to a variety of factors, including policy changes, the demand for our products and competing products, our launch of new mobile applications and content 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 gross margin fluctuations from period to period.

For instance, our cost of revenues as a percentage of total revenues may be higher in a particular period if a handset company that is entitled to a relatively higher percentage of revenue introduces a new handset model through which we generate a substantial amount of revenues, compared to other periods when revenues are generated through handsets from handset companies that are entitled to a relatively lower percentage of revenue. In addition, changes in policies and practices of network operators may affect the availability of mobile service providers and user experience in a particular period, result in increased billing and transmission failure rates, cause delays associated with switching from certain mobile service providers to others, and affect our quarterly results of operations.

Our revenues may be affected by seasonality. For example, our revenues tend to be higher during holiday seasons when users tend to purchase more in-app virtual items, premium features and other content through Maopao platform. Such seasonality was less prominent in recent periods, but may become more prominent in the future. Operating results for a particular period are not necessarily indicative of our future results. If our operating results for any quarter fall below investor expectations or estimates by securities research analysts, the trading price of our ADSs may decline.

Risks Related to Doing Business in China

Changes in economic and political policies of the PRC government could materially adversely affect the economic growth of China, negatively impacting our business.

We conduct substantially all of our operations 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 slowed in the second half of 2008 and early 2009. There is also uncertainty with respect to the Chinese economy for 2014 and beyond. Any prolonged slowdown in the Chinese economy, in particular the mobile applications industry, could negatively impact our business, operating results and financial condition. For example, our users may decrease spending on our offerings, while we may have difficulty expanding our user base to offset the impact of decreased spending by our existing users.

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The PRC government exercises significant control over China’s economic growth through direct allocation of resources, monetary and tax policies and a host of other government policies, such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies and regulate the growth of the economy or specific markets. Government involvement has been instrumental in China’s significant growth in the past 30 years. If the PRC government’s policies fail to help the Chinese economy achieve further growth or otherwise negatively affect our business, our growth rate, strategy and results of operations could be adversely affected.

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 law, and our PRC subsidiaries, Hangzhou Dianneng Technologies Co., Ltd., or Dianneng, Pusida (Beijing) Technologies Co., Ltd., or Pusida, and Hangzhou Tiandian Investment Consulting Co., Ltd., or Tiandian, are foreign-invested enterprises. Various regulations in China restrict foreign-invested entities from holding certain licenses required to operate mobile application store business, including telecommunications value-added services operation licenses, and from making certain strategic investments in China.

In light of these restrictions, we rely on our SPEs, Hangzhou Sky, Mijia, Fanyi, Feineng, Miyi, Najia, Tianchu, Kaimi, Dangyi, Zunqi, Geyuan, Mugu, Feidong and Weipin, to hold and maintain the licenses necessary to operate our mobile application store business in China, and our SPE, Sky Investment, to make strategic investments in China. We do not have any equity interest in our SPEs, but receive their economic benefits through various contractual arrangements and certain corporate governance and shareholder rights arrangements.

We have entered into contractual arrangements with each of our SPEs and each of their shareholders which provide us with control over our SPEs. For a description of these contractual arrangements, see “Item 4. Information on the Company — B. Organizational Structure — Contractual Arrangements with the SPEs and their Shareholders.”

Under the equity pledge agreements included in these contractual arrangements, the shareholders of Hangzhou Sky, Mijia, Fanyi, Feineng, Miyi, Najia, Tianchu , Kaimi, Dangyi, Zunqi, Geyuan, Mugu, Feidong and Weipin pledged their respective equity interests in these SPEs to Dianneng and the shareholder of Sky Investment pledged its equity interests in Sky Investment to Tiandian. According to PRC law, such a pledge must be registered with the relevant administration for industry and commerce. We have registered the pledge of our SPEs’ equity interests with the local Administration for Industry and Commerce. However, we cannot assure you that Dianneng and Tiandian will be able to enforce these pledges if PRC laws and regulations applicable to the equity pledge change in the 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.

The relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local license holder. The Circular further requires each telecommunications value-added services operation license holder to have the necessary facilities for its approved operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications mobile service providers must maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of regulatory interpretations, 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 General Administration of Press and Publication, or GAPP, together with the National Copyright Administration and the 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 that foreign investors may not 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 measures such as establishing joint venture companies or contractual or technical arrangements.

