F-1/A 1 d573845df1a.htm AMENDMENT NO.2 TO FORM F-1 AMENDMENT NO.2 TO FORM F-1
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As filed with the Securities and Exchange Commission on November 12, 2013

Registration No. 333-191846

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Sungy Mobile Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   7389   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Floor 17, Tower A, China International Center

No. 33 Zhongshan 3rd Road

Yuexiu District, Guangzhou 510055

People’s Republic of China

Tel: (+86 20) 6681-5066

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue

4th Floor

New York, New York 10017

(1 212) 750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower

The Landmark

15 Queen’s Road Central

Hong Kong

(+852) 3740-4700

 

Leiming Chen, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

(+852) 2514-7600

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨                      

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨                      

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨                      

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount of shares to be
registered(1)(2)
 

Proposed maximum

offering price per share

  Proposed maximum
aggregate offering price(1)(2)
  Amount of
registration fee(4)

Class A ordinary shares, par value US$0.0001 per share(2)(3)

 

48,300,000

 

US$1.92

  US$92,575,000   US$11,923.66

 

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
(2) Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class A ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
(3) American depositary shares issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No.333-             ). Each American depositary share represents six Class A ordinary shares.
(4) US$10,304 was previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, ISSUED NOVEMBER 12, 2013

7,000,000 American Depositary Shares

Sungy Mobile Limited

LOGO

Representing 42,000,000 Class A Ordinary Shares

 

 

This is an initial public offering of American Depositary Shares, or ADSs, of Sungy Mobile Limited. Sungy Mobile Limited is offering 7,000,000 ADSs. Each ADS represents six Class A ordinary shares, par value US$0.0001 per share.

Prior to this offering, there has been no public market for the ADSs or our shares. We anticipate that the initial public offering price will be between US$9.50 and US$11.50 per ADS. We have applied to have our ADSs listed on the NASDAQ Global Market, or NASDAQ, under the symbol “GOMO.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

The underwriters have the right to purchase up to an additional 1,050,000 ADSs from us at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus, to cover over-allotments of ADSs.

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. The Class B ordinary shares outstanding immediately after the completion of this offering will constitute approximately 72.6% of our total outstanding shares and 96.4% of the then voting power, assuming the underwriters do not exercise their option to purchase additional ADSs.

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 13.

 

      

Price to
Public

    

Underwriting

Discounts and
Commissions

    

Proceeds to
Us

Per ADS

     US$                      US$                      US$                

Total

     US$                      US$                      US$                

Delivery of the ADSs will be made on or about             , 2013.

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

 

Credit Suisse                         J.P. Morgan

Oppenheimer & Co.

 

China Renaissance Securities

(Hong Kong) Limited        

The date of this prospectus is             , 2013.


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LOGO


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

THE OFFERING

     7   

OUR SUMMARY CONSOLIDATED FINANCIAL DATA

     10   

CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

     12   

RISK FACTORS

     13   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     55   

USE OF PROCEEDS

     56   

DIVIDEND POLICY

     57   

CAPITALIZATION

     58   

DILUTION

     59   

EXCHANGE RATE INFORMATION

     61   

ENFORCEABILITY OF CIVIL LIABILITIES

     62   

CORPORATE HISTORY AND STRUCTURE

     65   

SELECTED CONSOLIDATED FINANCIAL DATA

     70   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     72   

INDUSTRY

     102   

BUSINESS

     106   

PRC REGULATION

     123   

MANAGEMENT

     141   

PRINCIPAL SHAREHOLDERS

     150   

RELATED PARTY TRANSACTIONS

     153   

DESCRIPTION OF SHARE CAPITAL

     155   

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     167   

SHARES ELIGIBLE FOR FUTURE SALE

     179   

TAXATION

     181   

UNDERWRITING

     187   

EXPENSES RELATING TO THIS OFFERING

     194   

LEGAL MATTERS

     195   

EXPERTS

     195   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     196   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

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

Dealer Prospectus Delivery Obligation

Until                     , all dealers that buy, sell or trade ADS, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from a report commissioned by us and prepared by App Annie Limited, or App Annie, an independent research firm, in October 2013, to provide information on the ranking of our applications on Google Play globally. We refer to this report as the App Annie Intelligence Report in this prospectus.

Overview

We are a leading provider of mobile internet products and services globally with a focus on applications and mobile platform development. We were one of the top three publishers worldwide on Google Play as measured by the number of downloads in the Applications category for the nine months ended September 30, 2013, based on the App Annie Intelligence Report.

Our platform product, GO Launcher EX, manages apps, widgets and functions on Android smartphones and serves as users’ first entry point to their phones. GO Launcher EX was the No. 1 most downloaded product in the Personalization category on Google Play in both 2012 and the nine months ended September 30, 2013, according to the App Annie Intelligence Report. It has attracted approximately 239 million users as of September 30, 2013, with the average monthly active users reaching 42 million in the third quarter of 2013. GO Launcher EX is available in 38 languages and has attracted users from over 200 countries and regions since it was launched in November 2010.

Building upon our success in GO Launcher EX, we have developed a portfolio of GO series products which include our launcher products and a broad range of other GO series apps and widgets that provide rich functionality, enhanced performance and extensive personalization for Android smartphones. Our GO series products in aggregate have attracted approximately 325 million users worldwide as of September 30, 2013, with over 70% of these users from locations outside of China. The average monthly active users for our GO series products were 87 million in the third quarter of 2013. As of October 15, 2013, we had one out of the 17 non-game products with more than 100 million cumulative downloads and three out of the 44 non-game products with more than 50 million cumulative downloads on Google Play, excluding apps developed by Google, according to Google Play store statistics archived by App Annie. We have created and continued to expand a GO platform that is built upon GO Launcher EX and integrates all of our GO series products as well as third-party mobile internet products and services.

We have devoted ourselves to the mobile internet industry since our inception in 2003, starting with products and services based on the Wireless Application Protocol and the Symbian mobile operating system. When Android grew in popularity as a mobile operating system, the extensive technologies and know-how we had accumulated from prior endeavors in the mobile internet industry enabled us to seize the market opportunity and develop and successfully launch our GO series products for Android smartphones within a short period of time.

In addition to our GO series products and GO platform, we also offer 3G.cn, a mobile internet portal, and mobile reading services, both of which provide us with a stable and growing user and paying customer base.

 

   

We launched 3G.cn, one of the first Chinese mobile internet portals, in March 2004, when the mobile internet was still in its infancy. It provides mobile users access to a vast array of professional media and user-generated content, such as entertainment and sports events coverage in multi-media formats. 3G.cn had more than 44 million unique visitors in September 2013.

 

 

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We started charging fees for our mobile reading services in the first half of 2010 to capture one of the early monetization opportunities in the mobile internet industry. Our mobile reading services are comprised of an expanding library of original and copyrighted literary works and a growing and highly engaged user community.

We generate our revenues through advertising in various forms, paid apps and premium themes, in-app purchase for advanced functionalities as well as users’ purchases of literary content. We expect to explore additional monetization opportunities and diversify our revenue sources as we continue to expand our GO platform to seize opportunities in the mobile internet industry.

We have achieved significant growth in recent years. Our total revenues increased from RMB96.6 million in 2011 to RMB185.2 million (US$30.3 million) in 2012, representing a 91.7% growth, and from RMB124.7 million for the nine months ended September 30, 2012 to RMB230.0 million (US$37.6 million) in the same period in 2013, representing an 84.4% growth. We achieved profitability since 2012 and our net income was RMB15.2 million (US$2.5 million) in 2012 and RMB61.0 million (US$10.0 million) for the nine months ended September 30, 2013.

Our Strengths

We believe that the following competitive strengths have contributed to the growth of our business:

 

   

Global leading mobile platform products;

 

   

Open platform with diversified product offerings;

 

   

Large and fast growing global user base;

 

   

Superior user experience supported by strong research and development capabilities; and

 

   

Experienced and stable core management team with strong commitment to the mobile internet industry.

Our Strategies

Our goal is to become a global leading mobile internet platform. We strive to achieve this goal by pursuing the following strategies:

 

   

Expand our user base;

 

   

Strengthen and enrich our GO platform;

 

   

Improve the monetization of our products and services;

 

   

Continue to invest in and enhance our research and development capabilities; and

 

   

Selectively pursue strategic alliance and acquisition opportunities.

Our Industry

The global mobile internet industry has seen rapid development with the continuous enhancement of infrastructure, introduction of increasingly affordable mobile devices and advancement in wireless technology. According to International Data Corporation, or IDC, the number of global mobile internet users reached 1.1 billion in 2012, and is expected to increase to 2.3 billion in 2017, representing a compound annual growth rate, or CAGR, of 15.8%.

Smartphones, which combine advanced computing and network capabilities in a compact form, are increasingly popular among consumers around the world. Worldwide smartphone shipments are expected to

 

 

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increase from 723 million units in 2012 to 1.6 billion units in 2017, representing a CAGR of 16.9%. In the smartphone market, Android, an operating system developed and introduced by Google in 2008, has grown to capture the largest market share, according to IDC. In 2012, Android smartphone shipment amounted to 497 million, more than three times as much as iOS, the operating system with the second largest market share. Android is expected to continue to be the dominant operating system by 2017, according to IDC.

With the proliferation of mobile internet and smartphones, people are spending more time on their mobile devices. As a result, the industry has seen the emergence of an app economy and mobile activities, which is a key driver for mobile advertising. According to IDC, the total number of free and paid downloads on mobile application stores worldwide is expected to grow from 47.2 billion in 2012 to 187.0 billion by 2017, representing a CAGR of 31.7%. Mobile advertising spending worldwide reached US$8.8 billion in 2012 and is expected to expand to US$59.7 billion in 2017, representing a CAGR of 46.7%, according to eMarketer.

The mobile internet industry is still at a nascent stage. We believe the industry will continue to experience constant evolutions and innovations with significant monetization potential.

Our Challenges

Our ability to achieve our goal and execute our strategies is subject to risks and uncertainties, including but not limited to those relating to our ability to:

 

   

implement our relatively new business/revenue model and generate and increase revenues from our innovative GO series products;

 

   

retain and grow our user base and expand our product and service offerings;

 

   

continue developing innovative technologies in response to evolving industry trend and user demand and maintain our technological leadership;

 

   

develop and maintain relationships with third-party app developers and advertisers in a broad range of industries; and

 

   

attract and retain qualified personnel.

In addition, we face risks and uncertainties related to our compliance with applicable PRC regulations and policies, particularly those risks and uncertainties associated with our control over our variable interest entities, which is based on contractual arrangements rather than equity ownership.

Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these challenges and risks.

Corporate Information

Our principal executive offices are located at Floor 17, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou 510055, Peoples Republic of China. Our telephone number at this address is (+86 20) 6681 5066. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is www.sungymobile.com. The information contained on our website is not a part of this prospectus.

 

 

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Corporate History and Structure

We commenced operations in June 2003 in China and we established Sungy Data Ltd. in the British Virgin Islands as our holding company in January 2005. In August 2013, Sungy Data Ltd. was redomiciled in the Cayman Islands as an exempted company registered under the laws of the Cayman Islands. In October 2013, Sungy Data Ltd. was renamed Sungy Mobile Limited. For more details, see “Corporate History and Structure.” PRC laws and regulations currently limit foreign ownership of companies that provide internet information distribution services. Therefore, Sungy Mobile Limited, through Jiubang Computer Technology (Guangzhou) Co. Ltd., or Jiubang Computer, one of its wholly owned subsidiaries in the PRC, entered into a series of contractual arrangements with certain PRC entities and their shareholders through which Sungy Mobile Limited provides substantially all of its services. Through these contractual arrangements, Sungy Mobile Limited exercises effective control over, and receives substantially all of the economic benefits from, these PRC entities. As a result of these contractual arrangements, Sungy Mobile Limited, through Jiubang Computer, is the primary beneficiary of these PRC entities and account for them as “variable interest entities”, or VIEs, and consolidate the financial results of these VIEs into our financial statements in accordance with U.S. GAAP.

If our VIEs and their shareholders fail to perform their obligations under these contractual arrangements that give us effective control over our VIEs, we could be limited in our ability to enforce the contractual arrangements. Further, if we are unable to maintain effective control over our VIEs, we would not be able to continue to consolidate our VIEs’ financial results in our consolidated financial statements.

Almost all of our revenues in our consolidated financial statements are derived from our VIEs and we rely on dividends and service fees paid to us by our PRC subsidiaries and our VIEs in China. We, through Jiubang Computer, have the right to determine the service fees based on the technical difficulty and complexity of the services and the actual labor costs incurred for providing the services to the VIEs during the relevant period. Our VIEs have been experiencing accumulated losses and, as a result, we have elected not to charge our VIEs for any material amount of service fees. We expect to charge more service fees to the VIEs and derive more revenues directly from our PRC subsidiaries after the VIEs’ accumulated losses have been eliminated.

We are subject to foreign exchange control restrictions and restrictions on foreign investment into our PRC subsidiaries and VIEs, and the payment of dividends by our PRC subsidiaries to our Cayman holding company is subject to certain restrictions under the PRC laws and regulations, all of which may restrict our ability to access the revenues and cash of our PRC subsidiaries and VIEs. For a detailed discussion of the risks associated with our corporate structure and the contractual arrangements underlying our corporate structure, see “Risk Factors—Risks Related to Our Corporate Structure” and “—Risks Relating to Doing Business in China.”

 

 

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The following diagram illustrates our corporate structure and principal subsidiaries and variable interest entities as of the date of this prospectus:

 

LOGO

 

(1) Jiubang Digital is one of our variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang, our co-founders, and Sanju Advertising, one of our variable interest entities, each owns 16%, 4% and 80% of Jiubang Digital’s equity interests, respectively.
(2) Sanju Advertising is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 20% and 10% of Sanju Advertising’s equity interests, respectively.
(3) Hengye Software is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 10% and 20% of Hengye Software’s equity interests, respectively.
(4) Zhiteng Computer is one of our variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang each owns 80% and 20% of Zhiteng Computer’s equity interests, respectively.
(5) Dormant entity without operations.

Our Dual Class Share Structure

Upon completion of this offering, we will have a dual class ordinary share structure. Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares. All of our outstanding ordinary shares will be redesignated as Class B ordinary shares and all of our outstanding preferred shares will be automatically converted into Class B ordinary shares immediately prior to the completion of this offering. All share-based compensation awards, including options and share purchase rights, regardless of grant dates, will entitle holders

 

 

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to purchase Class A ordinary shares once the vesting and exercise conditions on such share-based compensation awards are met. Holders of Class A and Class B ordinary shares will have the same rights, including dividend rights, except that holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share, and Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time, while Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances. The ADSs being sold in this offering represent Class A ordinary shares. See “Description of Share Capital—Ordinary Shares” for more details regarding our Class A ordinary shares and Class B ordinary shares.

Implications of Being an Emerging Growth Company

As a company with less than US$1.0 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

 

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THE OFFERING

The following information assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Offering price

We currently estimate that the initial public offering price will be between US$9.50 and US$11.50 per ADS.

 

ADSs offered by us

7,000,000 ADSs

 

Concurrent Private Placement

Concurrently with, and subject to, the completion of this offering, Qihoo 360 Technology Co. Ltd., or Qihoo 360, and Kingsoft Internet Software Holdings Limited, or Kingsoft, through a subsidiary, has each agreed to purchase from us US$15.0 million and US$5.0 million, respectively, in Class A ordinary shares at a price per share equal to the initial public offering price adjusted to reflect the ADS-to-ordinary-share ratio. Assuming an initial offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, each of these investors will purchase 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares from us, respectively. Our proposed issuance and sale of Class A ordinary shares to these investors are being made through private placement pursuant to an exemption from registration with the U.S. Securities and Exchange Commission under Regulation S of the Securities Act of 1933, as amended, or the Securities Act. In connection with this investment, we have agreed to grant these investors certain registration rights as described under “Description of Share Capital—Registration Rights in Connection with Concurrent Private Placement.” The investors has each agreed with the underwriters not to, directly or indirectly, sell, transfer or dispose of any Class A ordinary shares acquired in the private placement for a period of 180 days after the date of this prospectus, subject to certain exceptions. See “Underwriting”.

 

Ordinary shares outstanding immediately after this offering

194,864,242 ordinary shares (or 201,164,242 ordinary shares if the underwriters exercise their over-allotment option in full) will be outstanding immediately upon the completion of this offering, comprised of (i) 53,428,570 Class A ordinary shares, par value US$0.0001 per share (or 59,728,570 Class A ordinary shares in total if the underwriters exercise their over-allotment option in full to purchase additional ADSs), including 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares we will issue and sell in the private placement to Qihoo 360 and Kingsoft, respectively, concurrently with this offering, assuming an initial public offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, and (ii) 141,435,672 Class B ordinary shares, par value US$0.0001 per share. The 141,435,672 Class B ordinary shares outstanding immediately after the completion of this offering will

 

 

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represent 72.6% of our total outstanding shares and 96.4% of the then total voting power.

 

ADSs outstanding immediately after this offering

7,000,000 ADSs (or 8,050,000 ADSs if the underwriters exercise their over-allotment option in full)

 

The ADSs

Each ADS represents six Class A ordinary shares, par value US$0.0001 per share.

 

  The depositary will hold the Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement.

 

  If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares, after deducting its fees and expenses.

 

  You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Over-allotment option

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to 1,050,000 additional ADSs.

 

Use of proceeds

We plan to use the net proceeds we receive from this offering and from investment by Qihoo 360 and Kingsoft for general corporate purposes, which may include research and development of new mobile internet products, services, technology and infrastructure, expanding our selling and marketing activities, working capital needs, potential acquisitions, partnerships, alliances and licensing opportunities. See “Use of Proceeds” for additional information.

 

Lock-up

We, our directors and executive officers, our existing shareholders and certain of our option holders, Qihoo 360 and Kingsoft have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ADSs or ordinary shares or securities convertible into or exercisable or exchangeable for our ADSs or ordinary shares for a period of 180 days after the date of this prospectus. See “Underwriting” for more information.

 

 

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Proposed NASDAQ symbol

We have applied to have the ADSs listed on NASDAQ under the symbol “GOMO.” Our ADSs and Class A ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of Depositary Trust Company on             , 2013.

 

Depositary

JPMorgan Chase Bank, N.A.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 490,000 ADSs offered by this prospectus to some of our directors, officers, employees, business associates and related persons.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks that you should carefully consider before investing in our ADSs.

The number of ordinary shares that will be outstanding immediately after this offering:

 

   

assumes re-designation or conversion of all outstanding ordinary shares and series A, B and C preferred shares into 86,678,104 Class B ordinary shares immediately upon the completion of this offering;

 

   

assumes no exercise of the underwriters’ over-allotment option;

 

   

includes 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares we will issue and sell in the private placement to Qihoo 360 and Kingsoft, respectively, concurrently with this offering, assuming an initial public offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus;

 

   

excludes 10,520,133 Class A ordinary shares issuable upon exercise of our outstanding share options at a weighted average exercise price of US$0.94 per Class A ordinary share; and

 

   

excludes 16,261,112 Class A ordinary shares issuable upon exercise of certain share purchase rights at a weighted average price of US$0.78 per share.

 

 

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OUR SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of comprehensive income (loss) data (except for non-GAAP measure data) for the years ended December 31, 2011 and 2012 and the summary consolidated balance sheets data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of comprehensive income (loss) data (except for non-GAAP measure data) for the nine months ended September 30, 2012 and 2013 and summary consolidated balance sheet data as of September 30, 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The unaudited condensed consolidated financial statements include all adjustments that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    Year Ended December 31,     Nine Months Ended September 30,  
    2011     2012     2012     2013  
    RMB     RMB     US$     RMB     RMB     US$  

Summary Consolidated Statements of Comprehensive Income (Loss) Data:

           

Revenues

    96,594,538        185,218,681        30,264,490        124,746,450        229,992,987        37,580,553   

Cost of revenues(1)

    (46,617,793     (74,813,098     (12,224,362     (53,850,022     (69,485,007     (11,353,759
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    49,976,745        110,405,583        18,040,128        70,896,428        160,507,980        26,226,794   

Operating Expenses:

           

Research and development expenses(1)

    (30,190,352     (34,041,250     (5,562,296     (24,178,877     (29,512,729     (4,822,341

Selling and marketing expenses(1)

    (35,305,268     (45,914,065     (7,502,298     (34,240,540     (34,876,237     (5,698,732

General and administrative expenses(1)

    (23,224,454     (25,614,849     (4,185,433     (18,153,564     (27,992,607     (4,573,955
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (38,743,329     4,835,419        790,101        (5,676,553     68,126,407        11,131,766   

Change in fair value of warrants

    (2,356,037     —          —          —          —          —     

Share of losses of equity method investments

    (3,744,390     (1,072,946     (175,318     (1,072,946     —          —     

Impairment loss on equity method investments

    (389,270     —          —          —          —          —     

Gain on disposal of an equity method investment

    —          4,182,485        683,413        4,182,485        —          —     

Investment income on short-term investment

    2,251,269        124,862        20,402        124,862        168,544        27,540   

Interest income

    205,715        194,643        31,804        133,940        167,031        27,292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (42,776,042     8,264,463        1,350,402        (2,308,212     68,461,982        11,186,598   

Income tax benefit (expense)

    —          6,903,561        1,128,033        —          (7,481,860     (1,222,526
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (42,776,042     15,168,024        2,478,435        (2,308,212     60,980,122        9,964,072   

Basic earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.13        0.02   

Diluted earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.12        0.02   

Weighted average ordinary shares outstanding

           

Basic

    51,880,468        51,880,468        51,880,468        51,880,468        51,839,995        51,839,995   

Diluted

    51,880,468        51,880,468        51,880,468        51,880,468        54,833,100        54,833,100   

Non-GAAP Measure(2)

           

Adjusted EBIT

    (40,333,826     8,495,903        1,388,219        (2,105,131     72,833,723        11,900,936   

 

 

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(1) The amount of share-based compensation costs for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013 are as follows:

 

     Year Ended December 31,      Nine Months Ended September 30,  
     2011      2012      2012      2013  
     RMB      RMB      US$     

RMB

    

RMB

    

US$

 

Cost of revenues

     74,458         76,111         12,436         59,981         258,848         42,295   

Research and development expenses

     111,716         164,374         26,859         130,096         880,039         143,797   

Selling and marketing expenses

     52,355         124,850         20,400         99,095         397,357         64,928   

General and administrative expenses

     53,365         60,748         9,926         47,849         3,002,528         490,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     291,894         426,083         69,621         337,021         4,538,772         741,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For a reconciliation of our non-GAAP measure to the GAAP measure of net income or loss, see “—Non-GAAP Financial Measure.”

