F-1/A 1 v242440_f1a.htm F-1/A

As filed with the Securities and Exchange Commission on December 7, 2011

Registration No. 333-169515

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

AMENDMENT NO. 9 TO
FORM F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



 

SUNITY ONLINE ENTERTAINMENT LIMITED

(Exact name of Registrant as specified in its charter)

   
Cayman Islands   7379   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Level 9, Block A, No. 31
Gaoxin Road, Xi’an, P.R.C. 710075
+86-29-88278225

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



 

National Corporate Research, Ltd.
10 East 40 Street, New York, N.Y. 10016
212-947-7200

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



 

Copies to:

 
Mitchell S. Nussbaum, Esq.
Loeb & Loeb LLP
345 Park Avenue, New York, New York 10154
Tel: 212-407-4000 Fax: 212-407-4990
  Arthur Marcus, Esq.
Gersten Savage, LLP
600 Lexington Avenue
9th Floor
New York, N.Y. 10022
Tel: 212-752-9700 Fax: 212-980-5192


 

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. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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. o

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. o

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. o

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 Commission, acting pursuant to said Section 8(a), may determine.

 

 


 
 

TABLE OF CONTENTS

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 
PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION, DATED DECEMBER 7, 2011

[GRAPHIC MISSING]

Sunity Online Entertainment Limited

      Minimum Offering: 1,000,000 American Depositary Shares,
                         Representing 1,000,000 Ordinary Shares

      Maximum Offering: 1,600,000 American Depositary Shares,
                         Representing 1,600,000 Ordinary Shares

This is the initial public offering of our American Depositary Shares, or ADSs. We are offering a minimum of 1,000,000 ADSs and a maximum of 1,600,000 ADSs. The public offering is being underwritten on a “best efforts” basis. The underwriters must sell the minimum number of securities offered (1,000,000 ADSs), if any are sold, and are required to use only their best efforts to sell the securities offered. The offering will remain open for three business days from the date of this prospectus. See “Underwriting” on page 128. Each ADS represents one of our ordinary shares. We currently expect the initial public offering price to be $5.00 per ADS.

We have applied to list our ADSs on the NASDAQ Capital Market under the symbol “SUNG.” There is no assurance that this application will be approved.

See “Risk Factors” beginning on page 9 to read about risks you should consider before buying our ADSs.

     
  Per
ADS
  Minimum Offering   Maximum Offering
Public offering price   $ 5.00     $ 5,000,000     $ 8,000,000  
Underwriting discount(1)   $     $     $  
Proceeds to us, before expenses   $     $     $  
(1) Represents an underwriting discount equal to the sum of (A) 7% of the public offering price in the case of investors introduced by the underwriters to us and (B) 2.5% of the public offering price in the case of investors introduced by us to the underwriters. A description of underwriter compensation is set forth on page 128 of this prospectus in the section entitled “Underwriting.”

V.X. Fortune Capital Ltd. and Hong Kong Datang Investment Management Limited, two separate private investment funds located in China (the “Funds”), are each being allocated the opportunity to purchase 470,000 ADSs in this offering, and each has indicated an intention to purchase all of such ADSs. The ADSs purchased by the Funds will be subject to a lock-up agreement like those described under “Securities Eligible for Future Sale — Lock-Up Agreements.” Accordingly, the ADSs being sold under this offering may be narrowly marketed to institutional accredited and other sophisticated investors which do not require immediate liquidity from their investments, and may not be widely distributed among investors.

We do not intend to maintain an escrow account in connection with this offering. We anticipate that payment for the ADSs will be made by authorization of withdrawal from securities accounts maintained by investors with ICM Capital Markets Ltd., the representative of the underwriters, or other underwriters participating in the offering, and that payment in any other manner will not be accepted. Any funds authorized to be withdrawn from a securities account will continue to accrue interest, if any interest is to accrue on such amounts, at the contractual rates until closing or termination of the offering, but a hold will be placed on such funds, thereby making them unavailable to the purchaser until closing or termination of the offering. If a purchaser authorizes an underwriter to withdraw the amount of the purchase price from a securities account, such underwriter will do so as of the date of closing. Accordingly, since the investors’ funds will remain in their respective securities accounts until they consent to the sale of the ADSs being purchased, we do not believe the lack of a separate escrow account in connection with this offering will have any adverse effect on investors.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York within three business days of the date of this prospectus, subject to the condition that at least 1,000,000 ADSs have been subscribed and paid for.

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

ICM Capital Markets Ltd.

Prospectus dated       , 2011.


 
 


 
 


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS

Prospectus

 
PROSPECTUS SUMMARY     1  
RISK FACTORS     9  
FORWARD-LOOKING STATEMENTS     39  
USE OF PROCEEDS     40  
DIVIDEND POLICY     41  
CAPITALIZATION     42  
DILUTION     44  
EXCHANGE RATE INFORMATION     46  
ENFORCEMENT OF CIVIL LIABILITIES     47  
SELECTED FINANCIAL AND OPERATING DATA     49  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     51  
OUR CORPORATE HISTORY AND STRUCTURE     67  
OUR BUSINESS     71  
REGULATION     83  
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     93  
MAJOR SHAREHOLDERS     97  
RELATED PARTY TRANSACTIONS     98  
DESCRIPTION OF SHARES     100  
DESCRIPTION OF AMERICAN DEPOSITARY SHARES     108  
SECURITIES ELIGIBLE FOR FUTURE SALE     115  
TAXATION     117  
UNDERWRITING     128  
EXPENSES RELATING TO THIS OFFERING     135  
LEGAL MATTERS     135  
EXPERTS     135  
WHERE YOU CAN FIND ADDITIONAL INFORMATION     136  
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES     136  
INDEX TO FINANCIAL STATEMENTS     137  


 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

i


 
 

TABLE OF CONTENTS

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” beginning on page 9 before deciding whether to buy our ADSs.

Unless otherwise indicated, our financial information presented in this prospectus has been prepared in accordance with United States Generally Accepted Accounting Principles, or U.S. GAAP. This prospectus contains conversions of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader.

Unless otherwise noted, all conversions from Renminbi to U.S. dollars were made at the noon buying rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of [•  ], which was RMB [•  ] to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On December [•  ], 2011, the noon buying rate was RMB[•  ] to US$1.00.

Unless otherwise indicated, all information in this prospectus reflects a 1-for-2.49 reverse share split of our ordinary shares that was effected on October 2, 2010, which we refer to herein as the “reverse share split,” and assumes the sale of 1,600,000 ADSs, the maximum number of ADSs offered in this offering.

We obtained statistical data, market data, other industry data and forecasts used throughout this prospectus from publicly available information.

Overview

We are a rapidly growing online game developer and operator in China. Our net income for the fiscal years ended March 31, 2011, 2010 and 2009 was $4,860,381, $3,886,085 and $2,868,985, respectively, representing an increase in net income of 25% and 35% in each of the years ended March 31, 2011 and 2010, respectively. We currently develop game systems and operate game websites. We have a leading position in the casual games market, as well as the role playing games market, as measured by the popularity of our online games, Qihang Game, or QHG, and Han Dynasty Game, or HDG. According to iResearch Consulting Group, QHG is one of the “Top 10” outstanding cards and chess games for 2010 and HDG is one of the “Top 15” new Webgames for 2010 in China.

Our QHG Website is a client-end game/Webgame website featuring card and chess games. Our HDG Website is a role playing game, or RPG, that innovatively combines the real history of the Han Dynasty with the players’ action in specific scenes which simulate the way of life during the Han Dynasty. Our Happy Canyon Game, or HCG, is a casual game which implements a social networking service where players play online games involving communications with other players to enhance their social relationships. Our ISS Website is a role playing game, or RPG. It is a funny cartoon-style game which is based on ancient Chinese legends. We also have two new Webgames in the pipeline, both of which we are developing in-house. Each of these two new Webgames, Immortal Navigator, or NVT, and Space War Game, or SWG, are RPGs. We expect to begin open beta testing of NVT in December 2011 and SWG in February 2012.

We use a time-based revenue model for QHG, where players are charged based on the amount of time they spend playing the game. We use an item-based revenue model for HDG, HCG and ISS, where players play the games for free, and are charged only for purchases of in-game items, such as performance enhancing items, clothing, accessories and pets. We distribute prepaid game tokens to players in China through a network of third-party distributors, who sub-distribute the game tokens to numerous retail outlets.

We have a dedicated product development team that helps us identify market trends and user preferences. Based on feedback from our players, we launch new virtual items to maintain game players’ interest.

Industry Background

According to the China Internet Network Information Center, or CNNIC, in June 2008 China surpassed the United States as having the largest population of Internet users in the world. According to a study we commissioned by iResearch Consulting Group, a leading Chinese Internet research and consulting firm that

1


 
 

TABLE OF CONTENTS

provides in-depth studies of consumer behavior in the Internet, media, e-commerce, online games, wireless value-added services and other new economy fields, as of December 31, 2009, the number of Internet users in China had reached 384 million, an increase of 28.9% compared with December 31, 2008. It is further anticipated that the number of Internet users in China will grow to approximately 590 million by 2012. Within the China Internet market, online games have been a fast growing segment and one of the most popular activities for Internet users.

In addition, China’s online games industry has other key characteristics, including:

growing popularity of online games developed by Chinese game developers;
dramatic growth of the Webgame market; and
increasingly competitive market dynamics.

Our Competitive Strengths

We believe that the following competitive strengths enable us to compete effectively and capitalize on the rapid growth in the online game market:

we are a fast growing Chinese gaming company with a leading position in the casual game and Webgame markets in China;
we are among few Chinese gaming companies who independently developed their whole gaming system, from the underlying gaming engines to the user interface;
we have extensive nationwide distribution and marketing networks in China; and
our management team has extensive experience in China’s information technology industries and capital markets.

Our Growth Strategies

Our goal is to become one of the leading online game companies in the world. Our primary growth strategies include:

further expanding and diversifying our game portfolio through self-development and strategic acquisitions of complementary online game businesses; and
promoting the 633 Platform as a game portal website.

Our Challenges

The successful execution of our growth strategies is subject to certain risks and uncertainties, including those relating to:

our limited operating history;
our dependence on one game for a significant part of our revenues;
our ability to operate and improve our existing games to satisfy the changing demands of game players;
our ability to develop and launch new games that are commercially successful;
our ability to respond to competitive pressures, including competition that arises from new games introduced by our competitors and other forms of entertainment;
our ability to protect our intellectual property rights;
our ability to maintain an effective system of internal control over financial reporting; and
the regulatory environment in China.

Please see “Risk Factors” beginning on page 9 and other information included in this prospectus for a detailed discussion of these risks and uncertainties.

2


 
 

TABLE OF CONTENTS

Recent Developments

Selected Estimated Results for the Quarter Ended June 30, 2011:

The following information is an estimate of our selected preliminary unaudited financial and operating data for the quarter ended June 30, 2011. The selected preliminary unaudited financial and operating data presented below are subject to the completion of our normal quarter-end closing procedures. Accordingly, this data may change and those changes may be material. This information is deemed to be preliminary because it is unaudited and has been internally prepared by management.

We estimate our revenues for the quarter ended June 30, 2011 to be approximately $2.83 million. This represents an increase of approximately 7.5% from our revenues of $2.63 million for the quarter ended June 30, 2010, primarily driven by new games and our new game operation platform, as well as the impact of the business tax incentives.

We estimate our gross profit for the quarter ended June 30, 2011 to be approximately $1.99 million. This represents an increase of approximately 18% from the quarter ended June 30, 2010, primarily driven by new games and our new game operation platform.

We estimate our operating income for the quarter ended June 30, 2011 to be approximately $1.05 million. This represents a decrease of approximately 6.2% from operating income of $1.12 million for the quarter ended June 30, 2010, primarily due to the increased equipment leasing expenses and marketing expenses related to our new game operation platform we recently developed.

This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical financial statements and the related notes contained elsewhere in this prospectus.

Our Corporate History and Structure

Our business has been conducted in the PRC through Sunity Xi’an, a PRC limited liability company established in 2006. On December 7, 2009, we formed Sunity HK, a wholly-owned subsidiary of Sunity Cayman established in Hong Kong and on March 19, 2010, we formed Sunity WFOE, which is our indirect wholly-owned subsidiary that is a registered wholly foreign owned enterprise in the PRC and a wholly-owned subsidiary of Sunity HK. Our current ownership structure is presented under the following organization chart:

[GRAPHIC MISSING]

3


 
 

TABLE OF CONTENTS

Through the use of certain contractual arrangements between Sunity WFOE and Sunity Xi’an we are able to effectively control Sunity Xi’an’s daily operations and financial affairs. All of the issued and outstanding shares of Sunity Xi’an are currently held by fourteen Chinese citizens, including our chairman and chief executive officer, Fan Zhang, who owns a 46.28% equity interest in Sunity Xi’an.

Sunity Cayman has no ownership interest in Sunity Xi’an and depends on the contractual arrangements to control Sunity Xi’an. The contractual arrangements may not be as effective in providing Sunity Cayman with control over Sunity Xi’an as direct ownership. See “Risk Factors — Sunity WFOE’s contractual arrangements with Sunity Xi’an and its shareholders may not be as effective in providing control over Sunity Xi’an as direct ownership of Sunity Xi’an and the shareholders of Sunity Xi’an may have potential conflicts of interest with us” on page 21 of this prospectus.

Corporate Information

Our registered office is located at the offices of Portcullis TrustNet (Cayman) Ltd., Marquee Place, Suite 300, 430 West Bay Road, P.O. Box 32052, Grand Cayman KY1-1208, Cayman Islands, British West Indies. Our principal executive offices are located at Level 9, Block A, No. 31 Gaoxin Road, Xi’an, P.R.C., and the telephone number at this address is 86-29-88278225. Our website is www.sunity5.com. Information contained on our website does not constitute part of, and is not deemed incorporated by reference into, this prospectus. Our agent for service of process in the United States is National Corporate Research, Ltd., 10 East 40 Street, New York, N.Y. 10016, Tel: 212-947-7200.

4


 
 

TABLE OF CONTENTS

The Offering

This public offering is being underwritten on a “best efforts, minimum/maximum” basis. The offering is being made without a firm commitment by the underwriters, which have no obligation or commitment to purchase any of our ADSs. The closing of the offering and delivery of the ADSs is expected to occur within three business days of the date of this prospectus. See “Underwriting” on page 128.

ADSs in the offering    
    Minimum: 1,000,000
Maximum: 1,600,000
ADSs outstanding immediately after the offering    
    Minimum: 1,000,000
Maximum: 1,600,000
Ordinary shares outstanding prior to the offering    
    4,425,703
Ordinary shares outstanding after the offering    
    Minimum: 5,425,703
Maximum: 6,025,703
Proposed NASDAQ Capital Market symbol    
    SUNG
Timing and settlement for ADSs    
    The ADSs are expected to be delivered against payment on       , 2011 subject to the condition that at least 1,000,000 ADSs have been subscribed and paid for. The ADSs initially will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York.
The ADSs    
    Each ADS represents one ordinary share, par value $0.00249 per share. The ADSs may be evidenced by American depositary receipts, or ADRs.
    The depositary will be the holder of the ordinary shares underlying the ADSs, and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.
    You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for that surrender.
    We may amend or terminate the deposit agreement for any reason without your consent. Any amendment which imposes or increases fees or charges or which materially prejudices any substantial existing rights you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to the ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement, as amended, if you continue to hold your ADSs.
    To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement of which this prospectus forms a part.
Depositary    
    The Bank of New York Mellon

5


 
 

TABLE OF CONTENTS

Use of proceeds    
    Our net proceeds from this offering, assuming the minimum number of securities offered (1,000,000 ADSs) is sold are expected to be approximately $      million, and assuming the maximum number of securities offered (1,600,000 ADSs) is sold are expected to be approximately $      million, each assuming a public offering price of $5.00. We plan to use net proceeds that we receive from this offering to expand our research and development efforts and for other general corporate purposes. See “Use of Proceeds” on page 40.
Risk Factors    
    Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 9.
Lock-Ups    
    We, our directors, officers, and all of our principal shareholders have agreed, and any investment by either Fund will be conditioned on its agreeing, with the underwriters, subject to certain exceptions, not to offer, sell or otherwise dispose of any of our securities for a period of 180 days from the closing of this offering. See “Underwriting” on page 128.

6


 
 

TABLE OF CONTENTS

Summary Financial and Operating Data

The summary financial and operating data as of and for the years ended March 31, 2009, 2010 and 2011 presented below have been derived from Sunity Xi’an’s audited financial statements that are included elsewhere in this prospectus. Selected balance sheet data for our company as of March 31, 2009 has been omitted from the financial statements that are included elsewhere in this prospectus in accordance with Instruction 3 to Item 8.A.2 to Form 20-F. Our results of operations in any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” beginning on page 9 of this prospectus. The summary financial information for those periods and as of those dates should be read in conjunction with the financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 51 of this prospectus.

     
  Years Ended March 31,
     2011   2010   2009
Income Statement Data:
                          
Revenues   $ 12,383,357     $ 9,542,832     $ 8,254,382  
Cost of revenue     3,429,864       2,420,491       2,440,153  
Gross profit     8,953,494       7,122,341       5,814,229  
Operating expenses     3,382,270       2,920,045       2,945,785  
Other income (expenses)     14,036       3,409       541  
Income before income tax     5,585,259       4,205,706       2,868,985  
Income tax     724,878       319,621        
Net Income     4,860,381       3,886,085       2,868,985  
Effects of foreign currency conversion     534,490       8,936       166,686  
Comprehensive income   $ 5,394,871     $ 3,895,020     $ 3,035,671  

  

     
       Years Ended March 31,
     2011   2010   2009
Balance Sheet Data:
                          
Working capital (deficit)   $ 9,742,277     $ 3,366,866     $ (117,470 ) 
Total assets     17,504,771       11,535,739       8,486,982  
Total liabilities     1,477,362       917,052       2,226,616  
Total liabilities and shareholders’ equity     17,504,771       11,535,739       8,486,982  
Shareholders’ equity   $ 16,027,409     $ 10,618,687     $ 6,260,366  

  

         
    Years Ended March 31,
       2011   2010   2009   2008
Selected Operating Data:(1)
                                            
QHG(2)(3)     ACU       10,056       11,277       6,004        
       PCU       11,834       14,325       7,505        
HCG(4)     ACU       1,806                    
       PCU       2,415                    
HDG(5)     ACU       39,798       14,920              
       PCU       50,127       18,887              

(1) We quantify our user base by measuring “Average Concurrent Users” (ACU) and “Peak Concurrent Users” (PCU). We believe that ACUs and PCUs are key non-financial variables that are necessary in understanding our business operations and financial results. As ACUs and PCUs are non-financial variables, the data presented has not been audited or reviewed.
(2) In November 2010, some of QHGs games were combined into HCG, a SNS game community developed by us to increase players’ loyalty. Eventually, all of our current players and distributors of QHG will be transferred to HCG and QHG will cease to exist.
(3) QHG did not operate online until May 2008, and as a result did not generate any revenue prior to that date.
(4) HCG did not operate online until September 2010, and as a result did not generate any revenue prior to that date.
(5) HDG did not operate online until October 2009, and as a result did not generate any revenue prior to that date.