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As advised by our PRC counsel, Han Kun Law Offices, 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. However, substantial uncertainties remain regarding the interpretation and application of the GAPP Notice. Accordingly, GAPP may 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 violate the GAPP Notice in connection with the operation of online games, GAPP in conjunction with the relevant regulatory authorities would have the power to investigate and deal with such violations, including in serious cases by refusing or cancelling relevant licenses and registrations.

In the opinion of Han Kun Law Offices, our PRC counsel, (i) the ownership structure and the business and operation model of each of our SPEs are in compliance with all existing PRC laws and regulations and (ii) each contract under Dianneng’s contractual arrangements with Hangzhou Sky, Mijia, Fanyi, Feineng, Miyi, Najia, Tianchu, Zunqi, Geyuan, Kaimi, Dangyi, Mugu, Feidong and Weipin and each of their shareholders and each contract under Tiandian’s contractual arrangements with Sky Investment and its shareholder is valid and binding and will not result in any violation of PRC laws or regulations currently in effect. However, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Circular and the GAPP Notice. Accordingly, we cannot assure you that 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 and the GAPP Notice, 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, without limitation:

Any of these or similar actions could significantly disrupt our business and materially reduce our revenues, profitability and cash flows.

If any of these penalties results in our inability to direct the activities of any of our SPEs that significantly impacts our economic performance, and/or our failure to receive the economic benefits from any of them, we may not be able to consolidate the financial results of these SPEs into our consolidated financial statements in accordance with IFRS.

Our contractual arrangements with the SPEs and their respective shareholders may not provide control over the SPEs as effectively as direct ownership of these companies.

We conduct our mobile application business in China through Hangzhou Sky, Mijia, Fanyi, Feineng, Miyi, Najia, Tianchu, Zunqi, Geyuan, Kaimi, Dangyi, Mugu, Feidong and Weipin. In addition, we pursue strategic investment opportunities in China through Sky Investment. We enter into contractual arrangements with our SPEs and their respective shareholders in order to provide us with effective control over these companies. See “Item 4. Information on the Company — B. Organizational Structure — Contractual Arrangements with the SPEs and their Shareholders.”

As a result of these contractual arrangements, we have control over our SPEs. Accordingly, we consolidate the results of operations, assets and liabilities of the SPEs in our financial statements.

Although Han Kun Law Offices, our PRC legal counsel, has advised us 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 the SPEs as direct ownership. In addition, the SPEs or their respective shareholders may breach the contractual arrangements.

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We cannot assure you that when conflicts of interest arise, the SPEs and their respective shareholders will act completely in our interests or that these 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 “— Uncertainties with respect to the PRC legal system could materially adversely affect us.”

In the fiscal years ended March 31, 2012, 2013 and 2014, our SPEs contributed in aggregate 98.9%, 95.8% and 90.0%, respectively, of our total revenues. In the event that we are unable to enforce the contractual arrangements, we may not be able to direct the activities of our SPEs, and as a result, our ability to conduct our business may be negatively affected, and we may not be able to consolidate the financial results of the SPEs into our consolidated financial statements in accordance with IFRS.

We believe that we have the ability to renew the contractual arrangements with our consolidated SPEs when necessary based on (i) our exclusive option to purchase all or part of the equity interests in our consolidated SPEs, when and to the extent permitted by PRC law, or to request any existing shareholders of our consolidated SPEs to transfer all or part of their equity interests in our consolidated SPEs to another PRC person or entity designated by us at any time at our discretion, and (ii) the powers of attorney that shareholders of our consolidated SPEs’ have granted to us.

Our ability to enforce the equity pledge agreements between us and the shareholders of our consolidated SPEs may be subject to limitations imposed by PRC laws, rules and regulations.

Under our equity pledge agreements with our consolidated SPEs and their respective shareholders, these shareholders have agreed to pledge all of their respective equity interests in the consolidated SPEs to us. These pledges secure the performance of our consolidated SPEs’ obligations under the various contractual arrangements, including the business operation agreements and technology development agreements. As of March 31, 2014, the pledges of equity interests by shareholders of our consolidated SPEs were registered with the relevant local branch of the State Administration for Industry & Commerce.