 

     As of December 31,     As of September 30, 2013  
     2011     2012    
     RMB     RMB     US$    

RMB

   

US$

 

Summary Consolidated Balance Sheets Data:

          

Cash

     81,011,002        83,598,378        13,659,866        114,233,689        18,665,635   

Accounts receivable, net

     33,167,598        46,341,590        7,572,155        82,110,607        13,416,766   

Total assets

     135,853,500        164,318,473        26,849,424        235,275,090        38,443,642   

Total liabilities

     33,894,056        46,632,878        7,619,751        54,365,853        8,883,309   

Redeemable convertible preferred shares

     390,097,630        447,127,915        73,060,117        479,883,120        78,412,274   

Ordinary shares

     42,360        42,360        6,922        44,069        7,201   

Accumulated deficit

     (327,181,409     (369,820,097     (60,428,120     (349,798,394     (57,156,600

Total shareholders’ deficit

     (288,138,186     (329,442,320     (53,830,444     (298,973,883     (48,851,941

Non-GAAP Financial Measure

We define adjusted earnings before interest and tax, or Adjusted EBIT, a non-GAAP financial measure, as net income or loss excluding the effect of (i) interest income, (ii) income tax expense or benefit, (iii) share-based compensation costs and (iv) change in fair value of warrants. We review Adjusted EBIT in addition to net income or loss to obtain a better understanding of our operating performance and we also believe it is useful supplemental information for investors to evaluate our business. Adjusted EBIT has material limitations as analytical tool. Interest income, income tax expense or benefit, and share-based compensation costs have been and will continue to be significant recurring factors in our business. In addition, because Adjusted EBIT is not calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider Adjusted EBIT in isolation from or as an alternative to net income or loss prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

     Year Ended December 31,     Nine Months Ended September 30,  
     2011     2012     2012     2013  
     RMB     RMB     US$     RMB     RMB     US$  

Net income (loss)

     (42,776,042     15,168,024        2,478,435        (2,308,212     60,980,122        9,964,073   

Deduct: interest income

     (205,715     (194,643     (31,804     (133,940     (167,031     (27,292

Add back: income tax expense (benefit)

     —          (6,903,561     (1,128,033     —          7,481,860        1,222,526   

Add back: share-based compensation costs

     291,894        426,083        69,621        337,021        4,538,772        741,629   

Add back: change in fair value of warrants

     2,356,037        —          —          —          —          —     

Adjusted EBIT

     (40,333,826     8,495,903        1,388,219        (2,105,131     72,833,723        11,900,936   

 

 

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CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

Except where the context otherwise requires and for purposes of this prospectus only:

 

   

“Sungy Mobile Limited,” “we,” “us,” “our company” and “our” refer to Sungy Mobile Limited, its subsidiaries and, in the context of describing our operations and consolidation financial information, also include our variable interest entities, Guangzhou Jiubang Digital Technology Co., Ltd., or Jiubang Digital, Guangzhou Sanju Advertising Media Co., Ltd., or Sanju Advertising, Guangzhou Hengye Software Technology Co., Ltd., or Hengye Software, and Guangzhou Zhiteng Computer Technology Co., Ltd., or Zhiteng Computer;

 

   

“ADSs” refers to our American depositary shares, each of which represents six Class A ordinary shares;

 

   

“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

   

“ordinary shares” prior to the completion of this offering refer to our ordinary shares, par value US$0.0001 per share and, upon the completion of this offering, to our Class A and Class B ordinary shares, par value US$0.0001 per share;

 

   

“RMB” and “Renminbi” refer to the legal currency of China;

 

   

“US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;

 

   

“User” for our GO series products refers to a smartphone in which one or more of our GO series products has been downloaded and activated, according to our internal statistics. Each smartphone is counted as one user regardless of the number of GO series products installed on that smartphone;

 

   

“Monthly active user” for our GO series products refers to a smartphone in which one or more of our GO series products has been downloaded and activated and that accessed mobile internet at least once during the relevant month, according to our internal statistics. Each smartphone is counted as one monthly active user in any given month regardless of the number of GO series products installed on that smartphone;

 

   

“unique visitor” to 3G.cn means a visitor to 3G.cn from a specific mobile phone containing an individual browser cookie. No subsequent visits from the same mobile phone using the same cookie during a relevant period are added to our total unique visitors count for that period. An individual who accesses 3G.cn multiple times from the same mobile phone with the same cookie is counted as a unique visitor for each cookie he or she uses; and

 

   

A “paid download” refers to a download of our mobile application product from application stores in any of the following two categories: (i) our paid mobile application product, Next Launcher, and (ii) paid premium themes or advanced functionalities for our free mobile application products.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

 

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RISK FACTORS

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

Risks Relating to Our Business and Industry

Our GO series products and GO platform are relatively new, and the continued growth of our business is subject to a high degree of uncertainty.

Our GO series products and GO platform are relatively new and have only a short operating history, and the core elements of our GO platform are unique and rapidly evolving. Our Go series products have rapidly achieved global popularity since the launch of GO Launcher EX in November 2010. We were one of the top three publishers worldwide on Google Play as measured by the number of downloads in the Applications category for the nine months ended September 30, 2013, based on the App Annie Intelligence Report. Our GO series products have attracted approximately 325 million users worldwide as of September 30, 2013. However, due to the relatively short history of GO series products and services, the sustainability of user demand and the continued growth of our GO series products and GO platform are subject to a high degree of uncertainty. There are few proven methods of projecting user demand or industry trends on which we can rely, and we cannot assure you that we will be successful in the future. As the mobile internet industry is experiencing constant changes and innovation, many of the determining factors for the future of our GO series products and our GO platform are beyond our control, including our ability to anticipate and adapt to rapid changes in industry trends and the tastes and preferences of our users, our ability to develop a larger portfolio of GO series products and services that will continue to be popular among users, our ability to integrate a large number of third party mobile internet products and services into our GO platform to serve a wider range of our users’ needs, the continued worldwide growth in the use of our mobile internet products, and the availability and popularity of other competing mobile internet products.

We have devoted, and expect to continue to devote, substantial resources to the development of our GO platform and the expansion of the products and services offered on this platform, but we cannot guarantee that we will be able to continuously improve the functionality and performance of our GO series products so that they continue to appeal to our users, advertisers, third-party developers or other business partners.

There are significant uncertainties in the revenue potential of our GO series products and GO platform.

There is no proven revenue model for our GO series products and GO platform, as the fast growth of the mobile internet industry is a very recent phenomenon and we offer a unique, innovative portfolio of products and services that redefines the Android user experience. Leveraging the large user base of our GO series products, we have been experimenting with various revenue models, including user purchases of premium themes and premium launcher product, in-app purchases of advanced functionalities, and advertisers’ payments for different forms of advertising on our GO platform either through direct sales or through third-party advertising agencies and mobile advertising networks such as Google AdMob and GetJar. We also intend to enter into arrangements with more third-party mobile internet products and services providers for their offerings on our GO platform. We cannot assure you that our existing revenue streams can continue to grow as we expected or that we can successfully identify new significant revenue streams, nor can we guarantee that we will be successful in developing and building an effective revenue model for our GO platform. As a result, there is significant uncertainty in our revenue potential.

 

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Our business is increasingly subject to the risks relating to international operations, which could adversely affect our financial conditions and results of operations.

Our business has rapidly expanded internationally since we released our GO Launcher EX and other GO series products. Our GO series products have attracted approximately 325 million users worldwide as of September 30, 2013, with over 70% of these users from locations outside of China. The international market forms an important component of our growth strategy, but expanding our business internationally exposes us to a number of risks, including:

 

   

Difficulty in identifying appropriate local or international third-party business partners and establishing and maintaining a good working relationship with them;

 

   

Difficulty in selecting appropriate geographical regions for overseas expansion;

 

   

Difficulty in understanding local markets and culture;

 

   

Fluctuations in currency exchange rates;

 

   

Compliance with applicable foreign laws and regulations, including internet content requirements, foreign exchange controls, cash repatriation restrictions, intellectual property protection rules and data privacy requirements; and

 

   

Increased costs associated with doing business in foreign jurisdictions.

Our financial condition and results of operations could be adversely affected by these and other risks associated with conducting international operations.

Our GO series products and GO platform are built on the Android operating system and are highly reliant on third-party mobile internet products distribution platforms such as Google Play. Our revenues may suffer if the market demand for Android smartphones decreases, or if any of the distribution platforms that help make our GO series products available for download changes its standard terms and conditions in a way that is detrimental to us.

We built up our GO series products and GO platform on the Android operation system. Any significant downturn in the overall demand for Android smartphones or the use of Android smartphones could significantly and adversely affect the demand for our launcher products, which in turn would materially affect our revenues generated from GO series products. Although the Android smartphone market has grown rapidly in recent years, it is uncertain whether the Android smartphone market will remain growing at a similar rate in the future. In addition, due to the constantly evolving nature of the smartphone industry, another operating system for smartphones may eclipse the Android operating system and send the Android system into a decline in popularity. To the extent that our GO series products continue to be operated on Android smartphones and to the extent that our future revenues substantially depend on the use and sales of Android smartphones, our business would be vulnerable to any downturns in the Android smartphone market.

In addition, we rely upon third party mobile internet products distribution platforms such as Google Play to make our GO series products available for user download. Google Play, a global application distribution platform on Android smartphones, is currently the main distribution channel for our GO series products outside of China. In China, where Google Play is not available, we work with other similar local distribution platforms to make our GO series products available to users in the country. We expect to continue to derive a substantial number of downloads of our GO series products from such distribution platforms, especially Google Play. As such, the promotion, distribution and operation of our platform products are subject to Google Play’s and other similar distribution platforms’ standard terms and policies for application developers, which are very broad and subject to the interpretation of, and frequent changes by, Google Play and these other distribution platforms. If Google

 

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Play, or any of the major distribution platforms that help make our GO series products available for download, changes its standard terms and conditions in a way that is detrimental to us, or terminates its existing relationship with us, revenues from our GO series products and services could be materially and adversely affected.

We may not be able to continually meet user demand and retain or expand our user base.

Although we constantly monitor and research user needs, we may be unable to meet user demand on a continual basis or anticipate future user demands. A decrease in the number of users may reduce our monetization opportunities and have a material and adverse effect on our business, financial condition and results of operations. In order to attract and retain users and remain competitive, we must continue to innovate our products and services, improve user experience, and implement new technologies and functionalities.

The mobile internet business is characterized by constant changes, including but not limited to rapid technological evolution, continual shifts in user demands, frequent introductions of new products and services and constant emergence of new industry standards and practices. As a result, users may leave us for our competitors’ products and services more quickly than in other sectors. Thus our success will depend, in part, on our ability to respond to these changes on a timely and cost-effective basis, including improving and marketing our existing products and services and developing and pricing new products and services in response to evolving user needs. Our ability to successfully retain or expand our user base will depend on our ability to achieve the following, among others:

 

   

Anticipate and effectively respond to the growing number of mobile internet users in general and GO platform and GO series product users in particular;

 

   

Attract, retain and motivate talented application designers, product managers and engineers who have experience developing our GO series products or other mobile internet products and services;

 

   

Effectively market our existing and new mobile internet products and price them in response to evolving user needs;

 

   

Timely develop and launch new Go series products and other mobile internet products cost-effectively;

 

   

Further improve our GO platform to provide a compelling and optimal user experience through integration of products and services provided by existing and new third-party developers or business partners as well as our 3G.cn mobile portal and mobile reading base; and

 

   

Further provide quality content to attract and retain visitors, advertisers and readers to 3G.cn and our mobile reading base.

We cannot assure you that our existing products and services will continue to be sufficiently popular with our users. We may be unsuccessful in adding compelling new products and services to further diversify our product offerings. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of our new products or services. Moreover, we cannot be sure that any of our new products and services will achieve widespread market acceptance or generate incremental revenue the way our existing GO series products have done. If we fail to continue to achieve sufficient user satisfaction through our products or services or our products and services fail to meet our expectation to maintain and expand our user base, our business, results of operations and financial condition will be materially and adversely affected.

We may not be able to effectively manage our growth or implement our future business strategies, in which case our business and results of operations may be materially and adversely affected.

We anticipate continuous expansion in our business, both through internal growth and strategic cooperation with third party partners. We have experienced a period of significant rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. We cannot assure you that this level of significant growth will be sustainable or achieved at all in the future. We believe that our continued growth will depend on our ability to develop and enhance our products and services, attract new users, retain

 

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existing users, encourage additional purchases by existing users, continue developing innovative technologies in response to user demand, maintain an open platform for Android smartphone products and services from third party developers, increase brand awareness through marketing and promotional activities, react to changes in market trends, expand into new market segments, integrate our products onto our platform, attract new advertisers and retain existing advertisers and take advantage of the growth in the relevant markets. We cannot assure you that we will achieve any of the above.

To manage our growth and attain and maintain profitability, we will also need to further expand, train, manage and motivate our workforce and manage our relationships with users, third party developers, business partners and advertisers. We anticipate that we will need to implement a variety of enhanced and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. All of these endeavors involve risks and will require substantial management efforts and skills and significant additional expenditures. In addition, we currently derive revenues for GO series products primarily from outside of China, whereas our revenues from 3G.cn and our mobile reading services are primarily derived from China; this geographic diversification in the sources of our revenues may raise the level of difficulty in managing our growth and profitability. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. In addition, we cannot assure you that we will be able to effectively manage our growth or implement our future business strategies effectively, and failure to do so may materially and adversely affect our business and results of operations.

We have limited relevant operating history and it may be difficult to evaluate our business and prospects.

We commenced operations in 2003, and our business has undergone significant changes with the development of different mobile internet products, from the establishment of 3G.cn in 2004 to the beginning of charging fees for our mobile reading services in 2010 and, most recently, the launch of GO Launcher EX in November 2010. Given our history and our diversified sources of revenues, including the relatively new GO series products, and given the risks frequently encountered by fast-growing companies in relatively new and rapidly evolving industries such as the mobile internet industry, it may be difficult for you to evaluate our business, financial performance and prospects. Our historical growth rate may not be indicative of our future performance. We cannot assure you that we will grow at the same rate as we did in the past. You should consider our prospects in light of the risks and uncertainties that fast-growing companies in a relatively new and rapidly evolving market may encounter or to which such companies may be exposed.

If we fail to attract advertisers or if our advertisers reduce their spending with us, our revenues, profitability and prospects may be materially and adversely affected.

In the years ended December 31, 2011, 2012 and for the nine months ended September 30, 2013, our marketing revenues from mobile portal and mobile application products and services accounted for 49.3%, 37.5% and 40.6%, respectively, of our total revenues. Although our other services have experienced significant growth in recent years, we expect to derive an increasing percentage of revenues from marketing service, especially from our mobile application products and services, and our profitability and prospects will partly depend on the continued development of the advertising industry and advertisers’ allocation of budgets to mobile internet advertising. Companies that advertise on mobile internet may utilize other methods or channels that are more established than the marketing solutions we offer. If the mobile advertising market size does not increase from current levels, or if we are unable to capture and retain a sufficient share of that market, our ability to maintain or increase our current level of marketing revenues and our profitability and prospects could be materially and adversely affected.

We generate our marketing revenues from working with mobile advertising networks, advertising agencies and direct advertisers. Currently, a small number of advertising customers contribute a significant portion of our marketing revenues. One of our direct advertisers contributed approximately 20.7% of our marketing revenue, or

 

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8.4% of our total revenues for the nine months ended September 30, 2013. We cannot assure you that we will be able to retain this and other existing direct advertisers, maintain relations with existing advertising agencies or mobile advertising networks, attract new direct advertisers or work with new advertising agencies and mobile advertising networks. In addition, if any direct advertisers or advertising agencies determine that their expenditures on advertising with us do not generate expected returns, for reasons such as the amount and quality of content on our GO platform or 3G.cn fail to attract a sufficient number of users, such direct advertisers or advertising agencies may allocate a greater portion or all of their advertising budgets to other channels and reduce or discontinue doing business with us. Since our arrangements with third party advertising agencies typically involve short-term framework or project-based agreements, we cannot assure you that we can continue cooperating with such advertising agencies in the future. Although we intend to reduce reliance on third party advertising networks by developing our own advertising network in the future, failure to retain existing advertisers, enhance relations with existing advertising agencies and mobile advertising networks, attract new direct advertisers, work with new advertising agencies and mobile advertising networks or efficiently manage advertising inventory may materially and adversely affect our business, financial condition and results of operations.

We face competition in all aspects of our business. If we fail to compete effectively or if our reputation is damaged, our business, financial condition and results of operations may be materially and adversely affected.

Although we currently have a leading presence in the smartphone launcher platform products market, we cannot guarantee that we will be able to maintain our leading position in the future. We may face potential competition from leading mobile internet companies or smartphone manufacturers if they start to allocate resources and focus on the development in this business sector, and new competitors may also emerge. With more entrants into the smartphone launcher platform products business, aggressive price cutting by competitors may result in downward pressure on our gross margins in the future. We may then have to take actions to retain and attract users, such as cutting the price of our product and service offerings, which could adversely affect our profitability. If we fail to compete effectively, our market share would decrease and our results of operations would be materially and adversely affected.

We also face competition in other aspects of our business, particularly from companies that provide mobile portal services and mobile reading services. Some of our competitors have longer operating histories and significantly greater financial, technical and marketing resources than we do, and in turn have an advantage in attracting and retaining users and advertisers. In addition, many of our competitors that provide mobile portal and mobile reading services have significantly larger user bases and more established brand names than we do and may be able to more effectively leverage their user bases and brand names to provide integrated products and services, and thereby increase their respective market shares.

If we are not able to effectively compete in any aspect of our business or if our reputation is harmed by rumors or allegations regarding our business, our overall user base may decrease, which could reduce our paying users or make us less attractive to advertisers. We may be required to spend additional resources to further increase our brand recognition and promote our products and services, and such additional spending could adversely affect our profitability. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity relating to us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turn lead to reduced number of users and advertisers. Any legal proceedings or measures we take in response to such disputes may be expensive, time-consuming and disruptive to our operations and divert our management’s attention.

We may incur net losses and experience negative cash flow from operating activities in the future and may not be able to obtain additional capital in a timely manner or on acceptable terms, or at all.

We have incurred net losses historically and we may incur losses in the future as we grow our business. In addition, we experienced negative cash flow from operating activities of RMB29.5 million in 2011; although we

 

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generated positive cash flow from operating activities in the amount of RMB12.3 million (US$2.0 million) in 2012 and RMB38.1 million (US$6.2 million) for the nine months ended September 30, 2013, we may experience negative cash flows again in the future.

Our ability to achieve and maintain profitability and positive cash flow from operating activities depends on various factors, including but not limited to, the acceptance of our products and services by mobile internet users, the growth and maintenance of our user base, our ability to control our costs and expenses and grow our revenues and the effectiveness of our selling and marketing activities. We may not be able to achieve or sustain profitability or positive cash flow from operating activities, and if we achieve positive operating cash flow, it may not be sufficient to satisfy our anticipated capital expenditures and other cash needs. As such, we may not be able to fund our operating expenses and expenditures and may be unable to fulfill our financial obligations as they become due, which may result in voluntary or involuntary dissolution or liquidation proceeding of our company and a total loss of your investment.