7


 
 

TABLE OF CONTENTS

CERTAIN INFORMATION

In this prospectus, unless otherwise specified or the context so requires:

“633 Platform” refers to www.633.com, the webgame platform operated by us and through which players will be able to play games that are developed or operated by us;
“we,” “us,” “our company,” or “Company” refers to Sunity Cayman, and its subsidiaries and consolidated entities;
“casual game” refers to interactive online games that require no special skills and can be played by any age group. Casual games are typically distinguished by their simple rules and lack of a time commitment on the part of the player, as compared to more complex MMORPGs. Compared to MMORPGs, casual games have lower development and production costs;
“Client-end game” refers to the interactive online games that need to be played in the client-end software downloaded by the players to their computer before they start to play the games;
“dollars,” “US$” or “$” refer to the legal currency of the United States;
“HCG” refers to Happy Canyon Game, a Webgame that we developed in-house;
“HDG” refers to Han Dynasty Game, a Webgame that we developed in-house;
“ISS” refers to In Search of the Supernatural, a Webgame that we developed in-house;
“MMORPGs” refers to interactive online games that may be played simultaneously by hundreds of thousands of players and is an acronym for “Massively Multi-Player Online Role-Playing Games;”
“NVT” refers to Immortal Navigation, the temporary name of a Webgame that we developed in-house;
“PRC” or “China” refers to the People’s Republic of China;
“QHG” refers to Qihang Game, a cards and chess game website that we developed in-house and began operating in May 2008. QHG was previously known as a Dream Game, or DG;
“RMB” or ¥ refer to the legal currency of the People’s Republic of China;
“RPG” or “role-playing game” refers to a broad family of games in which players assume the roles of different fictional characters or avatars in a fictional setting. Actions taken within a role-playing game must be taken according to a formal system of rules and guidelines;
“SNS game” refers to Social Network Service Game, where the players play online games involving communications with other players to enhance social relationships;
“Sunity Cayman” refers to Sunity Online Entertainment Limited, a Cayman Islands exempted company;
“Sunity HK” refers to Hong Kong Sunity Online Entertainment Limited, a Hong Kong company which is a wholly owned subsidiary of Sunity Cayman;
“Sunity WFOE” refers to Beijing Yangguang Jiaze Network Technology Limited, a PRC company which is a wholly owned subsidiary of Sunity HK;
“Sunity Xi’an” refers to Xi’an Qujiang Sunity Technology Limited, a PRC company which has contractual relationships with Sunity WFOE (formerly known as Sunity (Beijing) Technology Co., Ltd.);
“SWG” refers to Space War Game, the temporary name of a Webgame that we developed in-house; and
“Webgame” refers to interactive online games that can be played in the web browser without downloading any client-ended software.

  

8


 
 

TABLE OF CONTENTS

RISK FACTORS

You should carefully consider all of the information in this prospectus, including various changing regulatory, competitive, economic, political and social risks and conditions described below, before making an investment in our ADSs. One or more of a combination of these risks could materially impact our business, results of operations and financial condition. 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

We have a limited operating history and the long-term potential growth of our online games is unproven, which makes it difficult to predict our future operating results.

Sunity Xi’an was incorporated on February 14, 2006 in Beijing, China under the name Sunity (Beijing) Technology Co., Ltd., and changed its name on March 3, 2011. We commenced our game development business in 2007. We launched QHG in May, 2008, HDG in October, 2009, HCG in September, 2010 and ISS in April 2011. QHG, HDG, HCG and ISS are games that we developed in-house. As such, we have a limited operating history in the game development and operating business for you to evaluate our business, financial performance and prospects. We may not be able to achieve or exceed current revenue and net income results or grow in future periods. Accordingly, our current revenues may not be indicative of our future revenues, and our revenues may, in fact, decline. We may also not have sufficient experience to address the risks frequently encountered by young companies using new and unproven business models and entering emerging and rapidly evolving markets, including the online game market in China. These risks may include our potential failure to:

develop new Webgames that are appealing to game players and meet our expected timetable for launches of new games;
respond in a timely manner to technological changes or resolve unexpected network interruptions;
comply with changes to regulatory requirements;
raise our brand recognition and game player loyalty;
maintain adequate control of our costs and expenses; and
successfully adapt to an evolving business model.

If we are unsuccessful in addressing any of the risks listed above, our business may be adversely affected.

As we currently depend on QHG, which was launched in 2008, for a significant part of our revenues, any adverse developments relating to QHG will adversely affect our results of operations.

We currently rely on our in-house developed cards and chess game, QHG, for a majority of our revenues. For the year ended March 31, 2011, 38% of our total revenues were derived from QHG, which was launched in May, 2008. Although we launched HDG in October, 2009, HCG in September, 2010 and ISS in April 2011 and will strive to develop and launch more games in the future, we cannot guarantee you that we will be able to successfully develop, launch and operate any of these new games. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

any reduction in or failure to grow the player base of QHG, any decrease in its popularity in the market due to intensifying competition or other factors;
any decrease in or failure to grow the amount of revenues generated from QHG;
failure by us to continually improve and update QHG on a timely basis; or
any breach of game-related software security, prolonged server interruption due to network failures, hacking activities or other factors or any other adverse developments relating to QHG.

9


 
 

TABLE OF CONTENTS

We may not be successful in operating and improving our games to satisfy the changing demands of game players.

We depend on the continual play and purchase of virtual items by our game players to generate revenues, which in turn depends on the continued attractiveness of our games to the game players and their satisfactory game-playing experience. We provide support for our games and collect game players’ feedback on their game-playing experience in order to resolve any programming flaws or other game operational issues in a timely manner. We also use software and systems to monitor game players’ preferences to develop and improve game features and virtual items in a way that is attractive to our game players. We continue to improve our games through regular updates as well as periodic major enhancements using expansion packs. However, we cannot assure you that our efforts will be effective in eliminating program errors associated with our games, satisfying game player demands, or retaining the continued attractiveness of our games. For example:

we may fail to provide game updates and expansion packs in a timely manner due to technologies, resources or other factors;
our game updates and expansion packs may contain program errors, and their installation may create other unforeseen issues that adversely affect the game-playing experience;
we may fail to timely respond to and/or resolve complaints from our game players;
we may fail to effectively respond to changing consumer tastes and preferences; and
new technologies in our competitors’ online game programming or operations could render our games obsolete or unattractive to players, thereby limiting our ability to recover related product development costs, purchase costs and licensing fees.

Our failure to address the above-mentioned issues could adversely affect the game-playing experience of our game players, damage the reputation of our games, shorten the lifespan of our games, and eventually result in the loss of game players and a decrease in our revenues.

If we fail to obtain necessary government approvals and/or comply with restrictions imposed by regulatory authorities, we may incur additional expenditures or be subject to significant fines and penalties.

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations. Our failure to comply with applicable PRC laws and regulations could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our business, operating results and financial condition.

We may fail to launch new games according to our timetable, and our new games may not be commercially successful.

In order for our business strategy to succeed over time, we must continually develop, launch and operate new online games that are commercially successful. We will not generate any revenue from a game until it enters open beta testing. We cannot assure you that we will be able to meet our timetable for new game launches. A number of factors, including technical difficulties, lack of sufficient game development personnel and other resources could result in delays in launching our new games. There are many factors that may adversely affect the popularity of our new games. For example, we may fail to anticipate and adapt to future technical trends, new business models and changing game player preferences and requirements, we may fail to effectively plan and organize marketing and promotional activities, or fail to differentiate our new games from

10


 
 

TABLE OF CONTENTS

our existing games. If the new games we introduce are not commercially successful, we may not be able to recover our product development costs, which can be significant, and our future profitability and growth prospects will decline.

Rapid technological changes may increase our game development costs.

The online game industry is evolving rapidly, so we need to anticipate new technologies and evaluate their possible market acceptance. In addition, government authorities or industry organizations may adopt new standards that apply to game development. Any new technologies and new standards may require increases in expenditures for game development and operations, and we will need to adapt our business to cope with the changes and support these new services to be successful. If we fall behind in adopting new technologies or standards, our existing games may lose popularity, and our newly developed games may not be well received in the marketplace. As a result, our business prospects and results of operations could be materially and adversely affected.

Our new online games may attract away players of our established games, which could materially and adversely affect our business.

Our new games may divert game players away from our existing games. If this occurred, it would decrease our existing games’ player base, which could in turn make these games less attractive to other game players, resulting in decreased revenues from our existing games. Game players of our existing games may also spend less money to purchase virtual items in our new games than they would have spent if they had continued playing our existing games, which could materially and adversely affect our total revenues.

The market in which we compete is highly competitive and pressures from existing and new companies may have a material adverse effect on our business, financial condition and results of operations.

Competition in the online game market in China is becoming increasingly intense. Nine online game companies have already listed their shares on NASDAQ, the New York Stock Exchange or the Hong Kong Stock Exchange. The majority of these nine online game companies focus on MMORPGs. While our primary focus is on Webgames and cards and chess games, some of the listed companies have already announced plans to develop Webgames. Moreover, there are many venture-backed private companies focusing on online game development, further intensifying the competition.

Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater brand name recognition, larger international player bases and significantly greater game development, technical, financial and marketing resources than we have. Furthermore, any of our current or future competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, more well established and well financed companies and therefore obtain greater financial, marketing and development and licensing resources than we have. This may allow them to devote greater resources than we can to develop and promote new online games and technologies similar to or better than our own. These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies. In addition, our existing and potential international competitors may establish cooperative relationships among themselves or with our local competitors. This may significantly enhance their competitiveness in the online game industry in China. New and increased competition may result in larger discounts demanded by our distributors, or price reductions in our virtual products and services, any of which could materially and adversely affect our business, financial condition and results of operations. In addition, increased competition in the online game industry in China could make it difficult for us to retain and expand our existing player base, which could reduce the number of dedicated players and players with high disposable incomes that play our games and from whom we derive most of our net revenues.

11


 
 

TABLE OF CONTENTS

Our revenues derived from being a service provider might decrease in the future. If we cannot successfully launch new games to offset the possible decrease in revenues from the SP service our revenues will be adversely affected.

We started as a service provider, or SP. As a SP, we provided all relevant services (other than data transfer and communications), including short-message and other value-added services, to mobile and landline phone users, based on the telecom operators’ platforms. However, in 2008 when this business began to decrease due to changes in the SP management policy issued by Ministry of Industry and Information Technology, or MIIT, we turned to the online gaming industry. Our first game, QHG was officially operated online in May, 2008. Though the majority of our revenue comes from online games, the revenue derived from the SP service continues to represent a portion of our income. Our strategy is to dedicate our resources to game development and operation. As a result, we will no longer invest in the SP service except to the extent that such SP service will be used for mobile gaming and for real-time payments. Therefore, we expect that our revenue from the SP service will decrease in the future. Our revenue will be adversely affected if we cannot successfully launch new games to offset the expected decrease in revenues from the SP service.

We may not be able to effectively utilize our RFID technology, and our profit would be negatively impacted as a result of potential impairment of RFID related intangible assets.

As of March 31, 2011, we had net intangible assets of $3,386,592, of which $2,629,342 was related to the radio frequency identification (RFID) technology. The technology uses an object (typically referred to as an RFID tag) applied to or incorporated into a product or person for the purpose of identification and tracking by using radio waves. The RFID business has not generated any revenue since 2008 and will not be our focus in the foreseeable future due to the strategic shift of our core business to online gaming. As a result, the primary role of the Company’s RFID technology has shifted to providing a mobile phone payment channel for our gaming business.

In March 2011, we launched the 633.com platform to provide an online gaming platform to third parties’ games in addition to our own developed games. This platform currently utilizes RFID technology for mobile phone payment. Our revenue from this platform has just started. With additional third party games and our own developed games adding to 633.com, we expect significant growth from this platform.

In the event we decide to permanently exit the RFID business and if the RFID related technology fails to provide an effective mobile phone payment channel for our gaming business, the associated intangible assets will no longer be utilized and may only be sold at fair market value. Our net income would then be negatively impacted as a result of any potential write down of these intangible assets.

We lease the domain name www.633.com from one of our minority shareholders at no cost. If the shareholder decides to take back the domain name in the event of a breach of the agreement, our business could be adversely affected.

We lease the domain name www.633.com from one of our minority shareholders at no cost. We have a written agreement with this shareholder which provides that we may use this domain name at no cost until December 31, 2012. This agreement has no specified term or expiration date. The cost to use the domain name www.633.com will be renegotiated by the end of 2012. We plan to develop the 633 Platform as a one-stop game that will meet all the needs of the players of games and expect significant growth from this platform.

Though we have agreed that the shareholder could not take back the domain name without our prior consent and he shall compensate us for any loss incurred in the event of a breach, if the shareholder decides to take back the domain name www.633.com and breaches the agreement, we may need to claim our losses through litigation, which will likely be costly and time-consuming and divert the attention and resources of our technical and management personnel. In such event, our business could be adversely affected.

12


 
 

TABLE OF CONTENTS

Our operating results fluctuate from period to period, and will continue to fluctuate significantly, making them difficult to predict and could cause our operating results for a particular period to fall below expectations, resulting in a decrease in the price of our ADSs.

Our operating results from period to period are highly dependent upon, and will fluctuate, based on the following factors:

the availability, quality and playability of our games;
the number of games that we and our competitors offer players and our respective pricing;
changes in our game rules and the corresponding impact on player behavior and purchasing patterns;
the quality, variety, popularity and mix of virtual products and services available for purchase in our free-to-play games and related in-game promotional efforts;
game development costs and licensing or royalty payments for games potentially licensed in the future;
our introduction of new online games, which may attract players away from our established games, and the mix of sales of our games;
the timing of game releases by our competitors;
the mix of sales through our distributors (who purchase prepaid game tokens at a discount to their face value) and direct sales of game points to players through our website;
the breadth and depth of our distribution network and the corresponding availability of our prepaid game tokens;
the success of our advertising and promotional efforts; and
seasonality of our sales and revenue recognition, during and around the Chinese New Year holidays in the first quarter, the Chinese Labor Day holidays in the second quarter, and the Chinese National Day holidays in the fourth quarter, when fewer of our targeted players play our games.

Due to these and other factors listed in this “Risk Factors” section, our operating results will vary from period to period, will be difficult to predict for any given period, may be adversely affected from period to period and may not be indicative of our future performance. In addition, our operating results may vary significantly from period to period as a result of factors beyond our control, such as the recent slowdown in China’s economic growth caused in part by the recent severe global crisis in the financial services and credit markets, and may be difficult to predict for any given period. Our past results may not be indicative of our future performance and our quarterly results may not be indicative of our full year results. If our operating results for any period fall below our expectations or the expectations of investors or any market analyst that may issue reports or analyses regarding our ADSs, the price of our ADSs is likely to decrease.

Our limited resources may affect our ability to manage our growth.

Our growth to date has placed, and our anticipated further expansion will continue to place, a significant strain on our management, systems, and resources. In addition to training and managing our workforce, we will need to continue to develop and improve our financial and management controls and our reporting systems and procedures. We may be unable to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future growth and materially and adversely affect our business, financial condition and results of operations.

We may not be successful in acquiring other early-stage gaming companies.

Selective acquisitions of complementary online game businesses to broaden our game formats is part of our strategy to expand our business. However, our management currently lacks experience in identifying potential companies that would be complementary to our business. In addition, our ability to grow through future acquisitions will depend on the availability of suitable acquisition candidates at an acceptable cost, our ability to compete effectively in attracting these candidates, and the availability of financing to complete larger

13


 
 

TABLE OF CONTENTS

acquisitions. Future acquisitions or investments could result in potential dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or impairment of goodwill and other intangible assets, any of which could adversely affect our financial condition and results of operations. The benefits of an acquisition or investment may also take considerable time to develop and any particular acquisition or investment may not produce the intended benefits.

Future acquisitions would also expose us to potential risks, including risks associated with the assimilation of new operations, technologies and personnel, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, customers, and other distributors as a result of the integration of new businesses. As a result, we may not be successful in acquiring other early-stage gaming companies and obtaining access to other valuable resources.

Future acquisitions and/or strategic alliances may have an adverse effect on our ability to manage our business.

Selective acquisitions and/or strategic alliances form part of our strategy to expand our business. We do not, however, have any prior experience integrating any new companies into ours, and we believe that integration of a new company’s operation and personnel will require significant management attention. The diversion of our management’s attention from our business and any difficulties encountered in the integration process could have an adverse effect on our ability to manage our business.

We generate a significant part of our revenues under the item-based revenue model, which has a short history of commercial application and presents risks related to consumer preferences and regulatory restrictions.

Currently, we operate HDG, HCG and ISS under the item-based revenue model. Under this revenue model, our game players are free to play the games for an unlimited amount of time, but are charged for purchases of certain virtual items. We currently expect that a substantial majority of our revenues, including parts of revenues from our games currently under development, will be generated under the item-based revenue model. The item-based revenue model requires us to design games that not only attract game players to spend more time playing our games, but also encourages them to purchase virtual items. The sale of virtual items requires us to track closely consumer tastes and preferences, especially as to in-game consumption patterns. If we fail to design virtual items that provide an incentive to game players to purchase them, we may not be able to effectively translate our game player base and their playing time into revenues. Although the item-based revenue model is currently a prevalent revenue model for MMORPGs in China, it does not have a long history of proven commercial application. In addition, the item-based revenue model may cause additional concerns with PRC regulators who have been implementing regulations designed to reduce the amount of time that Chinese youths spend on online games and intended to limit the total amount of virtual currency issued by online game operators and the amount of purchases made by individual game players. A revenue model that does not charge for time may be viewed by the PRC regulators as inconsistent with this goal. We cannot assure you that the item-based revenue model will continue to be commercially successful, or that in the future we will not need to change our revenue model back to the time-based revenue model or to a new revenue model. Any change in our revenue model could result in disruption of our game operations and decrease in the number of our game players.

We rely on data recorded in our billing systems for revenue recognition and to track game players’ consumption patterns of virtual items. If our billing systems fail to operate effectively, it will not only affect the completeness and accuracy of our revenue recognition, but also affect our ability to design and improve virtual items that appeal to game players.

Our game operations revenues are collected through the sale of our prepaid game tokens or online direct sales of game points. However, we do not recognize revenues when our prepaid game tokens or game points are sold. Rather, our revenues are recognized when the virtual items purchased by our game players are consumed. We rely on our billing systems to record the purchase and consumption of virtual items by our game players. If our billing systems fail to accurately record the purchase and consumption of virtual items, we may not be able to accurately recognize our revenues. In addition, various factors affect the estimated lives

14


 
 

TABLE OF CONTENTS

of virtual items, such as the average time period that game players typically play our games and other game player behavior patterns. The acceptance and popularity of expansion packs, promotional events and market conditions also affect the rate at which our virtual items are purchased and consumed. If such information is not accurately recorded, or if we do not have sufficient information due to our short operating history, we will not be able to accurately estimate the lives of the virtual items, which will also affect our ability to accurately recognize our revenues from such virtual items. Therefore, if our billing systems were damaged by system failure, network interruption, or virus infection, or attacked by a hacker, the integrity of our data would be compromised, which could materially and adversely affect our revenue recognition and the completeness and accuracy of our recognized revenues, resulting in possible restatement of our financial statements and loss of investors’ confidence in us.

In addition, we rely on our billing systems to record game player purchase and consumption patterns, based on which we improve our existing virtual items and design new virtual items. For example, we intend to increase development efforts on the number and variety of virtual items that our game players like to purchase, and we may also adjust prices accordingly. If our billing systems fail to record data accurately, our ability to improve existing virtual items or design new virtual items that are appealing to our game players may be adversely affected, which could in turn materially and adversely affect our revenues.

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could subject us to significant liabilities and other costs.

