Annual and Transition Report (foreign Private Issuer) (20-f)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

¨	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

¨	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 001-35645

China Mobile Games and Entertainment Group Limited

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrant’s Name Into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

Block A, 15/F Huajian Building

233 Tianfu Road, Tianhe District,

Guangzhou, PRC

(Address of Principal Executive Offices)

Ken Fei Fu Chang, Chief Financial Officer

13^th Floor, Asia Pacific Centre

No. 8 Wyndham Street, Central, Hong Kong

Tel: (852) 2700-6168

Email: ir@cmge.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
American Depositary Shares, each representing 14 Class A ordinary shares, par value $0.001 per share		Nasdaq Global Market

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

257,523,929 Class A ordinary shares and 180,821,228 Class B ordinary shares, par value $0.001 per share, as of December 31, 2014.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ¨ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAP x		International Financial Reporting Standards as issued by the International Accounting Standards Board ¨		Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

TABLE OF CONTENTS


	Page
INTRODUCTION		1
PART I		2
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		2
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE		2
Item 3. KEY INFORMATION		2
Item 4. INFORMATION ON THE COMPANY		43
Item 4A. UNRESOLVED STAFF COMMENTS		67
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		67
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		97
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		109
Item 8. FINANCIAL INFORMATION		111
Item 9. THE OFFER AND LISTING		112
Item 10. ADDITIONAL INFORMATION		113
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		122
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		124
PART II		125
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		125
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		125
Item 15. CONTROLS AND PROCEDURES		125
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT		127
Item 16B. CODE OF ETHICS		127
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES		127
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		127
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		127
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		127
Item 16G. CORPORATE GOVERNANCE		128
Item 16H. MINE SAFETY DISCLOSURE		128
PART III		129
Item 17. FINANCIAL STATEMENTS		129
Item 18. FINANCIAL STATEMENTS		129
Item 19. EXHIBITS		129

INTRODUCTION

Unless the context otherwise requires, in this annual report on Form 20-F:

•

“ADRs” refers to the American depository receipts, which, if issued, evidence our ADSs;

•

“ADSs” refers to our American depositary shares, each of which represents 14 Class A ordinary shares;

•

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report, Taiwan, Hong Kong and Macau;

•

“CMGE” refers to China Mobile Games and Entertainment Group Limited;

•

“RMB” or “Renminbi” refers to the legal currency of China, “$” or “U.S. dollars” refers to the legal currency of the United States, “JPY” refers to the legal currency of Japan, “KRW” refers to the legal currency of the Republic of Korea, and “TWD” refers to the legal currency of Taiwan;

•

“shares” or “ordinary shares” refers to our ordinary shares, including Class A and Class B ordinary shares, par value $0.001 per share;

•

“VIEs” refer to Guangzhou Yingzheng Information Technology Co., Ltd. and Shenzhen Lanyue Internet Technology Co., Ltd. (including its subsidiaries);

•

“V1 Group” refers to V1 Group Limited, previously known as VODone Limited, the controlling shareholder of the Company;

•

“WFOEs” refer Guangzhou Yitongtianxia Software Development Co., Ltd. and Huiyou Digital (Shenzhen) Ltd., our wholly foreign-owned enterprises; and

•

“we,” “us,” “our,” or “our company” refers to China Mobile Games and Entertainment Group Limited, its subsidiaries and consolidated entities, collectively.

Names of certain companies and games provided in this annual report are translated or transliterated from their original Chinese legal names.

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2012, 2013 and 2014 and our audited consolidated balance sheet data as of December 31, 2013 and 2014.

For your convenience, this annual report contains translations of some Renminbi and U.S. dollar amounts at the rate of RMB6.2046 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2014.

On September 25, 2012, we listed our ADSs on the Nasdaq Global Market under the symbol “CMGE.”

PART I

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

Item 3.

KEY INFORMATION

A.	Selected Financial Data

This annual report includes our selected consolidated statements of comprehensive income data for the years ended December 31, 2010, 2011, 2012, 2013 and 2014, and our selected consolidated balance sheet data as of December 31, 2010, 2011, 2012, 2013 and 2014.

The selected consolidated statement of comprehensive income data and consolidated balance sheet data for the years ended December 31, 2010 and 2011 have been derived from our audited consolidated financial statements that are not included in this annual report. Our selected consolidated statements of comprehensive income data and summary consolidated balance sheet data for the years ended December 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements that are included elsewhere in this annual report.

Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects,” and the consolidated financial statements and the notes to those statements included elsewhere in this annual report. Our historical results do not necessarily indicate our results expected for any future periods.

Selected Consolidated Statements of Comprehensive Income Data


	For the Year Ended December 31,
	2010			2011			2012			2013			2014
	RMB			RMB			RMB			RMB			RMB			US$
Net revenues
Games		110,071			204,794			172,185			319,218			1,264,695			203,832
Handset design		15,340			38,694			15,408			33,789			—			—

Total net revenues		125,411			243,488			187,593			353,007			1,264,695			203,832

Cost of revenues
Games		(32,827	)		(79,311	)		(74,878	)		(124,506	)		(483,943	)		(77,997	)
Handset design		(10,083	)		(29,037	)		(16,852	)		(31,491	)		—			—

Total cost of revenues		(42,910	)		(108,348	)		(91,730	)		(155,997	)		(483,943	)		(77,997	)

Gross profit
Games		77,244			125,483			97,307			194,712			780,752			125,835
Handset design		5,257			9,657			(1,444	)		2,298			—			—

Total gross profit		82,501			135,140			95,863			197,010			780,752			125,835

Operating expenses
Selling expenses		(952	)		(7,561	)		(15,838	)		(110,954	)		(320,887	)		(51,718	)
General and administrative expenses		(11,817	)		(16,263	)		(35,633	)		(55,925	)		(131,174	)		(21,141	)
Research and development expenses		(8,377	)		(24,566	)		(35,071	)		(54,294	)		(111,293	)		(17,937	)
Impairment of goodwill		—			—			(33,517	)		—			—			—
Impairment of intangible assets		—			—			(10,910	)		(2,613	)		—			—
Listing expenses		—			—			(17,307	)		—			—			—

Total operating expenses		(21,146	)		(48,390	)		(148,276	)		(223,786	)		(563,354	)		(90,796	)

Operating (loss) income		61,355			86,750			(52,413	)		(26,776	)		217,398			35,039
Interest income		70			927			1,474			3,322			8,241			1,328
Share of losses in equity method investments		—			—			—			—			(1,809	)		(292	)
Other income		—			293			451			25,654			5,238			844
Changes in fair value of contingently returnable consideration assets		(2,065	)		39,446			27,326			24,366			—			—

Income (loss) before income taxes and noncontrolling interests		59,360			127,416			(23,162	)		26,566			229,068			36,919
Income tax benefit (expense)		(18,647	)		35,927			8,689			197			(1,121	)		(180	)

Net (loss) income		40,713			163,343			(14,473	)		26,763			227,947			36,739

Accretion of contingently redeemable ordinary Shares		—			—			(3,023	)		(3,174	)		—			—
Net (loss) income attributable to shareholders		40,713			163,343			(17,496	)		23,589			227,947			36,739

Net (loss) income attributable to noncontrolling Interests		12,215			11,837			(135	)		503			(4,177	)		(673	)
Net (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders		28,498			151,506			(17,361	)		23,086			232,124			37,412

Other comprehensive income (loss):
Foreign currency translation adjustments		(111	)		(278	)		7			542			(3,332	)		(537	)

Unrealized gains on available-for-sale security		—			—			—			—			475			77

Other comprehensive income (loss)		(111	)		(278	)		7			542			(2,857	)		(460	)

Comprehensive (loss) income		40,602			163,065			(17,489	)		24,131			225,090			36,279

Comprehensive (loss) income attributable to noncontrolling interests		12,181			11,908			(135	)		451			(4,177	)		(673	)

Comprehensive (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders		28,421			151,157			(17,354	)		23,680			229,267			36,952

(Loss) earnings per share for Class A and Class B ordinary shares:
Basic		0.13			0.62			(0.06	)		0.07			0.55			0.09
Diluted		0.13			0.62			(0.06	)		0.06			0.52			0.08
(Loss) earnings per ADS:
Basic		1.82			8.68			(0.84	)		0.98			7.67			1.24
Diluted		1.82			8.68			(0.84	)		0.84			7.22			1.16
Weighted average number of Class A and Class B ordinary shares
Basic		212,500,000			244,594,415			302,853,059			319,576,830			423,638,426			423,638,426
Diluted		212,500,000			244,594,415			302,853,059			333,580,269			449,823,006			449,823,006
Weighted average number of ADS
Basic		15,178,571			17,471,030			21,632,361			22,826,916			30,259,888			30,259,888
Diluted		15,178,571			17,471,030			21,632,361			23,827,162			32,130,215			32,130,215

Non-GAAP Financial Information

To supplement our financial results presented in accordance with U.S. GAAP, we use non-GAAP net income, which is adjusted from our net income (loss) based on U.S. GAAP to exclude: (1) share-based compensation expenses, (2) internal investigation costs, (3) goodwill and intangible assets impairment loss, and (4) listing expenses. The non-GAAP financial information enables our management to assess our operating results without considering the impact of non-cash charges, including share-based compensation expense and impairment of good will and intangible assets, and non-recurring expenses, including listing expenses relating to our initial public offering.

Non-GAAP financial information is provided as additional information to help investors compare business trends among different reporting periods on a consistent basis and to enhance investors’ overall understanding of the historical and current financial performance of our continuing operations and prospects for the future. Non-GAAP financial information should not be considered a substitute for or superior to U.S. GAAP results. In addition, calculations of this non-GAAP financial information may be different from calculations used by other companies, and therefore comparability may be limited.

The following table sets forth our non-GAAP net income and the reconciliation of our non-GAAP net income to our U.S. GAAP net income (loss) for the periods indicated:


	For the Year Ended December 31,
	2012			2013		2014
	RMB			RMB		RMB		US$
	(in thousands)
U.S. GAAP net income (loss)		(14,473	)		26,763		227,947		36,739
Share-based compensation expenses		14,075			14,020		37,385		6,025
Impairment of goodwill		33,517			—		—		—
Impairment of intangible assets		10,910			2,613		—		—
Listing expenses		17,307			—		—		—
Internal investigation costs⁽¹⁾		—			—		2,543		410

Total non-GAAP adjustments		75,809			16,633		39,928		6,435

Non-GAAP net income		61,336			43,396		267,875		43,174

(1)

Internal investigation costs consist of legal expenses, consultancy fees and other fees incurred by our independent committee for an internal investigation relating to short seller allegations. See “Item 3. Key Information—D. Risk Factors—Risks Related to our Business—Techniques employed by manipulative short sellers may drive down the market price of our common stock.”

Summary Consolidated Balance Sheet Data


	As of December 31,
	2010		2011		2012		2013		2014
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents		104,038		187,237		128,736		249,126		349,343		56,304
Total current assets		174,560		273,267		255,469		555,454		1,146,683		184,812
Total assets		853,644		950,430		897,194		1,253,124		2,187,615		352,578
Total current liabilities		29,873		111,278		26,050		128,608		310,401		50,028
Total liabilities		119,668		154,252		57,988		148,371		333,135		53,691
Total shareholders’ equity		733,976		796,178		762,348		1,027,076		1,854,480		298,887

Selected Operating Data


	For the Year Ended December 31,
	2011		2012		2013		2014
Social Games
Number of games (as of the end of the period)		6		7		72		83
Total new registered users⁽¹⁾		12,701,493		21,460,178		113,075,858		230,785,097
Total paying user accounts⁽²⁾		809,407		303,613		7,686,498		21,125,926
ARPU⁽³⁾ (in RMB)		26.4		108.5		28.9		43.8
Single-Player Games
Number of games (as of the end of the period)		135		175		215		238
Total paying user accounts⁽⁴⁾		29,040,203		31,665,050		13,711,235		18,454,732
ARPU⁽⁴⁾ (in RMB)		4.6		3.6		4.3		14.4
Game Bundles
Number of games (as of the end of the period)		256		315		430		430
Total subscriptions⁽⁶⁾		9,584,497		5,906,564		6,141,868		3,241,815
Average revenue per subscription (in RMB)		4.6		4.5		5.1		4.1
Average monthly active users⁽⁷⁾		N/A		N/A		12,911,847		36,710,230
Average daily active users⁽⁸⁾		N/A		N/A		1,692,976		4,739,578

(1)	Represents the number of new registered users (as measured by user accounts) registered to play our social games within the relevant period.

(2)	Represents the number of users (as measured by user accounts) that have purchased in-game items for the relevant period, adjusted to eliminate double-counting of the same users.

(3)	Represents the average revenue per paying user, or ARPU.

(4)	Represents (i) the number of users that have purchased in-game items for the relevant period, adjusted to eliminate double-counting of the same users, and (ii) the total number of games purchased through app stores.

(5)	Represents the average revenue per paying user, or ARPU.

(6)	Represents the total number of monthly subscriptions to our game bundles offered through mobile network operators. A user who pays two subscription fees during one month to subscribe to different game bundles would be counted as two subscriptions.

(7)

Represents the total number of user accounts that have logged-in to or played a game during a particular month, adjusted to eliminate double-counting of the same user account. Average monthly active users for a particular period is the average of the monthly active users during that period. We started to record average monthly active users in 2013, and therefore such data is not available for 2011 and 2012.

(8)

Represents the total number of user accounts that have logged-in to or played a game during a particular day, adjusted to eliminate double-counting of the same user account. Average daily active users for a particular period is the average of the daily active users during that period. We started to record average daily active users in 2013, and therefore such data is not available for 2011 and 2012.

Exchange Rate Information

Our business is primarily conducted in China, and the financial records of our PRC subsidiaries are maintained in Renminbi, their functional currency. We also use Renminbi as our reporting currency. The assets and liabilities of our PRC subsidiaries are translated from Renminbi into U.S. dollars at the exchange rates on the balance sheet date, shareholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rate for the period. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Fluctuations in the value of the Renminbi may materially and adversely affect your investment.” On April 24, 2015, the exchange rate was RMB6.1930 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.


	Exchange Rate
	Period End		Average⁽¹⁾		Low		High
	(RMB per US$1.00)
2010		6.6000		6.7603		6.8330		6.6000
2011		6.2939		6.4475		6.6364		6.2939
2012		6.2301		6.2991		6.3879		6.2221
2013		6.0537		6.1478		6.2438		6.0537
2014		6.2046		6.1704		6.2591		6.0402
November		6.1429		6.1249		6.1429		6.1117
December		6.2046		6.1886		6.2256		6.1490
2015
January		6.2495		6.2181		6.2535		6.1870
February		6.2695		6.2518		6.2695		6.2399
March		6.1990		6.2386		6.2741		6.1955
April (through April 24, 2015)		6.1930		6.2000		6.2152		6.1927

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

Source: Federal Reserve Board

In addition, all translations from Hong Kong dollars to U.S. dollars are made for your convenience at the rate of HK$7.7531 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2014.

B.	Capitalization and Indebtedness

Not Applicable.

C.	Reasons for the Offer and Use of Proceeds

Not Applicable.

D.	Risk Factors

Risks Related to Our Business

Our new games may not be commercially successful and we may not be able to attract new players.

We cannot assure you that new games we license or develop will be commercially successful. You should not use the success of our existing games as an indication of the future commercial success of any of the games in our pipeline.

There are many factors that could adversely affect the popularity of our new games, including:

•

our ability to anticipate and adapt to future technology trends, new business models and changed game player preferences and requirements;

•

our ability to efficiently operate the game and resolve technical difficulties and player complaints;

•

our ability to plan and organize marketing and promotional activities; and

•

our ability to differentiate our new games from our existing games and other games offered by other companies.

In addition, though many new games are regularly introduced, only a relatively small number of “hit” titles accounts for a significant portion of total revenue for the industry. For example, in 2014, approximately 35.3% of our revenue was derived from Joyful Da Ying Jia and other card and board games in our “Joyful” series. If we fail to launch new games according to our timetable or at all or if our new games are not commercially successful, our business prospects and results of operations would be materially and adversely affected and we may not be able to recover our game licensing or development costs, which can be significant.

Further, many of our new games, especially social games, require significant build-up periods during which players are first introduced to the games and the rise in popularity of some games can be slow, if it happens at all. Thus, if a game that we anticipate gaining acceptance by our players fails to do so, we may not be able to realize this failure until several months after the game has been released, and if we do not introduce additional games to maintain our player base, the failure of recently introduced games to gain popularity could affect our ability to retain existing or attract new players. Further, if a build-up period coincides with the inevitable phasing-out period of our older games, the result could be a decrease in the number of total paying users or total subscriptions as well as revenue during that period.

We may not be able to retain existing players.

In order to retain players and compete against our competitors, we must continue to invest significant resources in research and development to develop new products, improve existing products and enhance player experience. We may not be able to maintain our player base if our products and services do not meet the needs of our players or are not effectively or timely marketed. We cannot guarantee that our mobile games will continue to sustain their current level of popularity, and our players may lose interest in our games over time despite our efforts to improve and upgrade our mobile games. If we are not able to maintain or extend the commercial lifespan of our mobile games, our business, prospects, financial condition and results of operations may be materially and adversely affected. Also, we have from time to time received user complaints with regards to fee collection and technical problems, among others. If we are unable to address these and other complaints in a timely manner, we may lose existing players and become unable to attract new players. Any material decrease in our existing players that is not compensated by a corresponding increase in new players could materially and adversely affect our business, financial condition and results of operations.

A substantial portion of our revenues are generated from a small number of games, and if we fail to extend the life cycle of our existing popular games or launch new popular games, we will not be able to maintain or grow our revenue and our financial results could be adversely affected.

We generate a substantial portion of our revenues from a few popular games. In 2014, our top five games contributed approximately 47.1% of our total revenues, with Joyful Da Ying Jia contributing approximately 26.9% of our total revenues. Our top games may have a finite life span and may fall out of favor with our users. As a result, we must maximize the life cycle of our popular games by developing, releasing and marketing new editions or updates that will continue to engage our users. Failing to extend the life of our existing popular games will materially and adversely affect our revenue growth and financial results. We must also identify and launch new games that will gain widespread popularity and become revenue growth drivers. This requires our substantial investment in game selection, research and development, sales and marketing and game operations. It is difficult to consistently anticipate user preference on a large scale. While we continue to invest significant resources in the launch of new games, we cannot assure you that new games, game editions or updates will be popular among our users and become profitable.

We are dependent on our ability to license new games.

We license many of our mobile games, including some of our most popular games, from third parties. In 2013 and 2014, we derived 50.9% and 52.3% of our net revenues, respectively, from games that were licensed from third parties including a small number of games that we purchased. In 2014, approximately 5.4% and 2.7% of our net revenues were derived from San Guo Weili Jiaqiang Ban and Crisis Action, respectively, both of which are social games we licensed from third parties. Choosing which games to license requires a high degree of judgment and we cannot guarantee that the games we license will generate profit. The failure of a particular licensed game may result in a significant write-down or write-off of game licensing fees.

We must maintain good relationships with our licensors to ensure the continued smooth operation of our licensed games. Additionally, we depend upon our licensors to provide technical support necessary for the operation of the licensed games, as well as updates and expansion packs that help to sustain interest in a game. Moreover, certain marketing activities often require the consent of our licensors.

Our licenses may be terminated upon the occurrence of certain events, such as a material breach by us. While the licenses with game developers generally are for a term that covers the life of the game, we may want to extend a license upon its expiration but may not be able to do so on terms acceptable to us or at all. Our licensors may also demand new revenue-sharing terms that are unacceptable to us. Our ability to continue to license our games and to maintain good relationships with our licensors also affects our ability to license new games developed by the same licensors.