According to applicable PRC laws, when an obligor fails to pay its debt, the pledgee may choose to either conclude an agreement with the pledgor to obtain the pledged equity or seek payments from the proceeds of the auction or sale of the pledged equity. If our consolidated SPEs or their shareholders fail to perform their respective obligations secured by the pledges under the equity pledge agreements, one remedy in the event of default under the equity pledge agreements is to require the pledgor to sell the pledged equity interests in an auction or private sale and remit the proceeds to our wholly owned subsidiaries in the PRC, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of the full value of the equity interests in our consolidated SPEs.

In addition, the registration forms of the local branch of the State Administration for Industry & Commerce, indicate that, the amounts of registered equity interests pledged to our wholly owned subsidiaries by Hangzhou Sky, Mijia, Fanyi, Feineng, Miyi, Najia, Tianchu, Zunqi, Geyuan, Kaimi, Dangyi, Mugu, Feidong and Weipin and Sky Investment, were RMB10.0 million, RMB10.0 million, RMB10.0 million, RMB1.0 million, RMB1.0 million, RMB1.0 million, RMB1.0 million, RMB3.0 million, RMB1.0 million, RMB0.5 million, RMB0.5 million, RMB0.5 million, RMB1.0 million and RMB0.5 million and RMB55.0 million, respectively, which in aggregate represent 100% of the registered capital of our consolidated SPEs. A PRC court may take the position that the amounts listed on the equity pledge registration forms represent the full amounts of the collateral that have been registered and perfected. In that event, a PRC court could deem the obligations secured under the equity pledge agreements in excess of the amounts listed on the equity pledge registration forms to be unsecured debt, materially adversely affecting our ability to be repaid.

The shareholders of our consolidated SPEs may have potential conflicts of interest with us, which may substantially disrupt our business.

The registered shareholders of our consolidated SPEs are our current or former directors, officers or employees and their relatives. For example, Mr. Michael Tao Song, our founder, chairman and chief executive officer, is one of the registered shareholders of Mijia, a consolidated SPE incorporated in 2007. In addition, Mr. Song owned approximately 21% of our outstanding common shares as of the date of this annual report on Form 20-F. See “Item 4. Information on the Company — B. Organizational Structure” for a list of the registered shareholders of our consolidated SPEs and their respective shareholdings.

Conflicts of interest may arise with respect to such shareholders’ duties to us and our consolidated SPEs. If any conflicts arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved in our favor. In addition, these shareholders may breach or cause our consolidated SPEs to breach or refuse to renew their existing contractual arrangements that allow us to exercise effective control over them and to receive economic benefits from them.

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The laws of the Cayman Islands provide that directors of a company owe a fiduciary duty to the company, which requires them to act in good faith and in the best interests of the company and not to use their positions for personal gain. If certain shareholders of our consolidated SPEs do not comply with their fiduciary duties to us as our designated directors, or if we cannot resolve any conflicts of interest or disputes between us and any current or future registered shareholders of our consolidated SPEs, we would have to rely on legal proceedings to remedy the situation, the outcome of which would be uncertain and which could substantially disrupt our business.

Contractual arrangements we have entered into may be subject to scrutiny by 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.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by PRC tax authorities. We could face adverse tax consequences if PRC tax authorities determine that the contractual arrangements between our PRC subsidiaries on the one hand, and our SPEs on the other, do not represent an arm’s-length price and adjust our SPEs’ 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 our SPEs, which could in turn increase their respective tax liabilities. In addition, 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,” was entitled to 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 for Hangzhou Sky from 2010 to 2012 was 12.5%. Hangzhou Sky was qualified as a “high and new technology enterprise” in 2011, entitling it to a preferential EIT tax rate of 15% from 2012 to 2014. Once Hangzhou Sky ceases to qualify as a “high and new technology enterprise”, its applicable EIT rate may increase to up to 25%, which could adversely affect our results of operations.

In addition, Mijia, as a “software enterprise,” was entitled to a full exemption from EIT in 2010 and 2011 and a 50% reduced EIT rate from 2012 to 2014. The reduced applicable EIT rate for Mijia from 2012 to 2014 is 12.5%. Once Mijia ceases to qualify as a “software enterprise”, its applicable EIT rate may increase to up to 25%, which could adversely affect our results of operations.