Our success depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. We will be subject to additional risks if entities licensing their intellectual property to us, including, for example, game source codes, do not have adequate rights in any such licensed materials. The validity and scope of claims relating to the intellectual property of game development and technology involve complex scientific, legal and factual questions and analysis and, therefore, tend to be uncertain. In particular, the patent field covering online games and related technology is rapidly evolving and surrounded by a great deal of uncertainty, and we cannot assure you that our technologies, processes or methods would not be covered by third-party patents, either now existing or to be issued in the future. In addition, some of our employees were previously employed at other companies, including our current and potential competitors. We also intend to hire additional personnel to expand our technical support team. To the extent that these employees are involved in research at our company similar to research in which they have been involved in while working for their former employers, we may become subject to claims that such employees or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees. Although we are not aware of any pending or threatened claim, future litigation may cause us to incur significant expenses, and third-party claims, if successfully asserted against us, may cause us to pay substantial damages, seek licenses from third-parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention and resources of our technical and management personnel.

We may need to incur significant expenses to enforce our proprietary rights, and if we are unable to protect such rights, our competitive position could be harmed.

We regard our proprietary software, domain names, trade names, copyrights, trade secrets and other intellectual property as critical to our success. In particular, we have spent a significant amount of time and resources in developing our game products and our ability to protect our proprietary rights in connection with our games is critical for the success of our game products and our overall financial performance. We are the registered owner of 8 software copyrights in China, and we expect to apply for additional software copyrights as we continue the development of our game portfolio. We have taken various measures to protect our source codes, including confidentiality agreements and segregation of source codes, so that only our Chief Technology Officer and the project leader have access to the entire source codes for any of our games. For further information, see “Business — Intellectual Property.”

However, we cannot assure you that our measures will be sufficient to protect our proprietary information and intellectual property. Implementation of intellectual property laws in China has historically been lacking, primarily because of ambiguities in the laws and difficulties in enforcement. Accordingly, protection of

15


 
 

TABLE OF CONTENTS

intellectual property rights in China may not be as effective as in the United States or in other developed countries. Policing unauthorized use of proprietary technology is difficult and expensive. Any steps we have taken to prevent the misappropriation of our proprietary technology may be inadequate.

Despite our efforts to protect our intellectual property, we cannot assure you that other online game developers will not copy our ideas and designs, or that other third parties will not infringe our intellectual property rights. Litigation relating to intellectual property rights may result in substantial costs to us and diversion of resources and management attention away from our business, and may not be successful. In addition, as our ideas and designs are not protected by patents, other online game developers may independently develop ideas and designs that compete with us.

We rely on our nationwide distribution network for a significant portion of our net revenues. Failure to maintain good relationships with our distributors could materially disrupt our business and harm our net revenues. We may fail to maintain a stable and efficient physical distribution network for our prepaid game tokens.

Online payment systems in China are in a developmental stage and are not as widely available to, or accepted by, consumers in China as they are in the United States. We rely heavily on a physical distribution network composed of third-party distributors across China for sales of our prepaid game tokens to our game players. As a result, our revenues could be adversely affected by the underperformance of our distributors, such as the failure to meet minimum sales or penetration targets or the failure to establish an extensive retail network. We generally sign one-year agreements with our distributors. We cannot assure you that we will continue to maintain favorable relationships with them. In addition, our distributors may violate our distribution agreements. Such violations may include, among other things, their:

failure to maintain minimum price levels for our prepaid game tokens in accordance with our distribution agreements;
failure to properly promote our games in important outlets, or cooperate with our sales and marketing team’s efforts in their designated territories; and
selling our prepaid game tokens outside their designated territories.

If we decide to penalize, suspend or terminate our distributors for acting in violation of our distribution agreements, or if the distributors fail to address material violations committed by any of their retail outlets in a timely manner, our ability to effectively sell our prepaid game tokens in any given territory could be negatively impacted, which could materially and adversely affect our revenues.

We may be liable in China for legal or regulatory violations by any of our distributors. Our products also face counterfeit-related risk.

We may be unable to effectively manage our nationwide distribution network. We have distribution agreements with two distributors, namely, Wang Yuguo and Xia Zhijun, who then manage over 200 sub- distributors of our game tokens for QHG. We also have distribution agreements with three other distributors, namely, Shanxi Yangguang Ruize Communication Technology Limited, Hangzhou Binglong Network Technology Limited and Chendou Shenfang Network Technology Limited, who directly distribute our game tokens for HDG and HCG. Any failure by our distributors, or, in turn, their sub-distributors, to operate in compliance with applicable law and as agreed to in the distributor agreements may result in liability to us, may harm our games’ reputation and may result in disputes with our players. For instance, failure by the distributors to observe our pricing policy may lead to increased competition between the distributors and therefore, interrupt the effective operation of our distribution network. To avoid the risks relating to the distributors, we have distribution administrators to handle claims made against the distributors and to conduct investigations accordingly.

In addition, the popularity of our games may also cause the counterfeiting of prepaid game tokens to be sold in the market. Though we will take measures to limit such counterfeiting, including establishing a call center which will verify the identity of our authorized distributors, we cannot assure you that such measures will be effective and the availability of counterfeit prepaid game tokens in the market may harm our reputation and may result in disputes with the players.

16


 
 

TABLE OF CONTENTS

Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on our business, financial condition and results of operations.

Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain players. All of the game servers operating our games, and all of the servers handling log-in, billing and data back-up matters for us are hosted and maintained by third party service providers. Major risks involved in such network infrastructure include any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

In the past, our server network has experienced unexpected outages for several hours and occasional slower performance in a number of locations in China as a result of failures by third party service providers. Our network systems are also vulnerable to damage from a variety of sources, many of which are not within our control, including, without limitation:

power loss and telecommunications failures;
software and hardware errors or crashes;
loss or interruption of Internet access;
computer viruses and similar disruptive problems; and
fire, flood and other natural disasters.

Any network interruption, virus or other inadequacy that causes interruptions in the availability of our online games or deterioration in the quality of access to our online games could damage our reputation in the marketplace, prevent or deter game players from purchasing our virtual items, reduce our players’ satisfaction and ultimately harm our business, financial condition and results of operations. In addition, any security breach caused by hackings, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our network systems and we do not have business interruption insurance.

Undetected programming errors or defects in our games and the proliferation of cheating programs could materially and adversely affect our business, financial condition and results of operations.

Our online games may contain undetected programming errors or other defects. In addition, parties unrelated to us have in the past, and may again in the future, develop Internet cheating programs that enable our users to acquire superior features for their game characters for which they would otherwise be required to pay or otherwise earn through game play. Furthermore, certain cheating programs could cause the loss of a character’s superior features acquired by a player. The occurrence of undetected errors or defects in our games, and our failure to discover and disable cheating programs affecting the fairness of our game environment, could damage our and our games’ reputations and result in players being discouraged from playing our games and purchasing virtual products and services in our games. This could materially and adversely affect our business, financial condition and results of operations.

We do not have business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, or offer them at a high price. As a result, we do not have any business liability, loss of data or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of our resources.

17


 
 

TABLE OF CONTENTS

We are dependent upon our existing management, our key development personnel and qualified technical personnel, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our executive officers and our key development personnel. If one or more of our executive officers or key development personnel was unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. In addition, if any of our executive officers or key employees joins a competitor or forms a competing company, we may lose know-how, key professionals and staff members as well as suppliers. These executive officers and key employees could develop and operate games that could compete with and take game players away from our existing and future games. Each of our executive officers and key personnel has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between our executive officers, key employees and us, these non-competition provisions may not be enforceable in China. If any of these were to happen, our competitive position and business prospects may be materially and adversely affected.

We are rapidly expanding our business and may need to hire a significant number of new employees. If we are unable to attract a sufficient number of qualified new employees or retain our existing employees, our business prospects may be materially and adversely affected.

As we are in the early stages of our development and our business is growing rapidly, we plan to increase the number of employees by the end of 2011 as we grow our business and revenues to achieve our strategic objectives, including senior-level executives, experienced project managers and game development personnel. However, our industry in China is characterized by high demand and intense competition for talent, particularly for game developers and related technical personnel, and we may not be able to attract a sufficient number of qualified new employees or retain existing employees to meet the growth of our business, in which case our growth strategy and our business prospects could be materially and adversely affected.

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

We have experienced a period of rapid growth and expansion that has placed, and will continue to place, strain on our management personnel, systems and resources. To accommodate our growth pursuant to our strategies, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, including payment systems and related security systems, procedures and controls, and the improvement of our accounting and other internal management systems, all of which require substantial management efforts and financial resources. We will also need to continue to expand, train, manage and motivate our workforce, and manage our relationships with our distributors, third-party service providers and game player base. All of these endeavors will require substantial management effort and skills and the incurrence of additional expenditures. We cannot assure you that we will be able to efficiently or effectively implement our growth strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.

There are uncertainties regarding the future growth of the online game industry in China.

The online game industry, from which we derive substantially all of our revenues, is a relatively new and evolving industry. The growth of the online game industry and the level of demand and market acceptance of our games are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors affecting the online game industry, many of which are beyond our control, including:

the growth of personal computer, Internet and broadband users and penetration in China and other markets in which we offer our games, and the rate of any such growth;
whether the online game industry, particularly in China and the rest of the Asia-Pacific region, continues to grow and the rate of any such growth;
general economic conditions in China, particularly economic conditions adversely affecting discretionary consumer spending, such as the slowdown in China’s economic growth partly caused by the recent global crisis in the financial services and credit markets;

18


 
 

TABLE OF CONTENTS

the availability and popularity of other forms of entertainment, particularly games of console systems, which are already popular in developed countries and may gain popularity in China; and
changes in consumer demographics and public tastes and preferences.

There is no assurance that online games will continue to be popular in China or elsewhere. A decline in the popularity of online games that we operate, will likely adversely affect our business and prospects.

The successful operation of our business and implementation of our growth strategies, including our ability to accommodate additional game players in the future, depend upon the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.

Although private Internet service providers currently exist in China, almost all access to the Internet is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or MIIT (formerly the Ministry of Information Industry). We rely on this infrastructure to provide data communications capacity primarily through local telecommunications lines. Although the government has announced plans to develop aggressively the national information infrastructure, we cannot assure you that this infrastructure will be developed as planned or at all. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in China may not support the demands necessary for the continued growth in Internet usage.

The limited use of personal computers in China and the relatively high cost of Internet access in relation to per capita gross domestic product may limit the development of the Internet in China and impede our growth.

The penetration rate for personal computers in China is significantly lower than it is in the United States and other developed countries. Furthermore, the cost of Internet access is still relatively high as compared to other developed countries. The limited use of personal computers in China and the relatively high cost of Internet access may limit the growth of our business. See “Risk Factors — The successful operation of our business and implementation of our growth strategies, including our ability to accommodate additional game players in the future, depend upon the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.” In addition, there may be increases in Internet access fees or telecommunication fees in China. If that happens, the number of our game players may decrease and the growth of our game player base may be materially impacted.

Risks Relating to Our Structure and Regulations

If the PRC government determines that the variable interest entity, or VIE, structure for operating our business does not comply with PRC government restrictions on foreign investment in the online game industry, we could face severe penalties and could possibly be required to cease operations.

Various regulations in China currently restrict or prevent foreign-invested entities from engaging in telecommunication services, including operating online games. Because of these restrictions, our game operations in the PRC are conducted through our VIE, Sunity Xi’an, a PRC company that is owned by our management and other Chinese individual shareholders, all of whom are PRC citizens. However, Sunity Xi’an is effectively controlled by our subsidiary, Sunity WFOE, through a group of contractual arrangements. For details of these contractual arrangements, see “Our Corporate History and Structure.”

A circular issued by MIIT in July 2006, or the MIIT circular, reiterated the regulations on foreign investment in telecommunications businesses. Under this circular, a domestic company that holds a license for the provision of Internet information service, or an ICP license, or a license to conduct any value-added telecommunications business in China, is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors to conduct value-added telecommunications businesses illegally in China.

Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local ICP license holder. The circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service

19


 
 

TABLE OF CONTENTS

providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulators, it is uncertain whether MIIT would consider our corporate structures and contractual arrangements as a kind of foreign investment in telecommunication services. Therefore, it is unclear what impact this circular will have on us or the other Chinese Internet companies that have adopted the same or similar corporate structures and contractual arrangements as ours.

A Notice issued by the General Administration of Press and Publication, or GAPP, together with the National Copyright Administration and the Office of the National Working Group for Combating Pornography and Illegal Publications on September 28, 2009, i.e., the Notice regarding implementing the “Three Classification” issued by the State Council, further strengthening the advance approval of online games, and the approval of management of imported games, or the GAPP Notice, stated that foreign investors are prohibited from investing and engaging in the operation of online games through any form of WFOE, sino-foreign joint-venture or cooperation. Under the GAPP Notice, foreign investors cannot actually control or participate in the operation of online games provided by domestic companies in any indirect form, such as by incorporating other joint-ventures, signing relevant agreements, or providing technical support. In the event of a violation of the GAPP notice, GAPP shall, in conjunction with the relevant authorities of the PRC, investigate and handle the same in accordance with the law. In serious cases, the relevant licenses and registrations shall be cancelled or revoked. However, it is not yet clear how this GAPP Notice will be interpreted, implemented and enforced.

Previously, while the Several Opinions concerning the Introduction of Foreign Capital into the Culture Industry (the “Opinions”) issued by the GAPP together with the Ministry of Culture, the State Administration of Radio, Film and Television, the National Development and Reform Commission and the Ministry of Commerce on July 6, 2005 state that foreign investors are prohibited from making investments to engage in the internet publication industry (which includes the online game businesses), foreign investors are not specifically defined in those Opinions. While the GAPP Notice further imposes more specific restrictions on foreign investors in terms of their engagement in the online game industry through indirect participation such as signing relevant agreements or providing technical support, such notice does not clearly define foreign investors either. Since a detailed interpretation of the GAPP Notice has not been issued, the definition of foreign investor as stated in the GAPP Notice remains unclear.

However, another foreign investment governing authority, the State Administration of Foreign Exchange, or SAFE, treats “Foreign Investors” as the investors who are ultimately controlled and operated by a foreign company (or companies) and/or a foreign citizen (or citizens) when incorporated. For an offshore corporation which is majority owned or controlled by Chinese domestic companies or Chinese citizens, SAFE adopts the concept of “Returning Investors” in contrast to the concept of “Foreign Investors.” “Foreign Investors” and “Returning Investors” take different approaches to apply for the Certificate of Foreign Exchange in the process of incorporation.

All of our shareholders, Sunity Cayman, Sunity HK and Sunity WFOE are collectively registered as a “Returning Investors” under Circular 75, which is the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, issued by SAFE on October 21, 2005. Accordingly, we are not recognized as “Foreign Investors” by SAFE. However, although our status as “Returning Investors” has been approved by SAFE that does not necessarily indicate that GAPP will adopt the same definition. Due to a lack of definition from the GAPP Notice, we find it unclear if our entities fall into the scope of “foreign investors” in the GAPP Notice.

In addition, the implementation and enforcement of the related restrictions imposed by the GAPP Notice also remain unclear. According to the GAPP Notice, in the event of a violation, GAPP shall, in conjunction with the relevant authorities of the PRC, conduct an investigation. However, as a detailed interpretation of the GAPP Notice has not been issued, it is not yet clear how the GAPP Notice will be implemented. Meanwhile, as of the date of this prospectus, we are not aware of any enforcement actions under the GAPP Notice that have been taken with respect to the online games business operations conducted under the contractual arrangements structure similar to the one adopted by us. Furthermore, to our knowledge, as of the date of this

20


 
 

TABLE OF CONTENTS

prospectus, there have been no indications from GAPP or any other regulatory agency that it intends to promulgate a new interpretation, clarification, law or other Notice, that would further clarify the term “Foreign Investor” under the GAPP Notice or the term “Returning Investor” recognized by SAFE, or that would otherwise cause us to believe that our current interpretation of the GAPP Notice is inaccurate and that our contractual arrangements are not valid. As a result, we believe that at this time the likelihood that any new interpretation, clarification, law or other Notice related to the GAPP Notice would affect the validity of our contractual arrangements is remote.

However, given that the relevant regulatory authorities have broad discretion in dealing with the interpretation, implementation and enforcement of the GAPP Notice, if regulatory authorities determine that the contractual arrangements currently used in our operations through Sunity WFOE is one of the means prohibited under the GAPP Notice, we and the other Chinese online gaming companies that have adopted the same or similar corporate structures and contractual arrangements may face severe penalties, including requiring us to restructure the relevant ownership structure, operations or contractual arrangements adopted by us, shutting down our servers or blocking our website, revoking the business and operating licenses of our operational entities in China etc. In addition, any such actions will materially and adversely affect our financial condition and results of operations. Such actions could also result in the termination of the contractual arrangements between Sunity Xi’an and Sunity WFOE. If such contractual arrangements are terminated, we would no longer be able to consolidate Sunity Xi’an’s operating results and we would have no source of revenue.

Sunity WFOE’s contractual arrangements with Sunity Xi’an and its shareholders may not be as effective in providing control over Sunity Xi’an as direct ownership of Sunity Xi’an and the shareholders of Sunity Xi’an may have potential conflicts of interest with us.

Sunity Cayman has no ownership interest in Sunity Xi’an and conducts substantially all of its operations and generates substantially all its revenues through contractual arrangements that its indirect subsidiary, Sunity WFOE, has entered into with Sunity Xi’an and its shareholders, and such contractual arrangements are designed to provide Sunity Cayman with effective control over Sunity Xi’an. See “Our Corporate History and Structure” for a description of these contractual arrangements. Sunity Cayman depends on Sunity Xi’an to hold and maintain certain licenses necessary for its game business. Sunity Xi’an also owns all of the necessary intellectual property, facilities and other assets relating to the operation of our games, and employs personnel for our game operations and distribution.

Although in the opinion of our PRC counsel, Shanghai Hui Kun Law Firm, each of these contractual arrangements is valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect, they may not be as effective in providing Sunity Cayman with control over Sunity Xi’an as direct ownership. If Sunity Cayman had direct ownership of Sunity Xi’an, it would be able to exercise its rights as a shareholder to effect changes in the board of directors of Sunity Xi’an, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. Due to the VIE structure, Sunity Cayman has to rely on contractual rights to effect control and management of Sunity Xi’an, which exposes Sunity Cayman to the risk of potential breach of contract by the shareholders of Sunity Xi’an. In addition, as Sunity Xi’an is jointly owned by its shareholders, it may be difficult for Sunity Cayman to change Sunity Xi’an’s corporate structure if such shareholders refuse to cooperate with it.

The shareholders, officers and/or directors of Sunity Xi’an may breach, or cause Sunity Xi’an to breach, the contracts for a number of reasons. For example, the interests of the shareholders of Sunity Xi’an and the interests of Sunity Cayman may conflict and we may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, we may have to rely on legal or arbitral proceedings to enforce our contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost us substantial financial and other resources, and result in disruption of our business, and we cannot assure you that the outcome will be in our favor.

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The

21


 
 

TABLE OF CONTENTS

legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Sunity Xi’an, and our ability to conduct our business may be materially and adversely affected.

Sunity WFOE and Sunity Xi’an’s contractual arrangements may result in adverse PRC tax consequences to us.