We are dependent on our ability to internally develop new games.

We must continue to successfully develop new games in-house to expand our game portfolio and introduce updates and expansion packs to extend the commercial lifespans of our games. Our ability to develop successful new games will largely depend on our ability to:

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attract, retain and motivate talented game development personnel;

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minimize launch delays and cost overruns in the development of new games;

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effectively monetize mobile games without degrading the game experience for our players; and

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effectively execute our game development plans.

In-house development requires a substantial initial investment prior to the launch of a game, as well as a significant commitment of future resources to produce updates and expansion packs. Our ability to introduce successful updates and expansion packs for our games will also depend on our ability to collect and analyze user behavior data and feedback from our online community in a timely manner and to effectively incorporate features into our updates and expansion packs to improve the variety and attractiveness of our virtual items. We cannot assure you that we will be able to collect and analyze player behavior data on a timely basis or that such data will accurately reflect player behavior.

We are dependent on relationships with app stores, web platforms and social networks.

We distribute our games through a number of app stores, web platforms and social networks, including Apple’s App Store, 91.com, Baidu, Qihoo 360, Google Play, China Mobile’s app store and 9game.cn. These app stores, web platforms and social networks also serve as payment collection channels. App stores, web platforms and social networks have strong bargaining power in dealing with online game developers and operators like us. We are subject to the standard service terms and conditions of these app stores, web platforms and social networks with regard to the promotion, distribution, operation and payment methods for our online games. If any of these app stores, web platforms or social networks (i) goes out of business, (ii) discontinues its relationship with us due to any reason, such as our failure to comply with any laws or regulations in any jurisdiction where

our games are offered, (iii) limits our access to its platforms, (iv) modifies its terms of services or other policies, (v) changes its fee structure, (vi) provides more favorable terms to our competitors or develop its own games, or (vii) is forced to cease the business relationship with us due to its lack of required license or permits or other regulatory compliance issues, our business could be adversely affected.

In addition, we have benefited from these platforms’ widely recognized brand names and large player bases. If any of these app stores, web platforms and social networks loses its market position or otherwise falls out of favor among players or other factors cause its player base to stop growing or shrink, of if any of them fails to perform its contractual obligations to us, we would need to identify alternative platforms for marketing, promoting and distributing our online games, which would consume substantial resources and may not be effective or available.

We are dependent on relationships with mobile network operators to distribute and promote our games.

We use PRC mobile network operators, directly and indirectly, to distribute our products to our players. The mobile telecommunications business in China is highly concentrated, and major mobile network operators, such as China Mobile, may from time to time issue new policies or change their business practices, requesting or stating their preferences for certain actions to be taken by all mobile service providers using their networks. For example, in the past, China Mobile, the service provider for all of our game bundles, decided to decrease the number of pop-up advertisements broadcast to its users. This limited the promotion of our game bundles on China Mobile’s platform and resulted in a decline in total subscriptions for our game bundles, which adversely affected our business.

The PRC government may implement new policies or change existing policies regulating the mobile telecommunications business. Such new policies or changes may cause our revenues to decrease or our operating costs to increase. We cannot assure you that PRC mobile network operators or the PRC government will not introduce additional requirements with respect to the procedures for ordering monthly subscriptions or single-transaction downloads of our mobile games, notifications to users, the billing of users or other consumer-protection measures or adopt other policies that may require significant changes in the way we promote and sell our mobile games, any of which could have a material adverse effect on our financial condition and results of operations.

We are dependent on relationships with mobile network operators and mobile service providers to receive payment.

We have entered into agreements with mobile service providers for proceeds collection, and these service providers in turn contract with mobile network operators, such as China Mobile, China Telecom and China Unicom, who provide billing and collection services. During 2012, 2013 and 2014, 40.6% , 22.2% and 12.5%, respectively, of our mobile phone game revenues were collected through our top ten mobile service providers, the top three of which were Guizhou Shanzi Information Technology Ltd., Shenzhen Givoe Technology Co., Ltd. and Beijing Leitingwanjun Network Technology Co. Ltd. during 2012, Shenzhen Weiqite Technology Co., Ltd., Guangzhou Yicheng Computer Technology Co., Ltd. and Nanjing Zhuoxunfeng Information Consulting Co., Ltd. during 2013, and Shenzhen Weiqite Technology Co., Ltd., Beijing Shunjie Interactive Technology Co., Ltd. and Beijing Zhangzhitong Technology Co., Ltd. during 2014. The concentration of our sales through one or a few large mobile service providers and China’s dominant mobile network operators could lead to a short-term disruption in our sales if one or more of them were to reduce its offerings or cease offering our products. Such concentration also makes us more vulnerable to collection risks should one or more of these providers or operators become unable or unwilling to share the proceeds it receives with us. Also, China Mobile places content providers, including us, into different preference classes based on a series of criteria, including game performance, customer satisfaction, responsiveness and technical support, among others. Further, we have in the past been reclassified by China Mobile due to user complaints, and we may be subject to downgrades in the future. Our operations and business could be harmed if our relationships with one or more of these mobile network operators and mobile

service providers deteriorates, or if one or more of the key mobile service providers experience deterioration in their business or experiences an increase in non-payment from users, or there is any disruption in the relationship between any of these mobile service providers and mobile network operators. In addition, we rely on some mobile network operators to distribute and promote certain of our games and changes in how they distribute or promote our games could have a material and adverse effect on our results of operations and financial condition.

Furthermore, we depend on mobile network operators directly and indirectly to maintain accurate records of payments of sales proceeds by users and to collect such payments. We receive periodic statements from mobile network operators and mobile service providers that indicate the aggregate amount of fees that were charged to users for purchases of mobile game products. Our mobile service providers usually generate their periodic statements to us based on the periodic statements they receive from the mobile network operators. We generally offer mobile network operators and service providers credit terms ranging from 30 to 60 days. Receivables from China Mobile in terms of accounts receivable balances accounted for 8.0%, 28.0% and 10.4% of our total trade receivables as of December 31, 2012, 2013 and 2014, respectively. Receivables from our top ten mobile service providers in terms of accounts receivable balances accounted for 71.1%, 9.8% and 26.0% of our total trade receivables as of December 31, 2012, 2013 and 2014, respectively. Failure to timely collect our receivables from mobile network operators or mobile service providers may adversely affect our cash flows. In addition, if the mobile network operators or mobile service providers demand increase to their share of revenues under our revenue-sharing arrangement, our results of operation may be materially and adversely affected.

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

Enhancing the awareness of our mobile game brands among players is a part of our growth strategy. We believe our future success depends on, among other things, market recognition and acceptance of, as well as our ability to promote, our CMGE brand. We market our mobile games and promote our brands through advertising and promotional programs such as online advertising. Our ability to sell our products and enhance recognition of our brands depends in part upon the success of these programs. There is no assurance that we will be able to effectively promote or develop our brand and if we fail to do so, our growth may be adversely affected. In addition, negative publicity or disputes regarding our brands, offerings, company or management could materially and adversely affect public perception of our brands. Many of the factors that affect our brands may be outside our control, such as industry participants, including handset companies and content providers working with us, tainting our brand because of the concern over the quality of such industry participants’ products and services. Any impact on our ability to effectively promote our brands or any significant damage to our brands’ image could materially and adversely affect our sales, profits and prospects.

Our efforts to expand our proprietary publishing platform may not be successful.

A component of our growth strategy is to create a comprehensive gaming platform where players can download our games without going through third-party intermediaries. In furtherance of this strategy, we have developed our Game Center application through which we publish our self-developed and licensed games for Android-based smartphones. Our Game Center application and our games are also available for download on various websites that we operate. We cannot guarantee that we will be successful in developing or expanding our proprietary publishing platform and players may choose to download games from other, more established publishing platforms.

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

We have a limited operating history under our current business model upon which to evaluate the viability and sustainability of our business. CMGE was incorporated in the Cayman Islands as an exempted limited liability company on January 20, 2011 by V1 Group as its wholly-owned subsidiary. Our business was formed through three separate acquisitions undertaken by V1 Group in 2009 and 2010 and was operated by V1 Group

through various subsidiaries and our variable interest entity, or VIE, until our reorganization effective August 23, 2011. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries, such as the mobile game industry in China, and companies that have been formed through the combination of previously separate businesses. Some of these risks and uncertainties relate to our ability to:

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maintain and extend our position as the leading mobile game publisher in China;

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continue to offer new and creative mobile games to attract and retain a larger player base and increase user activity;

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maintain and expand our distribution network; and

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upgrade our technology and infrastructure to support increased traffic and expanded offerings of products and services.

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

We generate a majority of our revenues from sales of virtual items. If we are unable to effectively market and price these virtual items, or if this business model ceases to be commercially successful, our results of operations, financial condition and business prospects could be materially and adversely affected.

Aside from game bundles, the majority of our games are free to play, and we generate a majority of our revenues from sales of virtual items, including virtual tokens and other virtual items. By allowing players to play our games without initial costs, this business model enables us to quickly attract new players to experience our games and then gradually develop their interest in purchasing our virtual items. However, the success of this business model largely depends upon whether we can attract game players to play our games and whether we can successfully encourage more players to purchase virtual items and more paying players to increase their in-game purchases. It is possible that we may not be able to market and price our virtual items effectively, or we might fail to accurately identify and introduce new and popular virtual items or price them properly. In addition, this business model may cease to be commercially successful. There is no assurance that a sufficiently broad base of game players will continue to accept this model or that a new, competing business model will not emerge. If we fail to continue to monetize our player base through sales of in-game virtual items, our business, financial condition and prospects may be materially and adversely affected.

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

The mobile game industry in China is highly competitive with low barriers to entry and we expect more companies to enter this industry and a wider range of games to be introduced. The industry is characterized by the frequent introduction of new products and services, short product life cycles, evolving industry standards, rapid adoption of technological and product advancements, as well as price sensitivity on the part of players. In China, we compete directly with:

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other mobile game publishers;

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other mobile game developers; and

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large China-based Internet companies that may develop and operate their own mobile games.

Some of our games are made available to players in countries outside of China through our cooperation with mobile network operators abroad, and various app stores. Our mobile game products offered internationally are also subject to intense competition. In addition, we face competition from other media formats and mobile applications and content, such as Internet-based games, mobile music, mobile books and social network services.

Some of our existing and potential competitors have significantly greater financial, technological and marketing resources and stronger relationships with industry participants than we do. Some of our competitors or potential competitors, especially major international mobile game developers, have greater mobile game development experience and resources than we have. If there are new entrants in the market or intensified competition among existing competitors, we may have to provide more incentives to industry participants, such as distributors and agents, which could adversely affect our profitability. If we fail to compete effectively, our market share could decrease and our results of operations could be materially and adversely affected.

Our ability to generate revenues could suffer if the PRC market for mobile games does not develop as anticipated.

The mobile games market in China has evolved rapidly in recent years, with developments such as the introduction of new business models, the development of user preferences, the increasing popularity of smartphones over feature phones, market entry by new competitors and the adoption of new strategies by existing competitors. We expect each of these trends to continue, and we must continue to adapt our strategy to successfully compete in our market. There are numerous other technologies and business models in varying stages of development, such as portable tablet computers, netbooks or other mobile Internet handsets involving fourth generation mobile technologies, which could render certain current technologies or applications obsolete. Accordingly, it is extremely difficult to accurately predict user acceptance and demand for our various existing and potential new offerings, and the future size, composition and growth of this market. Furthermore, given the limited history and rapidly evolving nature of our market, we cannot predict the price that players will be willing to pay for our mobile games or whether players will have concerns over security, reliability, cost and quality of service associated with mobile games. If acceptance of our mobile games is different than anticipated, our ability to maintain or increase our revenues and profits could be materially and adversely affected.

As social games are expected to account for a large portion of our revenues, any adverse developments relating to such content may adversely affect our results of operations.

We anticipate that revenue generated from our social games will continue to account for a large portion of our revenues in the foreseeable future. We are enhancing our efforts in developing and marketing social games because of the expected growth of the social game market. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

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any reduction in or failure to grow the player base of the existing social games;

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any decrease in popularity of the existing social games in the market or any decrease in their purchases due to intensifying competition or other factors;

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any failure to make quality upgrades, enhancements or improvements to social games in a timely manner in response to user preferences;

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any failure of our games to reach a critical mass of players to become popular;

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any failure to develop and launch new social games that appeal to players;

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any failure to efficiently operate social games and provide effective customer service;

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any failure to comply with regulatory requirements with respect to social games; or

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any breach of related software security, prolonged server interruption due to network failures, hacking activities or other factors or any other adverse developments relating to social games.

In addition, we currently derive the majority of our revenue from social games even though the number of social games in our portfolio is far less than the number of single-player games. As we continue to shift to licensing and developing a smaller number of higher revenue-generative games, we are exposed to concentration risks in the event that certain of these social games are not successful.

Our strategy of acquiring and investing in complementary businesses, assets and technologies may result in operating difficulties, dilution to our investors and other negative consequences.

As part of our business strategy, we have successfully acquired, and intend to continue to selectively acquire and invest in, businesses, assets and technologies that complement our existing business, including (i) acquisitions of companies, businesses, intellectual property rights, and other assets, (ii) minority investments in strategic partners, and (iii) investments in new interactive mobile game businesses. Acquisitions and investments involve uncertainties and risks, including:

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accurately evaluating potential acquisition targets and identifying acquisition targets with operations complementary to our existing operations;

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potential ongoing financial obligations and unforeseen or hidden liabilities;

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retaining key employees and maintaining the key business relationships with players of the businesses we acquire;

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failure to achieve the intended objectives, benefits or revenue enhancement;

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costs and difficulties of integrating acquired businesses and managing a larger business;

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the need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management and timely reporting;

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the possibility that, before the acquisition or investment, we will not discover important facts during due diligence that could have a material adverse impact on the value of the businesses we acquire or invest in;

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significant accounting charges resulting from the completion and integration of a sizeable acquisition and increased capital expenditures;

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the possibility that a change of control of a company we acquire triggers a termination of contractual or intellectual property rights important to the operation of its business; and

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diversion of resources and management attention.

Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. In addition, any such acquisition or investment may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. Furthermore, if we use our equity securities to pay for acquisitions, we may dilute the value of the ADSs and the underlying Class A ordinary shares. Our shareholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends.

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

The mobile applications industry is subject to rapid technological change, which requires us to anticipate well in advance, which technologies we must implement and take advantage of in order to make our mobile game products competitive in the market. We also need to invest significant financial resources in research and development to keep pace with technological advances in order to make our technologies, product offerings and development capabilities competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our development results. Our expenditures on research and development may not generate commensurate benefits. Given the fast pace with which mobile games technology has been and will continue to develop, we may not be able to timely improve our technologies in an efficient and cost-effective manner, or at all. New technologies in our industry could render the technologies and product offerings that we are developing or expect to develop in the future obsolete or uncompetitive, thereby potentially resulting in a decline in our revenues and market share.

Undetected programming errors or flaws in our mobile game products could harm our reputation or decrease market acceptance of our products.

Our mobile games are subject to frequent improvement and updates and may contain errors or flaws that may become apparent only after the updated applications are accessed by mobile users, particularly as we launch new updates under tight time constraints. From time to time, our players may inform us of programming flaws affecting their experience, and we are generally able to resolve such flaws promptly. However, if for any reason, programming errors or flaws are not resolved in a timely fashion, we may lose some of our players and our revenues will be affected negatively, and our reputation and market acceptance of our mobile games may also be harmed. In addition, the PRC government has promulgated rules and regulations targeting mobile service providers that charge for applications and other content without user consent. If a programming error or flaw in our products inadvertently charges players without consent, we may be subject to administrative penalties and fines.

Network interruptions caused by system failures or other internal or external factors may lead to player attrition and revenue reduction and harm our business and reputation.

Any failure to maintain the satisfactory performance, reliability, security and availability of our network and computer infrastructure may cause significant harm to our reputation and our ability to attract and maintain players. We have experienced server interruption lasting from several minutes to a few hours. Any server interruptions, break-downs or system failures, including failures which may be attributable to events within or outside our control that could result in a sustained shutdown of all or a material portion of our services, could adversely impact our ability to service our players and lead to player attrition and revenue reduction. Our network systems are also vulnerable to damage from computer viruses, fire, flood, earthquake, power loss, telecommunications failures, computer hacking and similar events.

The growth of our business may be adversely affected due to breaches of our security measures and unintended disclosures of our intellectual property or our customer data.

As we conduct our business on mobile handsets only, we are collecting and storing an increasing amount of customer data. We rely on proprietary encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential user information, such as user names and passwords. It is possible that our security controls over customer data may not prevent the improper disclosure of personal information. A party who is able to circumvent these security measures could misappropriate proprietary information or cause interruptions in our operations. A security breach that leads to disclosure of customer account information (including mobile numbers or other personal information) could harm our reputation and subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. We may be required to expend significant capital and other resources to prevent such security breaches or to alleviate problems caused by such breaches. We may also lose current or potential players of our mobile games that require the collection of customer data because of the perception that we cannot adequately protect our players’ privacy. Additionally, our business operation may be harmed by players’ concerns over playing games on their mobile phones. For instance, malware has been disguised as popular mobile games on Android devices. The malware will subscribe to the paid services without user’s consent thus resulting in fraudulent charges to players. Concerns over the security and privacy of user information may inhibit the wireless business generally, and our mobile games in particular. There can be no assurance that our security measures will prevent security breaches or that players’ interest in playing mobile games would continue if we experienced problems with malware. Failure to prevent security breaches or players’ concerns over mobile phone malware may have a material adverse effect on our business, prospects, financial condition and results of operations.

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

In addition to collection through China Mobile and mobile service providers, currently a large portion of our revenues is collected through payment processing agents, who help us collect sales proceeds through third-party

payment channels such as prepaid cards and bank remittances. In transactions utilizing third-party payment channels, secured transmission of confidential information, such as players’ card numbers and expiration dates, personal information and billing addresses, over wireless networks, the Internet and/or third-parties’ databases, is essential to maintain consumer confidence. We do not have control over the security measures of third-party payment channels and we cannot assure you that their security measures are adequate or will be adequate with the expected increased usage of their payment channels. Security breaches of these payment channels could expose us to litigation and possible liability for failure to secure customer transaction data and could harm our reputation and ability to attract players and encourage players to pay through these third-party payment channels.

Changes or adjustments we make to our existing or new games may not be well received by our game players.

As we develop new games or introduce updates and expansion packs to our existing games, we closely monitor our game players’ tastes and preferences and may introduce or change certain game features or game play styles to make our games more attractive. We cannot assure you that these changes or adjustments will be well received by our game players, who may decide not to play our new games or cease playing our existing games. As a result, any changes or adjustments we make to existing or new games may adversely impact our revenues and business prospects.

Our business is subject to the risks associated with international operations.

As of December 31, 2014, we operated ten games in overseas jurisdiction, and plan to increase this number in the future. Expanding our business internationally exposes us to a number of risks, including:

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fluctuations in currency exchange rates;

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our ability to select the appropriate geographical regions for international expansion;

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our ability to localize games and adapt them to local preferences;

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protecting our intellectual property rights overseas and managing the related costs;

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receiving payments from our games;

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compliance with different legal regimes;

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difficulty in identifying appropriate partners and establishing and maintaining good cooperation relationships with them;

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difficulty in understanding local market and culture; and

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increased costs associated with doing business in foreign jurisdictions.

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

We rely on a small portion of our total players for nearly all of our revenue.