We have financed our operations to date primarily with proceeds from the sale of equity securities and warrants. As of September 30, 2013, we had approximately RMB114.2 million (US$18.7 million) in cash. We expect that our existing cash will be sufficient to fund our operating and capital requirements for at least the next 12 months. However, we may need to raise additional capital to fund our continued operations. We cannot be certain that additional funding will be available in a timely manner or on acceptable terms, or at all. Our failure to obtain sufficient capital or sufficient capital in a timely manner or on acceptable terms could significantly harm our business, financial condition and prospects.

Our mobile reading services historically generated a substantial portion of our revenues. Our business and results of operations may be adversely affected if we fail to identify, attract and retain promising authors to generate popular literary content and support the continued growth of our mobile reading services.

In the years ended December 31, 2011, 2012 and for the nine months ended September 30, 2013, mobile reading services accounted for 34.7%, 39.3% and 31.9%, respectively, of our total revenues. We expect that our mobile reading services will continue to be an important revenue generating source and we rely on our authors to produce attractive literary content and drive the continued growth of our mobile reading services. We may not be able to identify, attract and retain promising authors to produce popular literary content on a scale sufficient to support the continued growth of our mobile reading services. We may lose our most successful authors to competitors who may offer our authors more favorable terms that we are unable to match. Our popular authors may request more favorable terms or higher prices for licensing or transferring the proprietary rights of their literary works to us. We cannot guarantee that the content created by our authors will be popular enough to help us increase the number of paying users or increase their spending with our mobile reading services. Although some of our authors agree to create literary content exclusively for us, we cannot control their productivity or the quality of their works produced within the contract term. We cannot be certain that the authors will continue to prefer to publish their literary works with our mobile reading services. In the event of any decline in our authors’ productivity or the quality of the literary works they produce, or if we are unable to attract or retain qualified authors , we may incur substantial costs to procure suitable replacement authors and content, which could have a negative impact on the number of our readers for our mobile reading services, and ultimately, on our business, financial condition and results of operations.

Our business depends substantially on the continuing efforts of our management team and key employees, and our business operations may be severely disrupted if we lose their services.

Our future success depends substantially on the continued efforts of our management team and key employees, in particular, Mr. Yuqiang Deng, our chief executive officer, Mr. Xiangdong Zhang, our president, Mr. Yingming Chang, our chief operating officer, and Mr. Aihua Huang, our vice president of technology. The loss of any of our management team members could harm our business. In addition, if any of our key employees were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a

 

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timely manner, or at all, which could result in significant disruptions to our business, and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business. If any of our core management team members or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff members.

In addition, if we are unable to attract or retain qualified employees to achieve a high level of success, we may not be able to grow our business or execute our business strategy and as a result, our revenues and profitability may decline. Each of our executive officers and key employees has made undertakings relating to non-competition obligations. However, these undertakings may not be enforceable in China, where our executives and key employees reside, in light of uncertainties with China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.” In addition, if one or more of our executives or other key personnel do not act in the best interests of our company when a conflict of interest arises, our business, prospects and reputation may be harmed.

The performance and functionality of our GO platform may be impacted by third party developers’ internet mobile products offered via our GO platform.

We have published a development kit for our GO platform to encourage third parties to develop themes for our GO series products. Over 10,000 third-party developed themes for our GO series products are currently available to suit our users’ diverse needs and preferences, in addition to the over 100 themes we have developed internally. We intend to expand our GO platform by cooperating with more third parties to offer their products and services on our platform. Although currently no single third-party developer is critical to our GO platform and we continue to develop our core GO series products and services internally, if the number of high quality third-party developers on our GO platform decreases, the overall quality of third-party developed products and services declines or the products from the third-party developers fail to be compatible with our GO platform, our ability to monetize the GO platform may be negatively impacted and we may have to allocate more resources to internally develop the relevant products, which could have a material and adverse effect on our financial results. In addition, if we fail to integrate 3G.cn, the mobile reading services or other GO series products into our GO platform, the business potential for the sustainable growth of our GO platform could be substantially limited.

We contract with third parties to provide content for 3G.cn and our mobile reading services and we may lose users and revenues if these arrangements are terminated or if the quality of their content deteriorates.

We have arrangements with a number of third parties to provide content to our 3G.cn, for example, news agencies and publishers, entertainment and sports program providers, and our mobile reading services, and we have relied and will continue to rely on third parties for a significant portion of the content and materials (including all news-related content and materials) that we offer on 3G.cn and on our mobile reading services. If a large number of these content providers terminate relationships with us, materially change our existing arrangements, or fail to deliver high-quality content that meets users’ needs, or if we fail to find other content providers to maintain or expand the content we offer, we may lose our users and suffer significant revenue losses.

In addition, the PRC government has the ability to restrict or prevent state-owned media from cooperating with us in providing certain content to us, which will result in a decline in the amount and scope of content we offer on 3G.cn, in which case our revenues will be negatively impacted. Certain state-owned media companies from whom we currently procure content have built their own portal websites and may discontinue the cooperations with us in the future.

We cannot assure you that we will be able to retain our third party content providers or attract new third party providers to provide sufficient and popular content or materials, which may materially and adversely affect our business, financial condition and results of operations.

 

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We depend on revenue-sharing arrangements with major mobile network carriers in China for a significant portion of our revenues from mobile reading.

A significant portion of our revenues from mobile reading services is derived from our revenue-sharing arrangements with major mobile network carriers in China, such as China Mobile, which run their own mobile reading base. We provide content to the mobile reading libraries of these mobile network carriers and receive a percentage of the fees paid by their users. For example, in 2011, 2012 and for the nine months ended September 30, 2013, we derived approximately 63%, 59% and 57%, respectively, of our net revenues related to our mobile reading services from revenue-sharing arrangements with China Mobile. Our agreements with these major mobile network carriers generally have a term of one year and there can be no assurance that the agreements will be extended or renewed upon the expiration of their respective terms or that we will be able to extend or renew such agreements on terms and conditions favorable to us or at all. If any of the major mobile network carriers breaches its obligations under its agreement with us or refuses to extend such agreement when the term expires, we may lose all or a portion of the users of the relevant mobile network carrier. Our mobile reading services will suffer if our relationship with any of the major mobile network carriers terminates or deteriorates, or if there are material changes to terms and conditions of the agreements which are detrimental to us.

We face risks relating to third parties’ billing and payment systems.

We depend on the billing and payment systems of third parties such as wireless carriers, mobile payment service providers (such as Google Play) and third-party payment processors to maintain accurate records of payments of sales proceeds by users and collect such payments. We receive periodic statements from these third parties which indicate the aggregate amount of fees that were charged to users of our products and services. Our business and results of operations could be adversely affected if these third parties fail to accurately account for or calculate the revenues generated from the sales of our products and services. If there are security breaches or failure or errors in the payment process of these third parties, user experience may be affected and our business results may be negatively impacted.

Failure to timely collect our receivables from third parties whose billing and payment systems we use and third-party payment processors may adversely affect our cash flows. Our wireless carriers and third-party payment processors may from time to time experience cash flow difficulties. Consequently, they may delay their payments to us or fail to pay us at all. Any delay in payment or inability of current or potential wireless carriers and third-party payment processors to pay us may significantly harm our cash flow and results of operations.

In addition, we rely on the billing statements provided by third party wireless carriers and third-party payment service providers in order to recognize a substantial portion of our revenues from our products and services. We may not be able to recognize revenue from our products and services from these third parties in the period in which the services are performed if we do not receive the billing statements from these third parties. Due to the delays in receiving such billing statements, our revenues may fluctuate between periods and may not reflect the actual performance of our services.

We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet or mobile network security breach were to occur, users concerned about the security of their online payments may become reluctant to purchase our products through payment service providers even if the publicized breach did not involve payment systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence in these payment systems. If any of the above were to occur and damage our reputation or the perceived security of the payment systems we use, we may lose paying users and users may be discouraged from purchasing our internal mobile products, which may have an adverse effect on our business and results of operations.

 

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Non-compliance on the part of third parties with which we conduct business could disrupt our business and adversely affect results of our operation.

Our third party content providers or other business partners may be subject to regulatory penalties or punishments because of their regulatory compliance failures, which may disrupt our business. Although we conduct a rigid review of legal formalities and certifications before entering into contractual relationships with our business partners, such as third party content providers, application developers and landlords, we cannot be certain whether any such third party has infringed or will infringe any third parties’ legal rights or violate any regulatory requirements. The legal liabilities and regulatory actions on our commercial partners may affect our business activities and reputation and in turn, our results of operations. For example, according to PRC regulations, all lease agreements are required to be registered with the local housing authorities. We presently lease properties at five different locations in China, and any failure to complete these required registrations by our landlords may expose our landlords and us to potential monetary fines. In addition, we intend to cooperate with selected mobile game publishers and developers to operate their mobile games on our GO platform. The online game industry, including online mobile games, is highly regulated in China and each online game operator is required to obtain licenses and permits and complete filing procedures for specific mobile games as well as to comply with various requirements when conducting business. We require our partners in the mobile game industry to provide their licenses, permits or filing documents in respect of the relevant online games before entering into cooperation arrangements with them, but we cannot assure you that such commercial partners or other developers who distribute online games and other applications through our platform without entering into cooperation arrangements with us will maintain all applicable permits and approvals, and any noncompliance on the part of such commercial partners may cause potential liabilities to us and in turn disrupt our operations.

If we fail to keep up with rapid technological changes in the internet and smartphone industries, our future growth may be adversely affected.

The internet industry and the smartphone industry are characterized by rapid and innovative technological changes. Our future success will depend on our ability to respond to rapidly changing technologies, adapt our products and services to evolving industry standards and improve the performance, functionality and reliability of our products and services. Our failure to adapt to such changes could harm our business. If we are slow to develop products and services that are compatible with smartphones, or if the products and services we develop are not widely accepted and used by smartphone users, we may not be able to capture a significant share of this increasingly important market. In addition, the widespread adoption of new internet, networking or telecommunications technologies or other technological changes for smartphones could require substantial expenditures to modify or adapt our products, services or infrastructure. If we fail to keep up with rapid and innovative technological changes to remain competitive, our future growth may be adversely affected.

If we fail to maintain and enhance our brands, or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.

We believe that maintaining and enhancing our brands, such as the GO brand for our GO platform, the GGbook brand for our mobile reading services and the 3G brand for our mobile internet portal, is of significant importance to the success of our business. Maintaining and enhancing the recognition and reputation of our brands are critical to our success and ability to compete. Well-recognized brands are important to increasing the number of users and enhancing our attractiveness to advertisers. Since our products and services are relatively new in the mobile internet market, brand maintenance and enhancement may directly affect our ability to maintain our market position.

Many factors, some of which are beyond our control, are important to maintaining and enhancing our brands and may negatively impact our brands and reputation if not properly managed, such as:

 

   

our ability to maintain a convenient and reliable user experience as user preferences evolve and as we expand into new service categories and new service lines;

 

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our ability to increase brand awareness among existing and potential users, readers, authors, content providers and advertisers through various marketing and promotional activities;

 

   

our ability to adopt new technologies or adapt our products and services to meet user needs or emerging industry standards;

 

   

our ability to effectively control the quality of third-party developers that offer their products and services on our GO platform; and

 

   

our ability to distinguish our GO name from other similar names in the market and maintain and enhance such name in the face of potential challenges from third parties.

Although we have established and developed our brands mostly through word of mouth referrals and repeat users and, in the case of GO series products, the Google Play distribution platform, as we expand, we may conduct various marketing and brand promotion activities to continue promoting our brands. We cannot assure you, however, that these activities will be successful or that we will be able to achieve the brand promotion effect we expect. In addition, any negative publicity in relation to our mobile internet products or services, regardless of its veracity, could harm our brands and reputation.

We have sometimes received, and expect to continue to receive, complaints from users regarding the quality of the products and services we offer. If our users’ complaints are not addressed to their satisfaction, our reputation and our market position could be significantly harmed, which may materially and adversely affect our business and prospects.

There are third parties in the mobile internet market with the name “Go” in their names or brands. These third parties may have registered similar brands to ours in different jurisdictions. We may be unable to clearly distinguish our GO name from such other similar names in the market, and may encounter difficulties in maintaining our GO name if there are challenges from third parties holding similar names.

Legal proceedings or allegations of impropriety against us or our management could have a material adverse impact on our reputation, results of operation, financial condition and liquidity.

We have been, and may be in the future, subject to allegations or lawsuits brought by our competitors, individuals or other entities against us or our management, including claims of unfair, unethical, fraudulent or otherwise inappropriate business practices. Any such lawsuit or allegation, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong doing by any key member of our management team could harm our reputation and user base and distract our management from day-to-day operations of our company. We cannot assure you that we or key members of our management team will not be subject to lawsuits or allegations of a similar nature in the future. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we will record a related contingent liability. As additional information becomes available, we will assess the potential liability and revise estimates as appropriate. In 2011, 2012 and the nine months ended September 30, 2013, we did not record any contingent liabilities relating to pending litigation. However, when we record or revise our estimates of contingent liabilities in the future, the amount of our estimates may be inaccurate due to the inherent uncertainties relating to litigation. In addition, the outcomes of actions we institute against third parties may not be successful or favorable to us. Litigations and allegations against us may also generate negative publicity that significantly harms our reputation, which may materially and adversely affect our user base and our ability to attract authors and advertisers. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert management’s and the board of directors’ attention from operating our business. We may also need to pay damages or settle the litigation with a substantial amount of cash. All of these could have a material adverse impact on our business, results of operation and cash flows.

 

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We may be subject to intellectual property infringement claims or other allegations, which could require us to pay substantial statutory penalties or other damages and fines, remove relevant content or enter into license agreements which may not be available on commercially reasonable terms.

Some third parties may own technology patents, copyrights, trademarks, trade secrets and internet content, which they may use to assert claims against us. We require our editors and relevant staff to sign agreements upon joining our company, to undertake to follow certain procedures designed to reduce the likelihood that we may use, develop or make available any content or applications without the proper licenses or necessary third party consents. However, these procedures may not be effective in completely preventing the unauthorized posting or use of copyrighted material or the infringement of other rights of third parties.

The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in China, is uncertain and still evolving. For example, as we face increasing competition and as litigation becomes a more common way to resolve disputes in China, we face a higher risk of being the subject of intellectual property infringement claims. We have also been subject to administrative penalties for offering certain literary works with expired licenses. Pursuant to relevant laws and regulations, internet service providers, including mobile internet service providers, may be held liable for damages if such providers have reasons to know that the works uploaded or linked infringe the copyrights of others. In cases involving the unauthorized posting of copyrighted content by users on websites in China, there have been court proceedings but no settled court practice that provides clear guidance as to under what circumstances hosting providers and administrators of a website such as 3G.cn or a reading base such as our mobile reading base or GO platform can be held liable for the unauthorized posting by third parties of copyrighted material. See “PRC Regulation—Intellectual Property Rights.” Any such proceeding could result in significant costs to us and divert our management’s time and attention from the operation of our business, as well as potentially adversely impact our reputation, even if we are ultimately absolved of all liability.

In addition, we cannot assure you that we will not become subject to intellectual property laws in other jurisdictions, such as the United States, by virtue of our ADSs being listed on NASDAQ, the ability of users to access, download and use our products and services in the United States and other jurisdictions, the ownership of our ADSs by investors in the United States and other jurisdictions, or the extraterritorial application of foreign law by foreign courts or otherwise, among other reasons. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be required to pay substantial penalties or other damages and fines, remove relevant content or enter into license agreements which may not be available on commercially reasonable terms or at all. Even though the allegations or claims could be baseless, defense against any of these allegations or claims would be both costly and time-consuming and could significantly divert the efforts and resources of our management and other personnel.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

We regard our trademarks, service marks, patents, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and patent law, trade secret protection and confidentiality and license agreements with our employees and others to protect our proprietary rights. As of September 30, 2013, we had registered 11 domain names that are material to our business, including 3G.net.cn, 3G.cn and jiubang.com, 55 software copyrights, six patents and 50 trademarks and service marks in China. In addition, we have filed 32 patent applications covering certain of our proprietary technologies and 18 trademark applications in China. We have also filed 20 trademark applications in South Korea and the U.S.

Monitoring unauthorized use of our intellectual property rights is difficult and costly, and we cannot be certain that we can effectively prevent misappropriation of our intellectual properties, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. From time to time, we may

 

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have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.

In addition, it is often difficult to create and enforce intellectual property rights in China and other countries outside of the United States. Patents, trademarks and service marks may also be invalidated, circumvented, or challenged. Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered by others. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Even where adequate, relevant laws exist in China and other countries outside of the United States, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment or an arbitration award delivered in another jurisdiction, and accordingly, we may not be able to effectively protect our intellectual property rights or enforce agreements in such countries. Given the potential cost, effort, risks and downsides of obtaining patent protection, in some cases we have not and do not plan to apply for patents or other forms of formal intellectual property protection for certain key technologies. If some of these technologies are later proven to be important to our business and are used by third parties without our authorization, especially for commercial purposes, our business and competitive position may be harmed.

If we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment for internet-based and mobile-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected.

The internet industry in China, including the mobile internet, is highly regulated. See “PRC Regulation.” Our PRC variable interest entities are required to obtain and maintain applicable licenses or approvals from different regulatory authorities in order to provide their current services. Under the current PRC regulatory scheme, a number of regulatory agencies, including the General Administration of Press, Publication, Radio, Film and Television, or GAPPRFT, the Ministry of Culture, or MOC, Ministry of Industry and Information Technology, or MIIT, and the State Council Information Office, or SCIO, jointly regulate all major aspects of the internet industry, including the mobile internet business. Operators must obtain various government approvals and licenses for relevant internet or publication business. We have obtained Internet Content Provider Licenses, or ICP licenses, for provision of internet and mobile network information services, a Value-added Telecommunications Business Operation License, or SP license, for provision of mobile network information services, a License for Online Transmission of Audio-visual Programs and an Internet Publishing License for internet publication and mobile games business and an Online Culture Operating License for operation of online games and music and entertainment products and an Online Culture Operating License for operation of internet comic and animation products. We have also obtained SMS Service Access Codes for provision of internet and mobile network information services. These licenses are essential to the operation of our business and are generally subject to annual government review. However, we cannot assure you that we can successfully renew these licenses annually or that these licenses are sufficient to conduct all of our present or future business.

We have applied for the approval to include publication of internet literature and mobile literature in our Internet Publishing License. We have also applied for the approval from the SCIO to publish news on 3G.cn or disseminate news through the mobile internet. We currently operate a current events channel on 3G.cn relating to current topics and social events produced by third party news agencies. As reported by certain news media, the State Internet Information Office recently named our mobile portal application, as one of the several mobile apps that provided internet news services without proper licenses or approvals, and required the named mobile apps to rectify the non-compliance as soon as possible. We have communicated with the State Internet Information Office and rectified the situation to meet their requirements. If the PRC government promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of relevant internet businesses and/or mobile and web-based subscription services that we plan to launch, the PRC government has the power to, among other things, levy fines, confiscate our income, revoke our business licenses, and require us to discontinue or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations.

 

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As we further develop and expand our products and services, we may need to obtain additional qualifications, permits, approvals or licenses. For example, we may be required to obtain a License for Production and Operation of Radio and TV Programs, and an Internet News Publication License for the productions and operation of our news programs. We cannot assure you that we or the service or content providers will be granted such qualifications, permits, approvals or licenses in a timely manner or at all. Prior to the receipt of such qualifications, permits, approvals or licenses, we may be deemed as being in violation of relevant laws or regulations and be subject to penalties.

In addition, we work with a lottery business partner to operate an online lottery through 3G.cn. Under PRC laws, a license is required for conducting the online lottery business. There have been no detailed procedures available for online lottery operators to submit the application for such license or for the approval authorities to grant such license. We intend to apply for the license as soon as detailed procedures are available under the relevant PRC law. If the PRC government finds that we were operating online lottery without a proper license, the PRC government has the power to, among other things, levy fines and confiscate our income. Any of these sanctions may have an adverse effect on our business and results of operations.

As the mobile internet industry in China and many other countries in which we operate is still at an early stage of development, new laws and regulations may be adopted from time to time to address new issues that come to the authorities’ attention. In the interpretation and implementation of existing and future laws and regulations governing our business activities, considerable uncertainties still exist. We cannot assure you that we will not be found in violation of any future laws and regulations or any of the laws and regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. In addition, we may be required to obtain additional license or approvals, and we cannot assure you that we will be able to timely obtain or maintain all the required licenses or approvals or make all the necessary filings in the future. If we fail to obtain or maintain any of the required licenses or approvals or make the necessary filings, we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed internet activities, the imposition of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.

Concerns about collection and use of personal data could damage our reputation and deter current and potential users from using our products and services, which could have material adverse effects on our business and results of operations.

Concerns about our personalization technology with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputation and results of operations. For example, one of our competitors had previously publicly spread allegations about our collection of user data. Although we were subsequently able to refute such allegations, such negative publicity and any additional negative publicity in relation to our services or products, regardless of its veracity, could seriously harm our reputation which in turn may deter current and potential users from using our products and services, which could have material adverse effects on our business and results of operations.