Under the Tax Collection and Management Law and its implementation rules issued in 2001 and 2002, respectively, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. “Related parties” are defined as organizations or entities that (1) have a direct or indirect control relationship in terms of capital, operation or sales/purchase; (2) are directly or indirectly owned by a common third party; or (3) possess any other connected relationship based on equity. In the Tax Management Procedure on the Connected Transactions between Related Parties issued in 2004, it is further stated that the management fee payable between the related parties shall be determined on an arms-length basis. We could face material and adverse tax consequences if the PRC tax authorities determine that contractual arrangements between Sunity WFOE and Sunity Xi’an were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by Sunity Xi’an, which could adversely affect us by (i) increasing Sunity Xi’an’s PRC tax liability without reducing Sunity WFOE’s PRC tax liability, which could further result in claims being made against us for underpaid PRC taxes; or (ii) limiting the ability of Sunity WFOE and Sunity Xi’an to maintain preferential PRC tax treatments and other financial incentives.

All of Sunity Cayman’s revenues have been, and will continue to be, generated through Sunity Xi’an, our VIE, and Sunity Cayman relies on payments made by Sunity Xi’an to Sunity WFOE, our subsidiary, pursuant to contractual arrangements to transfer any such revenues to Sunity WFOE. Any restriction on such payments and any increase in the amount of PRC taxes applicable to such payments may materially and adversely affect our business and our ability to pay dividends to our shareholders.

We conduct substantially all of our operations through Sunity Xi’an, our VIE, which generates all of our revenues. As Sunity Xi’an is not directly owned by us, it is not able to make dividend payments to us. Instead, Sunity WFOE, our indirect subsidiary in China, entered into a number of contracts with Sunity Xi’an, pursuant to which Sunity Xi’an pays Sunity WFOE for certain services that Sunity WFOE provides to Sunity Xi’an. However, depending on the nature of services provided, certain of these payments are subject to PRC taxes at different rates, including business taxes and VAT, which effectively reduce the payments that Sunity WFOE may receive from Sunity Xi’an. We cannot assure you that the PRC government will not impose restrictions on such payments or change the tax rates applicable to such payments. Any such restrictions on such payments or increases in the applicable tax rates may materially and adversely affect our ability to receive payments from Sunity Xi’an or the amount of such payments, and may in turn materially and adversely affect our business, our net income and our ability to pay dividends to our shareholders.

We do not hold Internet publishing licenses, which are required under PRC regulations, for the games we currently operate due to a lack of interpretative materials from the GAPP since our inception. If GAPP later challenges the commercial operation of our games, or if we fail to obtain or renew necessary licenses to commercially operate our games, we may be subject to various penalties, including restrictions on our operations and revocation of Sunity Xi’an’s business and/or operating licenses.

Pursuant to PRC regulations issued by GAPP and MIIT relating to the regulation of online publication, an online game operator needs to obtain an Internet publishing license in order to directly make its online games publicly available in the PRC, as operating online games is deemed to be an online publishing activity. See “Regulation — Online Games and Cultural Products.”

22


 
 

TABLE OF CONTENTS

We have already applied for such a license. Our application was filed with GAPP in early April, 2010. Due to a lack of interpretative materials from the GAPP, it is unclear how long it will take to obtain the Internet publishing license. The GAPP notice provides that if any entity or individual engages in online games operations without obtaining an Internet publishing license, the press and publication regulatory authorities shall have the right to request that the operator of such online games cease operation of such games and may notify the telecommunications regulatory authorities and the administrations for industry and commerce to revoke the relevant operations license and business license of the operator, however, the actual enforcement of such provisions is not clear in practice. We have made oral inquiries with the officials at GAPP and have been informed that GAPP is aware of and does not object to such practice, so long as the applications for the Internet publishing licenses for such online games have been filed with GAPP. We cannot assure you that we will be able to obtain the Internet publishing licenses for our games. If this practice is later challenged by GAPP, we may be subject to various penalties, including fines and the discontinuation or restriction on our operations and revocation of Sunity Xi’an’s business and/or operating licenses.

In addition to the requirement to obtain an Internet publishing license, pursuant to the GAPP Notice issued on September 29, 2009, all online games need to be screened by GAPP through advanced approvals before they are operated online, and any updated online game versions or any change to the online games shall be subject to further advanced approvals before they can be operated online. See “Regulation — Online Games and Cultural Products.” Both QHG and HDG were released online before the GAPP notice was issued. It is unclear whether the GAPP notice will apply to these games. In addition, we are not qualified to apply for advanced approvals for these games as the precondition for such application is to obtain the Internet publishing license, which we do not currently possess.

On May 10, 2003, the Ministry of Culture (the “MOC”) issued the Provisional Regulations for the Administration of Online Culture, which took effect on July 1, 2003. According to such regulations, Sunity Xi’an needs to obtain an Online Culture Operating Permit to operate its online games business. Although we were issued this permit in February 2010, after having applied for it in early 2008, during the period from May 2008 to February 2010, Sunity Xi’an operated its online games business without holding an Online Culture Operating Permit. If our operation of online games without an Online Culture Operating Permit is later challenged by the MOC, we may be subject to monetary penalties capped at RMB5,000 ($700).

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

The PRC government has adopted regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet any content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. When Internet content providers and Internet publishers, including online game operators, find that information falling within the above scope is transmitted on their websites or is stored in their electronic bulletin service systems, they are required to terminate the transmission of such information or delete such information immediately, keep records, and report to relevant authorities. Failure to comply with these requirements could result in the revocation of our ICP license and other required licenses and the closure of our websites. Website operators may also be held liable for prohibited information displayed on, retrieved from or linked to their websites.

In addition, the MIIT has published regulations that subject website operators to potential liability for the actions of game players and others using their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing.

As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as an RPG developer and operator. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our game players, despite our attempt to monitor such content. To the extent that regulatory authorities find

23


 
 

TABLE OF CONTENTS

any portion of our content objectionable, they may require us to curtail our games, which may reduce our game player base, the amount of time our games are played or the purchases of virtual items.

There are currently no laws or regulations in the PRC governing property rights of virtual assets except for a Notice released by the Ministry of Commerce and the Ministry of Culture, and therefore it is not clear what liabilities, if any, we may have relating to the loss of virtual assets by our game players.

In the course of playing our games, QHG, HDG, HCG and ISS, some virtual assets, such as game player experience, skills and weaponry, are acquired and accumulated. Such virtual assets can be highly valued by game players and in some cases are traded among game players for real money or assets. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of network service by a network crash, or by hacking activities. Except for “The Notice of Strengthening the Management of Online Game Virtual Currency” released by the Ministry of Culture and the Ministry of Commerce dated June 26, 2009 (“Notice 626”), there are currently no PRC laws and regulations governing property rights of virtual assets. Notice 626 clearly defines the scope of virtual currency and rules the transactions by the game operator. However, Notice 626 does not answer who is the legal owner of virtual assets and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law whether an operator of online games such as us would have any liability (whether in contract, tort or otherwise) for loss of such virtual assets by game players. Based on several judgments regarding the liabilities of online game operators for loss of virtual assets by game players, the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by game players. In the event of a loss of virtual assets, we may be sued by game players and may be held liable for damages. For further information, see “ Regulation — Virtual Currency.”

Our operations may be adversely affected by implementation of new anti-fatigue related regulations.

The PRC government may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction to perceived addiction to online games, particularly by minors. Recently, eight PRC government authorities, including the GAPP, the Ministry of Education and MIIT issued a notice requiring all Chinese online game operators to adopt an “anti-fatigue system” in an effort to curb addiction to online games by minors. Under the anti-fatigue system, three hours or less of continuous play is defined to be “healthy,” three to five hours is defined to be “fatiguing,” and five hours or more is defined to be “unhealthy.” Game operators are required to reduce the value of game benefits for minor game players by half when those game players reach the “fatigue” level, and to zero when they reach the “unhealthy” level. In addition, online game players in China are now required to register their identity card numbers before they can play an online game. This system allows game operators to identify which game players are minors. These restrictions could limit our ability to increase our business among minors. Furthermore, if these restrictions were expanded to apply to adult game players in the future, our business could be materially and adversely affected.

Restrictions on virtual currency may adversely affect our game operations revenues.

Our game operations revenues are collected through the sale of our prepaid game tokens or online sale of game points. The Notice on the Reinforcement of the Administration of Internet Cafes and Online Games, or the Internet Cafes Notice, issued by the Ministry of Culture on February 15, 2007, directs the People’s Bank of China, or PBOC, to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase virtual items. These restrictions may result in lower sales of our prepaid game tokens or game points, and could have an adverse effect on our game operations revenues.

24


 
 

TABLE OF CONTENTS

Our business may be adversely affected by public opinion and governmental policies in China.

Currently, most of our game players in China are young males, many of whom are students. Due to a relatively high degree of game player loyalty to online games, easy access to personal computers and Internet cafes, and the lack of other appealing forms of entertainment in China, many teenagers in China frequently play online games. This may result in these teenagers spending less time on or refraining from other activities, including education, vocational training, sports, and taking rest, which could result in adverse public reaction and stricter government regulation. For example, the PRC government has promulgated anti-fatigue-related regulations to limit the amount of time minors can play online games. See “Risk Factors — Our operations may be adversely affected by implementation of new anti-fatigue-related regulations.”

Adverse public opinion could discourage game players from playing our games, and could result in government regulations that impose additional limitations on the operations of online games as well as the game players’ access to online games, such as imposing stricter age and hour limits on Internet cafes, limiting the issuance of virtual currency by online game operators or the amount of virtual currency that can be purchased by an individual game player, or extending anti-fatigue-related regulations to adults. Such adverse public opinion and tightened government regulations could materially and adversely affect our business prospects and our ability to maintain or increase revenues.

In addition, the PRC State Administration of Taxation recently announced that it will tax game players on the income derived from the trading of virtual currencies at the rate of 20%. However, it is currently unclear how the tax will be collected. If the new tax policies on the tax on virtual currencies trading applies, we will be forced to increase the price of the virtual items to maintain the profit margin. Otherwise our profit margin will be negatively impacted by the implementation of the proposed new tax policies.

Risks Related to Doing Business in China

Contract drafting, interpretation and enforcement in China involves significant uncertainty.

We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail. Due to the materiality of certain contracts to our business, such as our distribution agreements with our main distributors regarding promoting our games and selling the game points of our games, any dispute involving such contracts, even without merit, may materially and adversely affect our reputation and our business operations, and may cause the price of our ADSs to decline.

Under the EIT Law, we and/or Sunity HK may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to us, our non-PRC resident enterprise ADS holders or shareholders and Sunity HK.

On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.

25


 
 

TABLE OF CONTENTS

If the PRC tax authorities determine that we are and/or Sunity HK is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we and/or Sunity HK may be subject to enterprise income tax at a rate of 25% on our and/or Sunity HK’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from the enterprise income tax. As a result, if we and Sunity HK are treated as PRC “qualified resident enterprises,” all dividends paid from Sunity WFOE to Sunity HK and from Sunity HK to us should be exempt from the PRC enterprise income tax.

If Sunity HK were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Sunity HK receives from Sunity WFOE (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, provided that Sunity HK owns more than 25% of the registered capital of Sunity WFOE continuously within 12 months immediately prior to obtaining such dividend from Sunity WFOE, and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “PRC-Hong Kong Tax Treaty”) were otherwise applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Sunity HK to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if we were treated as a “non-resident enterprise” under the EIT Law, and Sunity HK were treated as a “resident enterprise” under the EIT Law, then dividends that we receive from Sunity HK (assuming such dividends were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our ADS holders or shareholders.

Finally, if we are determined to be a “resident enterprise” under the EIT Law, this could result in a 10% PRC tax being imposed on dividends we pay to our investors that are not tax residents of the PRC (“non-resident investors”) and that are enterprises (but not individuals) and gains derived by them from transferring our ADSs or ordinary shares, if such income or gain is considered PRC-sourced income by the relevant PRC tax authorities. In such event, we may be required to withhold the applicable PRC tax on any dividends paid to such non-resident investors. Such non-resident investors also may be responsible for paying the applicable PRC tax on any gain realized by them from the sale or transfer of our ADSs or ordinary shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws.

On December 10, 2009, the State Administration of Taxation (“SAT”) released Circular Guoshuihan No. 698 (“Circular 698”) that reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 is retroactively effective from January 1, 2008. Circular 698 addresses indirect equity transfers as well as other issues. According to Circular 698, where a non-resident investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in a PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. We (or a non-resident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such non-resident investor’s investment in us).

26


 
 

TABLE OF CONTENTS

If any PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations). Prospective investors should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits. For further information, see the discussion in the section entitled “Taxation — PRC Taxation.”

The tax opinion provided to us by Shanghai Hui Kun Law Firm does not provide a “will” level of comfort on certain of the PRC tax issues discussed in the PRC tax disclosure and does not address all PRC tax issues, including those that are dependent on future facts or events.

Shanghai Hui Kun Law Firm, our PRC counsel in this offering, has provided an opinion to us (which is attached as Exhibit 8.2 to the registration statement of which this prospectus forms a part) that, subject to the assumptions, limitations and qualifications stated therein and herein, Shanghai Hui Kun Law Firm has confirmed and adopted as its opinion the statements of PRC tax law as set forth herein under the caption “Taxation — PRC Taxation” (the “PRC tax disclosure”). Due to the short history of the EIT Law and other applicable PRC tax laws and the lack of applicable implementing rules and legal procedures, it is not possible to predict unequivocally how certain tax consequences discussed in the PRC tax disclosure would be treated for PRC tax purposes, what contrary positions, if any, may be taken by PRC tax authorities and whether such positions would be materially different from those discussed in the PRC tax disclosure (although the PRC tax disclosure does describe certain possible alternative tax consequences). As a result, the word “should” rather than “will” is generally used throughout the tax disclosure in order to indicate a degree of uncertainty concerning these issues that is greater than would be indicated by a “will” level of opinion, but is less than would be indicated by a “more-likely-than-not” level of opinion. Moreover, certain tax issues that are discussed in the PRC tax disclosure are dependent on future facts or events, such as whether we will be classified as a “resident enterprise” for PRC income tax purposes, and therefore cannot be addressed by a tax opinion. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax issues discussed in the PRC tax disclosure and how they may relate to the investor’s particular circumstances. See “Taxation — PRC Taxation” below for a further discussion of these issues.

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

Our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

the amount of government involvement;
the level of development;
the growth rate;
the foreign exchange; and
the allocation of resources.

While the PRC economy has grown significantly since the late 1970s, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

27


 
 

TABLE OF CONTENTS

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the PRC economy could reduce demand for our products.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.

To fund any cash requirements we may have, we may need to rely on dividends, loans or advances made by our PRC subsidiary, Sunity WFOE, which are subject to limitations and possible taxation under applicable PRC laws and regulations.

We may rely on dividends and other distributions on equity, or loans and advances made by our Chinese subsidiary, Sunity WFOE, to fund any cash requirements we may have, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, and to service any debt we may incur. The distribution of dividends and the making of loans and advances by entities organized in China are subject to limitations. Regulations in the PRC currently permit payment of dividends only out of unrestricted retained earnings as determined in accordance with accounting standards and regulations in China. Sunity WFOE is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends, loans or advances. Sunity WFOE may also allocate a portion of its after-tax profits, as determined by its board of directors, to its staff welfare and bonus funds, which may not be distributed to us. In addition, if Sunity WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

Furthermore, under regulations of the State Administration of Foreign Exchange, or the SAFE, the Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.

Furthermore, we control our operating entity in China, Sunity Xi’an, through contractual arrangements rather than equity ownership. Sunity WFOE entered into an Exclusive Collaboration Agreement and Business Operation Agreement with Sunity Xi’an, pursuant to which Sunity Xi’an will pay Sunity WFOE for the services and license Sunity WFOE provides to Sunity Xi’an. See “Our History and Corporate Structure.” To the extent that there is any distributable profit in Sunity Xi’an, it may be difficult for Sunity Xi’an to distribute such profit to Sunity WFOE, which may further limit the amount that Sunity WFOE can distribute to us.

We may be required to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market.

On August 8, 2006, six PRC regulatory authorities, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process. The application of this new PRC regulation remains unclear.

28


 
 

TABLE OF CONTENTS

Our PRC legal counsel, Shanghai Hui Kun Law Firm, is of the opinion that prior CSRC approval for this offering is not required because (i) Sunity WFOE was incorporated by a foreign owned enterprise, and there was no acquisition of the equity or assets of a “PRC domestic company” as such term is defined under the New M&A Rules; and (ii) there is no provision in the New M&A Rules that clearly classifies the contractual arrangements between Sunity WFOE and Sunity Xi’an as a kind of transaction falling under the New M&A Rules. As a result we did not seek prior CSRC approval for this offering. However, we cannot assure you that the relevant PRC government authorities, including the CSRC, will reach the same conclusion as our PRC legal counsel. If the CSRC or other relevant PRC government authorities subsequently determine that prior CSRC approval is required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, as well as the trading price of our ADSs. The CSRC or other PRC regulatory authorities may also take actions requiring Sunity Cayman, or making it advisable for it, to halt this offering before settlement and delivery of the ADSs offered by this prospectus. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.

Substantially all of our assets, and substantially all of our directors and officers, reside in China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our officers and directors who do not reside in the United States, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that China does not have treaties with the United States or many other countries provide the reciprocal recognition and enforcement of judgments of courts. As a result, our public shareholders may have substantially difficulty protecting their interests through actions against our officers and directors that shareholders of a corporation with assets and management members located in the United States would not experience.

Uncertainties with respect to the PRC legal system could adversely affect us.

Our operations in China are governed by PRC laws and regulations. We are generally subject to laws and regulations in China, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

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

In particular, among other uncertainties regarding PRC laws and regulations that could affect us, the following uncertainties may have a significant adverse impact on our business and operations: (1) the uncertainties related to Contract Law of the PRC and relevant regulations may impede our ability to enforce contracts we have entered into with our business partners, customers and suppliers; (2) the uncertainties related to the Civil Procedure Law and relevant regulations may impede our ability to enforce our contracts and result in substantial costs and diversion of our resources and management attention; (3) the uncertainties related to Circular 75, Circular 142 released by the Administration of Foreign Exchange on August 29, 2008 and other foreign exchange regulations might limit our ability to transfer the net proceeds from this offering to Sunity Xi’an, acquire any other PRC companies, establish other VIEs in the PRC, or make dividend payments from Sunity Xi’an; (4) the uncertainties related to the New M&A Rules may require us to obtain prior

29


 
 

TABLE OF CONTENTS

approval of the China Securities Regulatory Commission, or CSRC, for the listing and trading of our ADSs on the NASDAQ Capital Market; (5) the uncertainties related to the new Enterprise Income Tax Law, or the EIT law, may result in tax consequence to us and our investors as we and/or Sunity HK may be classified as a “resident enterprise” of the PRC; (6) the uncertainty related to the Protection of Computer Software Regulations of the PRC and Anti-Unfair Competition Law of the PRC and relevant regulations may limit the legal protection to us in terms of intellectual property rights and confidentiality protections.

We also cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and our foreign investors, including you.

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

The change in value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 26.39% appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and March 31, 2011. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. As substantially all of our costs and expenses are denominated in Renminbi, the revision in exchange rate policy effected in July 2005 has increased, and potential future revisions could further increase, our costs and expenses in U.S. dollar terms. Our proceeds from overseas financing, such as this offering, will decrease in value if we choose not to or are unable to convert the proceeds of this offering into Renminbi and the Renminbi appreciates against the U.S. dollar, which may reduce the value of your investment.

Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.

Circular 75 states that if PRC residents use assets or equity interests in their PRC entities as capital contributions to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they must register with local SAFE branches with respect to their overseas investments in offshore companies. They must also file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations. Under this regulation, their failure to comply with the registration procedures set forth in such regulation may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on the capital inflow from the offshore entity to the PRC entity.