Only a small portion of all of the players who play our games are paying players. During the year ended December 31, 2014, we had 230.8 million new registered users of social games but only 21.1 million paying users of social games. In order to sustain our revenue levels, we must attract, retain and increase the number of players or more effectively monetize our players. We must devote significant resources to retain our players’ interest in our games and attract them to our other games. If we fail to grow or sustain the number of our players, or if the rates at which we attract and retain players declines or if the average amount that our players pay declines, our business may not grow and our financial results will suffer.

Our success depends on the continuing and collaborative efforts of our management team and other key personnel, and our business may be harmed if we lose their services.

Our future success depends heavily upon the continuing services of our key management team. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for management and key personnel is intense, the pool of qualified candidates is limited, and we may not be able to retain the services of our executives or key personnel, or attract and retain experienced executives or key personnel in the future. If any of our executives or other key personnel joins a competitor or forms a competing company, we may lose players, distributors, know-how and key personnel. Each of our executive officers and key employees has entered into an employment agreement with us that contains confidentiality provisions. If any disputes arise between any of our executives or key personnel and us, we cannot assure you the extent to which any of these agreements may be enforced.

We rely on highly skilled personnel. If we are unable to retain or motivate them or hire additional qualified personnel, we may not be able to grow effectively.

Our performance and future success depend on the talents and efforts of highly skilled individuals. We will need to continue to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in the mobile games industry for qualified employees is intense. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees. As competition in the mobile games industry intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel. While our game development engines help protect us from potential interruptions in our operations due to loss of development personnel, if we do not succeed in attracting additional highly skilled personnel or retaining or motivating our existing personnel, we may be unable to grow effectively.

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

We rely on a combination of copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights. As of December 31, 2014, we had registered 215 copyrights with the State Copyright Bureau of the PRC, for software we developed or acquired from third parties, and 25 trademarks, including the “CMGE” trademark and the “KKFun” trademark. The protection of intellectual property rights in China may not be as effective as those in the United States or other countries. We have in the past discovered some players had illegally modified our games so that they could access our games for free. The steps we have taken may be inadequate to prevent the misappropriation of our technology or unauthorized use of our brands or products. Reverse engineering, unauthorized copying or other misappropriation of our technologies, or unauthorized access of our products could enable third parties to benefit from our technologies or products without compensating us. Moreover, unauthorized use of our technology could enable our competitors to offer products and services that are comparable to or better than ours, which could harm our business and competitive position. From time to time, we may have to enforce our intellectual property rights and brands through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

Third parties may claim that we infringe their proprietary rights, which could cause us to incur significant legal expenses and prevent us from promoting our products and services.

From time to time we may receive claims that we have infringed the intellectual property rights of others. While we are currently unaware of any unresolved claims, any such claim, with or without merit, could result in costly litigation and distract our management from day-to-day operations. If we fail to successfully defend against such claims, we could be required to make unavailable or redesign our mobile games, pay monetary

amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our players. Any royalty or licensing arrangements that we may seek in such circumstances may not be available to us on commercially reasonable terms or at all. Also, if we acquire technology to include in our products from third parties, our exposure to infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of such technology. This exposure to liability could result in disruptions to our business that could materially and adversely affect our operating results.

If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements.

We are subject to reporting obligations under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and related rules require a public company to include a management report on the company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, under Section 404(b) of Sarbanes-Oxley, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we cease to qualify as an “emerging growth company” under the Securities Act of 1933, or the Securities Act, which may be up to five fiscal years following the date of the September 2012 listing of our ADSs.

In the preparation of the consolidated financial statements for the year ended December 31, 2014, we identified a material weakness in our internal control over financial reporting. The material weakness identified was identical to the one identified during the audit of our consolidated financial statements for the years ended December 31, 2011, 2012 and 2013. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of our company’s financial statements will not be prevented, or detected and corrected on a timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, effectively prevent fraud and operate as a public company.

The material weakness relates to insufficient personnel with U.S. GAAP expertise in the preparation and review of the financial statements and related disclosures in accordance with U.S. GAAP and Securities and Exchange Commission, or SEC, requirements. We have taken initiatives to improve and will continue to strengthen our internal control over financial reporting and disclosure controls. For details on these initiatives, please see “Item 5. Operating and Financial Review and Prospects—Internal Control Over Financial Reporting.” However, the implementation of these initiatives may not fully address the material weakness in our internal control over financial reporting. In addition, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to employ significant resources to maintain a financial reporting system that satisfies our reporting obligations. Our failure to remediate the material weakness or our failure to discover and address any other material weaknesses or deficiencies may result in inaccuracies in our financial statements or delay the preparation of our financial statements. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs, may be materially and adversely affected. Ineffective internal control over financial reporting could also expose us to increased risk of fraud or misappropriations of corporate assets and subject us to potential delisting from the stock exchange on which the ADSs are listed, regulatory investigations or civil or criminal sanctions.

If we are required to write down goodwill and other intangible assets, our financial condition and results may be materially and adversely affected.

When we acquire a business, a substantial portion of the purchase price of the acquisition is generally allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the amounts assigned to the fair value of the

assets acquired and the liabilities assumed of acquired businesses. As of December 31, 2014, goodwill represented RMB564.8 million (US$91.0 million), or 30.4% of our total shareholders’ equity, and other net intangible assets represented RMB212.6 million (US$34.3 million), or 11.4% of our total shareholders’ equity. Management performed impairment assessment annually and we did not recognize any impairment loss of intangible assets in 2014.

Under current accounting standards, if we determine that goodwill or intangible assets are further impaired, we will be required to write down the value of such assets and recognize corresponding impairment charges. We may make additional acquisitions in the future, and if we do so, goodwill and intangible assets may comprise a significant percentage of our shareholders’ equity. As such, any write-down related to such goodwill and intangible assets may adversely and materially affect our shareholders’ equity and financial results.

We may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all.

To grow our business and remain competitive, we may require additional capital. Our ability to obtain additional capital is subject to a variety of uncertainties, including:

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our future financial condition, results of operations and cash flows;

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general market conditions for capital raising activities by companies offering Internet and mobile products and services; and

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economic, political and other conditions in China and internationally.

We may be unable to obtain additional capital in a timely manner or on acceptable terms or at all. In addition, our future capital needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in 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 or our ability to pay dividends to our shareholders.

Techniques employed by manipulative short sellers may drive down the market price of our common stock.

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometimes known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog, or blogging, have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers who have limited trading volumes and are susceptible to higher volatility levels than large-cap stocks, can be particularly vulnerable to such short seller attacks. These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission, or the SEC and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed short sellers will continue to issue such reports.

We have been in the past and may in the future be the subject of short seller attacks. While we intend to strongly defend our public filings against any short seller attack, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. In addition, we have incurred in the past and may in the future incur costs relating to internal investigations relating to as well as in defending against such attacks. Investors should also be aware that in light of the relative freedom to operate that such persons enjoy, should we be targeted for such an attack, our common stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

We have been named as a defendant in a putative shareholder class action lawsuit that could have a material adverse impact on our business, financial condition and results of operations.

We will have to defend against the putative class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings,” including any appeals of such lawsuits should our initial defense be unsuccessful. We intend to vigorously defend ourselves against the claim, although, considering the preliminary stage of this lawsuit, there can be no assurance as to the probability of success. We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these lawsuits. An unfavorable outcome from the lawsuits, including any plaintiff’s appeal of the judgment in these lawsuits, could have a material adverse effect on our business, financial condition and results of operations. The litigation process may utilize a material portion of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. There can be no assurance that we will prevail in any such appeal and any adverse outcome of these cases could have a material adverse effect on our business or results of operations. In addition, we may be subject to putative class action lawsuits in the future and we cannot be certain whether such claims will succeed in being certified.

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

We maintain various insurance policies to safeguard against risks and unexpected events for our properties. However, as the insurance industry in China is still in an early stage of development, insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance, key-man life insurance, or insurance policies for certain of our properties. Any disruption in our network infrastructure or business operations, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources. Our insurance coverage may not be sufficient to prevent us from any loss and there is no certainty that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.

Our current ineligibility to use a Registration Statement on Form F-3 may affect our ability to access the public markets quickly to raise debt or equity capital.

As a result of the fact that we have amended our Form 20-F to correct an Item 15 disclosure deficiency, we are ineligible to register sales of our securities on the SEC’s short-form registration statement, Form F-3. We will not be eligible to use Form F-3 to conduct registered public offerings until our filings with the SEC have been timely made for 12 full months, assuming the other eligibility criteria are satisfied at that time. While we are ineligible to use Form F-3, which is faster and less costly to prepare, we will be required to file a long-form registration statement in order to effect a registered public offering. This will negatively affect our ability to access the public capital markets quickly and flexibly until we are once again eligible to use Form F-3. Furthermore, certain investors, for whom the ability to resell their shares relatively soon after they acquire them is important, may only be willing to participate in private financings by us if we can register their shares using a Form F-3. Therefore, our ineligibility to use Form F-3 may limit our ability to raise additional capital from such investors.

Risks Related to Our Corporate Structure

As our largest shareholder, V1 Group controls the outcome of our shareholder actions, and may thereby limit our ability to undertake any corporate action that requires shareholder approval, such as obtaining additional financing or making acquisitions.

V1 Group holds, directly or indirectly, 43.3% of our outstanding ordinary shares, including all of our Class B ordinary shares, representing 78.6% of the voting power of our outstanding ordinary shares. Its shareholding gives it the power to pass ordinary resolutions, thereby giving V1 Group effective control over a majority of our corporate actions (including appointment of directors) and, for so long as it holds more than two-thirds of the voting power of our outstanding ordinary shares, to pass special resolutions, which are required to effect important corporate actions including removing directors, approving a merger, changing our name, amending our constitutional documents and winding up our company. Even if V1 Group ceases to own or control more than 50% of our shares or voting power of our outstanding shares, for so long as it continues to have a substantial equity interest in us, it may, as a practical matter, be in a position to control many or all of our actions. Significant corporate actions, including the incurrence of material indebtedness, the issuance of a material amount of equity securities or significant strategic changes in our business, may be effected by our board of directors without the consent of our shareholders. V1 Group might oppose any action that would dilute its equity interest in us, and may be unable or unwilling to participate in our future financings. V1 Group, as our majority shareholder with the right to appoint directors to our board of directors, could block any such action and thereby materially harm our business or prospects. In addition, if V1 Group provides shareholder support to us in the form of shareholder loans or provides credit support by guaranteeing our obligations, they may become our creditors with different interests than shareholders with only equity interests in us. The concentration of controlling ownership of our shares may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of the ADSs.

We may have conflicts of interest with V1 Group and, because of V1 Group’s controlling ownership interest in us, may not be able to resolve such conflicts on terms favorable to us.

Conflicts of interest may arise between V1 Group and us in a number of areas relating to our past and ongoing relationships. Potential conflicts of interest that we have identified include, among others, competing for employee recruiting and retention and allocation of business and investment opportunities. There may be conflicts of interest arising from the ownership of V1 Group stock and options by members of our board and management, notwithstanding the duty of loyalty these persons owe us. Also, V1 Group may decide to sell all or a portion of the shares that it holds in us to a third-party and give that third-party substantial influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our stakeholders, including our employees or our public shareholders.

Our chairman, Lijun Zhang, is also the founder, chairman and a major shareholder of V1 Group. V1 Group may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including its stake in us. These decisions may be different from the decisions that we would have made on our own and may not be aligned with the interests of our shareholders. We may not be able to resolve any potential conflicts and, even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

On October 21, 2011, we entered into a non-compete agreement with V1 Group under which V1 Group agreed not to, among other things, engage, or assist any of its other subsidiaries in engaging, in the mobile game development and operation, and handset design business. However, so long as V1 Group continues to control us, we may not be able to bring a legal claim against V1 Group in the event of contractual breach, notwithstanding our contractual rights under the non-compete agreement. Even if the non-compete agreement is enforced, we may not receive adequate remedies from courts in China or elsewhere.

To comply with PRC laws and regulations limiting foreign ownership of telecommunication and online cultural businesses, we conduct a substantial portion of our businesses through our VIEs in China by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with applicable regulations, our business could be materially and adversely affected.

The PRC government restricts foreign investment in telecommunication, electronic and Internet publishing and online cultural businesses. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Investments”, “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Telecommunications Industry” and “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Online Games and Cultural Products.” In light of these restrictions, we conduct a significant portion of our business activities through our VIEs, Guangzhou Yingzheng Information Technology Co., Ltd., or Yingzheng and Shenzhen Lanyue Internet Technology Co., Ltd., or Lanyue. Although we do not have any equity interest in our VIEs, we are able to exercise effective control over our VIEs and receive substantially all of the economic benefits of its operations through various contractual arrangements with Yingzheng, Lanyue and their respective registered shareholders. For a description of these contractual arrangements, see “Item 4. Information on the Company—A. History and Development of the Company—Our Contractual Arrangements with our VIEs.”

On July 13, 2006, the Ministry of Industry and Information Technology of the PRC, or the MIIT, issued the “Circular on Strengthening Administration of Foreign Invested Value-Added Telecommunications Business Operation,” or the MIIT Circular. The MIIT Circular emphasizes that a foreign investor planning to invest in the PRC value-added telecommunications sector must set up a foreign-invested enterprise and apply for the applicable telecommunications business operating license. Further, a domestic value-added telecommunications services provider cannot lease, transfer or sell any telecommunications business operating license to a foreign investor, or provide resources, sites, facilities or other conditions to a foreign investor for its illegal operation of a telecommunications business in China. Due to a lack of interpretative materials from the regulators, it is currently unclear what impact the MIIT Circular will have on us or other companies that have adopted similar corporate and contractual structures.

On September 28, 2009, General Administration of Press and Publication, or GAPP, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications jointly published the Notice Regarding the Consistent Implementation of the “Stipulations on Three Provisions of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Internet Games and the Examination and Approval of Imported Internet Games,” or the GAPP Notice. The GAPP Notice prohibits foreign investors from participating in online game operating businesses through foreign-invested enterprises in China, and from controlling and participating in such businesses of domestic companies indirectly through other forms of joint ventures or contractual or technical support arrangements. As no detailed interpretation of the GAPP Notice has been issued to date, it is not clear how the GAPP Notice will be implemented. Furthermore, as some other primary government regulators, such as the Ministry of Commerce, or MOFCOM, Ministry of Culture, or MOC, and MIIT, did not join GAPP in issuing the GAPP Notice, the scope of the implementation and enforcement of the GAPP Notice remains uncertain. According to Regulations on the Main Functions, Internal Organization and Staffing of GAPP issued by the General Office of the State Counsel on July 11, 2008 and its interpretation circulars, GAPP is authorized to approve online games before their launch on the Internet, while the MOC is authorized to administer and regulate the overall online game industry. Once an online game is launched on the Internet, it will be regulated only by the MOC, and if an online game is launched on the Internet without the prior GAPP approval, the MOC is the authority responsible for investigating the matter. We thus believe GAPP is unlikely to take action against our contractual arrangements with our VIEs based solely on the GAPP Notice and without participation from other PRC governmental authorities, including the MOC. Effective on March 22, 2013, GAPP and the State Administration of Radio, Film and Television merged into one entity, namely, the State General Administration of Press, Publication, Radio, Film and Television, or, SAPPRFT, which oversees China’s press, publication, radio, film and TV sectors.

In January 2015, MOFCOM published a draft of the proposed Foreign Investment Law. If enacted, the draft Foreign Investment Law would replace the existing laws regulating foreign investment in China and harmonize the regulations governing both FIEs and PRC domestic entities. The draft Foreign Investment Law expressly includes “control through contractual arrangements” as a form of foreign investment subject to its regulation. It introduces the concept of a “negative list” which contains a catalogue of areas prohibiting foreign participation and a catalogue of areas subject to restrictions on foreign participation. Foreign investors are not allowed to invest in the “prohibited” category and are required to obtain entry clearances for investing within the “restricted” category. When applying for such entry clearances in respect of investments in “restricted” areas, the foreign investors which are controlled by PRC individuals or entities may apply for treatment as PRC investors. There are significant uncertainties as to the draft Foreign Investment Law, including, the content of its final form and the timing of its adoption and implementation. Because the negative list has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment and, in particular, whether the value-added telecommunications business, electronic and internet publishing and internet culture business will fall within the prohibited or restricted categories. Furthermore, the draft law is silent as to how existing VIEs and related contractual arrangements will be treated. The draft Foreign Investment Law, if adopted in its current form, could prevent certain FIE’s from continuing to conduct their operations in restricted industries through contractual arrangements.

Our PRC legal advisor, Guantao Law Firm, is of the opinion that (i) our ownership structure is in compliance with PRC law; (ii) the contractual arrangements are valid and legally binding and enforceable and do not result in any violation of PRC law; and (iii) there are, however, uncertainties regarding the interpretation and application of the MIIT Circular and GAPP Notice or any other current and future PRC laws and regulations and there can be no assurance that the PRC regulatory authorities that regulate the online game industry, in particular, the MIIT and SAPPRFT, the PRC courts or arbitration institutions will ultimately take a view that is consistent with the opinions of our PRC legal adviser. If we are found to be in violation of the MIIT Circular, the GAPP Notice or any other PRC laws or regulations, or if we fail to obtain or maintain any of the required permits or approvals under our VIE arrangements, the relevant regulatory authorities would have broad discretion in dealing with such violations, including revoking the business and operating licenses of our VIEs, levying fines, confiscating our income or the income of our VIEs to the extent that such income is related to the violation, discontinuing or restricting all or any portion of our operations or the operations of our VIEs or taking other regulatory or enforcement actions. Any of these events could materially and adversely affect our business, financial condition and results of operations.

Should our ownership structure under the current VIE arrangement be challenged by the PRC authorities while the foreign investment restrictions over the telecommunications sector remain in effect, we would need to restructure our ownership structure. In that case, we may still be able to (i) develop mobile games in China and own the copyright for those games; (ii) grant to our VIEs, or any other Chinese company that possesses necessary regulatory licenses, copyright licenses to operate our games in China and collect royalties from our VIEs or such other Chinese company; (iii) use our technology, expertise and experience to provide technical services and support to Yingzheng in exchange for service fees; and (iv) require the registered shareholders of our VIEs to pledge their equity interests in our VIEs in favor of us to secure our VIEs performance under these agreements. However, following such a restructuring we would not be able to adopt or rely on VIE arrangements and would thus be unable to exercise effective control over our VIEs. Such a loss of control could result in disruptions in our business that could materially and adversely affect our financial condition and results of operations. Further, we may not be able to consolidate our VIEs’ financial results in our consolidated financial statements in accordance with U.S. GAAP due to the lack of sufficient control over our VIEs after such restructuring, which could materially and adversely affect our financial condition and results of operations.

Our contractual arrangements with our VIEs and their respective shareholders may not be as effective in providing control over the entity as direct ownership.

In 2012, 2013 and 2014, our VIEs and their respective subsidiaries contributed in aggregate 19.0%, 43.6% and 86.9% of our total net revenues, respectively. Our contractual arrangements with our VIEs and their

respective shareholders may not be as effective in providing us with control over our VIEs as direct ownership. If our VIEs and their respective shareholders fail to perform their obligations under these contractual arrangements, we may incur substantial costs and resources enforcing these arrangements, and rely on legal remedies available under applicable PRC laws, including seeking specific performance and claiming damages. In particular, if shareholders of our VIEs refuse to transfer their equity interests to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may need to initiate legal actions to compel them to fulfill their contractual obligations.