We apply strict management and protection for any information provided by users and, under our privacy policy, without our users’ prior consent, we will not provide any of our users’ personal information to any unrelated third party. While we strive to comply with our privacy policy as well as all applicable data protection laws and regulations, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving, and future regulatory or user concerns about the extent to which personal information is used or shared with advertisers or others may adversely affect our ability to share certain data with advertisers, which may limit certain methods of targeted advertising. Concerns about the security of personal data could also lead to a decline in general usage of our products and services, which could lead to lower user numbers. For example, if the PRC government authorities require real-name registration by our users, the growth of our user numbers may

 

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slow down and our business, financial condition and results of operations may be adversely affected. See “—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulations of internet and mobile internet businesses and companies.” A significant reduction in user numbers could have a material and adverse effect on our business, financial condition and results of operations.

Errors, flaws or failures in our products or services could harm our reputation or decrease market acceptance of our services and products.

Our products and services may contain errors, flaws or failures that may only become apparent after their release, especially in terms of updated versions of our mobile internet products and services. We receive user feedbacks in connection with errors, flaws or failures in our products and services from time to time, and such errors, flaws or failures may also come to our attention during our internal testing process. We generally have been able to resolve such errors, flaws or failures in a timely manner, but we cannot assure you that we will be able to detect and resolve all of them effectively or in a timely manner. Errors, flaws or failures in our services and products may adversely affect user experience and cause our users to stop using our services and products, which could materially and adversely affect our business and results of operations.

If any system failure, interruptions and downtime occurs, our business, financial condition and results of operations may be materially and adversely affected.

Although we seek to reduce the possibility of disruptions or other outages, our GO platform, 3G.cn and our mobile reading services may be disrupted by problems with our own technology and system, such as malfunctions in our software or other facilities and network overload. Our systems may be vulnerable to damage or interruption from telecommunication failures, power loss, computer attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. Parts of our system are not fully redundant or backed up, and our disaster recovery planning may not be sufficient for all eventualities. Despite any precaution we may take, the occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in the availability of our products and services. Any interruption in the ability of our users to use our products and services could reduce our future revenues, harm our future profits, subject us to regulatory scrutiny and lead users to seek alternative internet mobile products.

Our servers may experience some downtime from time to time, which may negatively affect our brand and user perception of the reliability of our systems. Any scheduled or unscheduled interruption in the ability of users to use our servers could result in an immediate, and possibly substantial, loss of revenues.

We have limited control over the prices of the services provided by telecommunication service providers and may have limited access to alternative networks or services. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if internet access fees or other charges to mobile internet users increase, our user traffic may decline and our business may be harmed.

Security breaches or computer virus attacks could have a material adverse effect on our business prospects and results of operations.

Any significant breach of security of our computer systems could significantly harm our business, reputation and results of operations and could expose us to lawsuits brought by our users and partners and to sanctions by governmental authorities in the jurisdictions in which we operate. We cannot assure you that our IT systems will be completely secure from future security breaches or computer virus attacks. Anyone who is able to circumvent our security measures could misappropriate proprietary information, including the personal information of our users, obtaining users’ names and passwords and enabling the hackers to access users’ other online and mobile accounts, if those users use identical user names and passwords. They could also misappropriate other information, including

 

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financial information, uploaded by our users in a secure environment. These circumventions may cause interruptions in our operations or damage our brand image and reputation. Our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could cause system interruptions, website slowdown or unavailability, delays in communication or transactions, or loss of data. We may be required to incur significant additional costs to protect against security breaches or to alleviate problems caused by such breaches. In addition, a significant security breach or virus attack on our system could result in a material adverse impact on our business and results of operations.

We have granted, and may continue to grant, options, restricted shares and other types of awards under our share incentive plans, which may result in increased share-based compensation expenses.

We adopted a 2006 global share plan in June 2006, which was amended and restated in October 2013, or the 2006 Plan, and a 2010 global share plan in June 2010, which was amended and restated in October 2013, or the 2010 Plan. Under the 2006 Plan, we are authorized to grant options or other types of awards to purchase a maximum of 5,224,126 ordinary shares. Under the 2010 Plan, we are authorized to grant options or other types of awards to purchase a maximum of 5,373,659 ordinary shares. See “Management—Share Incentive Plans” for a detailed discussion. In October 2013, we adopted a 2013 share incentive plan, or the 2013 Plan. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2013 Plan, or the Award Pool, is 4,243,070, which equals to three percent of our total outstanding shares on an as-converted basis as of the date of adoption of the 2013 Plan, plus an automatic annual increase of a number of shares on the first day of each year, beginning on January 1, 2014, equal to the total number of shares underlying the awards granted in the year immediately prior to each annual increase; provided that shares underlying the awards issued under the 2013 Plan but remain unvested as of January 1 of a given year should be counted as part of the existing Award Pool and should not be counted as part of the number of shares to be added on January 1 of the same year. We have not granted any awards under the 2013 Plan as of the date of this prospectus. For the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, we recorded RMB0.3 million, RMB0.4 million (US$70 thousand) and RMB4.5 million (US$0.7 million), respectively, in share-based compensation expenses. The amount of these expenses is based on the fair value of the share-based compensation awards we granted. The expenses associated with share-based compensation have affected our net income and may reduce our net income in the future, and any additional securities issued under share-based compensation schemes will dilute the ownership interests of our shareholders, including holders of our ADSs. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, or consultants, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements as of and for the two years ended December 31, 2012, we and our independent registered public accounting firm identified one material weakness relating to insufficient accounting personnel for financial information processing and reporting with appropriate U.S. GAAP knowledge and two significant deficiencies, including a significant deficiency related to information technology general control, or ITGC, in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States. ITGC deficiencies include the failure to maintain an information technology management and security policy as guidance for processing financial and business data. We have implemented and are continuing to implement a number of measures to address the material weakness and deficiencies identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we

 

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cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses or significant deficiencies in the future.

Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2014. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.

Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Future strategic alliances or acquisitions may not be successful and may have a material and adverse effect on our business, reputation and results of operations.

We may enter into strategic alliances, including joint ventures or minority equity investments, with various third parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.

In addition, although we have no immediate acquisition plans, if appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. Future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses

 

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may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable laws and regulations, which could result in increased delay and costs.

Our results of operations may be subject to wide fluctuations due to a number of factors, which may adversely affect the trading price of our ADSs.

We may experience seasonality and other fluctuations in our business, reflecting fluctuations in mobile internet and smartphone usage. Revenues from mobile application products and services are typically higher in the fourth quarter due to Christmas holidays and increased marketing campaigns during the period. We generally experienced weaker demands for our mobile reading services and mobile portal marketing services in the first quarter of each year due to the Chinese New Year holidays. Revenues from mobile portal marketing services are generally higher in the third and fourth quarters as there are typically more large scale marketing campaigns during the period on our portal website. Thus, our operating results in one or more future quarters or years may fluctuate substantially or fall below the expectations of securities analysts and investors. In such event, the trading price of our ADSs may fluctuate significantly.

We have limited business insurance coverage. Any uninsured occurrence of business disruption may result in substantial costs to us and the diversion of our resources, which could have an adverse effect on our results of operations and financial condition.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence may disrupt our business operations, require us to incur substantial costs and divert our resources, which could have an adverse effect on our results of operations and financial condition.

Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by the downturn in the global or Chinese economy.

The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies went into a recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy in 2012. It is unclear whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including China’s. There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and tensions in the relationship between China and Japan. The mobile internet products and services industry may be affected by economic downturns. A prolonged slowdown in the world economy, including in the Chinese economy, may lead to a reduced amount of mobile internet advertising, which could materially and adversely affect our business, financial condition and results of operations. Our products and services may be viewed as discretionary by our users, who may choose to discontinue or reduce spending on such products and services during an economic downturn. In such an event, our ability to retain existing users and increase new users will be adversely affected, which would in turn negatively impact our business and results of operations.

 

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Moreover, a slowdown or disruption in the global or Chinese economy may have a material and adverse impact on financings available to us. The weakness in the economy could erode investor confidence, which constitutes the basis of the credit market. The recent financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all. Although we are uncertain about the extent to which the recent global financial and economic crisis and slowdown of Chinese economy may impact our business in the short-term and long-term, there is a risk that our business, results of operations and prospects would be materially and adversely affected by any global economic downturn or disruption or slowdown of Chinese economy.

Any catastrophe, including natural catastrophes and outbreaks of health pandemics and other extraordinary events, could disrupt our business operations.

Our operations may be vulnerable to interruption and damage from natural and other types of catastrophes, including earthquakes, fire, floods, hail, windstorms, severe winter weather (including snow, freezing water, ice storms and blizzards), environmental accidents, power loss, communications failures, explosions, man-made events such as terrorist attacks and similar events. Due to their nature, we cannot predict the incidence, timing and severity of catastrophes. If any such catastrophe or extraordinary event occurs in the future, our ability to operate our business could be seriously impaired. Such events could make it difficult or impossible for us to deliver our services and products to our users and could decrease demand for our products. Because we do not carry property insurance and significant time could be required to resume our operations, our financial position and results of operations could be materially and adversely affected in the event of any major catastrophic event.

In addition, our business could be adversely affected by the outbreak of influenza A (H1N1), avian influenza, H7N9, severe acute respiratory syndrome (SARS) or other pandemics. Any occurrence of these pandemic diseases or other adverse public health developments in China or elsewhere could severely disrupt our staffing or the staffing of our business partners and otherwise reduce the activity levels of our work force and the work force of our business partners, causing a material and adverse effect on our business operations.

Risks Relating to Our Corporate Structure

If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC governmental restrictions on foreign investment in mobile internet businesses, or if these laws or regulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and our business operations.

Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the distribution of online information, the online advertising, the operation of online games and the conduct of online commerce through strict business licensing requirements and other government regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services. Specifically, foreign ownership in an internet information provider or other value-added telecommunication service providers may not exceed 50%. In addition, according to the Several Opinions on the Introduction of Foreign Investment in the Cultural Industry promulgated by the MOC, the GAPPRFT, the National Development and Reform Commission and the Ministry of Commerce, or the MOFCOM, in July 2005, foreign investors are prohibited from investing in or operating, among others, any internet cultural operating entities. Companies providing mobile internet services such as ours are governed by these rules and regulations on internet companies in China.

We are a Cayman Islands company and we conduct our operations in China primarily through a series of contractual arrangements entered into among our PRC subsidiary, Jiubang Computer Technology (Guangzhou) Co., Ltd., or Jiubang Computer, our PRC variable interest entities, including Guangzhou Jiubang Digital Technology Co., Ltd., or Jiubang Digital, Guangzhou Sanju Advertising Media Co., Ltd., or Sanju Advertising, Guangzhou Hengye Software Technology Co., Ltd., or Hengye Software and Guangzhou Zhiteng Computer

 

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Technology Co., Ltd., or Zhiteng Computer, the shareholders of these variable interest entities and us. Our contractual arrangements with our PRC variable interest entities and their shareholders enable us to exercise effective control over our PRC variable interest entities because we have the power to direct activities of our variable interest entities that most significantly impact the economic performance of the variable interest entities and the obligation to absorb the expected losses and the right to receive the expected residual return of the variable interest entities that could potentially be significant to the variable interest entities. Accordingly, the financial statements for the variable interest entities are consolidated in our financial statements. All of the equity (net assets) or deficit (net liabilities) and net income (loss) of the variable interest entities are attributed to us. For a detailed description of these contractual arrangements, see “Corporate History and Structure.”

On September 28, 2009, the GAPPRFT, the National Copyright Administration and the Office of National Work Group for Combating Pornography and Illegal Publications jointly issued a Notice on Implementing the Provisions of the State Council on “Three Determination” and the Relevant Explanation of the State Commission Office for Public Sector Reform on Further Strengthening the Administration of the Pre-approval of Online Games and Examination and Approval of Imported Online Games, or Circular 13. Circular 13 restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating in domestic mobile game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements such as the variable interest entity structural arrangements we adopted. We are not aware of any companies that have adopted a corporate structure that is the same as or similar to ours having been penalized or terminated under Circular 13 since the effective date of the circular. Furthermore, we are advised by our PRC counsel, Jun He Law Offices, that the enforcement of Circular 13 is still subject to substantial uncertainty, including possible subsequent joint actions by relevant authorities, such as the MOC. In the event that we, our PRC subsidiaries, or PRC variable interest entities are found to be in violation of the prohibition under Circular 13, the GAPPRFT, in conjunction with the relevant regulatory authorities in charge, may impose applicable penalties, which in the most serious cases may include suspension or revocation of relevant licenses and registrations. In addition, various media sources have reported that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide.

Based on the advice of our PRC legal counsel, Jun He Law Offices, the current corporate structure of our PRC subsidiaries and our PRC variable interest entities, and the contractual arrangements among our PRC subsidiary, our PRC variable interest entities, their shareholders and us, as described in this prospectus, are in compliance with existing PRC laws, rules and regulations. However, we were further advised by Jun He Law Offices that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, and these laws or regulations or interpretations of these laws or regulations may change in the future. Furthermore, the relevant government authorities have broad discretion in interpreting these laws and regulations. Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to the opinion of our PRC legal counsel.

If our corporate structure, contractual arrangements and businesses of our company, our PRC subsidiaries or our PRC variable interest entities are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion in dealing with such violation, including

 

   

levying fines, confiscating our income or the income of our PRC subsidiaries or PRC variable interest entities,

 

   

revoking or suspending the business licenses or operating licenses of our PRC subsidiaries or PRC variable interest entities,

 

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shutting down our servers or blocking our platform, discontinuing or placing restrictions or onerous conditions on our operations,

 

   

requiring us to discontinue our operations,

 

   

requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and

 

   

taking other regulatory or enforcement actions that could be harmful to our business.

Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. Our PRC variable interest entities contributed most of our consolidated net revenues in the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013. If the imposition of any of these penalties causes us to lose the rights to direct the activities of our PRC variable interest entities or our right to receive their economic benefits, we would no longer be able to consolidate such entities.

We rely on contractual arrangements with our PRC variable interest entities and their shareholders for the operation of our business, which may not be as effective as direct ownership.

Because of PRC restrictions on foreign ownership of mobile internet businesses in China, we depend on contractual arrangements with our PRC variable interest entities in which we have no ownership interest to conduct our business. These contractual arrangements are intended to provide us with effective control over these entities and allow us to obtain economic benefits from them. Our PRC variable interest entities are owned directly by our core management team, Messrs. Yuqiang Deng, Xiangdong Zhang and Yingming Chang. For additional details on these ownership interests, see “Corporate History and Structure.” However, these contractual arrangements may not be as effective in providing control as direct ownership. For example, our PRC variable interest entities and their shareholders could breach their contractual arrangements with us by, among other things, failing to operate our business in an acceptable manner or taking other actions that are detrimental to our interests. If we were the controlling shareholder of these PRC variable interest entities with direct ownership, we would be able to exercise our rights as shareholders to effect changes to their board of directors, which in turn could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if our PRC variable interest entities or their shareholders fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies, which may be time-consuming, unpredictable and expensive. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materially and adversely affect our results of operations and damage our reputation. See “—Risks Relating to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

Our contractual arrangements with our PRC variable interest entities may result in adverse tax consequences to us.

As a result of our corporate structure and the contractual arrangements among our PRC subsidiary, our PRC variable interest entities, their shareholders and us, we are effectively subject to the 6% PRC value-added tax and related surcharges on revenues generated by our subsidiaries from our contractual arrangements with our PRC variable interest entities. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its affiliates or related parties to the relevant tax authorities. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our PRC variable interest entities were not on an arm’s length basis and therefore constitute a favorable transfer pricing

 

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arrangements. If this occurs, the PRC tax authorities could request that our PRC variable interest entities and any of their respective subsidiaries adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by reducing expense deductions recorded by such PRC variable interest entities and thereby increasing these entities’ tax liabilities, which could subject these entities to late payment fees and other penalties for the underpayment of taxes. Our consolidated net income may be materially and adversely affected if our PRC variable interest entities’ tax liabilities increase or if it becomes subject to late payment fees or other penalties.

The shareholders of our variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business.

The shareholders of our variable interest entities include Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang, who are also shareholders, directors and officers of our company. Conflicts of interest may arise between the roles of Mr. Deng, Mr. Zhang and Mr. Chang as shareholders, directors and officers of our company and as shareholders of our variable interest entities. We rely on these individuals to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to our company that requires them to act in good faith and in the best interest of our company and not to use their positions for personal gains. We cannot assure you that when conflicts arise, shareholders of our variable interest entities will act in the best interest of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

We may rely on dividends paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of our ADSs and ordinary shares.

We are a holding company, and we may rely on dividends to be paid by our wholly owned PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of our ADSs and ordinary shares and service any debt we may incur. If our wholly owned PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as Jiubang Computer, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the discretion of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our wholly owned PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders, which 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 securities.

Currently, our co-founders and our chief operating officer beneficially own an aggregate of 43.6% of our outstanding shares. Upon the completion of this offering, they will beneficially own an aggregate of 32.5% of our

 

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outstanding shares and 36.7% of the then total voting power, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs and we issue and sell 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares in the private placement to Qihoo 360 and Kingsoft, respectively, concurrently with this offering, assuming an initial public offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover of this prospectus. Our co-founders and our chief operating officer together hold 100% of the equity interest in each of our PRC variable interest entities, including Jiubang Digital through their shareholding in Sanju Advertising. These executive officers have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of any contemplated sale of our company and may reduce the price of our ADSs. These risks could intensify if any of these executive officers or their affiliates purchase ADSs in this offering.

In addition, if any of our core management team members violates the terms of their non-compete undertakings or employment agreements with us or their legal duties by diverting business opportunities from us, it will result in our loss of corporate opportunities. These actions may take place even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. Although after the completion of this offering, we will adopt a code of business conduct and ethics to help restrict conflicts of interest involving directors and officers, any violation of this code by our existing officers or directors may materially and adversely affect our business operations. For more information regarding the beneficial ownership of our company by our principal shareholders, see “Principal Shareholders.”

We may lose the ability to use and enjoy assets held by our PRC variable interest entities that are important to the operation of our business if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.

Some of our PRC variable interest entities hold certain assets, such as patents for the proprietary technology that are essential to the operations of our platform and important to the operation of our business. If any of these PRC variable interest entities goes bankrupt and all or part of its assets become subject to liens or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of such PRC variable interest entities undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Risks Relating to Doing Business in China

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of

 

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our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our assets are located in China and a significant number of our users, advertisers, suppliers and business partners are from China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. The Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and adversely affect our results of operations and financial condition.

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet and mobile internet businesses and companies.

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry, including mobile internet companies. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the internet business include, but are not limited to, the following:

 

   

There are uncertainties related to the regulation of the internet business in China, including evolving licensing practices and the requirement for real-name registrations. Permits, licenses or operations at some of our subsidiaries and PRC variable interest entities may be subject to challenge, or we may fail to obtain permits or licenses that may be deemed necessary for our operations or we may not be able to obtain or renew certain permits or licenses. See “—Risks Relating to Our Business and Industry—If we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment for internet-based and mobile-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected” and “PRC Regulation.” We are currently not required by PRC law to ask users for their real name and personal information when they

 

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register for a user account. We cannot assure you that PRC regulators would not require us to implement compulsory real-name registration in the future.

 

   

The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the SCIO, the MIIT and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry. We are unable to determine what policies this new agency or any new agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. Further, new laws, regulations or policies may be promulgated or announced that will regulate internet activities, including internet publication and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

In July 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunication business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunication business in China. According to this notice, either the holder of a value-added telecommunication business operating license or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Currently, all contracts with telecommunication carriers and other service providers to host the servers used in our business were entered into by Jiubang Digital, and such arrangements are in compliance with this notice. Jiubang Digital also owns a majority of the domain names and trademarks necessary for daily operation, and holds the ICP license and the SP license necessary to conduct our operations in China.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet and mobile internet businesses in China, including our business. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of internet business.

Content posted or displayed on GO platform, 3G.cn and our mobile reading base, including advertisements, may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.

The PRC government has adopted regulations governing internet and wireless access and the distribution of information over the internet and wireless telecommunication networks. Under these regulations, internet content providers and internet publishers 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 the public interest, or is obscene, superstitious, fraudulent or defamatory. Furthermore, internet content providers are also prohibited from displaying content that may be deemed by relevant government authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of the concerned platforms and reputational harm. The operator may also be held liable for such censored information displayed on or linked to their platform. For a detailed discussion, see “PRC Regulation.”

 

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Since our inception, we have worked to monitor the content on our platform and to make the utmost effort in complying with relevant laws and regulations. However, it may not be possible to determine in all cases the types of content that could result in our liability as a distributor of such content, and if any of the content on GO platform, 3G.cn or our mobile reading base is deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations. For example, as reported by certain news media, the State Internet Information Office recently named our mobile portal application, as one of the several mobile apps that contained certain inappropriate content, and required the named mobile apps to rectify the non-compliance as soon as possible. We have communicated with the State Internet Information Office and rectified the situation to meet their requirements.