We have requested that our shareholders who are PRC residents make the necessary applications, filings and amendments as required under Circular 75 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 75 or other related rules. Any future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government, including restrictions on Sunity WFOE’s ability to pay dividends or make distributions to us and our ability to increase our investment in Sunity WFOE.

30


 
 

TABLE OF CONTENTS

SAFE rules and regulations may limit our ability to transfer the net proceeds from this offering to Sunity Xi’an, our VIE in the PRC, which may adversely affect the business expansion of Sunity Xi’an, and we may not be able to convert the net proceeds from this offering into Renminbi to invest in or acquire any other PRC companies, or establish other VIEs in the PRC.

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

We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with recent PRC regulations relating to employee stock options granted by overseas listed companies to PRC citizens.

On December 25, 2006, the PBOC issued the Administration Measures on Individual Foreign Exchange Control, and its Implementation Rules were issued by SAFE on January 5, 2007, which both have taken effect on February 1, 2007. Under these regulations, all foreign exchange matters involved in an employee stock holding plan, stock option plan or similar plan in which PRC citizens participate requires approval from the SAFE or its authorized branch. On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options or restricted share units, or issued restricted shares by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to complete certain other procedures and transactional foreign exchange matters upon the examination by, and approval of, SAFE. We and our employees who are PRC citizens who have been granted stock options or restricted share units, or issued restricted shares are subject to the Stock Option Rule. However, currently, SAFE does not accept applications made by non-listed companies. As a result, we have not made such application. Upon the consummation of our initial public offering, we, and our employees who are PRC citizens who have been granted stock options, restricted shares or restricted share units, will complete all procedures and transactional foreign exchange matters to obtain approval of SAFE with respect to such stock options.

If the relevant PRC regulatory authority determines that we or our PRC employees who hold such options, restricted share units or restricted shares fail to comply with these regulations after our listing, we and/or such employees may be subject to fines and legal sanctions.

Risks Related to Our ADSs and Ordinary Shares

We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, our shareholders may have less protection for their shareholder rights than they would under U.S. law.

Our corporate affairs are governed by our memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against our 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 English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under

31


 
 

TABLE OF CONTENTS

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.

You may have difficulty enforcing judgments obtained against us since we are not a corporation organized under the laws of a state within the U.S. and because all our assets and executive officers are located outside the U.S.

We are a Cayman Islands company and all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, all of our directors and executive officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in Cayman Islands courts or PRC courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, all of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments.

Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman Islands will recognize a foreign judgment as the basis for a claim at common law in the Cayman Islands provided such judgment:

is given by a foreign court of competent jurisdiction;
imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;
is final;
is not in respect of taxes, a fine or a penalty; and
was not obtained in a manner and is not of a kind the enforcement of which is contrary to the public policy of the Cayman Islands.

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 U.S. company. See “Enforcement of Civil Liabilities.”

The market price for our ADSs may be subject to wide fluctuations and our securities may trade below the initial public offering price.

The initial public offering price of our ADSs will be determined by negotiations between us and representatives of the underwriters, based on numerous factors we discuss under “Underwriting.” This price may not be indicative of the market price of our ADSs after this offering. We cannot assure you that you will be able to resell your ADSs at or above the initial public offering price or our net asset value. The securities of a number of Chinese companies and companies with substantial operations in China have also experienced wide fluctuations subsequent to their initial public offerings, including trading at prices substantially below the initial public offering prices. Among the factors that could affect the price of our ADSs are risk factors described in this section and other factors, including:

announcements of competitive developments, including new games by our competitors;
regulatory developments in our target markets affecting us, our customers or our competitors;
actual or anticipated fluctuations in our quarterly operating results;
failure of our quarterly financial and operating results to meet market expectations or failure to meet our previously announced guidance;
changes in financial estimates by securities research analysts;

32


 
 

TABLE OF CONTENTS

changes in the economic performance or market valuations of other Internet or online game companies;
additions or departures of our executive officers and other key personnel;
announcements regarding intellectual property litigation (or potential litigation) involving us or any of our directors and officers;
fluctuations in the exchange rates between the U.S. dollar and the Renminbi;
release or expiration of the underwriters’ post-offering lock-up or other transfer restrictions on our outstanding securities; and
sales or perceived sales of additional securities.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular industries or companies. For example, the capital and credit markets have been experiencing volatility and disruption for more than 12 months. Starting in September 2008, the volatility and disruption in the securities markets reached extreme levels, developing into a global crisis. As a result, stock prices of a broad range of companies worldwide, whether or not they are related to financial services, have declined significantly. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

We have considerable discretion in the use of proceeds from this offering and we may use these proceeds in ways with which you may not agree.

We intend to use the net proceeds from this offering for general corporate purposes, including capital expenditures and funding possible future acquisitions. We have not allocated the net proceeds of this offering to any particular project or acquisition. Rather, our board of directors and our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our board of directors and our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADSs price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

There has been no public market for our ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ADSs. With the exception of the listing of our ADSs on the NASDAQ Capital Market, our ADSs will not be listed or quoted for trading on any exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

The initial public offering price for our ADSs will be determined by negotiations between us and representatives of the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.

The initial public offering price per ADS will be substantially higher than the net tangible book value per ADS prior to this offering. Consequently, assuming the completion of the maximum offering, when you purchase ADSs in this offering at the initial public offering price of $5.00 per ADS, you will incur immediate dilution of $       per ADS. See “Dilution.” In addition, you may experience further dilution to the extent that additional securities are issued upon settlement of restricted share units or exercise of outstanding options that we may grant from time to time.

33


 
 

TABLE OF CONTENTS

We may need additional capital and may sell additional ADSs or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or create debt service obligations for us.

We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Assuming completion of the maximum offering, we will have 1,600,000 ADSs outstanding. All ADSs sold in this offering, other than ADSs held by persons deemed to be our “affiliates,” will be freely transferable without restriction under the Securities Act. The remaining ADSs outstanding after this offering will be available for sale upon the expiration of the 180-day lock-up period beginning from the closing of this offering, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. Any or all of these ADSs may be released prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. In addition, we may grant or sell additional options, restricted ordinary shares or other ordinary share-based awards in the future to our management, employees and other persons, the settlement and sale of which may further dilute our shares and drive down the price of our ordinary shares and ADSs.

One of our directors and officers controls a significant amount of our ordinary shares and his interests may not align with the interests of our other shareholders.

Mr. Fan Zhang, our chairman and chief executive officer, currently owns approximately 46.28% of our issued and outstanding ordinary shares prior to the consummation of this offering. This significant concentration of share ownership may adversely affect the trading price of our ADSs because investors often perceive a disadvantage in owning shares in a company with one or several controlling shareholders. In addition, Mr. Wengtao Shi, our second largest shareholder who currently owns approximately 14.52% of our issued and outstanding ordinary shares prior to the consummation of this offering, is married to Mr. Zhang’s sister. Collectively, Mr. Zhang and Mr. Shi collectively own approximately 60.8% of our issued and outstanding ordinary shares prior to the consummation of this offering, and upon completion of this offering will own ___% of our issued and outstanding ordinary shares. In addition, Mr. Zhang and Mr. Shi, together with 12 other PRC citizens are currently the same ultimate shareholders of Sunity Xi’an and Sunity Cayman. Prior to the consummation of this offering these 14 shareholders own 100% of the shares of Sunity Cayman collectively, and upon completion of this offering will own ___% of our issued and outstanding ordinary shares. There is no agreement, arrangement or other understanding, written or oral, between Mr. Zhang, Mr. Shi or any of the other PRC shareholders with respect to the manner in which they will vote their shares. Furthermore, as a group, they have the ability to significantly influence or control the outcome of all matters requiring shareholder approval, including electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company that might reduce the price of our ordinary shares and ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.

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

Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We must implement financial and

34


 
 

TABLE OF CONTENTS

disclosure control procedures and corporate governance practices that enable us to comply, on a stand alone basis, with the Sarbanes-Oxley Act of 2002 and related Securities and Exchange Commission, or the SEC, rules, which may include the need to further develop accounting and financial capabilities, including the establishment of an internal audit function and development of documentation related to internal control policies and procedures. Failure to quickly establish the necessary controls and procedures would make it difficult to comply with SEC rules and regulations with respect to internal control and financial reporting. We will need to take further actions to continue to improve our internal controls. For example, we are a relatively young company with limited accounting personnel and other resources with which to address our internal controls and procedures. Although our CFO, together with certain of our other accounting personnel have U.S. GAAP reporting experience, such experience was primarily more than three years ago, and has been relatively limited in recent years. Given the changes in U.S. GAAP reporting over the course of the last three years, our internal controls over financial reporting may not be effective due to limited recent U.S. GAAP experience of our accounting department. To improve our internal control system, we intend to take or have taken the following steps:

Implement a training program to train personnel in our accounting department on U.S. GAAP reporting. We expect the training to be completed by March 31, 2012 and the estimated cost to be approximately US$50,000;
Hired a new financial professional as Financial Controller on April 1, 2011, who is a CPA, with significant recent U.S. GAAP reporting experience, specifically with respect to companies operating in China. Her monthly compensation is US$1,500; and
Created a new position of Chief Accounting Officer in October 2010 and hired a person to fill that position, to provide another level of review of our financial statements with respect to U.S. GAAP reporting. Her monthly compensation is US$1,400.

We believe that the foregoing steps are necessary and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. We believe the measures set forth above to improve our internal control over financial reporting are as comprehensive as that required by Section 404 of the Sarbanes-Oxley Act of 2002.

In the past, we have advanced funds to certain of our officers and shareholders and we have also transferred corporate funds into the personal bank account of an employee of the Company for payment of business expenses. For additional information regarding these transactions, see “Related Party Transactions.” We are in the process of instituting changes to our internal controls and management systems to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to perform an evaluation of our internal controls over financial reporting and file annual management assessments of their effectiveness with the SEC upon the filing of our second annual report. The management assessment to be filed is required to include a certification of our internal controls by our chief executive officer and chief financial officer. In addition to satisfying requirements of Section 404 upon the filing of our second annual report, we may also make improvements to our management information system to computerize certain manual controls, establish a comprehensive procedures manual for U.S. GAAP financial reporting, and increase the headcount in the accounting and internal audit functions with professional qualifications and experience in accounting, financial reporting and auditing under U.S. GAAP.

Our auditors are not required to attest to the effectiveness of our internal controls over financial reporting until our second annual report. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our share price.

Our auditors are not required to attest to the effectiveness of our internal controls over financial reporting until our second annual report. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective as of the end of our fiscal year. This assessment

35


 
 

TABLE OF CONTENTS

must include disclosure of any material weakness in our internal control over financial reporting identified by management. Because our auditors are not required to attest to the effectiveness of our internal controls over financial reporting until our second annual report, this may result in current and potential investors losing confidence in our financial reporting, which could harm our business and have a material adverse effect on our share price. In addition, as there is a strong possibility that we will be considered a smaller reporting company as defined in Rule 405 of the Securities Act, we will not be required to include an attestation report for any period that we are considered a smaller reporting company.

We may qualify as a passive foreign investment company, or “PFIC,” which could result in adverse U.S. federal income tax consequences to U.S. investors.

In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (looking through certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (looking through certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this prospectus captioned “Taxation — United States Federal Income Taxation — General”) of our ADSs or ordinary shares, the U.S. Holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Our actual PFIC status for our current taxable year or any subsequent taxable year will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year. We urge U.S. investors to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the tax consequences of PFIC classification to U.S. Holders, see the section of this prospectus captioned “Taxation — United States Federal Income Taxation — U.S. Holders — Passive Foreign Investment Company Rules.”

The tax opinion provided to us by Loeb & Loeb LLP does not provide a “will” level of comfort on certain of the U.S. tax issues discussed in the U.S. tax disclosure and does not address all U.S. tax issues, including those that are dependent on future facts or events.

Loeb & Loeb LLP, as U.S. counsel for us in connection with this offering, has provided an opinion to us (which is attached as Exhibit 8.1 to the registration statement of which this prospectus forms a part) that, subject to the assumptions, limitations and qualifications stated therein and herein, Loeb & Loeb LLP has confirmed and adopted as its opinion the statements of U.S. federal income tax law as set forth herein under the caption “Taxation — United States Federal Income Taxation” (the “U.S. tax disclosure”). Because of the absence of guidance directly on point as to how certain tax consequences discussed in the U.S. tax disclosure would be treated for U.S. federal income tax purposes, it is not possible to predict what contrary positions, if any, may be taken by the Internal Revenue Service (“IRS”) or a court considering these tax issues and whether such positions would be materially different from those discussed in the U.S. tax disclosure (although the tax disclosure does describe certain possible alternative tax consequences). As a result, the word “should” rather than “will” is used in certain portions of the U.S. tax disclosure in order to indicate a degree of uncertainty concerning these issues that is greater than would be indicated by a “will” level of opinion, but is less than would be indicated by a “more-likely-than-not” level of opinion. Moreover, certain tax issues that are discussed in the tax disclosure are dependent on future facts or events, such as whether we will be classified as a PFIC for U.S. federal income tax purposes, and therefore cannot be addressed by a tax opinion. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax issues discussed in the U.S. tax disclosure and how they may relate to the investor’s particular circumstances. See “Taxation — United States Federal Income Taxation,” below for a further discussion of these issues.

The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, and the procedures established by the depositary. The process of voting through the depositary may involve delays that limit the time available to you to consider proposed shareholders’ actions and also may restrict your ability to subsequently revise your voting instructions.

A holder of ADSs may exercise its voting rights with respect to the underlying ordinary shares only in accordance with the provisions of the deposit agreement. When the depositary receives from us notice of any shareholders meeting, if we request, it will distribute the information in the meeting notice and any proxy solicitation materials to you. The depositary will determine the record date for distributing these materials, and

36


 
 

TABLE OF CONTENTS

only ADS holders registered with the depositary on that record date will, subject to applicable laws, be entitled to instruct the depositary to vote the underlying ordinary shares. The depositary will also determine and inform you of the manner for you to give your voting instructions, including instructions to give discretionary proxies to a person designated by us. Upon receipt of voting instructions of a holder of ADSs, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. You may not receive sufficient notice of a shareholders’ meeting for you to withdraw your ordinary shares and cast your vote with respect to any proposed resolution, as a holder of our ordinary shares. In addition, the depositary and its agents may not be able to send materials relating to the meeting and voting instruction forms to you, or to carry out your voting instructions, in a timely manner. 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. The additional time required for the depositary to receive from us and distribute to you meeting notices and materials, and for you to give voting instructions to the depositary with respect to the underlying ordinary shares, will result in your having less time to consider meeting notices and materials than holders of ordinary shares who receive such notices and materials directly from us and who vote their ordinary shares directly. If you have given your voting instructions to the depositary and subsequently decide to change those instructions, you may not be able to do so in time for the depositary to vote in accordance with your revised instructions. The depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. In the event that voting on any resolution or matter is conducted on a show of hands basis in accordance with our Amended and Restated Memorandum and Articles of Association, the depositary will refrain from voting and the voting instructions (or the deemed voting instructions, as set out in the deposit agreement) received by the depositary from you will lapse. The depositary will have no obligation to demand voting on a poll basis with respect to any resolution and will have no liability to any holder of ADS for not having demanded voting on a poll basis.

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

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may not receive distributions on our ordinary shares or any value for them if such distribution is illegal or impractical or if any required government approval cannot be obtained in order to make such distribution available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or its custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible to make a distribution available to any holders of ADSs if it decides that it is unlawful or impractical to make such distribution. For example, it would be unlawful to make a distribution to a holder of ADSs if it consisted of securities that required registration under the Securities Act but that were not properly registered or distributed pursuant to an applicable exemption from registration, and it would be impractical to make a distribution if the costs equalled or exceeded the value of the distribution. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for them if it is unlawful or unreasonable from a regulatory perspective for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

37


 
 

TABLE OF CONTENTS

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

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

We may agree with the depositary to amend the deposit agreement and the ADSs without your consent, for any reason.

We may agree with the depositary to amend the deposit agreement and the ADSs without your consent, for any reason. For example, the amendment could add or increase fees or charges, facsimile costs, delivery charges or similar items. If any such amendment would prejudice a substantial right of our ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time the amendment becomes effective, our ADS holders are considered, by continuing to hold their ADSs, to agree to the amendment and to be bound by the ADSs and the deposit agreement, as amended.

Because of our status as a foreign private issuer, our shareholders do not receive the same protections as shareholders of a U.S. company.

Upon the completion of this offering, we will become subject to periodic reporting and other information requirements of the Exchange Act as applicable to foreign private issuers and will file reports, including annual reports on Form 20-F, and other information with the SEC. As we are a foreign private issuer, we are exempt from some of the Exchange Act reporting requirements, the rules prescribing the furnishing and content of proxy statements to shareholders, the requirements of Regulation FD (Fair Disclosure) and Section 16 short swing profit reporting for our officers and directors and for holders of more than 10% of our ordinary shares. Accordingly, because our reporting obligations are limited as a foreign private issuer, our shareholders do not receive the same protections as shareholders of a U.S. company.

38


 
 

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this prospectus are forward-looking statements. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is/are likely to” or other similar expressions. These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections and elsewhere in this prospectus.

This prospectus also contains data related to the online game industry. These market data include projections that are based on a number of assumptions. The failure of this market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections, which are based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

39


 
 

TABLE OF CONTENTS

USE OF PROCEEDS

After deducting the estimated underwriting discount and offering expenses payable by us, we expect to receive net proceeds of approximately $[] from this offering, if the minimum offering is sold, or $[______], if the maximum offering is sold. We anticipate that the proceeds of a minimum and a maximum offering would be applied approximately as follows:

Minimum Offering (1,000,000 ADSs)

   
Use of Net Proceeds   Amount   Percentage of
Net Proceeds
Expand our research and development efforts   $       %  
Increase our sales and marketing activities by promoting our new 633 Platform   $       %  
Expand and diversify our game portfolio by strategic acquisitions   $       %  
Expand our animation center in Shanghai, China to develop a 3-D webgame   $       %  
Working capital and other general corporate purposes   $       %  
Total   $       100 % 

Maximum Offering (1,600,000 ADSs)

   
Use of Net Proceeds   Amount   Percentage of
Net Proceeds
Expand our research and development efforts   $       %  
Increase our sales and marketing activities by promoting our new 633 Platform   $       %  
Expand and diversify our game portfolio by strategic acquisitions   $       %  
Expand our animation center in Shanghai, China to develop a 3-D webgame   $       %  
Working capital and other general corporate purposes   $       %  
Total   $       100 % 

We have not yet determined the final use of the net proceeds of this offering. The amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenues and cash generated by operations, our expenditures, potential changes in strategy and the other factors we describe in “Risk Factors.” We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds include:

the existence of presently unknown strategic opportunities or the need to take advantage of changes in timing of our existing research, development and/or commercial activities; and/or
the need or desire on our part to accelerate, increase or eliminate existing initiatives due to, among other things, changing market conditions and competitive developments.

From time to time, we evaluate these and other factors, and we anticipate continuing to make such evaluations to determine if our existing allocation of resources, including the proceeds of this offering, is being optimized. Therefore, we will have broad discretion in the way we use the net proceeds from this offering. Pending their ultimate use, we intend to invest the net proceeds from this offering primarily in investment grade, interest-bearing instruments. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a PFIC for U.S. federal income tax purposes, which could result in negative tax consequences to you. See “Taxation — United States Federal Income TaxationU.S. Holders Passive Foreign Investment Company Rules.”