If the applicable PRC authorities invalidate our contractual arrangements for violation of PRC laws, rules and regulations, or our VIEs or their respective shareholders terminate the contractual arrangements or fail to perform their obligations under these contractual arrangements, part of our mobile game businesses in China would be materially disrupted, and the value of our ordinary shares would decrease substantially. Furthermore, if we fail to renew these contractual arrangements upon their expiration and the relevant foreign investment restrictions remain effective, we would not be able to continue our mobile game business.

In addition, if our VIEs declare bankruptcy or if all or part of their assets become subject to court injunctions or asset freezes or liens or rights of third-party creditors, we may be unable to continue our business, which could materially and adversely affect our business, financial condition and results of operations. If our VIEs undergo a voluntary or involuntary liquidation proceeding, their respective shareholders or unrelated third-party creditors may claim rights to some or all of its assets and we would have to rely on their registered shareholders with whom we have contractual arrangements to protect our rights. The occurrence of any of these events may hinder our ability to operate part of our mobile game business, which could in turn materially harm our business and our ability to generate revenues and cause the market price of our ADSs to decline significantly.

The shareholders of our VIEs may have potential conflicts of interest with us, which may adversely affect our business.

The registered shareholders of Yingzheng are Yongchao Wang, De Liang and Feng Zheng, who are each directors and employees of the company. The registered shareholders of Lanyue are Ken Jian Xiao and Xiongfei Liu. Ken Jian Xiao is our chief executive officer and Xiongfei Liu, who holds a 1% interest in Lanyue, is an independent third-party. Conflicts of interest may arise between these shareholders’ duties to us and our VIEs. If such conflicts arise, these shareholders may not act in our best interests and conflicts of interest may not be resolved in our favor. In addition, these shareholders may breach or cause our VIEs to breach or refuse to renew its existing contractual arrangements that allow us to exercise effective control over it and to receive economic benefits from it. If certain shareholders of our VIEs do not comply with their fiduciary duties to us as our designated directors, or if we cannot resolve any conflicts of interest or disputes between us and such shareholders or any future beneficial owners of our VIEs, we would have to rely on legal proceedings to remedy the situation, which could result in disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.

Further, these remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our VIEs and their shareholders.

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

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within five years (or ten years in special cases) after the

taxable year when the arrangements or transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements with our VIEs and their respective shareholders were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment in taxation. In addition, the PRC tax authorities may impose interest on late payments on our VIEs for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if our VIEs’ tax liabilities increase significantly or if they are required to pay interest on late payments.

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

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698 and the Announcement on Several Enterprise Income Tax Issues Concerning Indirect Assets Transfer by Non-resident Enterprises, or SAT Circular 7, issued by the PRC State Administration of Taxation, or SAT on December 10, 2009 and February 3, 2015 respectively, if a non-resident enterprise indirectly transfers a “PRC taxable asset” through an arrangement without reasonable commercial purpose but rather to avoid the PRC EIT, the nature of the transaction shall be redefined and the transaction shall be treated as a direct transfer of the PRC taxable asset subject to the PRC EIT. The PRC taxable assets include assets of establishments or places of business in the PRC, real properties in the PRC and equity investments in PRC resident enterprises. The PRC tax authorities will comprehensively consider all arrangements relating to an indirect transfer transaction when determining whether the transaction has a reasonable commercial purpose. SAT Circular 7 lists certain criteria that should be taken into account for judging reasonable commercial purpose, and provides safe harbors including transfers in the public securities market and intra-group restructurings meeting the specified conditions. Under SAT Circular 7, the parties to an indirect equity transfer and the underlying PRC enterprise may voluntarily report to the tax authorities in respect of the transaction but are obligated to file relevant materials if requested by the authorities. The entity or individual obligated to pay the consideration for the equity transfer to the seller has the obligation to withhold the applicable PRC EIT. Failure to withhold or pay the applicable EIT in accordance with SAT Circular 7 may attract penalties imposed by the PRC tax authorities.

SAT Circular 7 applies to the transactions taking place before its issuance in respect of which the tax procedures have not been finally settled. We have not reported and it is not clear that we are required to report our offshore restructuring transactions, which were completed prior to the distribution, to the PRC tax authorities. It is possible that the PRC tax authorities would pursue our offshore enterprise shareholders to conduct a filing regarding our offshore restructuring transactions and request our PRC subsidiaries to provide such disclosures. If such transactions are deemed to lack of reasonable commercial purposes, we and our non-resident investors would be at risk of being taxed under SAT Circular 7 and may be required to expend valuable resources to comply with SAT Circular 7 or to establish that we should not be taxed under Circular 698, which may have a material adverse effect on our financial condition and results of operations or such non-resident enterprise investors’ investments in us.

MOFCOM may determine that our contractual arrangements are subject to their national security review and if they determine that our contractual arrangements are in violation of national security regulations, our business could be materially and adversely affected.

On August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement the Circular by General Office of State Council on Establishment of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or the Security Review Circular. According to the Security Review Circular, if a targeted domestic enterprise is engaged in industries (such as defense sector, important agriculture products, important energy and resources, important infrastructure, important transportation

services, key technologies and material equipment manufacturers) having a national security concern and the merger or acquisition will result in foreign investor’s acquiring actual control of the domestic enterprise, the transaction is subject to security review. According to the MOFCOM Security Review Regulations, MOFCOM will focus on substance and the actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Security Review Circular led by the National Development and Reform Commission and MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the mobile games business requires security review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review Circular are subject to MOFCOM review.

We acquired actual control over Yingzheng prior to promulgation of the Security Review Circular and the MOFCOM Security Review Regulations, so we do not believe we are required to submit our existing contractual arrangement with Yingzheng to MOFCOM for security review. We believe our current business operated in the PRC does not fall within the industries having a national security concern under the Security Review Circular and our contractual arrangement with Lanyue is not subject to MOFCOM’s security review. However, we have been advised by our PRC legal counsel, Guantao Law Firm, that as the Security Review Circular and the MOFCOM Security Review Regulations are relatively new and there is no clear statutory interpretation of them, there can be no assurance that MOFCOM will have the same view as we do when applying the national security review requirements. If MOFCOM takes the view that we are required to submit our existing contractual arrangement for review by them and the Inter-Ministerial Panel’s review, and if the Inter-Ministerial Panel determines that our contractual arrangement impacts or may impact national security, MOFCOM will, at the request of the Inter-Ministerial Panel and in collaboration with relevant departments, terminate our arrangement or take other effective measures, such as an equity transfer or assets transfer, so as to eliminate the impact of our contractual arrangement on national security. Any of these events could materially and adversely affect our business, financial condition and results of operations. Further, should MOFCOM take any of these actions, we may not be able to consolidate our VIEs’ financial results in our consolidated financial statements in accordance with U.S. GAAP due to lack of sufficient control over our VIEs after such restructuring, which could materially and adversely affect our financial condition and results of operations.

Risks Related to Regulation of Our Services and Products

The laws and regulations regulating mobile games in China continue to evolve and change. If we fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

We are required to obtain licenses, permits and approvals from different regulatory authorities in order to conduct our business. We have obtained the Internet Publishing License from SAPPRFT, which authorizes the release of our existing and future online mobile game products over the Internet, and the Online Culture Operation License from the MOC, which is required for the operation of online mobile games.

In addition, PRC laws and regulations require that all online mobile games that we develop and that we license from other PRC developers be approved by SAPPRFT and filed with the MOC. For games that we license from third parties in the PRC, these approval and filing requirements can be completed by the third-party game developer. If, however, the third-party fails to complete this approval and filing requirement, we are obliged to complete such requirements. In addition, the online games authorized by overseas developers shall be examined and approved by SAPPRFT and the MOC. We are in the process of obtaining SAPPRFT approvals and filing with the MOC for the games we currently operate in the PRC and have successfully filed some games with the MOC. In addition, we are also in the process of applying for the approvals from SAPPRFT and the MOC for certain games we license from overseas developers. Due to the short game lifespan of many mobile games, it

may not be practicable for us to apply for the approval from SAPPRFT or register with the MOC for many of our mobile games, which process can take several months. If any of our PRC operating companies fails to obtain or maintain any of the required permits or approvals or if our practice is later challenged by government authorities, they may be subject to various penalties, including without limitation, fines, being ordered to rectify the situation, confiscation of illegal revenues and the discontinuation of, or restriction on, our operations. Any such disruption in business operations would materially and adversely affect our financial condition and results of operations.

As mobile games are at an early stage of development in China, new laws and regulations may be adopted or amended from time to time that require licenses and permits beyond those we currently have. These regulations may also restrict our ability to expand our customer and player base or to provide services in additional geographic areas. Substantial uncertainty exists regarding the implementation and interpretation of the current PRC laws and regulations applicable to the operation of mobile games, and as new laws and regulations are passed, their implementation and interpretation may also be uncertain or unfavorable to our business and operations. We cannot assure you that in the future we will be able to obtain all required permits, licenses and approvals in a timely manner, or at all, and any failure to do so could result in penalties, or a requirement to curtail or cease operating all or part of our business, any of which may materially and adversely affect our financial condition, results of operations and future prospects.

We may be subject to regulations concerning electronic publications and be required to obtain approvals and licenses or change our business model regarding certain preinstalled single-player mobile games which could disrupt our operations, require a costly restructuring of our business or adversely affect our ability to roll out and operate new or existing preinstalled single-player mobile games.

On February 21, 2008, GAPP issued the Regulations on Administration of the Publishing of Electronic Publications, or the Electronic Publications Regulations, which became effective from April 15, 2008. The Electronic Publications Regulations require that a company wishing to publish “electronic publication” must obtain an Electronic Publications Publishing License from GAPP, and that the electronic games to be published must be approved by, or filed with, GAPP. There are no interpretative materials, specific instructions or detailed implementation rules in respect of requirements or procedures for applying for the license or approvals or making filings in respect of electronic publication and accordingly, we have so far not obtained such license, approvals or made such filings.

We have had meetings with GAPP officials during which we informed them of our business model regarding our single-player mobile games that are preinstalled on mobile devices and are not operated online. They informed us that by their legal nature these preinstalled single-player mobile games may be deemed as electronic publications and therefore are theoretically subject to the Electronic Publications Regulations; however, GAPP has to date never regulated the publication of single-player mobile games. During the meetings, the GAPP officials did not object to our current business model regarding preinstalled single-player mobile games. Furthermore, we believe GAPP is aware that many companies in China provide preinstalled or offline single-player mobile games to the public without these approvals and licenses, and we are unaware of any instance in which GAPP has penalized any company for its failure to obtain the approvals and licenses. The GAPP officials further informed us that prior to promulgating and implementing any new regulations to clarify the regulatory framework for both online and offline mobile games, GAPP is unlikely to take regulatory or enforcement actions against such companies. Effective on March 22, 2013, GAPP and the State Administration of Radio, Film and Television merged into one entity, SAPPRFT, which oversees China’s press, publication, radio, film and TV sectors. SAPPRFT may begin requiring mobile game companies, such as us, to obtain approval under the Electronic Publications Regulations and impose penalties for any past non-compliance. SAPPRFT may take enforcement action against us if it finds any game content to be in violation of any content restrictions issued by the PRC government.

If SAPPRFT adopts regulations or other rules to enforce the Electronic Publications Regulations against entities that develop, publish, preinstall in handsets or distribute single-player mobile games, we may be required to obtain approvals and licenses and/or change our current business model regarding our preinstalled single-

player games. Any failure to obtain the necessary approvals and licenses in a timely manner or at all could delay or prevent us from rolling out and operating new or existing preinstalled single-player mobile games. In addition, we may be required to restructure our operations to comply with such requirements by entering into a contractual arrangement with a non-foreign invested entity which holds the Electronic Publications Publishing License and entrusting such entity to file all preinstalled single-player games developed by Huiyou Digital (Shenzhen) Ltd., or Huiyou, with SAPPRFT for its approval. Such a restructuring could be costly and disruptive to our business and would expose us to the risks associated with such arrangements. See “—Risks Related to Our Corporate Structure—To comply with PRC laws and regulations limiting foreign ownership of telecommunication and online cultural businesses, we conduct a substantial portion of our businesses through our VIEs in China by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with applicable regulations, our business could be materially and adversely affected.”

Huiyou, our subsidiary, has historically operated online mobile games and is currently promoting certain of our online mobile games to handsets companies and design houses. If the PRC government determines that a license or permit is required for these activities, we might be subject to regulatory sanctions.

PRC laws and regulations require that an entity should obtain an Internet Publishing License and an Online Culture Operation License from the relevant PRC government authorities in order to operate in online mobile game business. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Online Games and Cultural Products.” However, our PRC subsidiary, Huiyou, has historically operated certain online mobile games without obtaining the required licenses from the relevant PRC government authorities, which may expose us to penalties and other administrative actions that may have a material adverse effect upon our business.

Currently, Huiyou is developing mobile games, including certain online mobile games. Once an online mobile game it has developed is ready to be commercialized, Huiyou licenses the game to Yingzheng, our VIE, which operates the game in its own name, and receives royalties from Yingzheng. Yingzheng currently holds all of the required licenses and certificates for online mobile game operations and is responsible for all aspects of operating the game, including server maintenance, user registration and regulatory filings and approvals. Yingzheng entrusts Huiyou to enter into contracts with handset companies and design houses to pre-install the licensed game in handsets, and with other mobile service providers for the collection of payments from end-users, for which Yingzheng pays commissions to Huiyou. Mobile network operators and service providers are responsible for collecting payments from game players and for paying the contracted portion of the payments to Huiyou, who receives them on behalf of Yingzheng, the operator of the game. Huiyou then shares the payments it receives with Yingzheng, according to their cooperation agreement.

Our PRC legal advisor, Guantao Law Firm, is of the opinion that this current business model does not violate applicable PRC laws and regulations because (i) Huiyou develops online mobile games and promotes such games to handsets companies and design houses but it is not engaged in the operation of such games; (ii) Huiyou licenses Yingzheng to operate such games in its own name and Yingzheng holds all necessary licenses and certificates for online mobile game operations; (iii) Huiyou keeps royalties and commissions for its copyright license and promotional services while Yingzheng receives from Huiyou revenues for operating the games; and (iv) there are no explicit provisions in PRC laws or regulations requiring Huiyou to obtain any approval or license in order to develop online mobile games, grant copyright licenses or provide promotional services, as contemplated by its cooperation agreement with Yingzheng. However, the relevant PRC governmental authorities may deem the activities of Huiyou described above to be the operation of online games without obtaining the required licenses, which may subject us to penalties, require us to make costly changes to our business model and materially disrupt our business.

Regulation and censorship of information disseminated over the Internet and wireless telecommunication networks in China may adversely affect our business, and the mobile service providers with which we cooperate may be liable for information displayed on, retrieved from, or linked to their platforms.

China has enacted regulations governing telecommunication mobile service providers, Internet and wireless access and the distribution of news and other information over the Internet and wireless telecommunication networks. Under these regulations, mobile content publishers like us are prohibited from posting or displaying over the Internet or wireless networks content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Throughout the history of our industry, many mobile games have been designed to include certain hidden content and game features that are accessible through the use of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. We have implemented preventive measures designed to reduce the possibility of hidden, objectionable content from appearing in the mobile games we publish. However, these preventive measures are subject to human error, circumvention, overriding and reasonable resource constraints.

Meanwhile, when Internet and mobile service providers find that any obscene, superstitious, fraudulent or defamatory information is transmitted on their platforms, they are required to terminate the transmission of such information or delete such information immediately, keep records, and report to relevant authorities. Mobile network operators like China Mobile, China Telecom and China Unicom also have their own policies prohibiting or restricting the distribution of inappropriate content. On December 15, 2009, the MIIT issued the Notice Regarding Plan for Further Regulating Obscene Materials on Mobile Phones, or Circular 672. Under Circular 672, mobile network operators are required to examine their business, promotional channels, as well as the business of their partners, and must immediately terminate such business if any obscene material is involved. Mobile service providers involved in distributing or publishing such obscene materials on mobile handsets are subject to immediate suspension or termination of cooperation with mobile network operators, and a violation will be reported to relevant authorities. Mobile network operators and mobile service providers must examine all websites accessed through mobile handsets and conduct full daily inspection of such websites. If any obscene material is found, access and transmission must cease and be reported to authorities. On June 3, 2010, the MOC issued the Online Game Measures, which became effective on August 1, 2010, according to which companies that plan to engage in the operation of online games, issuance of virtual currency and provision of virtual currency transaction services shall obtain a license from the provincial counterpart of the MOC. Online and mobile game operators are required to establish a self-censorship mechanism and ensure the lawfulness of the content of their games and corporate operations. On August 12, 2013, the MOC issued the Administrative Rules on Content Review by Internet Culture Operating Entities, which became effective on December 1, 2013, according to which companies operating internet culture business shall have personnel with the required qualification certificate to conduct content review on their products before they provide the products to the public, and they shall keep the content review records for at least two years. In addition, in July 2014, the SAPPRFT issued the Notice on Further Launch Verification of Real-name Registration for Anti-Fatigue System on Internet Games, stating that, in view of some of the hardware and functionality limitations inherent in mobile devices, anti-fatigue system requirements applicable to Internet games do not currently apply to mobile games. If the SAPPRFT in the future decides to expand the anti-fatigue system requirements to mobile games, our operating expenses would be likely to increase.

As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a mobile game developer and operator. In addition, we may not be able to control or restrict the content of other content providers linked to or accessible through our mobile service providers. To the extent that regulatory authorities find any portion of the applications and content on our mobile service providers objectionable, they may require them to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content on our mobile service providers, which may reduce our user traffic, which in turn decrease access to and downloading of our mobile games.

If we are required to comply with or are found to violate any laws or regulations governing virtual currency, prepaid card issuance and usage, online payment or money laundering, we may have to obtain additional licenses or approvals, be forced to change our current business practice, or be subject to certain penalties.

In January 2007, the MPS, MOC, MIIT and GAPP jointly issued a circular regarding online gambling which has implications for the use of virtual currency. The circular (a) prohibits online game operators from charging commissions in the form of virtual currency in relation to winning or losing of games; (b) requires online game operators to impose limits on use of virtual currency in guessing and betting games; (c) bans the conversion of virtual currency into real currency or property; and (d) prohibits services that enable game players to transfer virtual currency to other players. On June 4, 2009, MOC and MOFCOM jointly issued a notice regarding strengthening the administration of online game virtual currency, or Virtual Currency Notice, The Virtual Currency Notice prohibits online game operators from setting game features that involve the direct payment of cash or virtual currency by players for the chance to win virtual items or virtual currency based on random selection through a lucky draw, wager or lottery. Besides, the notice also prohibits game operators from issuing currency to game players through means other than purchases with legal currency. On June 3, 2010, the MOC issued Interim Measures for Online Games Administration, or the Online Game Measures, which became effective on August 1, 2010, aiming to further strengthen the MOC’s supervision of the online game industry, including the issuance and trade of virtual currency in online games. According to the Online Game Measures, an online game operator who issues or provides the trading services for the virtual currency must obtain a license for Internet culture operation from the MOC. Further, the Online Game Measures also provides, among other things, that virtual currency issued by online game operators may be only used to exchange its own online game products and services and may not be used to pay for the products and services of other entities. The issuance of virtual currency is permitted under Yingzheng’s Internet Culture Business License. However, if our current or future operations are found to violate the Virtual Currency Notice and Online Game Measures or any other related regulations, our business and financial condition, operation results and business prospects may be materially and adversely affected.

Risks Related to Doing Business in China

Adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially and adversely affect our business.

We conduct substantially all of our operations in China. Accordingly, our business, financial condition, results of operations and prospects depend significantly on economic developments in China. China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.