We may also be subject to potential liability for any unlawful actions of our users or third party service providers on our platform or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content or actions that may result in liability to us, and if we are found to be liable, we may be prevented from operating our business in China. Moreover, the costs of compliance with these regulations may continue to increase as a result of more content being made available by an increasing number of users and third party business parties on our GO platform, 3G.cn and the mobile reading base, which may adversely affect our results of operations. Although we have adopted internal procedures to monitor content and to remove offending content once we become aware of any potential or alleged violation, we may not be able to identify all the content that may violate relevant laws and regulations or third party intellectual property rights and even if we manage to identify and remove offending content, we may still be held liable for such third-party content.

In addition, under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our GO platform and 3G.cn to ensure that such content is true and accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of advertisements prior to internet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been obtained. Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertising operations or revoke our licenses.

While we have made significant efforts to ensure that the advertisements shown on our GO platform and 3G.cn are in full compliance with applicable PRC laws and regulations, we cannot assure you that all the content contained in such advertisements or offers is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on our business, financial condition, results of operations and prospects.

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.

Under the PRC Enterprise Income Tax Law, or the EIT Law, that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-

 

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controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on July 27, 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1, 2011. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and competent tax authorities.

According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 further clarifies the resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise.

Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups instead of those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

We believe that we should not be treated as a “resident enterprise” for PRC tax purposes even if the standards for “de facto management body” prescribed in SAT Circular 82 are applicable to us. However, we have been advised by our PRC counsel, Jun He Law Offices, that it is possible that the PRC tax authorities may take a different view given the lack of certainty regarding the interpretation and implementation of the EIT Law and its implementing rules, both of which became effective on January 1, 2008. If the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, then our world-wide income could be subject to PRC tax at a rate of 25%, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.

Although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the EIT Law, we cannot assure you that dividends by our PRC subsidiaries to our Cayman Islands holding company will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.

Foreign ADS holders may also be subject to PRC withholding tax on dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Although our holding company is registered in the Cayman Islands, it remains unclear whether dividends received and gains realized by our foreign ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.

 

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We face uncertainty with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.

We face uncertainties on the reporting and consequences on private equity financing transactions and share exchange involving the transfer of shares in our company by non-resident investors. According 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, with retroactive effect from January 1, 2008, or SAT Circular 698, where a non-resident enterprise transfers the equity interests in a PRC resident enterprise indirectly through a disposition of equity interests in an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the non-resident enterprise, as the seller, shall report such Indirect Transfer to the competent tax authority of the PRC resident enterprise within 30 days of execution of the equity transfer agreement for such Indirect Transfer. The PRC tax authority will examine the true nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement without reasonable commercial purposes and for the purpose of avoiding or reducing PRC tax, they will disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10% and our relevant subsidiaries or variable interest entities may be held liable for paying such tax. SAT Circular 698 also points out that when a non-resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the competent tax authorities have the power to make a reasonable adjustment on the taxable income of the transaction.

If our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our results of operations could be materially and adversely affected.

The Chinese government has provided various tax incentives to our subsidiaries in China. These incentives include reduced enterprise income tax rates. For example, under the EIT Law and its implementation rules, the statutory enterprise income tax rate is 25%. However, Jiubang Digital was recognized as a “high and new technology enterprise”, which enabled it to enjoy an enterprise income tax rate of 15% until December 31, 2013. Jiubang Computer has applied for “double soft” certification, and subject to the approval of competent tax authorities in Guangdong, Jiubang Computer will be entitled to exemption of the enterprise income tax for the first two years and half rate reduction of enterprise income tax for the subsequent three years. Any increase in the enterprise income tax rate applicable to our PRC subsidiaries or PRC variable interest entities in China, or any discontinuation or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by our PRC subsidiaries or PRC variable interest entities in China, could adversely affect our business, results of operations and financial condition. In addition, in the ordinary course of our business, we are subject to complex income tax and other tax regulations and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our results of operations and financial condition would be materially and adversely affected.

China’s M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is

 

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concerned, (ii) such transaction involves factors that have or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million within China) must be cleared by MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular No. 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular No. 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns.

In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.

The PRC State Administration of Foreign Exchange, or SAFE, promulgated regulations in October 2005 that require PRC citizens or residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders who are PRC citizens or residents. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. If our shareholders who are PRC citizens or residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have completed foreign exchange registration of PRC resident shareholders of Mr. Yuqiang Deng and Mr. Xiangdong Zhang for our financings that were completed before the end of 2010 and the subsequent transfer

 

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of their shares to their respective personal holding companies. We have also applied for foreign exchange registration of Mr. Yingming Chang, a PRC resident, for the shares he holds in our company, and are in the process of updating the foreign exchange registration of Mr. Yuqiang Deng and Mr. Xiangdong Zhang. Because of uncertainty over how the SAFE regulations will be interpreted and implemented and applied to us, we cannot predict how they will affect our business operations. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may have little control over either our present or prospective direct or indirect PRC resident shareholders or the outcome of such registration procedures. A failure by our current or future PRC resident shareholders to comply with the SAFE regulations could subject us to fines or other legal sanctions, restrict our cross-border investment activities, limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC employees who have been granted stock options will be subject to these regulations upon the completion of this offering. Failure of our PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect our business.

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and variable interest entities or to make additional capital contributions to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and variable interest entities. We may make loans to our PRC subsidiaries and variable interest entities, or we may make additional capital contributions to our PRC subsidiaries.

Any loans by us to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly owned PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. If we decide to finance our wholly owned PRC subsidiaries by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our variable interest entities, which are PRC domestic companies. Further, we are not likely to finance the activities of our variable interest

 

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entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in mobile internet services, online advertising, online games and related businesses.

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from the foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from the foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. Furthermore, SAFE promulgated a circular on November 19, 2010, known as Circular No. 59, which tightens the examination of the authenticity of settlement of net proceeds from our initial public offering and requires that the settlement of net proceeds shall be in accordance with the description in the prospectus included in our registration statement on Form F-1 (Registration No. 333-191846), which was filed with the U.S. Securities and Exchange Commission, or SEC, in connection with our initial public offering.

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 variable interest 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 use the proceeds we received from our initial public offering and 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.

Our PRC subsidiaries and PRC variable interest entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.

We are a holding company registered in the Cayman Islands. We rely on dividends from our PRC subsidiaries as well as consulting and other fees paid to us by our PRC variable interest entities for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to our shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Since we have not achieved profitability, we are not yet required to allocate funds for such reserve funds. Furthermore, if our PRC subsidiaries and PRC variable interest entities incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which may restrict our ability to satisfy our liquidity requirements.

In addition, the EIT Law and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

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Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow band. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the Renminbi has started to slowly appreciate against the U.S. dollar, though there have been periods recently when the U.S. dollar has appreciated against the Renminbi. It is difficult to predict how long the current situation may last and when and how this relationship between the Renminbi and the U.S. dollar may change again.

There remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciate against the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. The majority of our revenues and costs are denominated in Renminbi. Any significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from this initial public offering into Renminbi to pay our operating expenses, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of your investment.

The PRC government imposes control on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a substantial portion of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi 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 to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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Increases in labor costs in the PRC may adversely affect our business and our profitability.

The economy of China has been experiencing increases in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average wage level for our employees has also increased in recent years.

In addition, we have been subject to stricter regulatory requirements in terms of entering labor contract with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract law, that became effective in January 2008 and its implementation rules that became effective in September 2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.

We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our users by increasing prices for our products or services, our profitability and results of operations may be materially and adversely affected. Also, as the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice do not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

If the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.

Under PRC law, legal documents for corporate transactions, including contracts such as revenue-sharing contracts with advertisers, publishers and authors, which are important to our business, are executed using the chops or seals of the signing entity, or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration of Industry and Commerce.

Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries and variable interest entities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of our PRC subsidiaries and variable interest entities are members of our senior management team who have signed employment undertaking letters with us or our PRC subsidiaries and variable interest entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of our chops and the chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel of each of our subsidiaries and variable interest entities. Although we monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC

 

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subsidiaries or variable interest entities, we, our PRC subsidiaries or variable interest entities would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection 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 prospectus filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside of 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. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections and lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted recently 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 December 2012, the SEC brought administrative proceedings against five accounting firms in China, alleging that they refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. We are not involved in the proceedings brought by the SEC against the accounting firms. However, our independent registered public accounting firm is one of the five accounting firms named in the SEC’s proceedings and we may be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms. On May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation, or the MOU, with CSRC and the PRC Ministry of Finance, or MOF, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. The PCAOB continues to be in discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the PCAOB and audit China-based companies that trade on U.S. exchanges. Furthermore, it has been reported in July 2013 that Chinese regulators will hand over some audit documents of China-based U.S.-listed companies to the SEC. It is not immediately clear how this latest development could affect the SEC’s pending case against the five accounting firms. Therefore, it is difficult to determine the outcome of the administrative proceedings and the consequences thereof to us. If our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or

 

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abandonment of this offering, delisting of our Class A ordinary shares from NASDAQ or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Relating to Our ADSs and This Offering

An active trading market for our shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

We have applied to list our ADSs on NASDAQ. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. Even if an active public market for our ordinary shares or ADSs develops, we cannot assure you that it will continue. The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings, including companies in the internet and mobile internet businesses, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in such practices. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009, the third quarter of 2011 and the second quarter of 2012, which may have a material adverse effect on the market price of our ADSs.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our net revenues, earnings and cash flow;

 

   

announcements of new investments, acquisitions, strategic partnerships, or joint ventures;

 

   

announcements of new services and expansions by us or our competitors;

 

   

changes in financial estimates by securities analysts;

 

   

changes in the number of our users;

 

   

fluctuations in our operating metrics;

 

   

failure on our part to realize monetization opportunities as expected;

 

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additions or departures of key personnel;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

   

detrimental negative publicity about us, our competitors or our industry;

 

   

regulatory developments affecting us or our industry; and

 

   

potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

The approval of the China Securities Regulatory Commission may be required in connection with this offering and, if required, we cannot assure you that we will be able to obtain such approval.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. This regulation, among other things, requires offshore special purpose vehicles, or SPVs, formed for the purpose of an overseas listing and controlled by PRC companies or individuals, to obtain CSRC approval prior to listing their securities on an overseas stock exchange. The application of this regulation remains unclear. Our PRC legal counsel, Jun He Law Offices, has advised us that, based on their understanding of the current PRC laws, rules and regulations, neither CSRC approval nor any other governmental authorization is required in the context of the this offering because we are not a special purpose vehicle as defined by the M&A Rules which is required to obtain approval from the CSRC for overseas listings.

However, there are uncertainties regarding the interpretation and application of the PRC law, and there can be no assurance that the PRC government will ultimately take a view that is not contrary to the above opinion of our PRC legal counsel. If it is determined that the CSRC approval is required for this offering, we may face sanctions by CSRC or other PRC regulatory agencies for failure to seek the CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC although, to our knowledge, no definitive rules or interpretations have been issued to determine or quantify such fines or penalties, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that may have a material adverse effect on our business and the trading price of our ADSs. CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable to us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. If we elect not to comply with the abovementioned auditor attestation requirements or to comply with new or revised accounting standards, our investors may not have access to certain information they may deem important.

 

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If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale, or perceived sale or availability for sale, of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. There will be 7,000,000 ADSs (equivalent to 42,000,000 Class A ordinary shares) outstanding immediately after this offering, or 8,050,000 ADSs (equivalent to 48,300,000 Class A ordinary shares) if the underwriters exercise their options to purchase additional ADSs in full. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. In connection with this offering, we and our officers, directors and our shareholders have agreed not to sell any shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters. However, the underwriters may release the securities subject to lock-up agreements from the lock-up restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. In addition, 10,520,133 Class A ordinary shares underlying our outstanding options as of the closing of this offering will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. We may also issue additional options in the future which may be exercised for additional Class A ordinary shares. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their Class A ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$6.97 per ADS (assuming that no outstanding options to acquire Class A ordinary shares are exercised). This number represents the difference between our pro forma as adjusted net tangible book value per ADS of US$3.53 as of September 30, 2013, after giving effect to this offering, investment by Qihoo 360 and Kingsoft, and the assumed initial public offering price of US$10.50 per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

We will adopt our seventh amended and restated articles of association that will become effective immediately upon completion of this offering. Our new articles of association contain provisions to limit the

 

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ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary 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 ordinary shares and ADSs may be materially and adversely affected.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are registered under Cayman Islands law.

We are an exempted company limited by shares registered under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2012 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, 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 the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, 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 precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

 

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Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction.

We are a Cayman Islands company and a substantial majority of our assets are located outside of the United States. A significant percentage of our current operations are conducted in China. In addition, a significant majority of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible 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 United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

There are uncertainties as to whether Cayman Islands courts would:

 

   

recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and

 

   

impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree and such use may not produce income on increase our ADS price.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, or that these net proceeds will be placed only in investments that generate income or appreciate in value.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary 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 Class A ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and restated memorandum and articles of association which is currently in effect, the minimum notice period required for convening a general meeting is 14 days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

 

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The depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

   

we have failed to timely provide the depositary with notice of meeting and related voting materials;

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

   

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our Class A ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our Class A ordinary shares are not subject to this discretionary proxy.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action

 

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to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

Our proposed dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share. We will issue Class A ordinary shares represented by our ADSs in this offering. All of our outstanding ordinary shares and preferred shares as of the date of this prospectus will be automatically redesignated or converted into Class B ordinary shares immediately prior to the completion of this offering. We intend to maintain the dual-class voting structure after the completion of this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.

Due to the disparate voting powers attached to these two classes of ordinary shares, our existing shareholders will collectively own approximately 96.4% of the voting power of our outstanding shares immediately after this offering and will have considerable influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. In particular, our core management, Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang and their respective affiliates, will beneficially own approximately 32.5% of our total outstanding shares, representing 36.7% of our total voting power immediately after this offering. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

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

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs

 

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generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is 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 in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company”.

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and NASDAQ, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.0 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

We may be classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes, which could subject United States investors in our ADSs or Class A ordinary shares to significant adverse United States income tax consequences.

We will be classified as a “passive foreign investment company,” or “PFIC” if, in the case of any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market

 

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value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we treat our PRC variable interest entities as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our PRC variable interest entities for United States federal income tax purposes, and based upon our current income and assets (taking into account the proceeds from this offering) and projections as to the value of our ADSs and Class A ordinary shares following the offering, we do not presently expect to be classified as a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test will generally be determined by reference to the market price of our ADSs or Class A ordinary shares, fluctuations in the market price of our ADSs or Class A ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. Under circumstances where we determine not to deploy significant amounts of cash for active purposes or not to treat our PRC variable interest entities as owned by us for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are classified as a PFIC in any taxable year, a U.S. holder (as defined in “Taxation—Material United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or Class A ordinary shares and on the receipt of distributions on the ADSs or Class A ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holders may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. holder holds our ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or Class A ordinary shares. For more information see “Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

   

our growth strategies;

 

   

our ability to retain and increase our user base and expand our product and service offerings;

 

   

our ability to monetize our platform;

 

   

our future business development, results of operations and financial condition;

 

   

competition from companies in a number of industries including internet companies that provide mobile internet portal services and operate mobile reading services;

 

   

expected changes in our revenues and certain cost or expense items;

 

   

our expectation regarding the use of proceeds from this offering;

 

   

general economic and business condition globally and in China; and

 

   

assumptions underlying or related to any of the foregoing.

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

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

This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party providers of market intelligence, including but not limited to the App Annie Intelligence Report that we commissioned for the purposes of this offering. All industry publications and reports referred to in this prospectus generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, we make no representation as to the accuracy of such data.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$65.5 million, or approximately US$75.7 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. In addition, we expect to receive net proceeds of US$20.0 million from investments by Qihoo 360 and Kingsoft. These estimates are based upon an assumed initial public offering price of US$10.50 per ADS, the mid-point of the range shown on the front cover page of this prospectus. A US$1.00 change in the assumed initial public offering price of US$10.50 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$6.5 million, or approximately US$7.5 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

We plan to use the net proceeds from this offering and from investments by Qihoo 360 and Kingsoft primarily for general corporate purposes, which may include investment in research and development of new mobile internet products, services, technology and infrastructure, expanding our selling and marketing activities, working capital needs, potential acquisitions, partnerships, alliances and licensing opportunities.

The foregoing represents our current intentions based upon our present plans and business conditions. Our management, however, will have significant flexibility and discretion to apply the net proceeds from this offering and from investments by Qihoo 360 and Kingsoft. If an unforeseen event occurs or business conditions change, we may use the net proceeds differently than as described in this prospectus.

In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and only if we satisfy the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and variable interest entities or to make additional capital contributions to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.” We plan to apply to the MOFCOM or its local counterparts to use a substantial portion of the net proceeds we receive from this offering to increase the registered capital of our PRC subsidiaries. These PRC subsidiaries can then convert the increased registered capital in foreign currencies into Renminbi and use the Renminbi within their approved business scope. We may keep a portion of the net proceeds offshore for our foreign currency needs.

Pending any use as described above, we plan to invest the net proceeds in short-term financial instruments or demand deposits.

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Risk Factors—Risks Relating to Our Corporate Structure and Our Industry—Our PRC subsidiaries and PRC variable interest entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.” and “PRC Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.”

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

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2013:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the automatic conversion of all of our outstanding series A, B and C preferred shares into 86,678,104 ordinary shares immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (a) the automatic conversion of all of our outstanding series A, B and C preferred shares into 86,678,104 Class B ordinary shares immediately upon the completion of this offering (b) the sale of 42,000,000 Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$10.50 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised) and (c) our issuance and sale of 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares to Qihoo 360 and Kingsoft, respectively, concurrently with this offering, assuming an initial public offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus.

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

 

    As of September 30, 2013  
    Actual     Pro forma     Pro forma
as  adjusted(1)
 
    RMB     US$     RMB     US$     RMB     US$  

Redeemable Series A convertible preferred shares

    22,844,031        3,732,685        —          —          —          —     

Redeemable Series B convertible preferred shares

    167,655,677        27,394,718        —          —          —          —     

Redeemable Series C convertible preferred shares

    289,383,412        47,284,871        —          —          —          —     

Shareholders’ equity (deficit):

           

Ordinary shares (US$0.0001 par value; 413,321,896 shares authorized, 54,757,568 shares issued and outstanding on an actual basis; nil Class A ordinary shares and 141,435,672 Class B ordinary shares issued and outstanding on a pro forma basis and 53,428,570 Class A ordinary shares and 141,435,672 Class B ordinary shares issued and outstanding on a pro forma as adjusted basis)

    44,069        7,201        97,116        15,869        129,814        21,211   

Additional paid-in capital(2)

    —          —          479,830,073        78,403,606        1,002,773,958        163,851,954   

Accumulated other comprehensive income

    50,788,442        8,297,458        50,780,442        8,297,458        50,780,442        8,297,458   

Accumulated deficit

    (349,798,394     (57,156,600     (349,798,394     (57,156,600     (349,798,394     (57,156,600
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)(2)

    (298,973,883     (48,851,941     180,909,237        29,560,333        703,885,820        115,014,023   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable convertible preferred shares and shareholders’ equity (deficit)(2)

    235,275,090        38,443,642        235,275,090        38,443,642        758,251,673        123,897,332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.
(2) Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 change in the assumed initial public offering price of US$10.50 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease each of additional paid-in capital, total shareholders’ equity and total capitalization by US$6.5 million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares and holders of our outstanding series A, B, and C preferred shares which will automatically convert into our Class B ordinary shares upon the completion of this offering.

Our net tangible book value as of September 30, 2013 was approximately US$0.53 per ordinary share and US$3.18 per ADS. Net tangible book value per ordinary share represents the amount of total assets, minus the amount of total liabilities and intangible assets, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share. Because our Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented here based on all ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in such net tangible book value after September 30, 2013, other than to give effect to (1) the conversion of all of our series A, B, C preferred shares into Class B ordinary shares, which will occur automatically upon the completion of this offering, (2) our issuance and sale of              ADSs in this offering, at an assumed initial public offering price of US$10.50 per ADS, the mid-point of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised) and (3) our issuance and sale of 8,571,428 Class A ordinary shares and 2,857,142 Class A ordinary shares to Qihoo 360 and Kingsoft, respectively, concurrently with this offering, assuming an initial public offering price of US$10.50 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, our pro forma net tangible book value at September 30, 2013 would have been US$0.59 per outstanding ordinary share, including Class A ordinary shares underlying our outstanding ADSs, or US$3.53 per ADS. This represents an immediate increase in net tangible book value of US$0.38 per ordinary share, or US$2.29 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$1.16 per ordinary share, or US$6.97 per ADS, to purchasers of ADSs in this offering.