Miyi, as a “software enterprise,” is entitled to a full exemption from EIT in 2013 and 2014 and a 50% reduced EIT rate from 2015 to 2017. The reduced applicable EIT rate for Mijia from 2015 to 2017 is 12.5%. Once Miyi ceases to qualify as a “software enterprise”, its applicable EIT rate may increase to up to 25%, which could adversely affect our results of operations.

Najia, as a “software enterprise,” is entitled to a full exemption from EIT in 2013 and 2014 and a 50% reduced EIT rate from 2015 to 2017. The reduced applicable EIT rate for Mijia from 2015 to 2017 is 12.5%. Once Miyi ceases to qualify as a “software enterprise”, its applicable EIT rate may increase to up to 25%, which could adversely affect our results of operations.

Prior to January 1, 2012, pursuant to Provisional Regulation of China on Business Tax and its implementing rules, any entity or individual rendering services in the territory of PRC was generally subject to a business tax at the rate of 5% on the revenues generated from provision of such services. In November 2011, the MOF and the State Administration of Taxation, or the SAT, jointly issued two circulars setting out the details of the VAT Pilot Program, which changes business tax to value-added tax for certain industries, including, among others, research and development and technical services, information technology services, and cultural and creative services. The VAT Pilot Program initially applied only to these industries in Shanghai, and has been expanded to eight additional provinces, including Beijing, Tianjin, Zhejiang Province (including Ningbo), Anhui Province, Guangdong Province (including Shenzhen), Fujian Province (including Xiamen), Hubei Province and Jiangsu Province in 2012. On May 24, 2013, the MOF and the SAT jointly issued the Circular on Tax Policies on the Nationwide Expansion of the Pilot Program for the Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or Circular 37, which expanded the VAT Pilot Program nationwide as of August 1, 2013. Pursuant to the Circular on the Inclusion of Telecommunications Industry in the Pilot Collection of Value-added Tax in Lieu of Business Tax promulgated by Ministry of Finance and the SAT on April 29, 2014, or Circular 43, Circular 37 has been replaced by Circular 43 and the VAT Pilot Program has been expanded to cover telecommunication service, as currently conducted by us, as of June 1, 2014. See “Item 5. Operating and Financial Review and Prospects — Taxation.”

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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 materially adversely affect our operating results.

We may 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 materially adversely affect our ability to conduct our business.

We are a holding company, and we may rely on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements. 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 PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends.

Furthermore, if our PRC subsidiaries incur debt 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 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 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 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 a tax treaty with China provides for a different withholding arrangement.

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

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 on global income. Under the Implementing Rules, “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 determining 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 apply: (i) a Chinese Funded Enterprise’s major management department and personnel who are responsible for carrying out daily operations are located in the PRC; (ii) the department or the personnel who have the right to decide or approve the Chinese Funded Enterprise’s financial and human resource matters are located in the PRC; (iii) the major assets, account book, company seal and meeting minutes of the Chinese Funded Enterprise are located or stored in the PRC; and (iv) the directors or management personnel holding no less than 50% voting rights of the Chinese Funded Enterprise habitually reside in the PRC.

The circular provides that the above standards shall apply to enterprises 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 subsidiaries such as income from our international operations, we will be subject to a 25% PRC income tax rate on our global income, which could significantly increase our tax burden and materially adversely affect our cash flow and profitability.

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

Under the PRC Enterprise Income Tax Law and related Implementing Rules, 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 source within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to the 10% PRC income tax rate if such gain is regarded as income derived from sources within the PRC unless a treaty otherwise provides.

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

We face uncertainty regarding 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 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 in order to avoid PRC tax, it will disregard the existence of the overseas holding company used for tax planning purposes and re-characterize the Indirect Transfer. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%.

Uncertainties with respect to the PRC legal system could materially adversely affect 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 retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and divert resources and management attention.

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

As an offshore holding company of our PRC operating subsidiaries, we may make additional loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Loans by us to our PRC subsidiaries, 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.

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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 capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

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

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income primarily comes 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 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 State Administration of Foreign Exchange, or 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, 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 its business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, 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 SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to transfer the net proceeds from any offering of our securities to our subsidiaries 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.