The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Between late 2003 and 2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of China’s, or the PBOC’s, statutory deposit reserve ratio and imposing commercial bank lending guidelines, which slowed the growth of credit. In 2008 and 2009, however, in response to the global financial crisis, the PRC government loosened such requirements. Any actions and policies adopted by the PRC government or any prolonged slowdown in China’s economy, in particular the mobile applications industry, could have a negative impact on our business, operating results and financial condition in a number of ways. For example, our players may decrease spending on our offerings, while we may have difficulty expanding our player base fast enough, or at all, to offset the impact of decreased spending by our existing players.

We may rely on dividends and other distributions from our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could materially and adversely affect our ability to conduct our business.

As an offshore holding company, we may rely principally on dividends from our subsidiaries in China for our cash requirements, including to pay dividends or make other distributions to our shareholders or to service our debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, the PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is required each year to set aside at least 10% of its annual after-tax profits (as determined under PRC accounting standards) into its statutory reserve fund until the aggregate amount of that reserve reaches 50% of such entity’s registered capital. These reserves are not distributable as cash dividends.

If our subsidiaries in China incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions, pay dividends and otherwise fund and conduct our business.

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

We may transfer funds to our PRC subsidiaries or finance our PRC subsidiaries by means of shareholder’s loans or capital contributions upon completion of an offering. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the gap between the registered capital and the total amount of the investments in such subsidiaries, and shall be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Furthermore, any capital contributions we make to our PRC subsidiaries shall be approved by the MOFCOM or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

In addition, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC, unless otherwise provided by PRC laws. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay Renminbi loans if they have not used the proceeds of such loans. Furthermore, SAFE promulgated a circular on November 9, 2010, or Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. SAFE further promulgated the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45, on November 16, 2011, which expressly prohibits foreign-invested enterprises from using the registered capital settled in Renminbi converted from foreign currencies to grant loans through entrustment arrangements with a bank, repay inter-company loans or repay bank loans that have been transferred to a third-party. Circular 142, Circular 59 and Circular 45 may significantly limit our ability to transfer the net proceeds from an offering to our PRC subsidiaries and convert the net proceeds into Renminbi, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Pursuant to a supplementary agreement entered into between 3GUU Mobile Entertainment Industrial Co., Ltd., or 3GUU BVI and Yingzheng and a supplementary agreement entered into between China Wave Group Limited, or China Wave, and Lanyue, 3GUU BVI and China Wave, are obligated to provide Yingzheng and Lanyue, respectively, with continuing financial support to meet the capital demands of their business operations. Under the current PRC law and policies regarding foreign direct investment and foreign debt, there are only limited means for an offshore company to provide financial support to a domestic PRC company. Currently, the only way that 3GUU BVI and China Wave are able to provide financial support to Yingzheng and Lanyue is by providing a guarantee for Yingzheng and Lanyue to secure RMB loans from a bank within the PRC.

Fluctuations in the value of the Renminbi may materially and adversely affect your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the Renminbi has appreciated significantly against the U.S. dollar.

There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against foreign currencies. On June 20, 2010, the PBOC announced that the PRC government would reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. We cannot predict how this new policy will impact the Renminbi exchange rate.

Our revenues and costs are mostly denominated in the Renminbi, and a significant portion of our financial assets are also denominated in the Renminbi. Any significant fluctuations in the exchange rate between the Renminbi and the U.S. dollar may materially and adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on the ADSs in U.S. dollars. In addition, any fluctuations in the exchange rate between the Renminbi and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

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

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our wholly-owned PRC subsidiaries in China, Huiyou, OWX (Beijing) Technology Co., Ltd., or OWX Beijing, and Guangzhou Yitongtianxia Software Development Co., Ltd, or Yitongtianxia, to fund any cash and financing requirements we may have. See “Item 4. Information on the Company—A. History and Development of the Company” and “Item 4. Information on the Company—C. Organizational Structure.”

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, Huiyou, OWX Beijing and Yitongtianxia may pay dividends in foreign currency to us without pre-approval from SAFE. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. With the prior approval from SAFE, cash generated from the operations of our PRC subsidiary may be used to pay off debt they owe to entities outside China in a currency other than the Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the ADSs.

Uncertainties in the PRC legal system could materially and adversely affect our business.

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

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements, including those governing PRC tax matters, are relatively new and amended frequently, and their interpretation and enforcement often raise uncertainties that could limit the reliability of the legal protections available to us. 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 violations of these policies and rules until the violations have occurred. Furthermore, any litigation in China may be protracted and result in substantial costs and diversion of resources and management’s attention. We cannot predict future developments in the PRC legal system. We may be required to procure additional permits, authorizations and approvals for our operations, which we may not be able to obtain. Our inability to obtain such permits or authorizations may materially and adversely affect our business, financial condition and results of operations.

The approval of the China Securities Regulatory Commission, or the CSRC, might have been required in connection with the listing and trading the ADSs on the Nasdaq Global Market.

Pursuant to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, an offshore special purpose vehicle formed for purposes of overseas listing and controlled directly or indirectly by PRC companies or individuals shall obtain CSRC approval prior to listing and trading its securities on an overseas stock exchange. On December 14, 2006, the CSRC published procedures for special purpose vehicles to obtain approval of overseas listings. The procedures include filing documents with the CSRC and take several months to complete. The application of this new PRC regulation remains unclear.

Based on the advice we received from our PRC legal counsel, Guantao Law Firm, we did not seek CSRC approval in connection with the listing as our PRC legal counsel was of the opinion that such approval was not required because we are not an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals as defined by the New M&A Rules. However, we cannot assure you that PRC government authorities, including the CSRC, will reach the same conclusion as our PRC legal counsel. If the CSRC or other PRC government authorities determine that prior CSRC approval was required, any future registered offering will be delayed until we obtain the approval from the CSRC, which may take several months or longer. If a prior approval from the CSRC is required but not obtained, 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 future offerings into the PRC, or take other actions that could materially and adversely affect our business or the trading price of the ADSs. The CSRC or other PRC regulatory authorities may also require us, or make it advisable for us, to halt an offering before settlement and delivery of the ADSs offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur.

A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.

SAFE on October 21, 2005. Pursuant to Circular 37, a PRC resident should complete the registration with the local SAFE counterpart before making contributions to an offshore special purpose vehicle, or SPV, defined as an offshore enterprise directly established or indirectly controlled by the PRC resident for the purpose of overseas investment and financing, with his/her legally owned assets or interests in a domestic enterprise or offshore assets or interests. The PRC resident is also required to update the registration upon capital increase or deduction, share transfer or swap, merger or division, and other significant change of the SPV. PRC residents who have contributed legitimate domestic or offshore assets or interests to SPVs but have yet to obtain SAFE registrations before the implementation of Circular 37 are required to complete the registrations in accordance therewith. The fulfillment of the SAFE registrations as described above is a prerequisite for other regulatory procedures required for relevant cross-border investment activities and capital flows, such as the offshore entity’s inbound investment and the onshore entity’s payment of dividends. Failure to comply with Circular 37 may subject relevant PRC residents to penalties under the PRC foreign exchange administration regulations.

On February 13, 2015, SAFE issued the Circular on Further Simplifying and Improving Foreign Exchange Administration Policies Concerning Direct Investments, or Circular 13, which will become effective on June 1, 2015. Circular 13 has removed the requirement for SAFE’s approval on foreign exchange registrations in connection with domestic and overseas direct investments, including such registration required by Circular 37. The qualified banks are delegated the power to directly conduct such foreign exchange registrations under SAFE’s supervision.

These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future. However, the regulations are newly issued and it is unclear how they will be interpreted and implemented. Furthermore, in practice, however, different local SAFE branches may have different views on interpretation and implementation of the SAFE regulations. We cannot assure you that all of our beneficial owners that are PRC residents will be able to register or update the registration of their equity interest in us as required. If they fail to make or update the registration, our PRC subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

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

In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In addition, Circular of the SAFE on Relevant Issues Concerning the Foreign Exchange Administration for Domestic Individuals’ Participating in the Share Incentive Schemes of Overseas-Listed Companies, or Circular 7, was promulgated by the SAFE on February 15, 2012.

In accordance with Circular 7, PRC residents who are granted shares or share options by an overseas publicly-listed company under a share incentive scheme are required, through the PRC subsidiary of the overseas publicly-listed company, to entrust a PRC agent to register with SAFE or its local office and complete certain procedures relating to the share incentive schemes. A PRC agent can be one of the PRC subsidiaries participating in the share incentive scheme or another institution qualified to hold the assets as designated by the PRC subsidiary and in accordance with PRC laws. We and our PRC employees who receive shares under the stock option plan are subject to these regulations. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions.

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, both effective from January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a PRC resident enterprise and is subject to a 25% enterprise income tax on its global income. The implementation rules further define the term “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties of an enterprise. The State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which sets out certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China.

Although such circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria set forth in Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals. As a result, we cannot assure you that the SAT will not implement Circular 82 or amend the rules in the future to the effect that such rules will apply to us or any of our overseas subsidiaries. The SAT issued the Administrative Measures on Enterprise Income Tax of Foreign-Incorporated Chinese-Controlled Resident Enterprises (Trial), or Bulletin 45, on July 27, 2011, which will take effect from September 1, 2011. According to these measures, in the event that the PRC authorities subsequently determine that we should be treated as a resident enterprise and ever decide to issue the Resident Enterprise Recognition Letter for Foreign-Incorporated Chinese-Controlled Enterprises to us, we are required to handle all tax matters according to the rules governing PRC resident enterprises for the enterprise income tax purpose from the year when such letter is issued to us. In addition, Bulletin 45 specifies that when provided with a copy of a Resident Enterprise Recognition Letter, the payer should not withhold 10% income tax when paying Chinese-sourced dividends, interest and royalties to the offshore incorporated PRC resident enterprise. If the PRC tax authorities determine that our company or any of our overseas subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, our company or our subsidiaries outside of China will be subject to the uniform enterprise income tax rate of 25% as to our global income as well as tax reporting obligations. Second, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the PRC New EIT Law, there is no assurance that we would enjoy such tax exempt treatment on dividend paid to us from our PRC subsidiary as offshore incorporated PRC resident enterprise controlled by PRC enterprise or corporate group enjoy under Bulletin 45. As a result, such dividend may continue to be subject to a 10% withholding tax. Finally, dividends payable by us to our investors and gain on the sale of our shares may become subject to PRC withholding tax.

Any change in the tax treatment we currently enjoy in the PRC may materially and adversely impact our net income.

Our PRC subsidiaries are incorporated in the PRC and are governed by applicable PRC income tax laws and regulations. The New EIT Law and its implementing rules, both of which came into effect on January 1, 2008, impose a statutory rate of 25% on PRC enterprises. However, the New EIT Law also permits enterprises to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules, under which enterprises established before the promulgation date of the New EIT Law that were granted tax holidays under the then effective tax laws or regulations may continue to enjoy their tax holidays until their expiration. In addition, under the New EIT Law and its implementation regulations, newly established software enterprises are entitled to a two-year exemption followed by a three-year 50% enterprise income tax rate reduction from its first profit-making year, and a qualified high and new technology enterprises are entitled to a preferential tax rate of 15%. Preferential tax treatments and incentives granted to us by PRC governmental authorities are subject to

review and may be adjusted or revoked at any time in the future. While the PRC enterprise income tax is generally imposed based on actual taxable income, some of our subsidiaries pay enterprise income tax based on a deemed profit calculation. Shenzhen Qilewuxian Software Development Co., Ltd., Shenzhen Yikechuanghui Technology Co., Ltd., Shenzhen Zhongtuokechuang Technology Co., Ltd., or Zhongtuo, and Shenzhen Douwan Network Technology Co., Ltd., or Douwan, paid enterprise income taxes calculated according to deemed profit rates from 6% to 10% during certain taxable periods based on documentation issued by the local tax authorities in lieu of their actual profits. However, starting from July 1, 2011 Shenzhen Yikechuanghui Technology Co., Ltd. ceased applying the deemed profits methodology as it was no longer qualified under the applicable criteria. Similarly, on January 1, 2012 and July 1, 2012 Douwan and Zhongtuo, respectively, also ceased applying the deemed profits methodology. In addition, in 2013 Shenzhen Qilewuxian Software Development Co., Ltd. did not pay tax as it had ceased operations. We cannot assure you that the local tax authorities will not, in the future, change their position and discontinue any of our current tax treatments, potentially with retroactive effect. The discontinuation of any of our current tax treatments could materially increase our tax obligations and adversely impact our net income.

The New EIT Law will affect tax exemptions on dividends to be paid by our PRC subsidiaries to us through our Hong Kong subsidiaries and we may not be able to obtain certain treaty benefits under the relevant tax treaty.

We are a holding company incorporated under the laws of the Cayman Islands. We conduct substantially all of our business and derive all our income through our PRC subsidiaries. Prior to January 1, 2008, dividends derived by foreign enterprises from business operations in China were not subject to the PRC enterprise income tax. However, under the New EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are “non-resident enterprises” are subject to a 10% withholding tax starting from January 1, 2008, unless such shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a preferential arrangement.

Pursuant to the Notice of the SAT on Issuing the Table of Tax Rates on Dividends in Treatises, or Notice 112, which was issued on January 29, 2008, the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, such withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. In October 2009, the SAT further issued the Notice on How to Understand and Determine the “Beneficial Owners” in Tax Treaties, or Circular 601. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as “beneficial owners” may not be approved to enjoy tax treaty benefits, and “beneficial owners” refers to individuals, companies or other organizations which are normally engaged in substantive operations. These rules also set forth certain adverse factors on the recognition of a “beneficial owner.” Specifically, they expressly exclude a “conduit company” that is usually established for the purposes of avoiding or reducing tax obligations or transferring or accumulating profits and not engaged in substantive operations such as manufacturing, sales or management, from being a “beneficial owner.” On June 29, 2012, the SAT further issued the Announcement of the SAT regarding Recognition of “Beneficial Owner” under Tax Treaties, or Announcement 30, which provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors that supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. As a result, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiaries may be subject to a reduced withholding tax at a rate of 5% if our Hong Kong subsidiaries are determined to be Hong Kong tax residents and are considered to be “beneficial owners” that are generally engaged in substantive business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Otherwise, we may not be able to enjoy the preferential withholding tax rate of 5% under the tax arrangement and therefore be subject to withholding tax at a rate of 10% with respect to dividends to be paid by our PRC subsidiaries to us through our Hong Kong subsidiaries.

Certain of our subsidiaries have not made all necessary contributions to social insurances and the housing fund, which could subject us to penalties, including fines and court enforcement.

In accordance with the relevant laws and regulations on social security, employers in the PRC are required to make contributions to various social insurances (including medical, pension, unemployment, work-related injury and maternity insurance) and the housing fund on behalf its employees. As of December 31, 2014, certain of our subsidiaries have not made all necessary contributions to the various social insurances and the housing fund on behalf of their employees, the aggregate amount of which is RMB27.1 million (US$4.4 million), for which we have made a full provision. Our PRC legal counsel, Guantao Law Firm, has advised us that our failure to make such payments could subject us to penalties, including fines, and court enforcement.

If the custodians or authorized users of our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these corporate instruments, our business and operations could be materially and adversely affected.

The corporate chops and seals of our PRC entities are essential to our ability to enter into contracts, conduct banking business and take certain corporate actions, including registering any change to the composition of the board of directors or management with the relevant PRC authorities. In order to maintain the physical security of our corporate chops and seals, we generally store these items in secured locations accessible only to authorized personnel, who are usually members of our senior management. Although we monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could experience significant disruption to our operations. Attempts to remedy such disruption may involve expensive legal or other proceedings, and we may not prevail for a long time or at all. In particular, during any period we lose effective control of an entity as a result of such misuse or misappropriation, the business activities and economic contribution of the affected entity could be severely disrupted, or our auditor may be unable to access documents and information from such entities that may be necessary for them to complete an audit of the consolidated financial statements of our group.

Risks Related to the ADSs

The market price for the ADSs may be volatile.

The market price of our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the Nasdaq Global Market on September 25, 2012, the trading price of our ADSs have ranged from US$3.00 to US$40.31 per ADS, and the last reported trading price on April 27, 2015 was US$21.43 per ADS. The market price of the ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

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regulatory developments in the mobile game industry;

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actual or anticipated fluctuations in our quarterly or annual results of operations;

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changes in financial estimates by securities research analysts or the failure by securities research analysts to cover our ADSs after the listing;

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negative publicity, studies or reports;

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changes in conditions of Internet and mobile security industry;

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changes in performance and valuation of our peer or comparable companies;

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announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;

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changes in our senior management;

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fluctuations in the exchange rate between the Renminbi and the U.S. dollar; and

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sales or anticipated sales of additional ordinary shares or ADSs.

In addition, securities markets have experienced significant price and volume fluctuations unrelated to the operating results of any particular companies. These market fluctuations may also materially adversely affect the market price of the ADSs.

Our ADSs may have a low trading volume and limited liquidity, resulting from a lack of analyst coverage and institutional interest.

Our ADSs may receive limited attention from market analysts. Lack of up-to-date analyst coverage may make it difficult for potential investors to fully understand our operations and business fundamentals, which may limit our trading volume. Such limited liquidity may impede the development of institutional interest in our ADSs, could adversely affect the value of our ADSs and limit your ability to sell our ADSs.

As a “controlled company” under the Nasdaq Listing Rules, we rely on exemptions from certain corporate governance requirements, and therefore our shareholders may have less protection than if we did not rely on the controlled company exception.

Because V1 Group, owns more than 50% of the total voting rights in our company, we are a “controlled company” under the Nasdaq Listing Rules. We rely on the “controlled company” exemption under the Nasdaq Listing Rules and are not obligated to comply with certain Nasdaq corporate governance requirements, including requirements: that a majority of our board of directors be independent directors; that we have a corporate governance and nominating committee composed entirely of independent directors; that we have a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and for an annual performance evaluation of the nominating and governance committee and the compensation committee. See “Item 16G. Corporate Governance” for more information on the differences between our corporate governance practices and those followed by domestic U.S. companies under the Nasdaq Listing Rules. We are not required to and will not voluntarily meet all these requirements. If we are no longer a “controlled company,” we may in the future invoke the “home country” exemptions available to foreign private issuers, such as us, under the Nasdaq Listing Rules which are similar to the exemptions for controlled companies. As a result of our use of the “controlled company” exemptions, and any future use by us of the “home country” exceptions, holders of our ADSs will not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make the ADSs less attractive to investors.

As we are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, we benefit from certain exemptions from reporting requirements that apply to other public companies that are not emerging growth companies. For example, we will not be required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley until up to five fiscal years after our September 2012 listing. Emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We will cease to be an emerging growth company on the earliest of (i) the last day of the fiscal year in which we had US$1 billion or more in annual gross revenues, (ii) the last day of the fiscal year following the fifth anniversary of our listing, (iii) the date on which we have, during the previous three-year period, issued more than US$1 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

We cannot predict if investors will find the ADSs less attractive if we rely on any of the exemptions available to emerging growth companies. If some investors find the ADSs less attractive as a result, there may be a less active trading market for the ADSs and the price of the ADSs may be more volatile.

We may be classified as a passive foreign investment company, or PFIC, which could result in adverse United States federal income tax consequences to United States holders of the ADSs or ordinary shares.

Based on the market value of our ADSs, the value of our assets and the composition of our income and assets, we do not believe we were a PFIC for United States federal income tax purposes for the taxable year ended December 31, 2014, and we do not expect to be a PFIC for our current taxable year ending December 31, 2015. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the United States Internal Revenue Service, or IRS, will not take a contrary position. A non-United States corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year.