The following table illustrates the dilution on a per ordinary share basis assuming that the initial public offering price per Class A ordinary share is US$10.50 and all ADSs are exchanged for ordinary shares:

 

Assumed initial public offering price per Class A ordinary share

   US$ 1.75   

Net tangible book value per ordinary share as of September 30, 2013

   US$ 0.53   

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding preferred shares as of September 30, 2013

   US$ 0.21   

Pro forma net tangible book value per ordinary share as adjusted to give effect to the automatic conversion of all of our outstanding preferred shares, this offering and the investment by Qihoo 360 and Kingsoft as of September 30, 2013

   US$ 0.59   

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

   US$ 1.16   

Amount of dilution in net tangible book value per ADS to new investors in the offering

   US$ 6.97   

A US$1.00 change in the assumed public offering price of US$10.50 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma net tangible book value after giving effect to the offering by US$6.5 million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.04 per ordinary share and US$0.22 per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.13 per ordinary share and US$0.78 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated

 

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offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The following table summarizes, on a pro forma basis as of September 30, 2013, the differences between the shareholders as of September 30, 2013, including holders of our preferred shares that will be automatically converted into Class B ordinary shares upon the completion of this offering, and the new investors with respect to the number of ordinary shares purchased from us in this offering and the investment by Qihoo 360 and Kingsoft, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$10.50 per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

    Ordinary Shares
Purchased
    Total Consideration     Average Price
Per Ordinary
Share
     Average
Price Per
ADS
 
    Number      Percent     Amount      Percent       

Existing shareholders

    141,435,672         72.6     36,905,463         28.3     0.26         1.57   

New investors

    53,428,570         27.4     93,500,000         71.7     1.75         10.50   
 

 

 

    

 

 

   

 

 

    

 

 

      

Total

    194,864,242         100.0     130,405,463         100.0     0.67         4.02   
 

 

 

    

 

 

   

 

 

    

 

 

      

If the underwriters were to fully exercise the over-allotment option to purchase additional Class A ordinary shares from us, the percentage of our ordinary shares held by existing shareholders would be 70.3%, and the percentage of our ordinary shares held by new investors would be 29.7%.

A US$1.00 change in the assumed public offering price of US$10.50 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease total consideration paid by new investors, total consideration paid by all shareholders, average price per ordinary share and average price per ADS paid by all shareholders by US$7.0 million, US$7.0 million, US$0.04 and US$0.24, respectively, assuming the sale of ADSs at US$10.50, the mid-point of the range set forth on the cover page of this prospectus, and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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EXCHANGE RATE INFORMATION

Our reporting currency is the Renminbi because a significant portion of our business is primarily conducted in China and a majority of our revenues are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.1200 to US$1.00, the rate in effect as of September 30, 2013. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, 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 Renminbi into foreign exchange and through restrictions on foreign trade. On November 1, 2013, the rate was RMB6.0993 to US$1.00.

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

 

     Certified Exchange Rate  

Period

   Period End      Average      Low      High  
     (RMB per US$1.00)  

2008

     6.8225         6.9193         7.2946         6.7800   

2009

     6.8259         6.8295         6.8470         6.8176   

2010

     6.6000         6.7603         6.8102         6.6000   

2011

     6.2939         6.4475         6.6364         6.2939   

2012

     6.2301         6.3080         6.3879         6.2221   

2013

           

May

     6.1340         6.1416         6.1665         6.1213   

June

     6.1374         6.1342         6.1488         6.1248   

July

     6.1284         6.1343         6.1408         6.1284   

August

     6.1193         6.1213         6.1302         6.1123   

September

     6.1200         6.1198         6.1213         6.1178   

October

     6.0943         6.1032         6.1209         6.0815   

November 1

     6.0993         6.0993         6.0993         6.0993   

 

(1) Annual averages were calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We expect to enjoy the following benefits after we become a company registered in the Cayman Islands in the near future:

 

   

political and economic stability;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany registration in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

 

   

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated. Under the deposit agreement with our depositary, JPMorgan Chase, N.A., the federal or state courts in the City of New York shall have non-exclusive jurisdiction over any suit, action, proceeding or dispute that may arise out of or in connection with the deposit agreement, and with regard to any claim or dispute arising from the relationship created by the deposit agreement, the depositary, in its sole discretion, is entitled to refer such dispute or difference for final settlement by arbitration, with the seat and place of the arbitration being New York, New York State. Moreover, under the contractual arrangements that we entered into with Jiubang Digital, Sanju Advertising, Hengye Software and Zhiteng Computer, any disputes arising from those contracts that cannot be resolved through friendly negotiations will be resolved through arbitration conducted through China International Economic and Trade Arbitration Commission.

Our PRC legal counsel, Jun He Law Offices, has advised us that in the event that a shareholder originates an action against a company in China for disputes related to contracts or other property interests, the PRC court may accept a course of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if (a) the contract is signed and/or performed within the PRC, (b) the subject of the action is located within the PRC, (c) the company (as defendant) has seizable properties within the PRC, (d) the company has a representative organization within the PRC, or (e) other circumstances prescribed under the PRC law. The action may be initiated by a shareholder through filing a complaint with the PRC court. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on its behalf. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies.

Maples and Calder, our legal counsel as to Cayman Islands law, has also advised us that a shareholder may, in limited circumstances, commence an action against persons who have allegedly wronged the company, where the company itself has failed to enforce such claim against such persons directly. Such action is brought on the basis of a primary right of the company, but is asserted by a shareholder on behalf of the company commonly known as a “derivative action.” Generally, claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company’s articles of association. Civil proceedings are generally commenced by originating process (by writ or originating summons). A shareholder may commence proceedings in the Cayman Islands and may instruct an attorney to act on the shareholder’s behalf. Service of proceedings on the company is effected

 

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through the delivery of the originating process at the registered office of the company. There are no particular formalities that a non-resident shareholder must comply with to initiate and commence proceedings in the Cayman Islands.

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

We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder, our legal counsel as to Cayman Islands law, and Jun He Law Offices, our legal counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

There is uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Maples and Calder has advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction will be recognised and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:

 

  (a) is given by a foreign court of competent jurisdiction;

 

  (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;

 

  (c) is final;

 

  (d) is not in respect of taxes, a fine or a penalty; and

 

  (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

Jun He Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is rendered or on reciprocity between the jurisdictions. China does not have any treaties

 

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or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. A judgment that does not violate the basic principles of PRC law or national sovereignty, security or public interest may be recognized and enforced by a PRC court base on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. However, as of the date of this prospectus, no treaty or other form of reciprocity exists between China and the United States or the Cayman Islands governing the recognition and enforcement of judgments. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands.

 

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CORPORATE HISTORY AND STRUCTURE

Corporate History

We commenced operations in June 2003, with the establishment of Guangzhou Jiubang Digital Technology Co., Ltd., or Jiubang Digital. We, through Jiubang Digital, started our mobile internet business, including the launch of 3G.cn, our mobile internet portal in March 2004, and subsequently our GO Launcher EX in November 2010. Jiubang Digital is one of our PRC variable interest entities through the contractual arrangement described below.

In January 2005, we incorporated Sungy Data Ltd. under the laws of the British Virgin Islands as our offshore holding company.

In March 2005, Sungy Data Ltd. established Jiubang Computer Technology (Guangzhou) Co., Ltd., or Jiubang Computer, our wholly owned subsidiary in China. Jiubang Computer entered into a series of contractual arrangements, as a result of which Sungy Data Ltd. became primary beneficiary of, and exercise effective control over the operations of, these PRC entities:

 

   

In June 2006, we entered into certain contractual arrangements with Jiubang Digital and its then shareholders. As of the date of this prospectus, Guangzhou Sanju Advertising Media Co., Ltd., or Sanju Advertising (a company wholly owned by Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang), Mr. Yuqiang Deng, and Mr. Xiangdong Zhang each holds 80%, 16% and 4% of the equity interest in Jiubang Digital, respectively;

 

   

In June 2006, we entered into certain contractual arrangements with Sanju Advertising and its then shareholders. As of the date of this prospectus, Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each holds 70%, 20% and 10% of the equity interest in Sanju Advertising, respectively. Sanju Advertising primarily engages in advertising services;

 

   

In August 2006, we entered into certain contractual arrangements with Guangzhou Zhiteng Computer Technology Co., Ltd., or Zhiteng Computer and its then shareholders. As of the date of this prospectus, Mr. Yuqiang Deng and Mr. Xiangdong Zhang each holds 80% and 20% of the equity interest in Zhiteng Computer, respectively. Zhiteng primarily engages in technology supporting services; and

 

   

In May 2010, we entered into certain contractual arrangements with Guangzhou Hengye Software Technology Co., Ltd., or Hengye Software and its then shareholders. As of the date of this prospectus, Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each holds 70%, 10% and 20% of the equity interest in Hengye, respectively. Hengye Software primarily engages in mobile internet value-added services.

In November 2008, we acquired 70% of the equity interest in XMedia Technologies Ltd, or XMedia, a company incorporated in the Cayman Islands. In November 2009, we acquired the remaining 30% equity interest in XMedia. As a result, XMedia became our wholly-owned subsidiary.

In February 2011, we indirectly acquired 33% of the equity interest in Zhuhai Zhengdian Technology Co., Ltd., or Zheng Dian, a company incorporated in China. In May 2012, we sold all of our equity interest in Zheng Dian.

In August 2013, Sungy Data Ltd. was redomiciled in the Cayman Islands as an exempted company registered under the laws of the Cayman Islands. In October 2013, Sungy Data Ltd. was renamed Sungy Mobile Limited.

 

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Corporate Structure

The following diagram illustrates our corporate structure and principal subsidiaries and variable interest entities as of the date of this prospectus:

 

LOGO

 

(1) Jiubang Digital is one of our variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang, our co-founders, and Sanju Advertising, one of our variable interest entities, each owns 16%, 4% and 80% of Jiubang Digital’s equity interests, respectively.
(2) Sanju Advertising is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 20% and 10% of Sanju Advertising’s equity interests, respectively.
(3) Hengye Software is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 10% and 20% of Hengye Software’s equity interests, respectively.
(4) Zhiteng Computer is one of variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang each owns 80% and 20% of Zhiteng Computer’s equity interests, respectively.
(5) Dormant entity without operations.

The following is a summary of the currently effective contractual arrangements, as amended and restated, among Sungy Mobile Limited, formerly known as Sungy Data Ltd., Jiubang Computer, Jiubang Digital and its shareholders and subsidiaries. Except explicitly indicated otherwise below, the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Sanju Advertising and its shareholders, the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Hengye Software and its shareholders, and the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Zhiteng Computer and its shareholders are

 

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substantially the same as the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its shareholders and subsidiaries.

Contractual Arrangements with Jiubang Digital

Master Exclusive Service Agreement

Under the master exclusive service agreement between Jiubang Computer and Jiubang Digital and its subsidiaries, Jiubang Computer has the exclusive right to provide Jiubang Digital and its subsidiaries services related to Jiubang Digital’s business, including but not limited to technology development, technical consulting services, network development, updating and daily maintenance, market research and consulting services. Jiubang Computer has the right to determine the service fees based on the technical difficulty and complexity of the services and the actual labor costs it incurs for providing the services during the relevant period. The term of this agreement is ten years and will be automatically extended upon the expiration. Jiubang Computer may terminate the agreement at any time with a 30-day prior written notice to Jiubang Digital, whereas none of Jiubang Digital and its subsidiaries can terminate this agreement.

Business Cooperation Agreement

Pursuant to the business cooperating agreement by and among Sungy Mobile Limited, Jiubang Computer, Jiubang Digital’s shareholders, including Sanju Advertising, Mr. Yuqiang Deng and Mr. Xiangdong Zhang, Jiubang Digital and its subsidiaries, Jiubang Digital and its subsidiaries shall accept and follow our suggestions on their daily operations and financial management. The nominee shareholders of Jiubang Digital must appoint candidates recommended by us as Jiubang Digital’s board of directors, and Jiubang Digital must appoint candidates recommended by us as the directors of Jiubang Digital’s subsidiaries. Also, we have the right to appoint senior executives of Jiubang Digital and its subsidiaries. In addition, Jiubang Digital and its subsidiaries agree not to engage in any transaction that may materially affect their assets, obligations, rights or operation without our prior written consent. To ensure sufficient cashflow required by the business operations of Jiubang Digital, Sungy Mobile Limited agrees that it will, to the extent permissible under PRC law, through itself or any party designated by it, provide financial support to Jiubang Digital. The agreement shall be in effect as long as Jiubang Digital exists. None of Jiubang Digital, its shareholders and subsidiaries can terminate this agreement. Jiubang Computer may terminate the agreement by providing a 30-day prior written notice to Jiubang Digital and its shareholders.

Proxy Agreement and Power of Attorney

Under the proxy agreement and power of attorney by and among Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its shareholders, including Sanju Advertising, Mr. Yuqiang Deng and Mr. Xiangdong Zhang, each of Jiubang Digital’s shareholders irrevocably nominates, appoints and constitutes Sungy Mobile Limited as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of its equity interests in Jiubang Digital. Each shareholder further covenants with and undertakes that, if the shareholder receives any dividends, interest, any other forms of capital distributions, residual assets upon liquidation, or proceeds or consideration from the transfer of equity interest as a result of, or in connection with, such shareholder’s equity interests in Jiubang Digital, the shareholder shall, to the extent permitted by applicable laws, remit all such dividends, interest, capital distributions, assets, proceeds or consideration to Jiubang Computer or Sungy Mobile Limited, to the extent permitted by law, without any compensation. The proxy agreement and power of attorney will remain effective as long as Jiubang Digital exists. Jiubang Digital’s shareholders does not have the right to terminate this agreement or revoke the appointment of the attorney-in-fact without the prior written consent of Sungy Mobile Limited.

Loan Agreements

Under loan agreements by and among Jiubang Computer, Jiubang Digital and each of the individual shareholders of Jiubang Digital, Jiubang Computer made interest-free loans in an aggregate amount of RMB10.0

 

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million to the two individual shareholders of Jiubang Digital exclusively for the purpose of the capital contribution of Jiubang Digital. The loans can only be repaid with the proceeds derived from the sale of all of the equity interests in Jiubang Digital to Jiubang Computer or its designated representatives pursuant to the equity option agreement. Each of the loan agreements has an indefinite term until the full repayment of the loan thereunder.

Except the foregoing, there are not any other loan agreements between our subsidiaries and shareholders of our variable interest entities.

Exclusive Option Agreement

Under the exclusive option agreement between Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its shareholders, Sungy Mobile Limited has the right to require each of the shareholders to transfer to Sungy Data Ltd., Jiubang Computer or a third party designated by Sungy Mobile Limited, to the extent permitted under PRC law, all or part of such shareholder’s equity interests in Jiubang Digital. Also, Sungy Mobile Limited has the right to require Jiubang Digital to transfer any and all of its assets to Jiubang Computer or a third party designated by Sungy Mobile Limited and has the sole discretion as to when to exercise such options, either in part or in full. Without Sungy Mobile Limited’s prior written consent, Jiubang Digital’s shareholders shall not transfer their equity interests in Jiubang Digital, and Jiubang Digital shall not transfer its assets. The transfer price will be the minimum amount of consideration permitted under PRC law at the time of such share transfer. The agreement will remain effective as long as Jiubang Digital exists. Sungy Mobile Limited and Jiubang Computer may terminate the agreement at any time with a ten-day prior written notice to Jiubang Digital and its shareholders, whereas none of Jiubang Digital and its shareholders can terminate this agreement.

Equity Pledge Agreement

Under the equity pledge agreement between Jiubang Computer, Jiubang Digital and its shareholders, the shareholders of Jiubang Digital have pledged all of their equity interests in Jiubang Digital to Jiubang Computer to guarantee the performance of all the obligations of Jiubang Digital and its shareholder and subsidiaries under the master exclusive service agreement, business cooperation agreement, loan agreements and exclusive option agreement. This pledge will remain effective until all the guaranteed obligations are performed or all the principal agreements are terminated.

Spousal Consent Letters

Pursuant to spousal consent letters, the spouse of each of Mr. Yuqiang Deng and Mr. Yingming Chang acknowledged that certain equity interests in Jiubang Digital (directly or through Sanju Advertising) held by and registered in the name of her spouse will be disposed of pursuant to relevant arrangements under the business cooperation agreement, the proxy agreement and power of attorney, the exclusive option agreement, the equity pledge agreement and the loan agreement. These spouses undertake not to take any action to interfere with the disposition of such equity interests, including, without limitation, claiming that such equity interests constitute communal property of marriage.

In the opinion of our PRC legal counsel:

 

   

the ownership structures of our PRC variable interest entities and our PRC subsidiaries in China, both currently and after giving effect to this offering, comply with all existing PRC laws and regulations; and

 

   

the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, each of our viable interest entities and its shareholders and subsidiaries (as the case may be) governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

 

   

each of our PRC subsidiaries and each of our PRC variable interest entities has all necessary corporate power and authority to conduct its business as described in its business scope under its business license.

 

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The business licenses of each of our PRC subsidiaries and each of our PRC variable interest entities are in full force and effect. Each of our PRC subsidiaries and each of our PRC variable interest entities is capable of suing and being sued and may be the subject of any legal proceedings in PRC courts. To the best of our PRC legal counsel’s knowledge after due inquiries, none of our PRC subsidiaries, PRC variable interest entities or their respective assets is entitled to any immunity, on the grounds of sovereignty, from any action, suit or other legal proceedings; or from enforcement, execution or attachment.

We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Relating to Our Corporate Structure and Our Industry—If the PRC government finds that the structure we have adopted for our business operations does not comply with PRC governmental restrictions on foreign investment in mobile internet businesses, or if these laws or regulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and our business operations.”

Almost all of our revenues in our consolidated financial statements are derived from our VIEs and we rely on dividends and service fees paid to us by our subsidiaries and our VIEs in China. Our VIEs have been experiencing accumulated losses and, as a result, we have elected not to charge our VIEs for any material amount of service fees. We expect to charge more service fees to the VIEs and derive more revenues directly from our PRC subsidiaries after the VIE’s accumulated losses have been eliminated.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of comprehensive income (loss) data (except for non-GAAP measure data) for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheets data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of comprehensive income (loss) data (except for non-GAAP measure data) for the nine months ended September 30, 2012 and 2013 and the selected consolidated balance sheet data as of September 30, 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements include all adjustments that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following selected financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    For the Year Ended December 31,     Nine Months Ended September 30,  
    2011     2012     2012     2013  
    RMB     RMB     US$     RMB     RMB     US$  

Selected Consolidated Statements of Comprehensive Income (Loss) Data:

           

Revenues

    96,594,538        185,218,681        30,264,490        124,746,450        229,992,987        37,580,553   

Cost of revenues(1)

    (46,617,793     (74,813,098     (12,224,362     (53,850,022     (69,485,007     (11,353,759
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    49,976,745        110,405,583        18,040,128        70,896,428        160,507,980        26,226,794   

Operating Expenses:

           

Research and development
expenses(1)

    (30,190,352     (34,041,250     (5,562,296     (24,178,877     (29,512,729     (4,822,341

Selling and marketing
expenses(1)

    (35,305,268     (45,914,065     (7,502,298     (34,240,540     (34,876,237     (5,698,732

General and administrative
expenses(1)

    (23,224,454     (25,614,849     (4,185,433     (18,153,564     (27,992,607     (4,573,955
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (38,743,329     4,835,419        790,101        (5,676,553     68,126,407        11,131,766   

Change in fair value of warrants

    (2,356,037     —          —          —          —          —     

Share of losses of equity method investments

    (3,744,390     (1,072,946     (175,318     (1,072,946     —          —     

Impairment loss on equity method investments

    (389,270     —          —          —          —          —     

Gain on disposal of an equity method investment

    —          4,182,485        683,413        4,182,485        —          —     

Investment income on short-term investment

    2,251,269        124,862        20,402        124,862        168,544        27,540   

Interest income

    205,715        194,643        31,804        133,940        167,031        27,292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (42,776,042     8,264,463        1,350,402        (2,308,212     68,461,982        11,186,598   

Income tax benefit (expense)

    —          6,903,561        1,128,033        —          (7,481,860     (1,222,526
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (42,776,042     15,168,024        2,478,435        (2,308,212     60,980,122        9,964,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.13        0.02   

Diluted earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.12        0.02   

Weighted average ordinary shares outstanding

           

Basic

    51,880,468        51,880,468        51,880,468        51,880,468        51,839,995        51,839,995   

Diluted

    51,880,468        51,880,468        51,880,468        51,880,468        54,833,100        54,833,100   

Non-GAAP Measure(2)

           

Adjusted EBIT

    (40,333,826     8,495,903        1,388,219        (2,105,131     72,833,723        11,900,936   

 

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(1) The amount of share-based compensation costs for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013 is as follows:

 

     For the Year Ended December 31,      Nine Months Ended September 30,  
           2011                  2012            2012      2013  
     RMB      RMB      US$      RMB      RMB      US$  

Cost of revenues

     74,458         76,111         12,436         59,981         258,848         42,295   

Research and development expenses

     111,716         164,374         26,859         130,096         880,039         143,797   

Selling and marketing expenses

     52,355         124,850         20,400         99,095         397,357         64,928   

General and administrative expenses

     53,365         60,748         9,926         47,849         3,002,528         490,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     291,894         426,083         69,621         337,021         4,538,772         741,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For a reconciliation of our non-GAAP measure to the GAAP measure of net income or loss, see “—Non-GAAP Financial Measure.”