40


 
 

TABLE OF CONTENTS

DIVIDEND POLICY

We do not intend to pay any dividends in the future and expect to retain all available funds to support our operations and to finance the growth and development of our business. We are not subject to any contractual restrictions on paying dividends. The amount and payment of dividends will be determined by a simple majority vote at a general shareholders’ meeting, typically, but not necessarily, based on the recommendation of our Board of Directors. Any future dividend declaration will be subject to various factors, including:

the level of our cash and retained earnings;
our expected financial performance;
our projected levels of capital expenditure and other investment plans;
the adequacy of our working capital; and
the dividend yield of similarly listed companies with similar growth prospects as well as comparable manufacturers of online gaming products.

Pursuant to Sunity Cayman’s memorandum and articles of association, the Board of Directors has the power to distribute dividends and interim dividends. No dividend payments shall be made other than out of our profits or the monies otherwise available for dividend distribution under Cayman Islands law.

Sunity Cayman is a holding company and its cash flow depends on the issuance of dividends to it from its indirect wholly owned subsidiary, Sunity WFOE in China. The ability of Sunity WFOE to pay dividends to Sunity Cayman is subject to various restrictions, including legal restrictions in China that permit payment of dividends only out of net income determined in accordance with PRC accounting standards and regulations. Under the PRC laws, Sunity WFOE must allocate at least 10% of its after-tax profit to its statutory general reserve fund until the balance of the statutory general reserve fund has reached 50% of its registered capital. Sunity WFOE may also allocate a portion of its after-tax profits, as determined by its board of directors, to its staff welfare and bonus funds which may not be distributed to us.

Any dividends paid by Sunity WFOE to its immediate holding company, Sunity HK or from Sunity HK to Sunity Cayman, may be subject to PRC withholding tax under the PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules, both of which became effective on January 1, 2008. In addition, Sunity Cayman may be subject to PRC taxes on dividends received from Sunity HK. Any such taxes could materially reduce the amount of dividends, if any, Sunity Cayman could pay to its shareholders. Any dividends Sunity Cayman pays also may be subject to PRC withholding taxes. There are significant uncertainties under the new corporate income tax law of the PRC, or the EIT Law, which became effective on January 1, 2008, regarding our PRC enterprise income tax liabilities, including PRC taxes on dividends paid to us by our PRC subsidiary. The EIT Law also contains uncertainties regarding possible PRC withholding tax on dividends we pay to our overseas investors and gains realized from the sale or transfer of our ADSs or ordinary shares by our overseas investors. For a further discussion of these issues, see the sections entitled “Taxation — PRC Taxation” and “Risk Factors — Risks Relating to Doing Business in China.”

Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, which will distribute them to the holders of ADSs according to the terms of the deposit agreement, after deduction of applicable fees, expenses and taxes. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical. See “Description of American Depositary Shares — Dividends and Other Distributions.”

41


 
 

TABLE OF CONTENTS

CAPITALIZATION

The following table sets forth our capitalization, as of March 31, 2011:

on an actual basis;
on a pro forma, as adjusted basis to give effect to the issuance and sale of the minimum and maximum ADSs offered in this offering at an assumed public offering price of US$5.00 per ADS, after deducting underwriting discounts, commissions and estimated offering expenses of $       .

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The information presented below is unaudited.

   
  Minimum Offering
(1,000,000 ADSs)
As of March 31, 2011
     Actual(1)   Pro Forma
As Adjusted(2)
     (unaudited)   (unaudited)
Stockholders’ Equity
              
Ordinary shares, par value $0.00249, 20,080,321 shares authorized; 4,425,703 shares issued and outstanding   $ 11,020     $  
Additional paid-in-capital   $ 4,331,942     $  
Statutory Reserves   $ 1,554,244     $  
Retained Earnings   $ 8,669,657     $  
Accumulated Other Comprehensive Income   $ 1,471,566     $  
Total Shareholders’ Equity   $ 16,027,409     $  
Total Liabilities and Shareholders’ Equity(3)   $ 17,504,771     $  
Total Capitalization(3)   $ 16,027,409     $  

(1) Based on 4,425,703 of our ordinary shares outstanding as of March 31, 2011 (as adjusted to reflect a 1-for-2.49 reverse share split that was effected on October 2, 2010).
(2) The 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 public offering price and other terms of this offering determined at pricing.
(3) Assuming the minimum 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 increase (decrease) in the assumed public offering price of US$5.00 per ADS would increase (decrease) each of total shareholders’ equity and total capitalization by US$       million.

42


 
 

TABLE OF CONTENTS

   
  Maximum Offering
(1,600,000 ADSs)
As of March 31, 2011
  Actual(1)   Pro Forma As Adjusted(2)
     (unaudited)   (unaudited)
Stockholders’ Equity
           
Ordinary shares, par value $0.00249, 20,080,321 shares authorized; 4,425,703 shares issued and outstanding   $ 11,020     $     
Additional paid-in-capital   $ 4,331,942     $     
Statutory Reserves   $ 1,554,244     $     
Retained Earnings   $ 8,669,657     $     
Accumulated Other Comprehensive Income   $ 1,471,566     $     
Total Shareholders’ Equity   $ 16,027,409     $     
Total Liabilities and Shareholders’ Equity(3)   $ 17,504,771     $     
Total Capitalization(3)   $ 16,027,409     $     

(1) Based on 4,425,703 of our ordinary shares outstanding as of March 31, 2011 (as adjusted to reflect a 1-for-2.49 reverse share split that was effected on October 2, 2010).
(2) The 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 public offering price and other terms of this offering determined at pricing.
(3) Assuming the maximum 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 increase (decrease) in the assumed public offering price of US$5.00 per ADS would increase (decrease) each of total shareholders’ equity and total capitalization by US$   million.

43


 
 

TABLE OF CONTENTS

DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the public offering price per share is substantially in excess of the book value per ADS attributable to the existing shareholders for our presently outstanding ordinary shares. All information in this Dilution section reflects a 1-for-2.49 reverse share split that was effected on October 2, 2010.

Our net tangible book value as of March 31, 2011 was approximately RMB82.78 million (US$12.64 million), or RMB18.70 (US$2.86) per ordinary share and RMB_____ (US$_____) per ADS outstanding at that date. Net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets. Dilution is determined by subtracting net tangible book value per ADS from the assumed public offering price per ADS of US$       per ADS.

If the minimum amount of ADSs is sold, without taking into account any other changes in such net tangible book value after March 31, 2011, other than to give effect to the sale at the assumed public offering price of US$5.00 per ADS, with estimated net proceeds of US$       million, after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at RMB       million (US$       million) would have been RMB     million (US$     million), RMB     (US$      ) per outstanding ordinary share and RMB_____ (US$_____) per outstanding ADS. This represents an immediate increase in pro forma net tangible book value of RMB     (US$      ) per share and RMB_____ (US$_____) per outstanding ADS to existing shareholders and an immediate dilution in pro forma net tangible book value of     % per share or RMB     (US$      ) per share and RMB_____ (US$_____) per outstanding ADS to new investors in this offering.

The following table illustrates this per share dilution assuming the minimum amount of ADSs is sold:

   
  RMB   US$
Assumed public offering price per ADS   $          $       
Net tangible book value per ADS at RMB     (US$    )   $     $  
Increase in net tangible book value per ADS attributable to this offering   $     $  
Net tangible book value per ADS as of March 31, 2011 after giving effect to the offering   $     $  
Dilution in net tangible book value per ADS to new investors in the offering   $     $  

If the maximum amount of ADSs is sold, without taking into account any other changes in such net tangible book value after March 31, 2011, other than to give effect to the sale at the assumed public offering price of US$5.00 per ADS, with estimated net proceeds of US$ million, after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at RMB          million (US$         million) would have been RMB          million (US$         million), RMB (US$) per outstanding ordinary share and RMB (US$) per outstanding ADS. This represents an immediate increase in pro forma net tangible book value of RMB           (US$        ) per share and RMB  (US$) per outstanding ADS to existing shareholders and an immediate dilution in pro forma net tangible book value of          % per share or RMB          (US$        ) per share and RMB  (US$) per outstanding ADS to new investors in this offering.

44


 
 

TABLE OF CONTENTS

The following table illustrates this per share dilution assuming the maximum amount of ADSs is sold:

   
  RMB   US$
Assumed public offering price per ADS   $        $     
Net tangible book value per ADS at RMB          (US$        )   $        $     
Increase in net tangible book value per ADS attributable to this offering   $        $     
Net tangible book value per ADS as of March 31, 2011 after giving effect to the offering   $        $     
Dilution in net tangible book value per ADS to new investors in the offering   $        $     

The following table summarizes on a pro forma basis the differences as of March 31, 2011 between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares purchased from us assuming the minimum amount of ADSs is sold, the total consideration paid and the average price per ADS paid.

           
  ADSs Held   Total Investment
     Number   Percentage
of the
Company
  Percentage
of Voting
Rights
  Amount   Percentage
of
Investment
  Average Cost
Per Share
Existing Shareholders                       %         %         %          
New Investors                 %         %                  %          
Total                 %         %                  %          

The following table summarizes on a pro forma basis the differences as of March 31, 2011 between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares purchased from us assuming the maximum amount of ADSs is sold, the total consideration paid and the average price per ADS paid.

           
  ADSs Held   Total Investment
  Number   Percentage of the Company   Percentage of Voting Rights   Amount   Percentage of Investment   Average Cost Per Share
Existing Shareholders                 %         %                  %          
New Investors                 %         %                  %          
Total                 %         %                  %          

45


 
 

TABLE OF CONTENTS

EXCHANGE RATE INFORMATION

We conduct our business in China and substantially all of our revenues are denominated in Renminbi. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains conversions of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all conversions from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, as of December 31, 2010, which was RMB[•  ] to US$1.00. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On December [•  ], 2011, the noon buying rate was RMB[•  ] 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.

       
  Renminbi per U.S. Dollar Noon Buying Rate
     Average(1)   High   Low   Period-End
Year ended March 31, 2008     7.4197       7.7345       7.0105       7.0120  
Year ended March 31, 2009     6.8532       6.9870       6.7899       6.8329  
Year ended March 31, 2010     6.8286       6.8371       6.8176       6.8258  
Year ended March 31, 2011     6.7080       6.8323       6.5483       6.5483  
2009
                                   
January     6.8360       6.8403       6.8225       6.8392  
February     6.8362       6.8470       6.8241       6.8395  
March     6.8360       6.8438       6.8240       6.8329  
April     6.8304       6.8361       6.8180       6.8180  
May     6.8235       6.8326       6.8176       6.8278  
June     6.8334       6.8371       6.8264       6.8245  
July     6.8317       6.8342       6.8300       6.8319  
August     6.8324       6.8358       6.8300       6.8300  
September     6.8291       6.8303       6.8247       6.8262  
October     6.8269       6.8287       6.8248       6.8264  
November     6.8271       6.8300       6.8255       6.8265  
December     6.8275       6.8299       6.8244       6.8259  
2010
                                   
January     6.8269       6.8295       6.8258       6.8268  
February     6.8285       6.8330       6.8258       6.8258  
March     6.8262       6.8270       6.8254       6.8258  
April     6.8256       6.8275       6.8229       6.8247  
May     6.8275       6.8310       6.8245       6.8305  
June     6.8184       6.8323       6.7815       6.7815  
July     6.7762       6.7807       6.7709       6.7735  
August     6.7873       6.8069       6.7670       6.8069  
September     6.7396       6.8102       6.6869       6.6905  
October     6.6675       6.6912       6.6397       6.6705  
November     6.6538       6.6892       6.6330       6.6670  
December     6.6497       6.6745       6.6000       6.6000  
2011
                                   
January     6.5964       6.6364       6.5809       6.6017  
February     6.5761       6.5965       6.5520       6.5713  
March     6.5645       6.5743       6.5483       6.5483  
April     6.5267       6.5477       6.4900       6.4900  
May     6.4957       6.5073       6.4786       6.4786  
June     6.4746       6.4830       6.4628       6.4635  
July     6.4575       6.4720       6.4360       6.4360  
August     6.4036       6.4401       6.3778       6.3778  
September     6.3882       6.3975       6.3780       6.3780  
October     6.3710       6.3825       6.3534       6.3547  
November (through November 25)     6.3524       6.3802       6.3400       6.3802  

Source Federal Reserve Bank of New York

(1) Annual averages are calculated from month-end rates. Monthly and interim period averages are calculated using the average of the daily rates during the relevant period.

46


 
 

TABLE OF CONTENTS

ENFORCEMENT OF CIVIL LIABILITIES

We are a Cayman Islands exempted company. Substantially all of our current operations are conducted in China and substantially all of our assets are located China. Furthermore, all or most of our directors and officers and some experts named in this prospectus reside outside the United States and a substantial portion of their assets are located outside the United States. As a result, investors may not be able to effect service of process within the United States upon us or our directors or officers or some experts or to enforce against us or them in United States courts judgments predicated upon the civil liability provisions of U.S. federal securities laws. However, shareholders can originate actions in China.

There is doubt as to the enforceability of original actions in the Cayman Islands or the People’s Republic of China courts of civil liabilities predicated solely upon U.S. federal securities laws. The enforceability of judgments entered by U.S. courts predicated upon the civil liability provisions of U.S. federal securities laws in the Cayman Islands or the PRC’s courts of civil liabilities will be subject to compliance with procedural requirements under Cayman Islands or Chinese law, including the condition that the judgment does not violate Cayman Islands and Chinese public policy.

Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman Islands will recognize a foreign judgment as the basis for a claim at common law in the Cayman Islands provided such judgment:

is given by a foreign court of competent jurisdiction;
imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;
is final;
is not in respect of taxes, a fine or a penalty; and
was not obtained in a manner and is not of a kind the enforcement of which is contrary to the public policy of the Cayman Islands.

There are no enforcement treaties between China and the Cayman Islands. Shareholders may originate actions against us in the Cayman Islands. As a general rule, the proper plaintiff in an action in respect of a wrong alleged to be done to a company is prima facie the company itself. However, there are a number of exceptions to this rule, pursuant to which a shareholder of the company may sue in the company's name. In particular, a shareholder can do so:

If what has been done amounts to “fraud on the minority” of shareholders and the wrongdoers are themselves in control of the company, on the basis that if the aggrieved minority were not allowed to bring a claim on behalf of themselves and all others, the dispute could never reach the court because the wrongdoers themselves, being in control of the company, would not allow the company to sue,
If the act complained of constitutes an infringement of individual rights of shareholders, for example the right to vote, or pre-emption rights,
If the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority, or
If the act complained of is ultra vires the objects of the company or illegal.

In the above cases, if a shareholder of record can show that (a) they have a prima facie case on the merits; (b) they fall within one of the above exceptions; and (c) they are acting in good faith, the Cayman Islands Grand Court may grant leave to continue a derivative action. Shareholders who have their own independent cause of action against a Cayman Islands company, in circumstances where their loss is not merely a reflection of loss suffered by the company, may initiate civil proceeding against the company in accordance with the Court rules. The company (and/or any other defendant) may in certain circumstances contend that the Cayman Islands is not the appropriate forum for those proceedings. Shareholders also have

47


 
 

TABLE OF CONTENTS

standing to file a petition seeking to wind up the company, including on the grounds that it is just and equitable that the company be wound up.

Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. There is therefore doubt as to the enforceability in Hong Kong in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any State or territory within the United States.

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 U.S. company.

For additional information with regard to enforcement of civil liabilities, see “Risk Factors — You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and our management.” and “Risk Factors — Uncertainties with respect to the PRC legal system could adversely affect us.”

We have appointed National Corporate Research, Ltd., located at 10 East 40 Street, New York, N.Y. 10016 as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

48


 
 

TABLE OF CONTENTS

SELECTED FINANCIAL AND OPERATING DATA

The following selected financial and operating data of our predecessor company, Sunity Xi’an, as of and for the years ended March 31, 2011, 2010 and 2009 presented below have been derived from Sunity Xi’an’s audited financial statements that are included elsewhere in this prospectus. Selected balance sheet data for our company as of March 31, 2009 has been omitted from the financial statements that are included elsewhere in this prospectus in accordance with Instruction 3 to Item 8.A.2 to Form 20-F. This data should be read in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The financial statements are prepared and presented in accordance with U.S. GAAP. In accordance with Item 3.A.1 of Form 20-F, we are omitting our selected consolidated financial data for fiscal year 2007 because we do not currently have audited financial statements for this year and such information cannot be provided in accordance with U.S. GAAP without unreasonable effort or expense. Our results of operations in any period may not necessarily be indicative of the results that may be expected for any future period. See “Risk Factors” included elsewhere in this prospectus.

     
  Years Ended March 31,
     2011   2010   2009
Income Statement Data:
                          
Revenues   $ 12,383,357     $ 9,542,832     $ 8,254,382  
Cost of revenue     3,429,864       2,420,491       2,440,153  
Gross profit     8,953,494       7,122,341       5,814,229  
Operating expenses     3,382,270       2,920,045       2,945,785  
Other income (expenses)     14,036       3,409       541  
Income before income tax     5,585,259       4,205,706       2,868,985  
Income tax     724,878       319,621        
Net Income     4,860,381       3,886,085       2,868,985  
Effects of foreign currency conversion     534,490       8,935       166,686  
Comprehensive income   $ 5,394,871     $ 3,895,020     $ 3,035,671  

  

     
  Years Ended March 31,
     2011   2010   2009
Balance Sheet Data:
                          
Working capital (deficit)   $ 9,742,277     $ 3,366,866     $ (117,470 ) 
Total assets     17,504,771       11,535,739       8,486,982  
Total liabilities     1,477,362       917,052       2,226,616  
Total liabilities and shareholders’ equity     17,504,771       11,535,739       8,486,982  
Shareholders’ equity   $ 16,027,409     $ 10,618,687     $ 6,260,366  

         
    Years Ended March 31,
       2011   2010   2009   2008
Selected Operating Data:(1)
                                   
QHG(2)(3)     ACU       10,056       11,277       6,004        
       PCU       11,834       14,325       7,505        
HCG(4)     ACU       1,806                    
       PCU       2,415                    
HDG(5)     ACU       39,798       14,920              
       PCU       50,127       18,887              

(1) We quantify our user base by measuring “Average Concurrent Users” (ACU) and “Peak Concurrent Users” (PCU). We believe that ACUs and PCUs are key non-financial variables that are necessary in understanding our business operations and financial results. As ACUs and PCUs are non-financial variables, the data presented has not been audited or reviewed.
(2) In November 2010, some of QHGs games were combined into HCG, a SNS game community developed by us to increase players’ loyalty. Eventually, all of our current players and distributors of QHG will be transferred to HCG and QHG will cease to exist.

49


 
 

TABLE OF CONTENTS

(3) QHG did not operate online until May 2008, and as a result did not generate any revenue prior to that date.
(4) HCG did not operate online until September 2010, and as a result did not generate any revenue prior to that date.
(5) HDG did not operate online until October 2009, and as a result did not generate any revenue prior to that date.

50


 
 

TABLE OF CONTENTS

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 titled “Selected Historical Financial and Operating Data” and the financial statements included elsewhere in this prospectus. This discussion and analysis may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” of this prospectus.

Overview

We are a rapidly growing online game developer and operator in China. We currently develop game systems and operate game websites. We have a leading position in the casual games market as well as the Webgame market as measured by the popularity of our online games QHG, HDG and HCG. We began switching our core business from service provider, or SP, service and radio frequency identification, or RFID, service to develop and operate casual “online games” in China in 2007.