On November 16, 2011, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Relating to Further Clarification and Regulation of Certain Capital Account Items under Foreign Exchange Control (“Circular 45”) to further strengthen and clarify its existing regulations on foreign exchange control under SAFE Circular 142. Circular 45 expressly prohibits foreign invested entities, including wholly foreign owned enterprises, from converting registered capital in foreign exchange into RMB for the purpose of equity investment, granting certain loans, repayment of intercompany loans, and repayment of bank loans which have been transferred to a third party.

Further, Circular 45 generally prohibits foreign invested entities, such as our PRC subsidiaries, from converting registered capital in foreign exchange into RMB for the payment of various types of cash deposits. If our variable interest entity requires financial support from us or our PRC subsidiaries in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund our variable interest entity’s operations will be subject to statutory limits and restrictions, including those described above.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 142, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or any consolidated affiliated entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

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Fluctuations in the value of the RMB may materially adversely affect 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. In June 2010, the PRC government announced that it would increase Renminbi exchange rate flexibility. From June 2010 to March 2012, the RMB appreciated by 7.8% against the U.S. dollar. In March 2014, the People’s Bank of China widened the band around which the value of the Renminbi is allowed to deviate from the daily reference rate, which may allow for greater volatility in the U.S. dollar and Renminbi exchange rate. 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 a significant portion of our financial assets, are denominated in RMB. We principally rely on dividends and other distributions paid to us by our PRC subsidiaries. Any significant revaluation of the RMB may materially 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 restrictions on our ability to inject capital into our PRC subsidiaries and our PRC subsidiaries’ ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.

SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, or 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 process for SAFE registration, which standardized more specific and stringent supervision of the registration relating to the SAFE notice.

As of the date of this annual report, all of our shareholders and beneficial owners who are subject to the SAFE notice have obtained registration in accordance with its requirements.

We are committed to comply with the SAFE notice and have taken steps to help ensure that our shareholders and beneficial owners who are subject to the SAFE notice 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. In July 2014, the SAFE notice was superseded by Notice on Domestic Residents’ Offshore Financing and Roundtrip Investment Through Special Purpose Vehicles. The impact of this recent regulatory development on our business operations remains unclear.

Failure to comply with the registration requirements for employee share option plans may subject our PRC equity incentive plan participants or us to fines and other legal or administrative sanctions.

On February 15, 2012, SAFE promulgated the Notice on Foreign Exchange Administration of PRC Residents Participating in Share Incentive Plans of Offshore Listed Companies, or SAFE Circular No. 7, to replace the previous Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of Offshore Listed Companies. SAFE Circular No. 7 regulates foreign exchange matters associated with employee stock option incentives or similar incentives permitted under applicable laws and regulations granted to PRC residents by companies whose shares are listed on offshore stock exchanges. Pursuant to SAFE Circular No. 7, all PRC residents participating in share incentive plans of offshore listed companies shall, through their employers, jointly retain qualified PRC agents to register with local SAFE branches. PRC residents include PRC nationals or foreign citizens having been consecutively residing in PRC for not less than one year, acting as directors, supervisors, senior management personnel or other employees of PRC entities affiliated with such offshore listed company. A qualified PRC agent may be a PRC entity involved in the share incentive plan or a PRC institution eligible for asset trusteeship, which is lawfully selected to handle various foreign exchange matters related to share incentive plans and applies annually for a quota for conversion and/or payment of foreign currencies in connection with the domestic individuals’ exercise of their employee stock options. The foreign exchange proceeds received by PRC residents from sale of shares under share incentive plans granted by offshore listed companies must be remitted to bank accounts in China opened by their employers or PRC agents.

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Furthermore, a Notice Concerning Individual Income Tax on Earnings from Employee Stock Options, jointly issued by the MOF and SAT, provides that domestic companies that implement employee share option programs must file the employee share option plans and other relevant documents with local tax authorities having jurisdiction over the companies before implementing such plans, and must file share option exercise notices and other relevant documents with local tax authorities before exercise by their employees of any share options, and clarify whether the shares issuable under the employee share options referenced in the notices are shares of publicly-listed companies.