The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we expect to be or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations, including regulations relating to royalty income and income from intangible assets, as well as certain IRS guidance relating to the classification of assets as producing active or passive income and certain IRS guidance relating to the distinction between services income and royalties for United States federal income tax purposes. Such regulations and guidance are potentially subject to different interpretations. If the percentage of our assets treated as producing passive income increases, we may be a PFIC for the taxable year ended December 31, 2014, or we may become a PFIC for the current or one or more future taxable years.

In addition, the determination of whether we expect to be or will become a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may depend upon the market value of the ADSs or ordinary shares) and also will be affected by how, and how quickly, we spend our liquid assets. In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our current market capitalization. Among other matters, if our market capitalization were to decrease below our current market capitalization, we may become a PFIC for the current or future taxable years because our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being classified as a PFIC for the taxable year ended December 31, 2014, or becoming classified as a PFIC for the current or one or more future taxable years.

If we are a PFIC for any taxable year during which a United States person holds an ADS or ordinary share, certain adverse United States federal income tax consequences could apply to such United States Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

Our dual-class ordinary share structure with different voting rights limits the ability of our shareholders to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Pursuant to our Second Amended and Restated Memorandum and Articles of Association, our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to five votes per share. We may issue Class A ordinary shares represented by ADSs in future registered offerings. Only V1 Group and its affiliates hold our Class B ordinary shares.

Each Class B ordinary share is convertible into one Class A ordinary share at any time upon the Class B shareholder’s request. Class A ordinary shares are not convertible into Class B ordinary shares under any

circumstances. Upon any transfer of Class B ordinary shares to any person or entity which is not an affiliate of the Class B shareholder, such Class B ordinary shares will automatically and immediately convert into an equal number of Class A ordinary shares.

Due to the disparate voting powers attached to these two classes, as of March 27, 2015, V1 Group owns approximately 43.3% of our outstanding ordinary shares, representing 78.6% of our total voting power, and has considerable influence over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a merger of our company. This concentrated control limits the ability of individual holders of our ADSs to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

We may need additional capital, and the sale of additional ADSs or other equity securities could result in dilution to our shareholders.

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell equity or debt securities or obtain a credit facility. The sale of equity securities could result in 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. It is uncertain whether 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.

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

In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

Our memorandum and articles of association contain anti-takeover provisions that could materially and adversely affect the rights of holders of our ordinary shares and ADSs.

Our articles of association contain provisions that could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could deprive our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and their qualifications, limitations or restrictions. These preferred shares may include dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may provide rights and preferences that holders our ordinary shares or ADSs do not have.

We could issue preferred shares quickly on terms that could delay or prevent a change in control of our company or make removal of management more difficult. If we issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

Furthermore, our amended and restated articles of association provide for a staggered board, which means that our directors are divided into three classes, with one-third of our board retiring from office and standing for re-election at each general meeting of our shareholders. Accordingly, with our staggered board, at least two annual general meetings of our shareholders are generally required in order to effect a change in a majority of our directors as a result of retirement by rotation. Our staggered board can discourage proxy contests for the election of our directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to take control of our board in a relatively short period of time.

The depositary for our ADSs may give us a discretionary proxy to vote the Class A ordinary shares underlying our ADSs if holders of ADSs do not give voting instructions, which could adversely affect such holders’ interests.

Under the deposit agreement for the ADSs, if we asked for voting instructions from the holders of ADSs but the depositary does not receive those instructions by the cutoff date it sets, the depositary will give us a discretionary proxy to vote the Class A ordinary shares underlying such ADSs as to all matters at the shareholders’ meeting unless:

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we instructed the depositary we do not wish to receive a discretionary proxy;

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we informed the depositary that there is substantial opposition to the particular matter; or

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the particular matter would have a material adverse impact on shareholders.

The effect of this discretionary proxy is that if holders of our ADSs do not give voting instructions, they cannot prevent the Class A ordinary shares underlying their ADSs from being voted, except in the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our Class A ordinary shares are not subject to this discretionary proxy.

Holders of the ADSs will not have the same voting rights as the holders of our Class A ordinary shares and may not receive voting materials in time to be able to exercise their right to vote through the depositary.

Holders of the ADSs will not be able to directly exercise voting rights attaching to the Class A ordinary shares represented by their ADSs. Holders of the ADSs will have the right to instruct the depositary how to vote the shares represented by the ADSs, but may not receive voting materials in time to instruct the depositary to vote, and they may not have the opportunity to exercise a right to vote.

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

We may 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 or exempt from registration under the Securities Act with respect to all holders of ADSs.

We are not obligated 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 the ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

Holders of the ADSs may be subject to limitations on transferring their ADSs.

The ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems doing so expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs when our books

or the books of the depositary are closed, when we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, under any provision of the deposit agreement or for any other reason.

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

Our corporate affairs are governed by our Second Amended and Restated 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 the directors, the rights of minority shareholders to institute actions and the fiduciary responsibilities of our directors to us 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, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands.

The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States. In particular, the Cayman Islands has a less developed body of securities law than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, our public shareholders may encounter more difficulty in protecting their interests against actions taken by the management, the board of directors or the controlling shareholders of our company than they would as shareholders of a public company incorporated in the United States.

Holders of our ADSs may have difficulty enforcing judgments obtained against us.

We are a Cayman Islands company, and we conduct substantially all of our operations in the PRC. Substantially all of our assets are located outside of the United States. In addition, most of our directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult for holders of our ADSs to effect service of process upon our directors and officers in the United States. It may also be difficult for holders of our ADSs to enforce 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, most of whom are not residents of the United States and the substantial majority of whose assets are located outside of the United States.

In addition, the courts of the Cayman Islands or the PRC may not recognize or enforce judgments of U.S. courts against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the United States or any state. Furthermore, Cayman Islands or PRC courts may not be competent to hear original actions brought in the Cayman Islands or the PRC against us or our directors and officers predicated upon the securities laws of the United States or any state.

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide holders of our ADSs the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for holders of our ADSs to evaluate our performance and prospects.

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we are still subject to the anti-fraud and anti-manipulation rules of the SEC such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, holders of our ADSs should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

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

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit and quality control procedures, which may be addressed as part of the inspection process to improve the quality of future audits. The inability of PCAOB to inspect independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit or quality control procedures compared to those conducted by auditors outside of the PRC that are subject to PCAOB inspections. As a result, investors may be deprived of the benefits of PCAOB inspections and they may lose confidence in our reported financial information and procedures and the quality of our financial statements.

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

Starting in 2011 the Chinese affiliates of the ‘‘big four’’ accounting firms, (including our independent registered public accounting firm) were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the Chinese accounting firms, (including our independent registered public accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide

by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

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

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of our ordinary shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Item 4. INFORMATION ON THE COMPANY

A.	History and Development of the Company

CMGE was incorporated in the Cayman Islands as an exempted limited liability company on January 20, 2011 by V1 Group as its wholly-owned subsidiary. Our business was acquired through three separate transactions by V1 Group in 2009 and 2010 and was operated by V1 Group through various subsidiaries and a VIE, until our reorganization, effective August 23, 2011. The three separate transactions were the acquisition of: (i) Dragon Joyce Group, which focused on developing, operating and marketing mobile games for feature phones; (ii) OWX Hong Kong Limited, or OWX HK, which operated our handset design business; and (iii) 3GUU BVI, which focused on developing, operating and marketing mobile games.

As a result of these transactions, V1 Group became the beneficial owner of 70.2% of our equity interests through its 100% equity interests in each of Dragon Joyce Limited, or Dragon Joyce, OWX Holding Co. Ltd, or OWX Holding, and Action King Limited, or Action King, while the former minority shareholders of Dragon Joyce, OWX Holding and 3GUU BVI collectively owned 29.8% of our equity interests.

Listing

On September 25, 2012, we listed our ADSs on the Nasdaq Global Market under the symbol “CMGE.”

Share Purchase Agreement, Private Placements and Follow-on Public Offering

On March 21, 2012, we and V1 Group entered into a share purchase agreement with MediaTek Inc., or MediaTek, Core Tech Resources Inc., or Core Tech, a subsidiary of MediaTek, and PVG Venture Capital Partners (Wuxi), Limited Partnership, or PVG, pursuant to which Core Tech and PVG agreed to subscribe for 15,450,144 and 11,035,817 shares of our ordinary shares, respectively, for consideration of US$7 million and US$5 million, respectively. These ordinary shares contain a liquidation preference. The transaction was closed on May 11, 2012.

We issued and sold an aggregate of 2,500,000 ADSs at US$10.00 per ADS, for gross proceeds of US$25 million before deducting offering expenses, to Champion Plus Group Limited, or Champion, a subsidiary of Zennon Capital Partners, L.P., and Grand Synergy Limited, a subsidiary of New World Strategic Investment

Limited, in a private placement. Champion also received warrants to purchase up to an aggregate of 100,000 ADSs that are exercisable at any time commencing six months after the closing date and over a two year period. The transaction closed in August 2013.

In November 2013, we issued 1,035,000 ADSs to ICBC Credit Suisse Asset Management (International) Company Limited, acting as the investment manager for the National Council for Social Security Fund, for consideration of US$15 million. In connection with this sale of our securities, we provided the National Council for Social Security Fund registration rights with respect to the purchased securities. In particular, we agreed to file a registration statement on Form F-3 when requested by the National Council for Social Security Fund.

In November 2013, we issued 88,000 ADSs to ICBC Credit Suisse Asset Management Co., Ltd., acting as the investment manager for ICBCCS Global China Opportunity Equity Fund, for consideration of US$1.3 million. On the same date, we issued 10,350 ADSs to ICBC Credit Suisse Asset Management (International) Company Limited for consideration of US$150,075.

In March 2014, we completed a public offering of 3,442,000 ADSs, representing 48,188,000 Class A ordinary shares, at a price of US$24.00 per ADS.

Acquisition and Disposal of Subsidiaries and Variable Interest Entities

In November 2013, we acquired 90.6% of the shares of Vogins Technology Co., Limited, or Vogins, for an aggregate purchase price of RMB1.1 million. 82.6% out of the 90.6% equity interest in Vogins was acquired from Gaintech Co. Limited, a subsidiary of Core Tech. Vogins, through its PRC operating subsidiary, provides payment processing services for content providers who promote their products through China Mobile. See “Item 7. Major Shareholders and Related Party Transactions.—B. Related Party Transactions—Acquisition of, and Contractual Relations with, Vogins.”

In 2013, we established Lanyue, an additional variable interest entity. We established Lanyue by entering into similar contractual agreements that were entered into when we established Yingzheng. See “Item 4. Information on the Company—C. Organizational Structure—Our Contractual Arrangements with our VIEs.” Lanyue was created to hold certain telecommunication licenses and to engage in game operation and game development.

In 2013, we disposed of our subsidiary, Douwan, which was engaged in the sale and development of mobile games. In April 2012, Douwan had transferred substantially all of its operating assets to another of our subsidiaries. Douwan was sold to an independent third-party for a consideration of RMB750,000.

In 2014, we established Tianjin Suiyue Technology Co., Ltd, or Tianjin Suiyue, and Beijing Wuyao Technology Co., Ltd., or Beijing Wuyao, each a subsidiary of Lanyue. We also established Beijing Zhuoyuechenxing Technology Co., Ltd, or Beijing Zhuoyuechenxing, as a subsidiary of Chengdu Zhuoxing Technology Co., Ltd., or Chengdu Zhuoxing, a subsidiary of Lanyue. Tianjin Suiyue, Beijing Wuyao and Beijing Zhuoyuechenxing are all engaged in mobile game publishing activities.

B.	Business Overview

Overview

¹	Gross billings of a company measure the total amount spent by the players on the games published by that company, which amount can be greater than the revenue derived by the company from its published games.

publishing, distribution and operation of mobile games, primarily in China. Our expertise and scale of operations, both as a game publisher and game developer, differentiate us from our competitors. For the year ended December 31, 2014, we had 42.8 million paying users (as measured by the total number of paying user accounts and total subscriptions for game bundles), including 21.1 million paying users of social games.

We have a large portfolio of popular and high-grossing games, as measured by downloads and revenues. As of December 31, 2014, our game portfolio included 83 social games, 430 game bundles and 238 single-player games. In addition to our existing games, we have a strong pipeline of games with a variety of themes, cultural characteristics and features designed to appeal to a broad base of players. In 2015, we plan to launch 33 social games and 12 single-player games. We anticipate that 15 of the 33 social games and 7 of the 12 single-player games we plan to launch in 2015 will be developed internally.

In order to leverage the high quality of our game portfolio, we have established a multifaceted publishing platform. In particular, we cooperate with numerous business partners, including handset companies, app stores, web platforms, chipset manufacturers, advertisers and mobile network operators. This multifaceted publishing platform has made us an attractive option for game developers who seek to publish their games across multiple distribution channels and has allowed us to license a number of successful games from a broad base of mobile game developers.

Our vision and strategy have allowed us to achieve financial success, especially as we have made the transition from developing feature phone games to publishing and developing smartphone games. Our revenues in 2012, 2013 and 2014 were RMB187.6 million, RMB353.0 million and RMB 1,264.7 million (US$203.8 million), respectively. Our net loss in 2012 was RMB14.5 million, our net income in 2013 was RMB26.8 million and our net income in 2014 was RMB227.9 million (US$36.7 million). Our non-GAAP net income, which excludes share-based compensation expenses, internal investigation costs, impairment of goodwill and intangible assets and listing expenses, was RMB61.3 million, RMB43.4 million and RMB267.9 million (US$43.2 million) for 2012, 2013 and 2014. See “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Information” for important information about non-GAAP financial measures.

How We Create Value for Game Players

We are dedicated to publishing and developing fun games that players love. In order to achieve this goal we publish and develop games with the following characteristics:

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Originality. We continuously seek innovative games to engage our players. We aggressively seek out original games developed by mobile game developers and also provide our game development team with the environment and resources to create popular games.

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Adaptive. Our extensive engagement with our players provides large amounts of data that we analyze in order to predict and adapt to player preferences. For our social games, we publish games that encourage social interactions among players to enhance their game-playing experience.

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High quality. Execution is critical to successfully bringing original game ideas to fruition. We develop mobile games primarily using our proprietary game engines and development methods, which allow us to create mobile games with consistent quality and system stability. Our in-depth experience operating a large portfolio of games allows us to minimize flaws in our games and provide players a smooth gaming experience.

How We Create Value for Game Developers

We offer game developers a number of distinct advantages in publishing their games through our publishing platform. In particular, we offer:

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Valuable game optimization. We are able to leverage our deep game development experience to refine the games we license from third parties and enhance player’s enjoyment and increase monetization.

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Game quality assurance and testing. Because of the large volume of games that we develop and license annually, we have a sophisticated testing system that we use to minimize game flaws before launch and ensure smooth operation.

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Strong marketing and distribution capabilities. We offer game developers a broad array of channels to market and promote games. We have entered into long-standing relationships with chipset and handset manufacturers, app stores, web platforms and mobile network operators and also promote our games through events and cooperation with advertisers.

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Stable software development kit, or SDK, and strong customer support. Our SDK allows us to support our licensed games and quickly connect our games to app stores and social networking websites as well as major payment gateways. Through continuing game upgrades, we are able to extend the life of our games and expand our player base. We also offer round-the-clock customer support to all of our game players.

Our Industry

China has experienced, and is expected to continue to experience, solid growth in the mobile game market. According to Analysys, the total market size of mobile games in China reached RMB29.4 billion in 2014, representing a CAGR of 72.8% from RMB3.3 billion in 2010, and is expected to grow at a CAGR of 33.5% from 2014 to 2016 to reach RMB52.4 billion in 2016. Key growth drivers for the mobile game industry in China include:

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Sustained economic growth and increasing disposable income. China has experienced significant economic growth over the last decade. As a result of large-scale urbanization, per capita disposable income of urban households has grown from RMB17,175 in 2009 to RMB28,844 in 2014, according to the National Bureau of Statistics of China.

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Increasing mobile internet, smartphone and tablet penetration. As it becomes more affordable and easier to access the internet via mobile devices, the universe of internet users is undergoing a migration from traditional desktop personal computers to mobile internet. Driven by increasing affordability and improved functionality of smartphones, according to Analysys, the number of smartphone users has reached approximately 421 million in 2014, and is expected to grow to approximately 538 million in 2016. In addition, as tablet devices continue to develop and offer more comprehensive functionalities similar to those of personal computers, an increasing population of internet users is expected to use tablets instead of personal computers at home for both entertainment and business purposes, leading to an increase in time spent on mobile devices.

•

Maturity of payment channels. Payment for mobile games and other value-added services in China have become more transparent, reliable and widely-accepted. Players have a variety of payment options for mobile value-added services, including through mobile network operation channels and payment channels such as Alipay, Unionpay, as well as bank cards and prepaid cards.

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Increased accessibility of data network connections. The continuous development of the data network infrastructure and reduced data streaming fees have enabled fast, easy and affordable mobile access to the internet through data network connections including 3G and Wifi networks. The emergence of 4G LTE networks is expected to further enhance connectivity for mobile devices in China. Moreover, as fast and easy access to mobile internet becomes available, the social network effect of mobile internet will continue to drive user engagement on mobile devices through social networks, social mobile games and other social functionalities on mobile devices.

China’s Mobile Game Ecosystem

Key players that form China’s mobile game ecosystem include:

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Mobile game developers: Mobile game developers design and develop mobile games. They either publish these self-developed games through distribution channels or license them to mobile game publishers;

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Mobile game publishers: Mobile game publishers license games created by third-party mobile game developers. Mobile game publishers may also provide additional value-added service such as enhancing the game to optimize player preferences, marketing and promotional campaigns, operation and data analysis of user behavior;

•

Distribution platforms: Mobile game publishers promote games through various distribution channels and mobile game portals, as well as through pre-installation on mobile devices; and

•

Payment channels: Payment channels facilitate the collection and transfer of payments for mobile games, in game purchases and other value-added services.

Our Games

Our games include social games as well as single-player games which are available both individually and as part of game bundles. The following table shows our game portfolio as of the dates indicated:


	As of December 31,
	2012		2013		2014
Social games
- licensed from third parties		0		51		55
- self-developed		7		21		28
Single-player games
- licensed from third parties		315		470		481
- self-developed		175		175		187

Total		497		717		751

Social Games

Social games enable interaction among large numbers of players using different handsets or tablet computers. In a typical social game, thousands of players play in the same game world at the same time. The players can assume specific characters to compete within the game. Social mobile games incorporate the following features to enhance user experience:

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different levels of strengths and weaknesses between game characters;

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ability of each character to gain different experiences and collect different virtual items;

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a game world that continues to evolve, even while a player is not playing the game; and

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an instant messaging system that allows players to communicate extensively with each other or form alliances in order to achieve collaborative objectives.

Our social games include a number of features that promote interaction between players. These features benefit from players’ existing social networks and also create new virtual communities of players. Players in our social games can compare relative progress, share requests, send gifts, and converse with each other while playing our games. These features enhance the virality and stickiness of our games, which allows us to attract large numbers of players for whom there is no direct marketing expense associated with their acquisition.

Our social games are available for download on a free-to-play basis. Compared to pay-to-play business models, the free-to-play approach tends to attract a wider audience of players, increasing the number of potential paying players. By attracting a larger audience, the free-to-play model also enables a higher degree of in-game social interaction, which enhances the game experience for all players. Free-to-play games have proven popular as they encourage players to “try before they buy” and to pay only for additional functionality that they desire.