We operate our business in China primarily through Sunity Xi’an, which was incorporated in Beijing, PRC in 2006. We do not hold any equity interest in Sunity Xi’an. In order to meet domestic ownership requirements under PRC law, which restricts foreign companies from operating in the telecommunications industry, which includes operating online games, on April 1, 2010, Sunity WFOE entered into contractual agreements with Sunity Xi’an and its equity owners, pursuant to which Sunity WFOE agreed to license its self-developed software, on an exclusive basis, to Sunity Xi’an, as well as to provide technical support services and business operation services to Sunity Xi’an. Through these contractual arrangements, Sunity WFOE also has the ability to effectively control Sunity Xi’an’s daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholder approval. As a result of these contractual arrangements, Sunity Cayman, the ultimate parent company of Sunity WFOE, is considered to be the primary beneficiary of Sunity Xi’an and Sunity Xi’an is a variable interest entity, or VIE, of Sunity Cayman under United States generally accepted accounting principles (US GAAP). Accordingly, Sunity Cayman consolidates Sunity Xi’an’s financial results, assets and liabilities in its financial statements. Sunity Xi’an is considered our predecessor company. Since both Sunity Cayman and Sunity Xi’an are under common control, Sunity Cayman’s financial statements will reflect this reorganization as a transaction under common control and will be prepared as if the reorganized corporate structure had been in existence throughout all the periods presented. If Sunity Xi’an and/or its equity owners breach the contractual arrangements with us, Sunity Cayman may not be able to continue to effectively control Sunity Xi’an’s operations and remain to be its primary beneficiary. In such case, Sunity Cayman would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light of uncertainties in the PRC legal system. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”

We operate our current games under time-based and item-based revenue models. Game players purchase prepaid game tokens or game points, which are used to purchase virtual items. We sell our prepaid game tokens to our nation-wide distributors throughout China, who in turn sub-distribute them to numerous retail outlets.

We were also engaged as a service provider, or SP, for short message and other value-added services to mobile phone users based on the telecom operators’ platforms. This business slowed when telecom operators started to compete into this sector. Commencing in 2010 and beyond, we will not promote the SP service as our main business. Instead, we will utilize the SP channels as a payment method for our game users to purchase game tokens.

We were also engaged in the radio frequency identification business, RFID. RFID is the use of an object (typically referred to as an RFID tag) applied to or incorporated into a product, animal, or person for the purpose of identification and tracking by using the radio waves. This business has not generated any revenue since 2008 and will not be our focus in the foreseeable future. Going forward, our RFID business will be used as a payment channel for our future game operations.

51


 
 

TABLE OF CONTENTS

Due to our limited operating history, our period-to-period operating history may not be meaningful. In addition, our limited operating history makes it difficult for us to have a historical basis for making certain critical accounting policies and accounting estimates. See “Risk Factors — Risks Related to Our Business and Our Industry — Our limited operating history makes evaluating our business and prospects difficult.” Furthermore, the online game industry and Internet usage in China may not continue to grow at current levels.

Recent Developments

Selected Estimated Results for the Quarter Ended June 30, 2011:

The following information is an estimate of our selected preliminary unaudited financial and operating data for the quarter ended June 30, 2011. The selected preliminary unaudited financial and operating data presented below are subject to the completion of our normal quarter-end closing procedures. Accordingly, this data may change and those changes may be material. This information is deemed to be preliminary because it is unaudited and has been internally prepared by management.

We estimate our revenues for the quarter ended June 30, 2011 to be approximately $2.83 million. This represents an increase of approximately 7.5% from our revenues of $2.63 million for the quarter ended June 30, 2010, primarily driven by new games and our new game operation platform, as well as the impact of the business tax incentives.

We estimate our gross profit for the quarter ended June 30, 2011 to be approximately $1.99 million. This represents an increase of approximately 18% from the quarter ended June 30, 2010, primarily driven by new games and our new game operation platform.

We estimate our operating income for the quarter ended June 30, 2011 to be approximately $1.05 million. This represents a decrease of approximately 6.2% from operating income of $1.12 million for the quarter ended June 30, 2010, primarily due to the increased equipment leasing expenses and marketing expenses related to our new game operation platform we recently developed.

This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical financial statements and the related notes contained elsewhere in this prospectus.

Basis of Presentation

Our financial statements were prepared in conformity with US GAAP. Our functional currency is the Chinese Renminbi (RMB), however, our financial statements were translated and presented in United States Dollars ($).

Use of Estimates

In preparing the financial statements in conformity with US GAAP, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by our management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Revenue Recognition

Our revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104, codified in FASB ASC Topic 605. Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations exist and collectability is reasonably assured. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

52


 
 

TABLE OF CONTENTS

Revenue from the SP business is recognized when the Group receives an income settlement bill from telecom operators for services provided by the Group through the telecom operators’ network to the end user. If the end user decides not to use the Group’s service during the month, the fee for the rest of the month is non-refundable.

The telecom operators maintain mobile phone user’s accounts. The Group is responsible for fulfillment, including the acceptability of the products or services ordered or purchased by the end user, indicate risks and rewards as principal in the transaction and that we should record revenue on a gross basis. Fees paid to the telecom operator are recorded in cost of revenues.

According to agreements with telecom operators, we provide information service to their mobile phone users. The service is provided through the platform owned by telecom operators. The price of the service is greater as a result of the performance of the service and is not evaluated based on another entity’s attributes such as marketing skills, market coverage, distribution system or reputation.

We are responsible for developing and marketing of products and the telecom operators are responsible for collection. The Group is also responsible for determining the nature, type, characteristics, or specifications of the product or service ordered by the end user. There is a separate contract between the Group and the telecom operator which stipulates 30% – 40% of total revenue is paid to each telecom operator which we treat as a platform usage cost and AR collection cost.

The Group determines the prices charged to the end user. There is a price of the service received by the end user. This price is based on the arrangement between the Group and the end user. The Group’s revenue varies if price arrangements with the end user changes. Similarly, payment to the telecom operator of 30% to 40% will vary as a result of change in revenue from the end user. The Group has multiple suppliers for a product or service ordered by a customer and discretion to select the supplier that will provide the product or service ordered by a customer.

Revenue from the online games is recognized as the game tokens are used by the end users. The Group sells game tokens to distributors who resell them to ultimate customers (game players) for casual games. The Group collects money from the distributors and is obligated to maintain the gaming software, the game website and manage customer relations. The Company issues new tokens to replace tokens which are lost by the customers. There is no expiration time or limit on the unused tokens. The unused token remains under unearned revenue until used by the ultimate customer. No returns are allowed under current PRC regulations and there is no expiration period on tokens sold and unused.

We have a time-based revenue model for our casual games, and an item-based revenue model for role play games. For casual games such as the Qihang Game (QHG), as well as the Happy Canyon Game (HCG) launched in mid-September 2010, we sell tokens to two first tier distributors, which in turn sell to second tier distributors. For role play games, such as the Han Dynasty Game (HDG), we sell tokens to three distributors, which in turn sell to game players. Game players in role playing games play the game for free but they buy game tokens to purchase in-game items, such as performance enhancing items, clothing, accessories and pets. We recognize revenue based on tokens used by the ultimate game players for time-based casual games and on purchases by game players of items for role-play games. QHG is the only time-based casual game currently operated. When the game token is sold to the players, it is accounted for as unearned revenue. The revenue will not be recognized until the players actually consume the game tokens to play QHG. While the player is playing QHG, the game token is charged and the revenue is recognized simultaneously. Each game token provides the player with an opportunity to play the game. The time to play the game is unlimited so long as the player survives in the game and can continue to play. The game is over once the player is defeated by the other players. The typical example is chess. A player uses a game token to play chess against another player. The token is used and the revenue is recognized at the time the game begins. If a player is defeated, the game is over. If a player wins, such player can continue to play the game with another player free of charge. However, the players cannot pause the game and resume. If a player has no response for a period of three to five minutes, depending on the game, such player is deemed to be defeated and such player’s game will terminate. The player then needs to use another token to play the game. Even if a player wins all of the games, such player’s token is completely used when such player leaves the game. Typically, a game lasts less than four hours depending upon the performance of a player. In contrast, we operate HDG, HCG and ISS

53


 
 

TABLE OF CONTENTS

under item-based revenue model. When the game token is sold to the players, it is accounted for as unearned revenue. The revenue will not be recognized until the players actually use the game tokens to purchase virtual items in the game. When the player purchases virtual items by utilizing the game token, the revenue is recognized simultaneously. In our games, the virtual items, such as weapons, costumes and energy medicines are used in a specific game level. The average lives of the virtual items are approximately ten hours. Most of the players play games over 20 hours per month. Typically, a game lasts for less than four hours depending upon the performance of a player. Considering the short lives of the virtual items, we recognize revenue as they are purchased.

Revenue from web game engine software sales is recognized upon the customers’ acceptance of the software. The prepayment is 30% of the service fee. We do not deliver the technical documents and software codes to the customer until we receive the prepayment. The customer is obligated to test and decide whether it will accept the software within ten business days. Upon acceptance, the customer is required to make payment of the remaining 70% of the service fee, at which time software sales are recognized.

The sale of engine software only involves a license to use the engine. We maintain the title to the software. We provide disclaimers to our customers that state we do not warrant the quality of the software but agree to provide free technical support for a period of six months after delivery. The free technical support is limited to telephone assistance. Such assistance meets the criteria of revenue recognition with the initial licensing fee as it meets the following conditions contained in ASC 985-605-25-71:

a. The post-contract customer support fee is included with the initial licensing fee.
b. The post-contract customer support included with the initial license is for one year or less.
c. The estimated cost of providing post-contract customer support during the arrangement is insignificant.
d. Unspecified upgrades or enhancements offered during post-contract customer support arrangements historically have been and are expected to continue to be minimal and infrequent.

Revenue from software development is recognized in accordance with ASC 985-605-25-3 — Software Not Requiring Significant Production, Modification, or Customization. Pursuant to the agreed terms, we are not obligated to provide post-sales service. The software development contracts are of a short term nature that requires development to be completed within 75 days and do not involve significant modification, customization or development. We have core software which we developed for our own use and sell to the customers with minor modifications that are not essential to the functionality of the software. Pursuant to the agreed terms, the customer is required to pay the first installment within seven days of acceptance and the rest of the fees within three months of the acceptance. The copyright of the software belongs to the customer and there is no licensing fee involved. The Company recognizes revenue upon the customer’s acceptance, when transfer of software accompanied by documentation is completed. Cost of Software Development Revenue is accounted for under ASC 985-20 as sold, leased or otherwise marketed. Cost of Software Development Revenue mainly includes developer’s salaries and amortization of intangible assets.

In the last quarter of fiscal 2011, the Company launched the 633.com portal which mainly provides a platform for third parties to make their games available to game players. The third parties’ web game model is generally an item based model where tokens are sold free of cost while items purchased for enhancement generates revenue. The revenue from third parties games is recognized when cash is received through on-line payment on a net basis, based upon an agreed revenue sharing ratio. For third parties games, we are responsible for marketing, promotion and maintenance of the 633.com platform; third parties are responsible for the maintenance of the games available on the platform, including the quality and service of the games.

Impairment of Long-Lived Assets

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

54


 
 

TABLE OF CONTENTS

Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the impairment of property and equipment for the years ended March 31, 2011, 2010 and 2009 was $0, $2,492 and $2,274 respectively. The impairment of intangible assets for the years ended March 31, 2011, 2010 and 2009 was $283,430, $0 and $88,528 respectively. Total impairments for the years ended March 31, 2011, 2010 and 2009 was $283,430, $2,492 and $90,802 as described in the below table.

The following table details impairment of long lived assets in the fiscal years ended March 31, 2011, 2010 and 2009.

     
  Years ended March 31,
     2011   2010   2009
Electronic Equipment   $     $ 2,492     $ 2,274  
Right to website                 79,656  
Software platform     283,430             8,872  
Total   $ 283,430     $ 2,492     $ 90,802  

The impairment is the result of rapid development and advancement in technology, electronic equipment and software, such as servers for SP business. For management right of web site, we considered that no more revenue will be generated in the future.

Recently Issued Accounting Pronouncements

On July 1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 —  Generally Accepted Accounting Principles — amendments based on Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards CodificationTM (“Codification”) and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Financial Statements.

In May, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in FASB ASC Topic 855-10-05, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, we adopted this pronouncement during the second quarter of 2009. SFAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued.

In April, 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic 825-10-50. This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures are required beginning with the quarter ending June 30, 2009. As of March 31, 2010, the carrying values of our financial instruments, including cash and cash equivalents, accounts receivable, other receivables, and other payables approximate their fair values due to the short-term maturity of such instruments.

55


 
 

TABLE OF CONTENTS

In April, 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB ASC Topic 320-10. This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. We adopted FSP No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on our financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for estimating fair value and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. We adopted FSP No. SFAS 157-4 beginning April 1, 2009. This FSP had no material impact on our financial position, results of operations or cash flows.

Factors Affecting Our Financial Condition and Results of Operations

Our results of operations are affected by several key factors, including the following:

General economic conditions affecting the online game industry in China

We have benefited from general conditions typically affecting the online game industry in China, including the overall economic growth, which has resulted in increases in disposable income and discretionary consumer spending; the increasing use of the Internet with the growth of personal computers and broadband penetration; the growing popularity of online games in comparison with other forms of entertainment; and favorable demographic trends, particularly the growth of the teenage and young adult population who are typically more inclined to play online games. We cannot assure you that the Chinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform and that any such growth will lead to growth in the casuals or RPG business, or that if there is a slowdown, such slowdown will not have a negative effect on our casuals and RPG business. For example, the appreciation of the Renminbi, the PRC government’s tightening macroeconomic measures implemented in 2010 to curb inflation, and other factors may lead to decreases in the level of disposable income of our game players and negatively affect their spending on playing casual and RPG business.

Our ability to develop and maintain popular online games and convert our game player base into paying customers

The popularity of our games drives the growth of our game player base, which is the key component driving the sales and consumption of our virtual items and thus our revenues. To maintain and grow the popularity of our games, we must diligently maintain the quality of the games and continually enhance the games to meet game player preferences and to provide incentives for game players to purchase virtual items. We solicit feedback from our game players and have a dedicated product development team that helps us to identify market trends and user preferences. We typically provide weekly updates and more substantial enhancements in the form of expansion packs every few months. We launch new virtual items to maintain game players’ interest. We plan the timing of our new virtual item launches to avoid over-monetizing our

56


 
 

TABLE OF CONTENTS

existing game player base. We generally only launch virtual items after we have gained a certain number of new game players. If we fail to manage the growth of our game player base and manage our sales and marketing strategies for new virtual items, our game player base may not grow and we may not be successful in selling new virtual items, which would have an adverse effect on our revenues.

The popularity and timing of the launch of new games

We currently have two new games in the pipeline, NVT and SWG, which we are developing in-house. Our results of operations will be significantly affected by the timing of our new game launches and the popularity of such new games.

Product development and sales and marketing expenses

Developing and marketing a new Webgame and maintaining its popularity in the market requires a commitment of significant resources, including product development and sales and marketing expenses. We typically incur such expenses several quarters before such games generate any revenues. If such games are not popular and do not generate substantial revenues, we may not be able to recover our product development and marketing expenses. In addition, because our product development strategy is to focus on a limited number of high-quality games, the failure of a small number of these games could adversely impact our growth rate.

The cost of attracting and retaining game development personnel

Competition in the online game industry in China is intense, making it increasingly costly to retain and motivate existing talent and to attract new talent necessary for the growth of our business. Many of our competitors have been aggressively hiring game development personnel. If we are unable to retain our current talent and to attract new talent, we may have difficulty developing new games or enhancements for our existing games or meeting our development schedule, which could have an adverse impact on our business, financial condition and results of operations. See “Risk Factors — Risks Related to Our Business — Our business may not succeed in a highly competitive market.”

Results of Operations

Our Revenues

The following table sets forth the revenues generated from our game operations, SP services and RFID business, both in absolute amount and as a percentage of total revenues for the period indicated:

           
  Year Ended March 31,
     2011   2010   2009
Revenues     % of
Total
Revenue
  Amount   % of
Total
Revenue
  Amount   % of
Total
Revenue
Game Operation Revenue   $ 10,637,982       86 %    $ 5,696,304       60 %    $ 2,218,259       27 % 
SP Revenue     688,608       6 %      3,279,310       34 %      6,036,123       73 % 
Software Development Revenue     1,046,799       8 %      544,951       6 %               0 % 
633 Platform Revenue     9,968       0 %               0 %               0 % 
Website Sale              0 %      22,267       0 %               0 % 
Total Revenue   $ 12,383,357       100 %    $ 9,542,832       100 %    $ 8,254,382       100 % 

In the year ended March 31, 2011, the revenue from SP service accounted for 5.6% of our total revenue. SP service is one of the payment methods (SMS) that our game players use to purchase game tokens. As a result, parts of the SP service are game operation revenue in its nature. In the future, we might not promote the SP service as our main business. Instead, we will only utilize the SP channels as a payment method for our game users to purchase game tokens.

57


 
 

TABLE OF CONTENTS

Game Operation Revenues

Our casual game has grown rapidly in the last couple of years. It has become our core business and is expected to grow even faster in the future with multiple games currently under development. In addition to casual games, we commenced development of role-playing games in the fourth quarter of 2009. Role playing games began to generate revenue beginning in January, 2010 and have grown even more rapidly than casual games since then. We currently develop game systems and operate game websites. We also plan to commence development of games for wireless devices such as mobile telephones later this year.

SP Revenues

With service provider business, SP, we provide short message and other value-added services to mobile phone users based on the telecom operators’ platforms. This business slowed down when telecom operators started to compete in this sector. For the year ended March 31, 2011, the revenue generated from the SP Service was $688,608, as compared with $3,279,310 for the year ended March 31, 2010. We do not expect revenues generated from the SP Service for the fiscal year ending March 31, 2012 to constitute a substantial portion of our total revenues.

RFID Revenues

We were also engaged in RFID, which uses an object (typically referred to as an RFID tag) applied to or incorporated into a product, animal, or person for the purpose of identification and tracking by using the radio waves. This business has not generated any revenue since 2008 and will not be our focus in the foreseeable future. However, RFID is an advanced technology for identification and we may utilize RFID technology to provide mobile phone payment channel for gaming business.

Cost of Revenue

Cost of Revenue for game operation is primarily comprised of channel costs, server depreciation costs and broad band leasing costs. Our cost of revenue for game operation represented 28% and 15% of total game operation revenue for the year ended March 31, 2011 and 2010 respectively. We expect our cost of revenues for game operation to increase as our revenue increase.

Cost of Revenue for SP is primarily comprised of profit sharing payment to the telecommunication companies and salaries and benefit expenses for product development personnel, as well as PRC business tax. Profit sharing payment to the telecommunication companies and salaries and benefit expenses for product development personnel cost constitute 48% and 47% of our total SP operation revenue for the years ended March 31, 2011 and 2010 respectively.

Operating Expenses:

Selling Expenses

Our sales expenses consist primarily of salaries and benefits expenses for sales and marketing personnel. Sales expenses constitute 5.57% and 13.59% of our total revenue for the years ended March 31, 2011 and 2010, respectively.

General and Administrative Expenses

Our general and administrative expenses consist primarily of depreciation costs, amortization of intangible assets as well as salaries and benefit expenses for management and administrative personnel. General and administrative expenses constitute 12.32% and 12.96% of our total revenue for the years ended March 31, 2011 and 2010 respectively.