We have registered with the local SAFE bureau on behalf of our employees who have been granted shares or share options under our share incentive plan and follow other procedures set forth in SAFE Circular No. 7 and other applicable regulations and we have filed the employee share option plans and other relevant documents with local tax authorities with competent jurisdiction. If we or any of our PRC option holders fail to comply with SAFE Circular No. 7, Notice Concerning Individual Income Tax on Earnings from Employee Stock Options or other relevant regulations in connection with our future grants of shares or share options, we or the relevant PRC option holders may be subject to fines and other legal or administrative sanctions.

The approval of the CSRC may have been required in connection with our initial public offering in December 2010 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 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 our initial public offering may have required approval from the CSRC. If CSRC approval had been required for our initial public offering in December 2010, our failure to obtain or delay in obtaining such approval 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 adversely affect our business, results of operations and financial condition.

Our PRC counsel, Han Kun Law Offices, 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 were not required to apply with the CSRC for the approval of the listing and trading of our ADSs on NASDAQ.

The M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies.

We may grow our business in part by acquiring other companies operating in our industry. Complying with the 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.

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Failure to obtain or maintain all applicable permits and approvals would materially adversely affect our business.

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 content through one of our SPEs in May 2010 but have not generated significant revenues from such content. Pursuant to PRC regulations, to offer mobile video content, 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.

In addition, if government authorities challenge our practice, we may be subject to various penalties, including fines and the discontinuation of or restriction on our offering of mobile video content subject to the regulations. Any such disruption in operations would materially adversely affect our financial condition and results of operations.

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

Our business could be materially adversely affected by the outbreak of H1N1, or swine influenza, avian influenza, severe acute respiratory syndrome, or SARS, influenza A virus subtype H7N9, or another epidemic. For instance, in early 2013, there were outbreaks of influenza A virus subtype H7N9 in nine provinces of China. 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 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. If we significantly change or decrease our workforce in the PRC, the labor contract law could adversely affect our ability to effect such changes in a timely and cost effective manner, and our results of operations could be adversely affected.

In addition, the labor contract law requires employers to 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. According to Interpretation (IV) of the Supreme People’s Court of Several Issues on the Application of Law in the Trial of Labor Dispute Cases, promulgated on January 18, 2013, a court will sustain an employees’ claim of three months’ compensation even when the employer requests to terminate the non-competition obligations.

Risks Related to 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 operating in our industry, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments, fluctuations in exchange rates between the RMB and the U.S. dollar, intellectual property litigation, release of 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 operations located mainly in China that have listed their securities in the United States may affect the volatility in the price 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 adversely affect the market price of our ADSs.

Future sales or issuances of a substantial number of our ADSs or common shares could adversely affect the price of our ADSs.

If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of common shares, the prevailing market price for our ADSs could decline.

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In addition, we may issue additional common shares or ADSs to fund future acquisitions or our operations. Your ownership interest in our company would be diluted and this, in turn, could materially adversely affect the price of our ADSs.

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

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

Pursuant to our amended and restated memorandum and articles of association, we may convene a shareholders’ meeting upon ten clear days’ notice. When a shareholder’s meeting is convened, you may not receive sufficient advance notice to withdraw the common shares underlying your ADSs to allow you to vote with respect to any specific matter. If we give timely notice, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you.

We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the common shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and the common shares underlying your ADSs may not be voted as you requested.

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

From time to time, we may 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 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 exempt 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 the such property and you will not receive such distribution.

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

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

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

We are organized in the Cayman Islands and substantially all of our assets are located outside of the United States. We conduct substantially all of our 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 their assets 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.

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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, it is uncertain 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 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.

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 Exchange Act, 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 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.

Our amended and restated articles of association contain provisions to limit the ability of others to acquire control of our company. These provisions could deprive 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 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 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 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 believe we may be a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or common shares.

Based on the market price of our ADSs, the value of our assets and the composition of our income and assets, we believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended March 31, 2014. 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. A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year.

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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, our PFIC status will depend in large part on the market price of our ADSs and common shares, which may fluctuate significantly. Because we believe we were a PFIC for the taxable year ended March 31, 2014, certain adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation”) of our ADSs or common shares with respect to any “excess distribution” received from us and any gain from a sale or other disposition of our ADSs or common shares. See “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”