 

     As of December 31,     As of September 30, 2013  
     2011     2012    
     RMB     RMB     US$     RMB     US$  

Selected Consolidated Balance Sheets Data:

          

Cash

     81,011,002        83,598,378        13,659,866        114,233,689        18,665,635   

Accounts receivable, net

     33,167,598        46,341,590        7,572,155        82,110,607        13,416,766   

Total assets

     135,853,500        164,318,473        26,849,424        235,275,090        38,443,642   

Total liabilities

     33,894,056        46,632,878        7,619,751        54,365,853        8,883,309   

Redeemable convertible preferred shares

     390,097,630        447,127,915        73,060,117        479,883,120        78,412,274   

Ordinary shares

     42,360        42,360        6,922        44,069        7,201   

Accumulated deficit

     (327,181,409     (369,820,097    
(60,428,120

    (349,798,394     (57,156,600

Total shareholders’ deficit

     (288,138,186     (329,442,320     (53,830,444     (298,973,883     (48,851,941

Non-GAAP Financial Measure

We define adjusted earnings before interest and tax, or Adjusted EBIT, a non-GAAP financial measure, as net income or loss excluding the effect of (i) interest income, (ii) income tax expense or benefit, (iii) share-based compensation costs and (iv) change in fair value of warrants. We review Adjusted EBIT in addition to net income or loss to obtain a better understanding of our operating performance and we also believe it is useful supplemental information for investors to evaluate our business. Adjusted EBIT has material limitations as analytical tool. Interest income, income tax expense or benefit, and share-based compensation costs have been and will continue to be significant recurring factors in our business. In addition, because Adjusted EBIT is not calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider Adjusted EBIT in isolation from or as an alternative to net income or loss prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

     Year Ended December 31,     Nine Months Ended September 30,  
     2011     2012     2012     2013  
     RMB     RMB     US$     RMB     RMB     US$  

Net income (loss)

     (42,776,042     15,168,024        2,478,435        (2,308,212     60,980,122        9,964,073   

Deduct: interest income

     (205,715     (194,643     (31,804     (133,940     (167,031     (27,292

Add back: income tax expense (benefit)

     —          (6,903,561     (1,128,033     —          7,481,860        1,222,526   

Add back: share-based compensation costs

     291,894        426,083        69,621        337,021        4,538,772        741,629   

Add back: change in fair value of warrants

     2,356,037        —          —          —          —          —     

Adjusted EBIT

     (40,333,826     8,495,903        1,388,219        (2,105,131     72,833,723        11,900,936   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section headed “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading provider of mobile internet products and services globally with a focus on applications and mobile platform development. We were one of the top three publishers worldwide on Google Play as measured by the number of downloads in the Applications category for the nine months ended September 30, 2013, based on the App Annie Intelligence Report.

Our platform product, GO Launcher EX, manages apps, widgets and functions on Android smartphones and serves as users’ first entry point to their phones. GO Launcher EX was the No. 1 most downloaded product in the Personalization category on Google Play in both 2012 and the nine months ended September 30, 2013, according to the App Annie Intelligence Report. It has attracted approximately 239 million users as of September 30, 2013, with the average monthly active users reaching 42 million in the third quarter of 2013. GO Launcher EX is available in 38 languages and has attracted users from over 200 countries and regions since it was launched in November 2010.

Building upon our success in GO Launcher EX, we have developed a portfolio of GO series products which include the launcher products and a broad range of other GO series apps and widgets that provide rich functionality, enhanced performance and extensive personalization for Android smartphones. Our GO series products in aggregate have attracted approximately 325 million users worldwide as of September 30, 2013, with over 70% of these users from locations outside of China. We have created and continued to expand a GO platform that is built upon GO Launcher EX and integrates all of our GO series products as well as third-party mobile internet products and services.

We launched 3G.cn, one of the first Chinese mobile internet portals, in 2004, and mobile reading services in 2010, to capture one of the early monetization opportunities in the mobile internet industry. Both 3G.cn and our mobile reading services provide us with a stable and growing user base and paying customer base.

We generate our revenues through paid apps and premium themes, in-app purchase for advanced functionalities, advertising in various forms as well as users’ purchases of literary content. We believe that we will be able to explore additional monetization opportunities and diversify our revenue sources as we continue to expand our GO platform to capitalize on opportunities in the mobile internet industry.

We have achieved significant growth in recent years. Our total revenues increased from RMB96.6 million in 2011 to RMB185.2 million (US$30.3 million) in 2012, representing a 91.7% growth and from RMB124.7 million for the nine months ended September 30, 2012 to RMB230.0 million (US$37.6 million) in the same period in 2013, representing an 84.4% growth. We achieved profitability since 2012 and our net income was RMB15.2 million (US$2.5 million) in 2012 and RMB61.0 million (US$10.0 million) for the nine months ended September 30, 2013.

 

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Selected Statement of Operations Items

Revenues

In the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, we derived our revenues from mobile application products and services, mobile reading services, mobile portal marketing services, and certain other services. The following table sets forth the principal components of our total revenues by amount and as a percentage of our total revenues for the periods presented.

 

    For the Year Ended December 31     For the Nine Months Ended September 30,  
    2011     2012     2012     2013  
    RMB     % of total
revenues
    RMB     US$     % of total
revenues
    RMB     % of total
revenues
    RMB     US$     % of total
revenues
 

Total revenues:

                   

Mobile application products and services

    3,896,544        4.0        34,056,890        5,564,851        18.4        18,673,969        15.0        102,493,555        16,747,313        44.6   

Mobile reading services

    33,547,733        34.7        72,766,802        11,890,000        39.3        50,064,718        40.1        73,479,590        12,006,469        31.9   

Mobile portal marketing services

    47,526,527        49.2        57,506,160        9,396,431        31.0        40,987,770        32.9        37,731,047        6,165,204        16.4   

Other revenues

    11,623,734        12.1        20,888,829        3,413,208        11.3        15,019,993        12.0        16,288,795        2,661,567        7.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    96,594,538        100.0        185,218,681        30,264,490        100.0        124,746,450        100.0        229,992,987        37,580,553        100.0   

Our revenues from mobile application products and services grew more than eight times, from RMB3.9 million in 2011 to RMB34.1 million (US$5.6 million) in 2012, while revenues from our mobile reading services grew by 116.9% from RMB33.5 million in 2011 to RMB72.8 million (US$11.9 million) in 2012 and revenues from our mobile portal marketing services grew by 21.0% from RMB47.5 million in 2011 to RMB57.5 million (US$9.4 million) in 2012. Our revenues from mobile application products and services increased by 499.0%, from RMB18.7 million for the nine months ended September 30, 2012 to RMB102.5 million (US$16.7 million) for the same period in 2013, while revenues from our mobile reading services grew by 46.8% from RMB50.1 million for the nine months ended September 30, 2012 to RMB73.5 million (US$12.0 million) for the same period in 2013. Revenues from our mobile portal marketing services decreased by 7.9% from RMB41.0 million for the nine months ended September 30, 2012 to RMB37.7 million (US$6.2 million) for the same period in 2013.

Our revenues in mobile application products and services began to increase in 2012 after we rolled out most of our GO series products in 2012 and such products continued to gain global popularity throughout the year. On the other hand, our mobile reading services and mobile portal marketing services continue to contribute a significant portion of our revenues. Although our mobile reading services continue to grow, the growth of revenues from our mobile reading services is not as fast as that of our revenues from mobile application products and services. We expect that our revenues from mobile application products and services will continue to grow at a faster pace than revenues from our mobile reading services and mobile portal marketing services in the near future.

Mobile application products and services

Revenues from our mobile application products and services accounted for 4.0%, 18.4% and 44.6% of our total revenues in 2011, 2012 and the nine months ended September 30, 2013, respectively. Mobile application products and services revenues mainly include revenues generated from (i) users’ purchase of premium themes and advanced functionalities for our free GO series products and Next Launcher, our paid product, and (ii) advertisements displayed on our GO series products. We provide advertising services both directly to advertisers and through third-party advertising networks. We sell mobile application products through application stores such as Google Play.

 

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We believe that the most significant factors affecting revenues from mobile application products and services include:

 

   

Mobile internet penetration rate. The fast growth of the mobile internet industry is a very recent phenomenon. The success of our mobile application products and services rely upon the popularity and penetration rate of mobile internet in different parts of the world.

 

   

Popularity of the Android system. We currently sell our mobile application products and services around the Android operating system. We may be affected by any significant downturn in the overall demand for or use of Android smartphones or any decline in the popularity of Android as an operating system, to the extent that our mobile application products and services continue to be operated on Android smartphones.

 

   

Number of free and paid downloads. A larger number of paid downloads are associated with more downloads of premium themes and advanced functionalities for our free GO series products and Next Launcher, our paid product. A larger number of free downloads may generate more paid downloads for premium themes and advanced functionalities for our free GO series products. It also attracts more monthly active users, which may in turn drive marketing revenues from advertisements displayed on our GO series products.

 

   

Mobile internet marketing revenues. Mobile internet marketing is a relatively new advertising model. The effectiveness of mobile internet as a marketing tool, measured in various ways such as click-through rates, may heavily influence advertisers’ attitude toward marketing on our GO platform. We generate revenues for advertisements displayed on our GO series products with advertising networks. We are also in the process of developing our own mobile internet marketing network and, after its completion, we may be able to retain a larger portion of these revenues and may be able to generate additional revenue streams by delivering advertisements to third-party mobile applications on behalf of our own advertising clients.

 

   

New products and revenue model. Our business and revenue model relating to GO series products and GO platform is still new and evolving. We have been experimenting with various revenue models with varying degrees of success. We intend to develop additional new products and services and experiment with new revenue models to fully explore our business potential.

The following table sets forth the key operating data relating to our GO series products for each of the seven quarters during the period from January 1, 2012 to September 30, 2013.

 

    For the three months ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
 
    (in millions)  

Total number of users (as at end of period)

    99        133        166        207        244        284        325   

Average monthly active users

    34        44        54        65        73        81        87   

Number of paid downloads

    0.2        0.3        0.4        0.5        0.5        0.5        0.5   

 

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The following table sets forth the revenues data relating to our mobile application products and services for each of the seven quarters during the period from January 1, 2012 to September 30, 2013.

 

     For the three months ended  
     March 31,
2012
     June 30,
2012
     September 30,
2012
     December 31,
2012
     March 31,
2013
     June 30,
2013
     September 30,
2013
 
     RMB     

RMB

    

RMB

    

RMB

     US$     

RMB

    

RMB

     RMB      US$  
     (in millions)  

Revenues from direct advertising services

     0.8         0.4         0.8         1.3         0.2         7.4         8.9         14.8         2.4   

Revenues from third-party advertising networks

     —           0.2         3.1         5.3         0.9         5.7         7.9         10.9         1.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Marketing revenues related to GO series products

     0.8         0.6         3.9         6.6      

 

1.1

  

     13.1         16.8         25.7         4.2   

Revenues from paid downloads

     2.2         4.1         7.1         8.8         1.4         10.9         20.1         15.9         2.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues from mobile application products and services

     3.0         4.7         11.0         15.4      

 

2.5

  

     24.0         36.9         41.6         6.8   

We started to offer direct advertising services, i.e., helping advertisers sourced directly by us distribute and promote their products on our GO platform, in the first quarter of 2012. Marketing revenues from direct advertising services have experienced a rapid increase because the number of user actions that generate revenues for us, such as clicks, downloads, installations or activations, and are attributable to the advertisements published on our GO series products continued to increase due to (i) increases in number of our direct advertisers and advertising space offered to direct advertisers in our GO series products, (ii) improvement in our ability to more effectively distribute relevant advertisements to our users and (iii) increases in our monthly active users. The increases in monthly active users in our GO series products are in turn driven by increased total downloads of our GO series products. Certain of our GO series products available for paid downloads are free of advertisements, and thus do not contribute to advertising sales.

We also offer advertising services on our GO platform through third-party advertising networks. Starting in the second quarter of 2012, users can download our premium themes and advanced functionalities for GO series products using their GetJar Gold, a virtual currency of GetJar, a third-party advertising network. We receive fees from GetJar, which generates advertising revenues from its advertising customers. In addition, we have established business relationship with Google AdMob previously. We entered into broader advertising arrangements with Google AdMob in 2013 and allowed advertisements from Google to be delivered to and displayed on our GO series products automatically. We generate revenues based on the number of clicks or actions attributable to these advertisements. Marketing revenues from third-party advertising networks have experienced a rapid increase because the number of user actions that generate revenues for us and are attributable to the advertisements published on our GO series products continued to increase primarily due to (i) increase in advertising space offered to third-party advertising networks in our GO series products and (ii) increases in our monthly active users.

Revenues from paid downloads were mainly from downloads of premium themes or advanced functionalities for our GO series products and, to a lesser extent, from downloads of our paid product, Next Launcher. Premium themes downloaded include those developed by ourselves and by third parties using our publicly available development kit. A small portion of the third-party premium theme developers have arrangements with us under which we sell their themes under our name through Google Play. We receive payments from Google Play and these third party developers receive a fixed percentage of the sales prices from us. Other third-party premium theme developers market and sell their themes by themselves under their own names and we receive no payment from these sales. However, these premium themes considerably contribute to the popularity of our GO series products. Our revenues from paid downloads were affected by changes in our product mix and were also significantly correlated to the number of paid downloads, which in turn were mainly

 

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driven by the number of our offerings of paid products, premium themes and advanced functionalities and our success in promoting these offerings.

Mobile reading services

Revenues from our mobile reading services accounted for 34.7%, 39.3% and 31.9% of our total revenues in 2011, 2012 and the nine months ended September 30, 2013, respectively. We derive revenues by providing content to third parties, such as uploading our literary content to third-party operated mobile reading platforms that charge their users for access to our content. Under revenue-sharing arrangements with such third parties, we receive an agreed percentage of the fees generated by the content we provide. Our mobile reading services revenues also include revenues generated from readers’ purchases of online literary content from our own reading channel on 3G.cn and GGBook. Such content can be subscribed for by chapter, by book or by month—providing access to a certain number of literary works for a month for a set fee.

We believe that the most significant factors affecting revenues from our mobile reading services include:

 

   

Distribution channels and revenue-sharing. A majority of our revenues from our mobile reading services are derived from reading platforms operated by third parties. We have entered into revenue-sharing arrangements with major mobile network carriers in China that run their own mobile reading databases, as well as with other mobile reading services providers such as major internet search companies and portals. Pursuant to these arrangements, we provide our original content to other mobile reading services providers in exchange for a portion of the reader fees they charge for our literary content. Our ability to distribute our literary content through more third-party mobile reading services providers, the growth in the number of paying users on these third-party service providers’ mobile reading platforms and our ability to negotiate more favorable revenue-sharing arrangements can significantly affect revenues from our mobile reading services.

 

   

Service mix and pricing. Users pay for our contents, by month, by book or by chapter, depending on what choices of subscription packages are available to them. Each of the mobile network carriers, third-party mobile reading services providers and ourselves offers multiple subscriptions packages with different levels of subscription fees for different amount of literary content. The mix of the subscription service package offerings—the number, type and price of our literary works that are included in a subscription package can vary greatly—and their acceptance by users can affect our revenues. We have no control over the subscription service packages offered by mobile network carriers and other third parties.

Mobile portal marketing services

Revenues from our mobile portal marketing services accounted for 49.2%, 31.0% and 16.4% of our total revenues in 2011, 2012 and the nine months ended September 30, 2013, respectively. Our mobile portal marketing services revenues primarily consist of advertising on 3G.cn in different formats and over different periods of time. We either charge advertisers a fixed fee for advertisements of certain sizes and formats in fixed locations over a period of time, or charge advertisers per action, such as when each time a user clicks on an advertisement, downloads, installs or activates an item being advertised.

We believe that the most significant factors affecting revenues from mobile portal marketing services include:

 

   

Number of advertisers. We attract advertisers by offering innovative mobile internet advertising solutions to fit the different needs of our advertisers. In addition, we have continually worked to enrich the content offerings on 3G.cn in order to increase its popularity, making it increasingly more attractive to advertisers.

 

   

Average revenue per advertiser. Average revenue per advertiser is primarily affected by market acceptance of mobile internet advertising and the allocation of advertising budgets by our advertisers to

 

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3G.cn. As the mobile internet industry is relatively new, the effectiveness of mobile advertising is less proven than the results for other forms of more traditional advertising. Our average revenue per advertiser may increase as advertisers allocate more advertising budgets to us.

Other revenues

Other revenues are primarily derived from the promotion of third-party provided mobile applications or value-added services, such as paid content, access to games or music files and picture download; we facilitate such promotion by placing such mobile applications or value-added services on third-party mobile channels. We receive a share of the revenues when such mobile applications or value-added services are purchased by users on the different online channels in which we help place them.

Cost of Revenues

Cost of revenues consists primarily of (i) content acquisition cost; (ii) personnel costs; (iii) processing fees paid to mobile application stores; (iv) distribution fees; (v) custody and bandwidth costs, and (vi) office rental fees. We expect that our cost of revenues will increase in absolute amount as we further grow our user base and expand our products and services.

Content acquisition cost. Content acquisition cost mainly includes copyright fees paid to authors and publishers for the right to publish literary products on our mobile reading base and acquisition cost for content displayed in our websites and certain themes developed by third parties for our GO launcher products. The copyright fees are initially recorded as intangible assets and amortized, on a straight-line basis, over the estimated useful life of the applicable literary products. Our content acquisition cost increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, and is expected to continue to increase as we continue to expand our mobile reading services.

Personnel costs. Personnel costs include salaries, other forms of compensation, including share-based compensation, and insurance for our employees of those departments directly involved in providing our services and the sale of mobile application products and related services. Our personnel costs increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, primarily because the expansion in our business required the hiring of additional personnel to run our daily operations and additional compensation to incentivize existing employees. We expect personnel costs to increase as we hire additional employees in line with the expansion of our business.

Processing fees paid to mobile application stores. Processing fees paid to mobile application stores include fees paid to stores such as Google Play, through which we sell our GO series products. Our processing fees paid to mobile application stores increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, which is consistent with our growth in revenue from GO series products. We expect processing fees paid to mobile application stores to increase as we continue to grow our GO series products and services.

Distribution fees. Distribution fees mainly include the amount paid to third parties that direct users to access our products or services, which may fluctuate from period to period.

Custody and bandwidth fees. Custody and bandwidth fees are paid to third parties for the hosting and maintenance of our servers and the purchase of bandwidth. Our custody and bandwidth fees increased from 2011 to 2012 primarily due to the increase in the number of servers and bandwidth in 2012 to serve our expanded user base. Our custody and bandwidth fees were relatively stable between the nine months ended September 30, 2012 and the nine months ended September 30, 2013.

Office rental fees. Office rental fees refer to lease payments we make to the landlords of our various office spaces in China and overseas for those departments directly involved in providing our services and the sale of

 

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mobile application products. Our office rental fees increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, primarily due to the fact that we leased additional office space to house our additional personnel in response to our expanded business operations. We expect office rental fees to increase as our business operations continue to expand in the future.

Operating Expenses

Our operating expenses consist of (i) research and development expenses, (ii) selling and marketing expenses and (iii) general and administrative expenses. The following table sets forth the components of our operating expenses for the periods indicated, both in absolute amounts and as percentages of our total revenues.

 

     For the Year Ended December 31,      For the Nine Months Ended September 30,  
     2011      2012      2012      2013  
     RMB      % of total
revenues
     RMB      US$      % of total
revenues
     RMB      % of total
revenues
     RMB      US$      % of total
revenues
 
    

(in thousands, except for percentages)

 

Operating expenses:

                 

Research and development expenses

     30,190         31.3         34,041         5,562         18.4         24,179         19.4         29,513         4,822         12.8   

Selling and marketing expenses

     35,305         36.5         45,914         7,502         24.8         34,241         27.4         34,876         5,699         15.2   

General and administrative expenses

     23,225         24.0         25,615         4,185         13.8         18,154         14.6         27,993         4,574         12.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     88,720         91.8         105,570         17,249         57.0         76,574         61.4         92,382         15,095         40.2   

Research and Development Expenses

Research and development expenses consist primarily of salaries and benefits, including share-based compensation, for research and development personnel, depreciation of office premise and servers utilized by the research and development personnel, as well as other expenses we have incurred in researching and developing our GO platform, GO series products, 3G.cn and mobile reading services. Research and development expenses increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, due to the need for higher levels of compensation for our research and development personnel, additional numbers of research and development personnel to meet the needs of the rapid growth of our business as well as higher rental costs associated with our expanding research and development department. We expect our research and development expenses may increase as we expand our research and development team to develop new products and services for our GO platform, improve technology for data analysis to further enhance user experience and develop enhanced features for our existing products and services to attract more users.