Taxation

Sunity Xi’an is governed by the Income Tax Law of PRC for Hi-Tech business. As a Hi-Tech entity, Sunity Xi’an is exempt from PRC income tax for the first three years from the date of its incorporation, and thereafter receives a 50% exemption on PRC income tax for the following 3 years. Until September, 2009, Sunity Xi’an was exempt from paying taxes. Since then, Sunity Xi’an has been subject to a 12.5% preferential tax rate. Sunity Xi’an will pay regular income tax of 25% from the seventh year.

58


 
 

TABLE OF CONTENTS

Year Ended March 31, 2011 Compared to the Year Ended March 31, 2010

The following table sets forth the results of our operations for the periods indicated as a percentage of net sales:

       
  Years Ended March 31,
     2011   2010
     $   % of Sales   $   % of Sales
Revenue   $ 12,383,357       100.0 %    $ 9,542,832       100.0 % 
Cost of Revenue     3,429,864       27.7 %      2,420,491       25.4 % 
Gross Profit     8,953,494       72.3 %      7,122,341       74.6 % 
Operating Expenses     3,382,270       27.3 %      2,920,045       30.6 % 
Income from Operation     5,571,223       45.0 %      4,202,296       44.0 % 
Non-operating Income     14,036       0.1 %      3,409       0.0 % 
Income tax expense     724,878       5.9 %      319,621       3.3 % 
Net Income   $ 4,860,381       39.2 %    $ 3,886,084       40.7 % 

Revenue. Total revenue was $12.38 million and $9.54 million for the years ended March 31, 2011 and 2010, respectively, representing an increase in revenue of $2.84 million, or 30%. This increase was mainly due to the rapid expansion of our Webgames business, which had $10.64 million in revenue for the year ended March 31, 2011, compared to $5.70 million for the year ended March 31, 2010, representing an increase of 87%. The growth of our Webgames business was primarily driven by RPG, which grew more rapidly than the casual games. For the year ended March 31, 2011, RPG revenue was $5.12 million, representing an increase of $4.41 million, or 623%, compared with the prior year; while casual games revenue was $5.53 million, representing an increase of $0.54 million, or 11%, compared with the prior year. SP revenue decreased by $2.59 million or 79% for the year ended March 31, 2011, compared to the prior year. The decrease in SP revenue was mainly due to the sluggish SP market. As a result, we had moved our core business to Webgames. We believe that our revenues will continue to grow as we continue to develop new Webgames and improve the quality of our services and our products.

Cost of Revenue. Cost of revenue for the year ended March 31, 2011 was $3.43 million while our cost of revenue for the year ended March 31, 2010 was $2.42 million, representing an increase of $1.01 million, or 42%. The increase in cost of revenue was mainly attributable to the increased revenue in our Webgame business.

Gross Profit. Gross profit was $8.95 million, representing gross margin of 72%, for the year ended March 31, 2011, compared to $7.12 million, representing gross margin of 75% for the year ended March 31, 2010. The increase in gross profits was mainly due to increased revenue in the Webgame business.

Operating Expenses. Operating expenses consisted of selling, general, administrative expenses and research and development expenses and totaled $3.38 million and $2.92 million for the years ended March 31, 2011 and 2010, respectively. In the fiscal year ended March 31, 2011, operating expenses have increased by $462,000, or 15.8%, from the fiscal year ended March 31, 2010. This increase resulted from the increase of research and development expenses by $500,000, or 17.1%, and the increase in administrative expenses by $262,000, or 9%, and offset by the decrease in selling expenses by $606,000, or 20.8%. The increase in administrative expenses was driven by the IPO related expenses. The increase in research and development expenses was driven by the new games development. The decrease in selling expenses was driven by the reduced sales representatives related to the SP business, which was no longer our core business.

Net Income. Net income was $4.86 million and $3.89 million for the years ended March 31, 2011 and 2010, respectively. The increase in net income of $0.97 million, or 25%, was attributable to the growth in our Webgame business. We believe that net income will continue to increase as we continue to increase our sales by providing quality services and products and control costs and operating expenses.

Liquidity and Capital Resources

We have financed our operations primarily through cash flows from equity contributions and cash flow from operations. As of March 31, 2011, we had $9.93 million in cash and equivalents. We believe our current cash, together with the proceeds from this offering as well as cash flows from operations, will be sufficient to meet our anticipated cash needs for the next twelve months. We may, however, require additional cash

59


 
 

TABLE OF CONTENTS

resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. Another factor that may have an adverse impact on our liquidity and ability to fund operations is the potential legal risk that we will be penalized or fined if the CSRC or other relevant PRC government authorities determine that prior CSRC approval is required for our offering. See “Risk Factors — We may be required to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market.”

We may rely on dividends and other distributions on equity, or loans and advances made by our Chinese subsidiary, Sunity WFOE, to fund any cash requirements we may have, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, and to service any debt we may incur.

The distribution of dividends and the making of loans and advances by entities organized in China are subject to certain limitations. Regulations in the PRC currently permit payment of dividends only out of unrestricted retained earnings, as determined in accordance with accounting standards and regulations in China. As of March 31, 2011, our retained earnings were $10,223,901. The retained earnings under PRC GAAP were $10,440,025. The difference is primarily due to the different accounting policies on revenue recognition and fluctuation in the exchange rate in the period presented. With respect to revenue recognition, under PRC GAAP, revenue is recognized when the game tokens are sold to the distributors. Under US GAAP, revenue is recognized only when the game tokens are used by the ultimate players. Our restricted and unrestricted retained earnings under US GAAP are set forth below:

     
  Years Ended March 31,
     2011   2010   2009
Unrestricted retained earnings   $ 8,669,657     $ 4,338,895     $ 848,670  
Restricted retained earnings (surplus reserve fund)     1,554,244       1,024,625       628,765  
Retained earnings (including surplus reserve fund)   $ 10,223,901     $ 5,363,520     $ 1,477,435  
Common Welfare Fund*   $     $     $  

* Common Welfare Fund is a voluntary fund and as such we do not reserve under this fund.

The distribution of dividends is also subject to restrictions on the net assets. The paid in capital, statutory reserves and the accumulated other comprehensive income are the primary restricted net assets that may not be paid out as dividends. In our financial statements, the accumulated other comprehensive income is mainly composed of the gains and losses resulting from converting RMB to US dollars and the statutory reserves are primarily composed of the surplus reserve fund. The use of the surplus reserve fund for dividend payments is allowed only when the following criteria are satisfied:

1. The surplus reserve fund still has a positive balance after using it to mitigate the operating loss.
2. When using the surplus reserve fund for dividend payments, the dividend payment should not exceed 6% of the face value of the stock.
3. After the dividend payment, the surplus reserve fund should not be below 25% of the registered capital.

Our restricted and unrestricted net assets under US GAAP are set forth below:

     
  Years Ended March 31,
     2011   2010   2009
Restricted net assets                           
Common stock   $ 11,020     $ 11,020     $ 10,000  
Paid in capital     4,318,091       4,318,091       3,854,790  
Additional paid in capital     13,851              
Subscription receivable     (11,020 )      (11,020 )      (10,000 ) 
Statutory reserves     1,554,244       1,024,625       628,765  
Accumulated other comp     1,471,566       937,077       928,141  
Unrestricted net assets                           
Unrestricted retained earnings   $ 8,669,657     $ 4,338,895     $ 848,670  

Under current circumstances, restrictions on retained earnings apply to our common welfare fund and statutory reserves. Since there are no reserves for the common welfare fund, the only restriction on retained earnings is statutory reserves, which is also a portion of the restrictions on net assets and shall not be

60


 
 

TABLE OF CONTENTS

calculated more than once. The combination of the restriction on retained earnings and the restriction on net assets is equal to the restriction on net assets. The unrestricted net assets is the amount ultimately available for dividend distribution.

The same restriction also applies on the other forms of distribution, including loans or advances from PRC subsidiaries to our parent companies. Under PRC laws, the maximum amount permitted to be distributed can be no more than the total amount of our unrestricted net assets. Our unrestricted net assets are the amount ultimately available for the distribution (including loans and advances) to Sunity HK and Sunity Cayman, the parent companies. As of March 31, 2011, our restricted net assets were $1,554,244. Since Sunity HK and Sunity Cayman, our parent companies, do not have any operations, there is presently no need for any loans or advances to be made from the PRC subsidiaries to Sunity HK or Sunity Cayman to fund operations. All cash currently generated has remained, and for the foreseeable future will remain, at the PRC subsidiary level to fund operations. We have no plans to declare dividends in the near future. Our earnings will be reinvested in the operations of the PRC subsidiaries. As a result, we do not believe the statutory limits will have a material adverse affect on our liquidity or our ability to fund operations.

In addition, under the regulations of the State Administration of Foreign Exchange, or the SAFE, the Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.

Cash Flows

The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended March 31, 2011 and 2010:

   
  Years Ended March 31,
     2011   2010
Cash provided by (used in):
                 
Operating Activities   $ 8,387,930     $ 5,092,186  
Investing Activities     (184,237 )      (2,030,688 ) 
Financing Activities     (171,740 )      (2,249,319 ) 

Cash Flow Provided by Operating Activities

Net cash flow provided by operating activities was $8.39 million for the year ended March 31, 2011, compared to cash flow provided by operating activities of $5.09 million for the year ended March 31, 2010.

The $3.3 million or 65% increase in net cash flow provided by operating activities for the year ended March 31, 2011 was mainly due to a decrease in due from related party of $1.1 million and an increase in net income of $1 million. The decrease in current assets other than due from related party and the increase in current liabilities also contributed to the increase in net cash flows provided by operating activities by $0.5 million and $0.4 million, respectively.

The decrease in due from related party of $1.1 million was mainly attributable to the collection of money deposited in the name of the cashier of the company. See “Related Party Transactions.”

The increase of net income was mainly attributable to the increase of our revenue, which grew by $2.84 million or 29.8% for the year ended March 31, 2011. Our revenue growth was driven by a significant increase in our web game operation revenue, which grew by $4.9 million or 86.8% for the year ended March 31, 2011.

The decrease in current assets other than due from related party was primarily driven by other receivables, which decreased as a result of an advanced payment related to IDC construction which was collected during the year ended March 31, 2011.

The increase in current liability was primarily driven by other payables, which increased as a result of advanced payments received from a customer that were returned during the year ended March 31, 2011.

Cash Flow Used in Investing Activities

Net cash flow used in investing activities was $0.18 million for the year ended March 31, 2011, compared to net cash flow used in investing activities of $2.03 million for the year ended March 31, 2010.

61


 
 

TABLE OF CONTENTS

The increase in net cash flow used in investing activities in the year ended March 31, 2010 was mainly due to an advance payment that was made in connection with construction of an Internet Data Center, as discussed in more detail below, and purchases of equipment during the period.

Cash Flow Provided by (Used in) Financing Activities

Net cash flow used in financing activities was $0.17 million in the year ended March 31, 2011, as compared to net cash flow used in financing activities of $2.25 million for the year ended March 31, 2010. The net cash flow used in financing activities in the year ended March 31, 2010 was mainly due to repayment of $1.53 million to a related party for a deemed dividend for technical services provided to us in the year ended March 31, 2010.

Year Ended March 31, 2010 Compared to the Year Ended March 31, 2009

The following table sets forth the results of our operations for the periods indicated as a percentage of net sales:

       
  Years Ended March 31,
     2010   2009
     $   % of Sales   $   % of Sales
Revenue   $ 9,542,832       100.0 %    $ 8,254,382       100.0 % 
Cost of Revenue     2,420,491       25.4 %      2,440,153       29.6 % 
Gross Profit     7,122,341       74.6 %      5,814,229       70.4 % 
Operating Expenses     2,920,045       30.6 %      2,945,785       35.7 % 
Income from Operation     4,202,296       44.0 %      2,868,444       34.8 % 
Non-operating Income     3,409       0.0 %      541       0.0 % 
Income tax expense     319,621       3.3 %            0.0 % 
Net Income   $ 3,886,085       40.7 %    $ 2,868,985       34.8 % 

Revenue.  Total revenue was $9.54 million and $8.25 million for the years ended March 31, 2010 and 2009, respectively, representing an increase in revenue of $1.29 million, or 15.6%. This increase was mainly due to fast expansion of our Webgames business, which had $5.70 million in revenue for the year ended March 31, 2010, compared to $2.22 million for the year ended March 31, 2009, representing an increase of 57%. The growth of the Webgames business was primarily driven by the casual games. For the year ended March 31, 2011, casual games revenue was $4.99 million, representing an increase of $2.77 million, or 125%, compared with the prior year; RPG revenue was $0.71 million, representing an increase of $0.71 million compared with $0 for the prior year. SP revenue decreased by $2.83 million or 46% for the year ended March 31, 2010, compared to the prior year. The decrease in SP revenue was mainly due to the sluggish SP market. As a result, we gradually began to move our core business to Webgames. We believe that our revenues will continue to grow as we continue to develop new Webgames and improve the quality of our services and our products.

Cost of Revenue.  Cost of revenue for the year ended March 31, 2010 was $2.42 million while our cost of revenue for the year ended March 31, 2009 was $2.44 million, representing a decrease of $0.02 million, or 0.8%. The decrease in cost of revenue was mainly attributable to the lower cost or higher gross profit margin in our Webgame business. We believe that our cost of revenue will continue to decrease as we strive to improve efficiency and control costs.

Gross Profit.  Gross profit was $7.12 million, representing gross margin of 74.6%, for the year ended March 31, 2010, compared to $5.81 million, representing gross margin of 70.4% for the year ended March 31, 2009. The increase in gross profits was mainly due to increased sales and increased Webgame business.

Operating Expenses.  Operating expenses consisted of selling, general, administrative expenses, research and development expenses and totaled $2.92 million and $2.95 million for the years ended March 31, 2010 and 2009 respectively.

Net Income.  Net income was $3.89 million and $2.87 million for the years ended March 31, 2010 and 2009, respectively. The increase in net income of $1.02 million, or 35.5%, was attributable to the growth in our Webgame business. Our management believes that net income will continue to increase as we continue to increase our sales by providing quality services and products, control costs and operating expenses.

62


 
 

TABLE OF CONTENTS

Liquidity and Capital Resources

We have financed our operations primarily through cash flows from equity contributions and cash flow from operations. As of March 31, 2010, we had $1.66 million in cash and cash equivalents.

Cash Flows

The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended March 31, 2010 and 2009:

   
  Years Ended March 31,
     2010   2009
Cash provided by (used in):
                 
Operating Activities   $ 5,092,186     $ 4,316,618  
Investing Activities     (2,030,688 )      (520,111 ) 
Financing Activities     (2,249,319 )      (3,125,135 ) 

Cash Flow Provided by Operating Activities

Net cash flow provided by operating activities was $5.09 million for the year ended March 31, 2010, compared to cash flow provided by operating activities of $4.32 million for the year ended March 31, 2009.

The increase in net cash flow provided by operating activities in the year ended March 31, 2010 was mainly due to an increase in net income of $1.02 million and an increase in accounts payable of $0.26 million.

Cash Flow Used in Investing Activities

Net cash flow used in investing activities was $2.03 million for the year ended March 31, 2010, compared to net cash flow used in investing activities of $0.52 million for the year ended March 31, 2009. The increase in net cash flow used in investing activities in the year ended March 31, 2010 was mainly due to an advance payment that was made in connection with construction of an Internet Data Center, as discussed in more detail below, and purchases of equipment during the period.

Cash Flow Provided by (Used in) Financing Activities

Net cash flow used in financing activities was $2.25 million in the year ended March 31, 2010, as compared to net cash flow used in financing activities of $3.13 million for the year ended March 31, 2009. The net cash flow used in financing activities in the year ended March 31, 2010 was mainly due to repayment of $1.53 million to a related party for deemed dividend for technical services provided to us in the year ended March 31, 2009, as compared with the repayment of $3.08 million to that same related party in the fiscal year ended March 31, 2009. For the year ended March 31, 2010, we also had an outstanding advance of $1.09 million to the Company’s cashier, which we did not have in the fiscal year ended March 31, 2009.

Capital Expenditures

Our capital expenditures include the purchase of intangible assets and property and equipment. Our capital expenditures were $184,237, $2,030,688 and $520,111 for the years ended March 31, 2011, 2010 and 2009, respectively.

Research and Development

Our research and development costs are related to Webgame development. Our research and development costs were $883,249, $383,554 and $146,354 for the years ended March 31, 2011, 2010 and 2009 respectively.

Seasonality

During and around school holidays and public holidays in China, we typically experience decreases in our average concurrent users and peak concurrent users, but such decreases historically have not had any significant impact on our revenues.

63


 
 

TABLE OF CONTENTS

We quantify our user base by measuring “Average Concurrent Users” (ACU) and “Peak Concurrent Users” (PCU). We believe that ACUs and PCUs are key non-financial variables that are necessary in understanding our business operations and financial results. Determining the concurrent users during a specified period of time (i.e, daily, monthly, quarterly and annually) helps us in a variety of ways, but specifically in determining the impact, if any, on revenues as a result of public holidays, seasonal or other events that may have an impact on user game time for each of our games.

Concurrent usership is the number of users logged onto a specific game at a specific time of the day. The servers for our games refresh every minute. As a result, we can obtain the number of concurrent users for each minute. We determine ACUs for a 60 minute period by taking the number of concurrent users over a 60 minute period and dividing that number by 60. Using that methodology we are able to obtain the ACUs for each hour. PCUs are determined over the course of a 24 hour period by determining the highest ACU within that 24 hour period. We determine PCUs for a 24 hour period by taking the number of concurrent users over a 24 hour period and dividing that number by 24. This also allows us to see the peak time of day for game use for a particular game. In the event that we have a “unique user”, which is a user who has logged onto two computers at the same time and is managing two different game accounts at the same time, we count such a user as two users.

Each of our games targets different audiences, whose ACUs, PCUs and peak gaming times vary. MMORPGs usually appeal to school age kids. Webgames are targeted toward the 25-year old and older working professionals and adults. Causal games (such as cards and chess games) are targeted toward adults over the age of 30. Based upon this methodology we have found that during holidays in China, MMORPGs might experience a decrease in revenues as school age kids are away on holiday. However, revenues from Webgames and Casual Games are not significantly impacted as their target audience is working people. As a result, we have found that there has not been a material impact on the revenues of any of the games during and around holidays.

Inflation

According to the PRC National Bureau of Statistics, the Consumer Price Index in China increased (0.9%) and 3.3% in calendar years 2009 and 2010, respectively. Inflation during those years did not have a material impact on our results of operations. However, inflationary pressure in the current economic environment may impact our future operations and financial performance.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

Substantially all of our operating revenues and expenses are denominated in RMB. Our exposure to foreign exchange risk relates primarily to cash and cash equivalents denominated in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Because we generally receive cash flows denominated in RMB, our exposure to foreign exchange risks should be limited. However, the value of our ordinary shares and ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because our ordinary shares and ADSs are traded in U.S. dollars and we any dividend payments we may pay in the future will be made in U.S. dollars.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 18.7% appreciation of the RMB against the U.S. dollar from July 21, 2005 to December 31, 2009. Significant international pressure on the PRC government to adopt an even more flexible currency policy could result in a further and more significant appreciation of the RMB against the U.S. dollar.

64


 
 

TABLE OF CONTENTS

To the extent we need to convert U.S. dollars into RMB for operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount it received from the conversion. Conversely, if we decide to convert RMB denominated cash amounts into U.S. dollars for the purpose of making dividend payments or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. We have not used, and do not expect to use in the future, any forward contracts or currency borrowings to hedge exposure to foreign currency exchange risk.