The games we develop for smartphones are also available for download on tablets through the same channels as smartphones, an aspect of our business we anticipate will continue to expand during 2015 because of the better user experience available through tablets, in particular for MMORPGs, due to their larger screen size compared to mobile phones.

We derive the majority of our revenue from social games. As of December 31, 2014, our portfolio contained 83 social games including card and board games, role-playing games and education games.

Single-Player Games

Single-player games usually involve relatively simple rules and do not require significant time commitment from players.

Single-player games are generally free to download. These games are offered in either “chances” or “stages,” depending upon the game. For games offered in chances, a user is given a certain number of chances to play the game for free. When the user uses up these free chances, he or she can purchase additional chances as an in-game premium feature to continue playing at the level they were previously at. However, as soon as the user exits the game, any unused chances that he or she purchased are forfeited and considered immediately consumed. If the user chooses not to purchase additional chances, their game is over and they must start over at the first level of the game should they wish to play again. For single-player games offered in “stages,” a user is given a certain number of trial stages in which he or she can play the game for free. When the trial stages are completed, he or she can purchase the right to play the remaining stages of the game as an in-game premium feature. Upon purchase, the remaining stages of the game will be unlocked and the user can gain access to all stages repeatedly without additional charges, even if he or she exits the game.

As of December 31, 2014, our portfolio contained 238 single-player games, including role-playing games, fighting or racing games, shooting games, trivia games and card games.

Game Bundles

We provide game bundles to players through China Mobile. For instance, for a monthly fee of RMB10 to RMB12, players can select and download six to eight games in a bundle. We had 5.9 million, 6.1 million and 3.2 million total subscriptions for game bundles in 2012, 2013 and 2014, respectively. In 2014, our game bundles ranked us number one in terms of revenues among all providers of game bundles through China Mobile.

Our Leading Games

We set forth below a description of some of our leading games in 2014.


		Joyful Da Ying Jia Game type: Social card game Developer: Self-developed Also marketed as: Joyful Zha Jin Hua

		Jue Zhan Sha Cheng Game type: Social RPG game Developer: Exclusive license² Awards: “Estar Award- Best Adapted Game”—2014 Analysys Internet Innovation Conference hosted by Analysys International Rankings: Top 3 on paid apps list in Apple’s App Store for a period of time in September 2014

		Crisis Action Game type: Social first-person shooting game Developer: Exclusive license Awards: • “2014 Golden Entertainment Award—Top 10 Action Mobile Games”—by Youxiduo.com • “Universe Award for Best Shooting”—2014 Annual Award by banma.com • “2014 Golden Feather Award —Most Popular Online Mobile Game”—by Chinajoy.net • “Annual Shooting Mobile Game Award”—2nd International Mobile Game Forum hosted by Ministry of Culture and State Internet Information Office • “2014 Global Mobile Internet Excellence Award—Best Mobile Game”—by iiMedia Research Group • “Top 10 Mobile Games—2014 Top 10 Most Popular Original Online Social Games”—2014 China Game Industry Annual Conference Rankings: Ranked No. 8 in Tongbu Tui platform in mainland China in terms of number of downloads for a period of time in September 2014

²	The exclusive license agreement is limited to mainland China.

San Guo Weili Jiaqiang Ban

Game type: Social card game

Developer: Exclusive license

Awards:

• “GGS Swallow Award—Best Online Game Marketing”—2014 Global Mobile Internet Conference hosted by Great Wall Club

Also marketed as: Wu Shuang San Guo

Note: Certain game names have been transliterated or translated from the original Chinese.

Game Development

Game Development Process

We develop new mobile games and related updates and expansion packs. We will continue to devote substantial resources to develop popular games with high revenue potential. Our in-house teams specialize in game planning, graphic design, research and development and game operation.

Our game development process generally includes the following key steps:

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concept generation;

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development of new game proposal and commencement of technical review;

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formulation of development projects;

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commencement of development;

•

closed beta testing; and

•

open beta testing.

We have a game design team that generates new game ideas based on market research, latest trends and player preferences. After a concept is generated, a committee consisting of representatives from management, marketing, operations and technology departments will review and approve the proposal. Upon the management’s approval, the design team prepares a detailed proposal that includes target audience, playing styles, game characters, storylines and budgets. We then form a project team consisting of: (i) game designers to develop a new game study and overall game design; (ii) graphic artists to design game characters and game environments; and (iii) programmers to develop server-end and user-end software. We then conduct closed beta testing with a group of selected players in preparation for the commercial launch and to address any technical problems they may encounter. Our quality assurance team follows its testing procedure to test the game before launch. After the commercial launch of our games, we continue to closely monitor the performance, consistency and stability of operational systems of the game. The development cycle is approximately two to four months for our most recent single-player games and six to twelve months for our most recent social games. In developing games, we believe we are a pioneer among mobile game companies in China in obtaining rights to develop mobile games based on popular franchises, stories and characters. For instance, in 2014, we obtained rights to develop and/or co-develop numerous mobile games based on popular characters and themes, including Hello Kitty, the Shaolin Temple, Naruto and One Piece.

Our extensive engagement with our players and our large game portfolio provides large amounts of data that we analyze using specially-developed processes and algorithms. This information includes player behavior patterns, retention rates, ARPU and paying user conversion rates. A specialized team uses this information to

create detailed models for different game types. We use these models, in addition to market research, to enhance our games by designing new features and quickly developing mobile games that cater to the latest user preferences. We believe our data analytic capabilities give us an advantage in understanding user attitudes and predicting trends in user behavior.

Game Development Engine and Software Development Kit

We develop our games using our proprietary game engines and development methods. We use our NCG game engine to develop our games which supports cross-platform systems technologies. All mobile games developed based on this game engine can receive updates or upgrades over-the-air as needed. Our game engine modularizes key functions, including graphic design, network connection, fee calculation, game operation and updates. This enables us to create colorful graphics with impressive visual effects and also provides a technical foundation upon which to develop innovative features in the game environment. We have developed a flexible SDK that we leverage for the development and launch of new games. Our SDK allows us to streamline each step along the game development lifecycle and quickly connect our games to app stores and social networking websites as well as major payment gateways. Our SDK and development platform have allowed us to achieve consistent quality and system stability. We have a specialized team that oversees the process of connecting our games with third-party platforms and resolving any technical issues that may arise in that process. With each release, we add features and functionality to improve our code base for future game development.

Game Development Team

As of December 31, 2014, we had approximately 500 research and game development employees. Most of our software programmers and testing engineers have bachelors or graduate degrees. We plan to continue to expand our research and development center by recruiting from leading universities in China.

Game Licensing

We strategically license games developed by mobile game developers to complement our existing portfolio. When we license games, we generally share a proportion of the income generated by the game with game developers. We also include in our categorization of licensed games a small number of games for which we have acquired all of the related intellectual property rights. In 2014, we licensed 55 social games, including Jue Zhan Sha Cheng and Crisis Action. Of the 55 games we licensed in 2014, 47 were on an exclusive basis.

We have teams in Beijing, Shenzhen, Guangzhou, Chengdu and Shanghai that specialize in identifying and selecting games based on their analysis of market trends and player preferences. When choosing which games to license, we typically engage a set of standardized procedures. First, we visit the game developer and watch a demonstration version of the mobile game. We then request and review the legal documentation showing that the game developer is the rightful holder of the intellectual property with respect to the game. We then conduct an internal evaluation into whether to license the game. Our vice president in charge of our publishing business is personally involved in the assessment and approval process. When choosing whether to license a game we consider the following factors:

•

originality of game concept;

•

market trends and consumer demand;

•

quality of game execution; and

•

the mobile game developer’s proposed contractual terms, including revenue sharing and exclusivity.

If we decide to license the game we will then begin contractual negotiations with the game developer to clarify the terms of the arrangement and revenue sharing.

Once we have successfully entered into an agreement to license a game, we refine the game using our prior game development experience. Our specialized game designers work with the developers of that game to improve graphics, storylines and operational integrity. We also use our sophisticated testing system to minimize game flaws before launch and to ensure smooth operation of the game. We believe that this process increases player enjoyment and monetization of our licensed games.

Publishing Platform

We promote our games through a broad array of distribution channels. Due to the strength of our publishing capacity, we have been recognized as a “2014 Annual Top 10 Chinese Game Company by Brand Name” by the Game Publication Committee of China Audio-video and Digital Publishing Association. To distribute our games, we cooperate with numerous business partners, including app stores, web platforms, mobile network operators, chipset manufacturers and handset companies,. Specifically, we utilize the following channels to promote our self-developed and licensed games.

App Stores, Web Platforms and Social Networks

We distribute our games in China and internationally, including in Taiwan and Korea, through a number of app stores, web platforms and social networks, including Apple’s App Store, Tencent, Baidu, Qihoo 360, Google Play, China Mobile’s app store and 9game.cn. Because of our strong publishing capabilities, we work closely with various web platforms to promote games that they have licensed on other platforms and through other distribution channels.

Our agreements with app stores, web platforms and social networks are generally for terms of one to three years. We share a certain percentage of the proceeds we receive through games offered in the app stores and through mobile portals.

Game Center Application

We publish our self-developed and licensed games through our Game Center application which is our proprietary application for Android-based smartphones and pre-installed on millions of handsets throughout China. Through our Game Center, players can download over 1,400 games, both those that we own and license and those that are owned and licensed by third parties. We developed our Game Center application internally and we own all of the intellectual property rights to the Game Center application.

In addition, in 2014, we established a game support platform titled “Super SDK”, which combines social chatting, cross promotion, data mining and other functions. It links game developers with multiple distribution channels while simultaneously increasing user stickiness and increasing the efficiency of developers in distributing and marketing their games.

Mobile Network Operators

We have developed strong relationships with mobile network operators, including China Mobile, China Telecom and China Unicom. Pursuant to these relationships we share revenue generated by the games hosted on their network and platforms.

We have entered into a channel cooperation agreement with China Mobile, the largest mobile network operator in China. Pursuant to the agreement, China Mobile promotes and distributes our games to players on its mobile game platform, and we receive technical support, customer support and user data from China Mobile. In exchange for providing these services, we share with China Mobile a certain percentage of the proceeds generated from the promotion and distribution of games on its platform. China Mobile deducts such portion and relevant expenses before transferring the proceeds to us. The agreement does not contain automatic renewal provisions, as is customary for service providers working with China Mobile.

Our VIE, Yingzheng, was recognized as a quality content provider by China Mobile in October 2010 and since then it has been granted access to fee-collection codes from China Mobile, which enables it to collect proceeds from our games directly through China Mobile, without having to use service providers as intermediaries. In addition to our relationship with China Mobile, we also entered into agreements with the other two major mobile network operators in China.

Advertisers, Agents and Promotional Events

We promote our games through advertising and promotional events. We also engage agents who promote our games across a wide variety of websites and platforms. In addition to online advertising through banner advertisements and pop-up ads, we also use traditional media to promote our games, for instance, through television commercials. We also spread our brand image to potential customers and business partners through attending industry events and hosting press conference. For example, we attended the 12th China Digital Entertainment Expo & Conference 2014 and promoted our games including San Guo Weili Jiaqiang Ban and Crisis Action. We also hosted a press conference in Shanghai in 2014 announcing our new games, which was attended by more than 100 members of the media and more than 400 domestic and overseas distributors, developers, IP owners and investment companies.

Game Operations

Game Management

Each mobile game is managed by a designated game management team. Our game management teams:

•

conduct cost/benefit analyses and produce detailed operational plans;

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coordinate internal resources and interact with our other departments such as game design, artistic design, quality assurance, marketing, and technological services;

•

devise the timing of the release of updates and expansion packs; and

•

manage the game’s virtual community on an ongoing basis by, for example, organizing in-game events.

A centralized game management center monitors the performance of each team. Our operational expertise and best practices are shared with all of our game management teams and departments.

Technology Infrastructure

Our network infrastructure is administered by our operations departments, which handle hardware, system and network operation and maintenance. Our systems are designed for: (i) scalability, (ii) seamless player synchronization, and (iii) reliability to support growth in our player base over our multifaceted publishing platform. We lease bandwidth from telecommunication operators such as China Mobile to connect to the national Internet backbone. We believe that our current network facilities and broadband capacity provide us with sufficient capacity to carry out our current operations.

We have developed an extensive technology infrastructure to support our game development and operations, including a nationwide server network. As of December 31, 2014, our server network consisted of servers with the capacity to support up to 5 million concurrent players. Due to the real-time interaction among hundreds of thousands of players for social games, the stable operation of our games requires a large number of servers and a significant amount of Internet connectivity bandwidth. We have game servers located in Beijing, Shanghai, Guangzhou and Shenzhen in China, as well as Hong Kong, Taiwan and Korea.

While we believe that our network infrastructure and maintenance will likely prevent network interruption resulting from attacks by hackers, there remains a possibility that such attacks could result in delays or interruptions on our network. For a further discussion, see the section entitled “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Undetected programming errors or flaws in our mobile game products could harm our reputation or decrease market acceptance of our products.”

Payment Channels

We offer a variety of payment options to our players. Some players make payments through the billing channels of China Mobile or other service providers, who in turn make payments to us. Players that purchase games through app stores make payments to the operators of the store, who in turn make payments to us. Players can also pay for our mobile games, including all games purchased through our Game Center application, with credit cards, debit cards and through companies such as Shenzhoufu, Unionpay, Alipay and Yeepay. We select service providers based on their network coverage, proceeds-sharing arrangements and track record of proceeds collection. Our agreements with service providers are generally for terms of one year with automatic renewal provisions. Service providers collect proceeds for us from players and we share a certain percentage of such proceeds with the service providers.

We are actively seeking to further expand the payment channels available to our players. As overall costs related to payment channels are lower than costs associated with mobile service providers, increased usage of payment processing agents will enable us to better manage our payment-related costs as a percentage of revenues and potentially increase our profitability. We plan to encourage usage of these payment channels through educational and promotional activities.

Sales and Marketing

We employ various traditional, online and mobile marketing programs and promotional activities, including in-game events and announcements, online and traditional advertising, and offline promotions. We primarily promote our games to end-users through mobile network operators, mobile portals and applications stores. We also employ cross-promotion techniques whereby users will be prompted after playing a particular game to consider playing another similar game. In addition to our advertising campaigns, we believe “word-of-mouth” within our large player base has also positively contributed to the popularity and sales of our mobile games.

To attract developers and publishing partners, we plan to continue advertising in industry publications and attending industry conferences such as China Joy, the Global Mobile Internet Conference and the China Game Industry Group Committee (CGIGC) annual conference. To attract players, we plan to increase our brand recognition through the efforts of our dedicated sales team. Our sales team consists of 140 employees with experience in some of the leading internet and technology companies in China and with the ability to promote our games through all types of traditional and emerging media. We also spread our brand image to potential customers through providing information about our games through media outlets and microblog services such as Weibo and also occasionally through celebrity endorsements and events.

Customer Service and Technical Support

Game players can access our customer service center via phone, online in-game chats or e-mail at any time 24 hours a day, seven days a week. With the growth of our player base and the expansion of our game portfolio, we expect to continue to expand the size of our customer service team. We have implemented detailed performance measures to monitor our calls to ensure that our customers receive quality service. In addition to providing customer service to our players, our customer service representatives also collect feedback about our games and generate for our management and operations personnel periodic reports that summarize important issues raised by players and our responses to those issues.

Competition

The mobile game market in China is highly competitive and fragmented. We compete directly with mobile game publishers and developers in China. We may face competition from app store operators, online game platforms, social networks, mobile and online game developers and other content providers. Some of our existing and potential competitors have significantly greater financial, technological and marketing resources, stronger relationships with industry participants and a larger portfolio of mobile game offerings than we do. Some of our competitors or potential competitors, especially major foreign mobile game developers, also have greater development experience and resources than we have.

We compete primarily on the basis of player base, relationships with online game platforms, mobile handset companies, mobile service providers and mobile network operators, key technologies and research and development capabilities. For a discussion of risks relating to competition, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may face increasing competition, which could reduce our market share and materially and adversely affect our results of operations.”

Intellectual Property

We regard our copyrights, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, suppliers and others to protect our proprietary rights.

As of December 31, 2014, we have registered 215 copyrights for software we developed or acquired from third parties with the State Copyright Bureau of the PRC, and 25 trademarks, including the “CMGE” trademark and the “KKFun” trademark. In addition, we have registered 36 domain names, including www.cmge.com and www.51pk.com.

While we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. Also, we cannot be certain that our products and services do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, as discussed in “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.”

Facilities

Our principal executive offices are located at Block A, 15/F Huajian Building, 233 Tianfu Road, Tianhe District, Guangzhou, PRC. We also maintain offices both within and outside China, including offices in Japan, Beijing, Guangzhou, Korea, Hong Kong, Chengdu, Shanghai and Shenzhen, under leases with terms ranging from one to five years. Our offices had an aggregate gross floor area of approximately 12,000 square meters as of December 31, 2014. We lease our facilities from independent third-parties and do not own any real property.

We believe that our leased facilities are adequate to meet our needs for the foreseeable future, and that we will be able to obtain adequate facilities, principally through leasing of additional properties, to accommodate our future expansions.

Insurance

We do not maintain any property insurance policies covering equipment and facilities for losses due to fire, earthquake, flood or any other disaster. We maintain director and officer liability insurance for our directors and

executive officers. Consistent with customary industry practice in China, we do not maintain business interruption insurance or key employee insurance for our executive officers. Damage to any of our uninsured equipment or buildings or a significant product liability claim could have a material adverse effect on our results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have limited insurance coverage which could expose us to significant costs and business disruption.”

Legal Proceedings

We may from time to time become a party to various legal, arbitral or administrative proceedings arising in the ordinary course of our business.

Beginning in June 2014, we were named as a defendant in two putative securities class actions filed in the United States District Court for the Southern District of New York, and in the United States District Court for the Southern District of New York, which have since been consolidated into one suit in the same court, In re China Mobile Games & Entertainment Group, Ltd. Securities Litigation, in the United States District Court for the Southern District of New York, Civ. No. 14-4471. The primary allegations are that certain Company filings with the Securities and Exchange Commission were false and/or misleading about the Company’s internal controls and compliance with U.S. GAAP. On November 20, 2014, the court consolidated the cases and appointed Miran Segregated Portfolio Company/Miran Long Short Equity Segregated Portfolio as the lead plaintiff. Plaintiffs filed their amended complaint on February 2, 2015 and on March 19, 2015 we moved to dismiss the complaint in full. We believe that we have meritorious defenses to the complaint and we intend to vigorously defend ourselves against the claim.

Regulations

Our provision of mobile game development and operation and mobile handset design services is subject to a number of PRC laws and regulations relating to the telecommunications services, Internet information services, electronic and Internet publications, online games and cultural products, and information security and censorship, and is regulated by various PRC government authorities, including:

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the Ministry of Industry and Information Technology, or MIIT (formerly the Ministry of Information Industry, or MII);

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the State General Administration of Press, Publication, Radio, Film and Television, or SAPPRFT (formerly the General Administration of Press and Publication, or GAPP, and the State Press and Publications Administration, or SPPA);

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the Ministry of Culture, or MOC;

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the Ministry of Public Security;

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the State Administration for Industry and Commerce, or SAIC;

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the Ministry of Commerce, or MOFCOM (formerly the Ministry of Foreign Trade and Economic Cooperation, or MOFTEC); and

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the State Administration of Foreign Exchange, or SAFE.

These PRC government authorities have issued a series of rules that regulate a number of different substantive areas of our business, which are discussed below.