Selling and marketing expenses

Selling and marketing expenses consist primarily of salaries and benefits, including share-based compensation, commissions for our selling and marketing personnel, and also general advertising and promotion expenses. Our selling and marketing expenses increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, primarily reflecting increased commissions for our selling and marketing personnel as our advertising revenues increased and an increased number of selling and marketing personnel to serve and maintain close relations with an increasing number of advertisers or advertising agencies. We expect that our selling and marketing expenses may increase as we intend to raise commission levels for our selling and marketing personnel due to increased advertising demand and the hiring of additional selling and marketing personnel.

 

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General and Administrative Expenses

General and administrative expenses consist primarily of salaries and benefits, including share-based compensation, for our general and administrative personnel, professional service fees, legal expenses and other administrative expenses. Our general and administrative expenses increased from 2011 to 2012 and from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, primarily due to the hiring of additional management and administrative staff and higher rental costs associated with larger office space to accommodate our expanded general and administrative staff. We expect our general and administrative expenses may increase as our business grows and as we incur increased costs related to complying with our reporting obligations under the U.S. securities laws as a public company.

Share-based Compensation Expenses

The amount of share-based compensation costs for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013 is allocated as follows:

 

     For the Year Ended December 31,      For the Nine Months Ended September 30,  
             2011                      2012                      2012                      2013          
     RMB      RMB      US$      RMB      RMB      US$  

Cost of revenues

     74,458         76,111         12,436         59,981         258,848         42,295   

Research and development expenses

     111,716         164,374         26,859         130,096         880,039         143,797   

Selling and marketing expenses

     52,355         124,850         20,400         99,095         397,357         64,928   

General and administrative expenses

     53,365         60,748         9,926         47,849         3,002,528         490,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     291,894         426,083         69,621         337,021         4,538,772         741,629   

We grant stock-based award such as share options to eligible employees, officers and directors. Awards granted to employees, officers, and directors are initially accounted for as equity-classified awards, which are measured at the grant date fair value of the awards and are recognized using the straight-line method, net of estimated forfeiture rates, over the requisite service period, which is generally the vesting period. In the future, we expect our share-based compensation expenses to increase in the absolute amount as our business continues to expand and as we continue to recruit qualified personnel to enhance our compliance capability to meet our reporting obligations under the U.S. securities laws as a public company. We have granted options to management members that are exercisable only upon the completion of the initial public offering. Share-based compensation expenses for these options will be recognized in the period in which this offering occurs.

Taxation

Cayman Islands

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands.

British Virgin Islands

Sungy Mobile Limited, before completing its transfer by way of redomiciliation to the Cayman Islands, was a BVI business company subject to the provisions of the BVI Business Companies Act, 2004. When Sungy Mobile Limited was a BVI business company, it was exempt from all provisions of the Income Tax Act of the BVI (including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable by us to persons who are not persons resident in the BVI).

 

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Capital gains realized with respect to any shares, debt obligations or other securities of a company by persons who are not persons resident in the BVI are also exempt from all provisions of the Income Tax Act of the BVI.

No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligations or any of our other types of securities, save for interest payable to or for the benefit of an individual resident in the European Union.

Hong Kong

No Hong Kong profits tax has been provided as we have no assessable profit arising in Hong Kong.

PRC

Current taxation primarily represented the provision for a state and local corporate income tax, or EIT, for subsidiaries and variable interest entities, or VIEs, operating in the PRC. Under the EIT Law, which became effective on January 1, 2008, all our PRC entities are subject to EIT at a rate of 25%, with the exception of any preferential treatments they may receive, such as the recognition that Jiubang Digital received as a “high and new technology enterprise”, which enabled it to enjoy a 15% preferential tax rate in place of the statutory 25% enterprise income tax until December 31, 2013.

According to a policy promulgated by the state tax bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and development activities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its tax assessable profits for that year, or Super Deduction. Jiubang Digital has claimed such Super Deduction in ascertaining its tax assessable profits from 2009 to 2012.

In addition, according to the EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derive dividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC shall be subject to PRC withholding tax, or WHT, at 10% (a further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is applicable to any dividends to be distributed from any of our subsidiaries to our company out of any profits such subsidiaries derived after January 1, 2008.

Our revenues from mobile reading services, mobile application products and services and other services are subject to business taxes at a rate of 3%-5% and related surcharges at a rate of 12% of business taxes in aggregate. Our revenues from mobile portal marketing service are subject to value added taxes at a rate of 6% and related surcharges at a rate of 12% of value added taxes in aggregate. In addition, certain mobile portal marketing revenues are subject to cultural development fees at a rate of 3%.

For more information on PRC tax regulations, see “PRC Regulation—Regulation on Tax.”

Internal Control Over Financial Reporting

In connection with the preparation and external audit of our consolidated financial statements as of and for the years ended December 31, 2011 and 2012, we and our auditors, an independent registered public accounting firm, noted one material weakness and two significant deficiencies in our internal control over financial reporting. The material weakness identified was due to insufficient accounting personnel with appropriate U.S. GAAP knowledge for financial information processing and reporting. The significant deficiencies identified

 

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related to (i) the lack of safeguarding controls over the use of our company’s assets and (ii) information technology general control, or ITGC, deficiencies.

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses, significant deficiencies and control deficiencies in our internal control over financial reporting as we and they may be required to do once we become a public company. We believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional material weaknesses or significant deficiencies may have been identified.

We implemented certain steps to improve our internal control over financial reporting:

 

   

In July 2013, we appointed a new chief financial officer to lead our accounting and financial reporting department. Our new chief financial officer has extensive working experience involving a number of U.S.-listed companies.

 

   

In 2013, we hired additional staff for the finance department who worked for a Big Four international accounting firm and have U.S. GAAP experience, and plan to hire more staff who have U.S. GAAP experience.

 

   

We intend to periodically evaluate the sufficiency of our accounting resources and needs for recruiting additional personnel and provide our accounting staff with regular U.S. GAAP training.

 

   

We intend to establish an internal audit function, establish strategies for further implementation of internal audit work and hire additional accounting staff with U.S. GAAP experience, U.S. CPA certificate, extensive accounting work experience or experience working in Big Four international accounting firms.

 

   

We are in the process of developing and implementing a full set of U.S. GAAP accounting policies and financial reporting procedures as well as related internal control policies. We intend to continually and systematically evaluate, appraise, enhance and improve these policies and procedures to meet updated U.S. GAAP requirements and our reporting obligations as an U.S.-listed company. We expect that these accounting policies and financial reporting procedures will be carried out by a qualified supporting staff overseen by our chief financial officer, who will be responsible for the final results and the quality of implementation. We will establish an independent audit committee to supervise the above measures, and intend to appoint a qualified financial expert as chairman of our audit committee.

 

   

We are in the process of implementing a set of policies and procedures to address our ITGC deficiencies.

 

   

We expect to complete the measures above as soon as practicable and we will continue to implement measures to remedy our internal control deficiencies in order to meet the deadline imposed under Section 404 of the Sarbanes-Oxley Act. However, the implementation of these measures may not fully address the existing material weakness and significant deficiencies in our internal control over financial reporting, and we cannot yet conclude that such existing material weakness and significant deficiencies have been fully remedied.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. See “Risk Factors—Risks Relating to Our Business—If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. Our business has grown rapidly since our inception. Our limited operating history makes it difficult to predict our future results of operations. We believe that period-to-period comparisons of results of operations should not be relied upon as indicative of future performance.

 

    Year Ended December 31,     Nine Months Ended September 30,  
    2011     2012     2012     2013  
    RMB     RMB     US$    

RMB

   

RMB

   

US$

 

Summary Consolidated Statements of Comprehensive Income (Loss) Data:

           

Revenues

    96,594,538        185,218,681        30,264,490        124,746,450        229,992,987        37,580,553   

Cost of revenues(1)

    (46,617,793     (74,813,098     (12,224,362     (53,850,022     (69,485,007     (11,353,759
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    49,976,745        110,405,583        18,040,128        70,896,428        160,507,980        26,226,794   

Research and development expenses(1)

    (30,190,352     (34,041,250     (5,562,296     (24,178,877     (29,512,729     (4,822,341

Selling and marketing expenses(1)

    (35,305,268     (45,914,065     (7,502,298     (34,240,540     (34,876,237     (5,698,732

General and administrative expenses(1)

    (23,224,454     (25,614,849     (4,185,433     (18,153,564     (27,992,607     (4,573,955
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (38,743,329     4,835,419        790,101        (5,676,553     68,126,407        11,131,766   

Change in fair value of warrants

    (2,356,037     —          —          —          —          —     

Share of losses of equity method investments

    (3,744,390     (1,072,946     (175,318     (1,072,946     —          —     

Impairment loss on equity method investments

    (389,270     —          —          —          —          —     

Gain on disposal of an equity method investment

    —          4,182,485        683,413        4,182,485        —          —     

Investment income on short-term investment

    2,251,269        124,862        20,402        124,862        168,544        27,540   

Interest income

    205,715        194,643        31,804        133,940        167,031        27,292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (42,776,042     8,264,463        1,350,402        (2,308,212     68,461,982        11,186,598   

Income tax benefit (expense)

    —          6,903,561        1,128,033        —          (7,481,860     (1,222,526
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (42,776,042     15,168,024        2,478,435        (2,308,212     60,980,122        9,964,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.13        0.02   

Diluted earnings (loss) per ordinary share

    (1.89     (0.83     (0.14     (0.89     0.12        0.02   

Weighted average ordinary shares outstanding

           

Basic

    51,880,468        51,880,468        51,880,468        51,880,468        51,839,995        51,839,995   

Diluted

    51,880,468        51,880,468        51,880,468        51,880,468        54,833,100        54,833,100   

Non-GAAP Measure(2)

           

Adjusted EBIT

    (40,333,826     8,495,903        1,388,219        (2,105,131     72,833,723        11,900,936   

 

(1) The amount of share-based compensation costs for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2012 and 2013 are as follows:

 

     Year Ended December 31,      Nine Months ended September 30,  
     2011      2012      2012      2013  
     RMB      RMB      US$     

RMB

    

RMB

    

US$

 

Cost of revenues

     74,458         76,111         12,436         59,981         258,848         42,295   

Research and development expenses

     111,716         164,374         26,859         130,096         880,039         143,797   

Selling and marketing expenses

     52,355         124,850         20,400         99,095         397,357         64,928   

General and administrative expenses

     53,365         60,748         9,926         47,849         3,002,528         490,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     291,894         426,083         69,621         337,021         4,538,772         741,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For a reconciliation of our non-GAAP measure to the GAAP measure of net income or loss, see “Our Summary Consolidated Financial Data—Non-GAAP Financial Measure.”

 

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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenues. Our revenues increased by 84.4% from RMB124.7 million in the nine months ended September 30, 2012 to RMB230.0 million (US$37.6 million) in the nine months ended September 30, 2013. This increase was primarily due to increases in revenues from our mobile application products and services and mobile reading services.

Mobile application products and services. Revenues from our mobile application products and services increased by 449.0% from RMB18.7 million in the nine months ended September 30, 2012 to RMB102.5 million (US$16.7 million) in the nine months ended September 30, 2013. This increase was primarily due to (i) an increase in our marketing revenues related to GO series products from RMB5.3 million in the nine months ended September 30, 2012 to RMB55.6 million (US$9.1 million) in the nine months ended September 30, 2013, which was due to the increased popularity of our GO series products and services, an increase in the number of user actions that generated revenues such as clicks, downloads, installations or activations, and were attributable to the advertisements published in our GO series products, and an increased variety of advertising formats and services we offered, and (ii) an increase in revenues generated from paid downloads of premium themes and advanced functionalities for our free GO series products and Next Launcher, our paid mobile application product, from RMB13.4 million in the nine months ended September 30, 2012 to RMB46.9 million (US$7.7 million) in the nine months ended September 30, 2013, as we started offering premium themes and advanced functionalities in the second quarter of 2012 with the number of paid downloads of GO series products increasing from approximately 0.2 million in the first quarter of 2012 to approximately 0.5 million in the third quarter of 2013. Increases in the above revenue streams were partly attributable to an increase in the average monthly active users for our GO series products from approximately 54 million for the three months ended September 30, 2012 to approximately 87 million for the three months ended September 30, 2013. The increase in our average monthly active users in turn resulted from an increase in the accumulated number of free downloads of our GO series products from approximately 207 million as of December 31, 2012 to approximately 325 million as of September 30, 2013.

Mobile reading services. Revenues from our mobile reading services increased by 46.8% from RMB50.1 million in the nine months ended September 30, 2012 to RMB73.5 million (US$12.0 million) in the nine months ended September 30, 2013, primarily due to an increase in revenues from third-party reading channels from RMB39.2 million in the nine months ended September 30, 2012 to RMB58.8 million (US$9.6 million) in the nine months ended September 30, 2013, as a result of higher demand for our literary content from reading channels operated by both major mobile network carriers and other third party mobile reading services providers.

Mobile portal marketing services. Revenues from our mobile portal marketing services were RMB37.7 million (US$6.2 million) in the nine months ended September 30, 2013, compared to RMB41.0 million in the nine months ended September 30, 2012.

Other revenues. Our other revenues increased by 8.4% from RMB15.0 million in the nine months ended September 30, 2012 to RMB16.3 million (US$2.7 million) in the nine months ended September 30, 2013. This increase was primarily due to an increase in third-party provided value-added services, such as paid content and access to game or music files, which we help promote through different online channels.

Cost of Revenues. Our cost of revenues increased by 28.9% from RMB53.9 million in the nine months ended September 30, 2012 to RMB69.5 million (US$11.4 million) in the nine months ended September 30, 2013. The increase in our cost of revenues was primarily a result of the following factors:

 

  (i) an increase in content acquisition cost from RMB17.3 million in the nine months ended September 30, 2012 to RMB22.7 million (US$3.7 million) in the nine months ended September 30, 2013;

 

  (ii) an increase in personnel costs from RMB13.5 million in the nine months ended September 30, 2012 to RMB15.5 million (US$2.5 million) in the nine months ended September 30, 2013;

 

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  (iii) an increase in processing fees paid to mobile application stores from RMB4.1 million in the nine months ended September 30, 2012 to RMB13.4 million (US$2.2 million) in the nine months ended September 30, 2013;

 

  (iv) an increase in office rental fees from RMB1.8 million in the nine months ended September 30, 2012 to RMB3.2 million (US$0.5 million) in the nine months ended September 30, 2013; and

 

  (v) a decrease in distribution fees from RMB10.7 million in the nine months ended September 30, 2012 to RMB7.6 million (US$1.2 million) in the nine months ended September 30, 2013.

The increase in these costs and fees was primarily attributable to the expansion of our business, which required more personnel, contents and office space for the delivery of our products and services. Our custody and bandwidth fees was RMB4.0 million in the nine months ended September 30, 2012, which stayed stable with the custody and bandwidth fees in the nine months ended September 30, 2013.

Operating Expenses. Our operating expenses increased by 20.6% from RMB76.6 million in the nine months ended September 30, 2012 to RMB92.4 million (US$15.1 million) in the nine months ended September 30, 2013, due to increases in research and development expenses, selling and marketing expenses and general and administrative expenses.

Research and development expenses. Our research and development expenses increased by 21.9% from RMB24.2 million in the nine months ended September 30, 2012 to RMB29.5 million (US$4.8 million) in the nine months ended September 30, 2013. This increase was primarily due to (i) higher rental costs associated with larger office space to accommodate our expanded team of research and development staff and (ii) our expanded team of research and development personnel, from 284 as of September 30, 2012 to 313 as of September 30, 2013, with the majority of new hirings in the first three quarters of 2012.

Selling and marketing expenses. Our selling and marketing expenses increased by 2.0% from RMB34.2 million in the nine months ended September 30, 2012 to RMB34.9 million (US$5.7 million) in the nine months ended September 30, 2013. We incurred higher personnel costs as a result of increased commissions for our selling and marketing personnel, which was partly offset by a decrease in advertising and marketing expenses as we conducted less brand promotion activities such as sponsorship for industry forum and sport events in the period.

General and administrative expenses. Our general and administrative expenses increased by 53.8% from RMB18.2 million in the nine months ended September 30, 2012 to RMB28.0 million (US$4.6 million) in the nine months ended September 30, 2013. This increase was primarily due to (i) higher rental costs associated with larger office space to accommodate our expanded general and administrative staff and (ii) the increase in share-based compensation costs due to additional option awards granted to our officers and employees.

Income Tax Expense. Our income tax expense was RMB7.5 million (US$1.2 million) for the nine months ended September 30, 2013. We expect to be qualified to enjoy certain preferential tax treatment by the end of 2013, which, if granted, will lower our effective income tax rate for the year ending December 31, 2013. We did not record any income tax expense for the nine months ended September 30, 2012.

Net Income (Loss). As a result of the foregoing, we recorded a net income of RMB61.0 million (US$10.0 million) in the nine months ended September 30, 2013, as compared to a net loss of RMB2.3 million for in the nine months ended September 30, 2012.

Non-GAAP Adjusted EBIT. Our non-GAAP Adjusted EBIT for the nine months ended September 30, 2013 was RMB72.8 million (US$11.9 million), compared to non-GAAP Adjusted EBIT loss of RMB2.1 million for the nine months ended September 30, 2012.

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues. Our revenues increased by 91.7% from RMB96.6 million in 2011 to RMB185.2 million (US$30.3 million) in 2012. This increase was primarily due to increases in revenues from our mobile application products and services, mobile reading services and mobile portal marketing services.

Mobile application products and services. Revenues from our mobile application products and services increased by 774.0% from RMB3.9 million in 2011 to RMB34.1 million (US$5.6 million) in 2012. This increase was primarily due to (i) an increase in revenues generated from paid premium themes and advanced functionalities for our GO series products from RMB3.9 million in 2011 to RMB22.2 million (US$3.6 million) in 2012, as we started offering premium themes and advanced functionalities in the second quarter of 2012 with the number of paid downloads of GO series products and services increasing from approximately 0.2 million in the first quarter of 2012 to approximately 0.5 million in the fourth quarter of 2012; and (ii) an increase in our marketing revenues related to GO series products from RMB 0.05 million in 2011 to RMB11.9 million (US$1.9 million) in 2012, which was due to the increased popularity of our GO series products and services, an increase in the number of user actions that generated revenues for us, such as clicks, downloads, installations or activations, and were attributable to the advertisements published in our GO series products, and an increased variety of advertising formats and services we offered. Increases in the above revenue streams were partly attributable to an increase in our average monthly active users, which ramped up to approximately 49 million for the year ended December 31, 2012. The increase in our average monthly active users in turn resulted from an increase in the accumulated number of free downloads of our GO series products and services which reached approximately 207 million as of December 31, 2012.

Mobile reading services. Revenues from our mobile reading services increased by 116.9% from RMB33.5 million in 2011 to RMB72.8 million (US$11.9 million) in 2012, primarily due to an increase in revenues from third-party channels from RMB25.6 million in 2011 to RMB58.0 million (US$9.5 million) in 2012, mainly because we only started entering into arrangements with third-party channels to promote our literary content on their websites or in their reading channels during the course of 2011.

Mobile portal marketing services. Revenues from our mobile portal marketing services increased by 21.0% from RMB47.5 million in 2011 to RMB57.5 million (US$9.4 million) in 2012. The overall increase primarily reflected an increase in advertisers from 240 in 2011 to 265 in 2012 and the increased average revenue per advertiser from RMB198,027 to RMB217,004 (US$35,458), as a result of increased market acceptance of mobile internet advertising and advertisers’ increased allocation of advertising budget to our portal.

Other revenues. Revenues from our other services increased by 79.7% from RMB11.6 million in 2011 to RMB20.9 million (US$3.4 million) in 2012. This increase was primarily due to an increase in the number of third-party provided mobile apps or value-added services, such as paid contents, picture download and access to game or music files, which are provided by third parties for us to help them to promote.

Cost of Revenues. Our cost of revenues increased by 60.5% from RMB46.6 million in 2011 to RMB74.8 million (US$12.2 million) in 2012. The increase in our cost of revenues was primarily due to:

 

  (i) an increase in content acquisition cost from RMB12.6 million in 2011 to RMB23.1 million (US$3.8 million) in 2012;

 

  (ii) an increase in distribution fees from RMB7.1 million in 2011 to RMB15.4 million (US$2.5 million) in 2012;

 

  (iii) an increase in personnel costs from RMB16.6 million in 2011 to RMB18.5 million (US$3.0 million) in 2012;

 

  (iv) an increase in processing fees paid to mobile application stores from RMB1.1 million in 2011 to RMB6.7 million (US$1.1 million) in 2012;

 

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  (v)