Regulations on Foreign Investments

On March 10, 2015, NDRC and MOFCOM jointly issued the new Guiding Catalogue for Foreign Investment Industries (2015 revision), which took effect on April 10, 2015. Pursuant to this catalogue, the

percentage of foreign investors’ participation in value-added telecommunications sector may not exceed 50% (save for e-commerce services, which does not apply to our business), and the producing and publishing of electronic publications, internet publishing services and internet culture business fall within the category of industries prohibiting foreign investment. In compliance with such foreign ownership restrictions, we have been operating our businesses in the PRC through Yingzheng and Lanyue, or our VIEs, which are owned by PRC citizens.

Regulations on Telecommunications Industry

Telecommunications Services

On September 25, 2000, the State Council of the PRC, or the State Council, promulgated the Regulations on Telecommunications of the PRC, or the Telecom Regulations, which regulate the telecommunication industry and telecommunication-related activities in the PRC. Pursuant to the Telecom Regulations, telecommunications business operations in the PRC are subject to certain licenses from MIIT or its provincial counterpart, depending upon the different categories of services and geographic region of operation. Telecommunications services are divided into two main categories: basic telecommunications services and value-added telecommunications services. Each category of services is further divided into several sub-categories. Pursuant to the Catalogue for Classification of Telecommunications Services effective as of April 1, 2003, our business constitutes the information services business, which falls within the value-added telecommunications business category.

On March 5, 2009, MIIT issued the Measures on Administration of Telecommunications Business Operation Licensing, or the Telecom Licensing Measures, which became effective on April 10, 2009 and repealed the Measures on Administration of Telecommunications Business Operation License issued in 2001. The Telecom Licensing Measures spell out the conditions, documents required and procedures for application for the telecommunications business operation license and specify the requirements on usage of the license and the code of conduct that telecommunications services providers must comply with. According to the Telecom Licensing Measures, telecommunications services providers are also required to lodge certain documents with the competent authorities in first quarter of each year and go through the annual inspection process in respect of their operations during the previous year.

Foreign Investment in Telecommunications Sector

Foreign investment in telecommunications sector is governed by the Regulations on Administration of Foreign Invested Telecommunications Enterprises, or the FITE Regulations, which were promulgated by the State Council on December 11, 2001, effective February 1, 2002 and amended on September 10, 2008. Pursuant to the FITE Regulations, a foreign investor must establish a Chinese-foreign equity joint venture with a Chinese partner to invest in telecommunications industry. A foreign-invested telecommunications enterprise, or FITE, is allowed to be engaged in basic telecommunications business and value-added telecommunications business. The foreign investor’s ultimate equity holding percentage in a value-added telecommunications business may not exceed 50%.

To comply with the restrictions on the foreign participation percentage in the telecommunications industry, we have established Yingzheng, a VIE to undertake the value-added telecommunications business. For a detailed discussion of the contractual arrangements with our VIE, please refer to “Item 4. Information on the Company. C. Organizational Structure—Our Contractual Arrangements with our VIEs.”

On July 13, 2006, MIIT issued the MIIT Circular which emphasizes that a foreign investor planning to invest in the value-added telecommunications sector in the PRC must set up an FITE and apply for the applicable telecommunications business operation license. A domestic value-added telecommunications services provider shall not lease, transfer or sell any telecommunications business operation license in any way to a foreign

investor, or provide resources, sites, facilities or other conditions for a foreign investor to illegally operate a telecommunications business in the PRC.

According to the MIIT Circular, if a foreign investor cooperates with a domestic value-added telecommunications services provider, the following requirements apply: (1) the domain names and registered trademarks used by the value-added telecommunications services provider must be legally owned by itself or its shareholder; (2) the value-added telecommunications services provider must have site, servers and other necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license; and (3) the value-added telecommunications services provider must safeguard its network information by establishing relevant measures and administrative system for network security and putting in place procedures for handling emergencies of network and information security.

Regulations on Electronic and Internet Publication

On February 21, 2008, GAPP issued the Regulations on Administration of Publishing of Electronic Publications, or the Electronic Publications Regulations, which became effective from April 15, 2008 and repealed the previous Regulations on Administration of Electronic Publications issued on December 30, 1997. Pursuant to the Electronic Publications Regulations, the PRC implements a licensing system for publishing of electronic publications. A company wishing to publish electronic publications must meet the specified requirements on registered capital, equipment, site and organizational structure and obtain the approval from SAPPRFT. With such approval, the company must handle registration with the provincial counterpart of SAPPRFT and obtain an Electronic Publications Publishing License. A company engaged in publishing of electronic publications is also required to go through a regular inspection process every two years, in which process, the company’s registration, qualification, business operation, compliance and internal management will be reviewed by the provincial counterpart of SAPPRFT. Mobile games are classified as a type of electronic production and publishing of mobile games is subject to the foregoing license and requirements.

On June 27, 2002, GAPP and MIIT jointly issued the Interim Regulations on Administration of Internet Publication, or the Internet Publication Regulations, which became effective from August 1, 2002. These regulations require business operations involving internet publishing to be approved by SAPPRFT prior to applying for the relevant approval from the MIIT. Under a relevant notice jointly issued by GAPP and other government authorities on September 28, 2009, provision of online games via Internet is regarded as an Internet publishing activity and subject to the prior approval by SAPPRFT. With such approval, the online game operator will be granted an Internet Publishing License specifically allowing online games operation. The notice prohibits any direct foreign investment in online games operation business. Furthermore, it prohibits foreign control or participation in domestic companies’ online game operation business in an indirect way such as entering into relevant agreements or providing technical support, or in any other disguised manner.

Regulations on Online Games and Cultural Products

On February 17, 2011, MOC issued the revised Interim Regulations on Administration of Internet Culture, or the Internet Culture Regulations, effective as of April 1, 2011. According to the Internet Culture Regulations, the “Internet cultural products” are defined as including the online games specially produced for Internet and games reproduced or provided through Internet. Provision of Internet cultural products and related services is subject to the approval of MOC or its provincial counterpart. MOC issued the Circular on Implementation of the Newly Revised Interim Regulations on Administration of Internet Culture on March 18, 2011, which provides that temporarily the authorities will not accept applications by foreign-invested Internet content providers for operation of Internet culture business (other than online music business).

On June 3, 2010, MOC issued the Interim Measures on Administration of Online Games, or the Online Game Measures, which became effective from August 1, 2010. Pursuant to the Online Game Measures, a

company wishing to be engaged in operation of online games, including mobile games operated through wireless telecommunication networks, issuance of virtual currency and/or provision of virtue currency transaction services must have a registered capital of at least RMB10 million and obtain an Internet Culture Business License from the provincial counterpart of MOC.

The Online Game Measures place restrictions on the content of online games and MOC is responsible for conducting the content review. With respect to the online games developed in the PRC, the online game operators are required to complete filing procedures with MOC within thirty days after the online games are provided via internet, and indicate the filing numbers at the designated places of their websites and in the games. Online game operators are also required to establish self-censorship systems and have dedicated personnel for the purpose to ensure the lawfulness of the content of online games.

The Online Game Measures require the online game operators to, based on the contents, functions and target users, formulate user guidance and warning information regarding the online games, and indicate such information at a conspicuous place of their websites and in the games. MOC has formulated the Essential Clauses of the Standard Agreement for Online Game Services. Pursuant to the Online Game Measures, the service agreement entered into between an online game operator and a user must include all the essential clauses specified by MOC. Other clauses in the service agreement shall not contravene the essential clauses. Furthermore, the online game operators are required to take technical and managerial measures to ensure online information security, including preventing computer virus invasion, attack or damage, backing up important data and saving user registration information, operating information, maintenance logs and other information, and protect State secrets, trade secrets and users’ personal information.

Regulations on Software Products

On March 5, 2009, MIIT issued the Measures on Administration of Software Products, or the Software Measures, which took effect as of April 10, 2009 and replaced the previous measures concerning the same subject matter issued on October 27, 2000. The Software Measures regulate development, production, sales, import and export of software products in the PRC in a view to promoting the development of China’s software industry. The Software Measures brought into place a registration and filing system for software products. Software products developed in China shall be registered with the provincial counterpart of MIIT and filed with MIIT, and be granted the Software Product Registration Certificates. According to the Circular on Purifying Online Games jointly issued by MOC, MIIT, SAIC and other relevant government authorities on June 9, 2005, if an online game is not registered and filed under the Software Measures, it is not allowed to be operated in the PRC.

Regulations on Technology Import and Export

On December 10, 2001, the State Council promulgated the Regulations on Administration of Import and Export of Technologies, which took effect as of January 1, 2002. These regulations and related legislations set out the regime regulating the import and export of technologies. The import and export of technologies is broadly defined as including transfer or license of patents, software and know-how, and provision of services in relation to the technology. Under the regime, technologies are classified as prohibited, restricted or freely-tradable. The technologies in the freely-tradable category may be traded freely without a special approval or license. The contracts for export of freely-tradable technologies are required to be filed with the relevant government authority for record but the filing procedure is not a pre-condition for effectiveness of the contracts.

Regulations on Information Security and Privacy Protection

On December 28, 2000, the Standing Committee of the National People’s Congress introduced legislation for protection of the Internet security. The legislation prohibits use of the Internet that violates the PRC laws and regulations or damages the public security. It also prohibits dissemination of illegal or socially destabilizing

content or leakage of state secrets through the Internet, or infringement on trade secret or other legal rights and interests. According to the Regulations on Protection of Computer Information System Security issued by the State Council and effective as of February 18, 1994, the public security authorities are responsible for supervising, inspecting and guiding the Internet security protection work of the information system users and investigate and penalize activities breaching the mandatory Internet security requirements.

On December 11, 1997, the State Council approved the Measures for Administration of Security Protection of Internet and Computer Information Network, and the measures took effect on December 30, 1997. The measures require internet service providers to provide a monthly report of certain user information to the public security authority and assist the public security authority in investigating incidents involving breach of laws and regulations on the Internet security.

On December 13, 2005, the Ministry of Public Security issued the Regulations on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which took effect from March 1, 2006. The Internet Protection Measures require ICP operators to take proper measures including anti-virus, data back-up and other related measures, and keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days, and detect illegal information, stop transmission of such information, and keep relevant records. Internet services providers are prohibited from unauthorized disclosure of users’ information to any third parties unless such disclosure is required by the laws and regulations. They are further required to establish management systems and take technological measures to safeguard the freedom and secrecy of the users’ correspondences.

Regulations on Intellectual Property

Copyright

The Copyright Law of the PRC, adopted in 1991 and revised respectively in 2001 and 2010, protects copyright and explicitly covers computer software copyright. On December 20, 2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from January 1, 2002 and amended on March 1, 2013, which are intended to protect the rights and interests of the computer software copyright holders and encourage the development of software industry and information economy. In the PRC, software developed by PRC citizens, legal person or other organizations is automatically copyright protected immediately after its development, without an application or approval. Software copyright may be registered with the designated agency and if registered, the certificate of registration issued by the software registration agency will be the preliminary evidence of the ownership of the copyright and other registered matters. On February 20, 2002, the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright Registration, which outline the operational procedures for registration of software copyright, as well as registration of software copyright license and transfer contracts. The Copyright Protection Center of China is mandated as the software registration agency under the regulations.

Trademark

The Trademark Law of the PRC, adopted in 1982 and revised respectively in 1993, 2001 and 2013, protects registered trademarks. The China Trademark Office under the SAIC is responsible for trademark registrations. Upon the registration of a trademark, the register will have the right to exclusively use the trademark. Registered trademark license agreements are required to be filed with the China Trademark Office for record.

Domain Name

Internet domain name registration and related matters are primarily regulated by the Implementing Rules on Registration of Domain Names issued by CNNIC, the domain name registrar of the PRC, which became effective on June 5, 2009, the Measures on Administration of Domain Names for the Chinese Internet, issued by MIIT on

November 5, 2004 and effective as of December 20, 2004, and the Measures on Domain Name Disputes Resolution issued by CNNIC on February 14, 2006 and effective as of March 17, 2006. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and the applicants become domain name holders upon successful registration.

SAFE Circular 37 and Relevant Regulations

On July 4, 2014, SAFE issued the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, which replaced the former circular commonly known as “SAFE Circular 75” issued by SAFE on October 21, 2005. Pursuant to Circular 37, a PRC resident should complete the registration with the local SAFE counterpart before making contributions to an offshore special purpose vehicle, or SPV, defined as an offshore enterprise directly established or indirectly controlled by the PRC resident for the purpose of overseas investment and financing, with his/her legally owned assets or interests in a domestic enterprise or offshore assets or interests. The PRC resident is also required to update the registration upon capital increase or deduction, shares transfer or swap, merger or division, and other material changes of the SPV. PRC residents who have contributed legitimate domestic or offshore assets or interests to SPVs but have yet to obtain SAFE registrations before the implementation of Circular 37 are required to complete the registrations in accordance therewith. The fulfillment of the SAFE registrations as described above is a prerequisite for other regulatory procedures required for relevant cross-border investment activities and capital flows, such as the offshore entity’s inbound investment and the onshore entity’s payment of dividends. Failure to comply with Circular 37 may subject relevant PRC residents to penalties under the PRC foreign exchange administration regulations.

On February 13, 2015, SAFE issued the Circular on Further Simplifying and Improving Foreign Exchange Administration Policies Concerning Direct Investments, or Circular 13, which will become effective on June 1, 2015. The Circular has removed the requirement for SAFE’s approval on foreign exchange registrations in connection with foreign direct investment and overseas direct investment, including such registration required by Circular 37. The qualified banks are delegated the power to directly conduct such foreign exchange registrations under SAFE’s supervision.

National Security Review

On August 25, 2011, MOFCOM promulgated the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement the Security Review Circular. According to the Security Review Circular, if a targeted domestic enterprise is engaged in industries (such as defense sector, important agriculture products, important energy and resources, important infrastructure, important transportation services, key technologies and material equipment manufacturers) having a national security concern and the merger or acquisition will result in foreign investor’s acquiring actual control of the domestic enterprise, the transaction is subject to security review. According to the MOFCOM Security Review Regulations, MOFCOM will focus on substance and the actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Security Review Circular led by the National Development and Reform Commission and MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the mobile games business requires security review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review Circular are subject to MOFCOM review. As we acquired actual control over Yingzheng prior to promulgation of the Security Review Circular and the MOFCOM Security Review Regulations, we do not believe we are required to submit our existing contractual arrangement with Yingzheng to MOFCOM for security review. We believe our current business operated in the PRC does not fall within the industries having a national security concern under the

Security Review Circular and our contractual arrangement with Lanyue is not subject to MOFCOM’s security review. However, we have been advised by our PRC legal counsel, Guantao Law Firm, that as the Security Review Circular and the MOFCOM Security Review Regulations are relatively new and there is no clear statutory interpretation of them, there can be no assurance that MOFCOM will have the same view as we do when applying the national security review requirements.

Regulations on Foreign Currency Exchange

The principal regulations governing foreign currency exchange in the PRC are the Regulations on Administration of Foreign Exchange, or the Foreign Exchange Regulations, promulgated by the State Council in 1996 and amended in 1997 and 2008. Under the Foreign Exchange Regulations, RMB is freely convertible for current account items, such as dividends distributions, interest payments, and trade and service-related foreign exchange transactions, on a basis of true and lawful transactions, but not for capital account items, such as direct investments, loans, repatriation of investments, and investments in securities outside the PRC, unless the prior approval of SAFE is obtained and registration with SAFE is completed.

Pursuant to the Rules on Administration of Settlement, Sale and Payment of Foreign Exchange Provisions, issued by the People’s Bank of China on June 20, 1996 and effective from July 1, 1996, foreign-invested enterprises in the PRC may purchase foreign currency, subject to a cap approved by SAFE, to settle current account transactions, without the approval from SAFE. Foreign exchange transactions under capital account are still subject to limitations and require approvals from or registrations with SAFE.

Regulations on Dividend Distribution

The principal regulations governing distribution of dividends by wholly foreign-owned enterprises include the Company Law of the PRC, adopted in 1993 and amended in 1999, 2004, 2005 and 2013, The Law on Wholly Foreign-owned Enterprises of the PRC, adopted in 1986 and amended in 2000, and the Implementing Rules of the Wholly Foreign-owned Enterprise Law, issued in 1990 and amended in 2001 and 2014. Under these laws and regulations, foreign-invested enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with the PRC accounting standards and regulations. Foreign-invested enterprises in the PRC are required to allocate 10% of its after-tax profits each year to their general reserves until the accumulated amount of such reserves has reached 50% of their registered capital. These reserve funds are not distributable as cash dividends.

SAFE issued the Notice on Issuing the Provisions on the Foreign Exchange Administration of Domestic Direct Investment of Foreign Investors and the Supporting Documents, or Circular 21, which became effective on May 13, 2013. Under the provisions, the foreign invested enterprises which have completed the foreign exchange registrations for direct investments can convert their payable dividends into foreign currencies and transfer such funds out of the PRC through the banks in the PRC. For the aforesaid purpose, the foreign invested enterprises are required to provide the banks with certain supporting documents for their review on a “genuine transaction” basis.

Laws on Labor and Social Security

On June 29, 2007, the PRC government promulgated the PRC Labor Contract Law, which became effective on January 1, 2008 and amended on December 28, 2012. Pursuant to the PRC Labor Contract Law and the PRC Labor Law, which became effective on January 1, 1995, (i) employers must execute written labor contracts with full-time employees, (ii) employers are prohibited from forcing employees to work overtime unless they pay overtime pay to the employees and the hours worked beyond the standard working hours are within the statutory limits, (iii) employers are required to pay salaries to employees on time and the salaries paid to employees shall not be lower than the local minimum salary standard, and (iv) employers shall establish its system of work safety

and sanitation, and provide employees with workplace safety training. In addition, in accordance with the relevant laws and regulations on social security, employers in the PRC are required to make contributions to various social insurances (including medical, pension, unemployment, work-related injury and maternity insurance) and the housing fund on behalf its employees. As of December 31, 2014, certain of our subsidiaries have not made all necessary contributions to the various social insurances and the housing fund on behalf of their employees, the aggregate amount of which is RMB27.1 million (US$4.4 million), for which we have made a full provision. Our PRC legal counsel, Guantao Law Firm, has advised us that our failure to make such payments could subject us to penalties, including fines and court enforcement.

C.	Organizational Structure

The following diagram illustrates our significant subsidiaries and VIEs as of the date of this annual report:

LOGO

(1)	Lanyue is one of our VIEs in China. Its current registered shareholders are Ken Jian Xiao and Xiongfei Liu who hold 99.0% and 1.0%, respectively. Ken Jian Xiao is our chief executive officer and a director and Xiongfei Liu is an independent third-party.

(2)	Yingzheng is one of our VIEs in China. Its current registered shareholders are Yongchao Wang, De Liang and Feng Zheng, who are 3GUU BVI’s officers and who each hold 76.0%, 4.0% and 20.0% of Yingzheng’s shares, respectively.

The following table sets out the details of our subsidiaries as of December 31, 2014:


Significant Subsidiaries*	Jurisdiction	Ownership Interest
3GUU Holding Limited	BVI		100	%
3GUU Mobile Entertainment Co. Limited	Hong Kong		100	%
3GUU Mobile Entertainment Industrial Co., Ltd.	BVI		100	%
Beauty Wave Limited	BVI		100	%
China Mobile Games and Entertainment Group (HK) Limited	Hong Kong		100	%
China Perfect Investments Limited	Hong Kong		100	%
China Wave Group Limited	BVI		100	%
CMGE Investment Limited	Hong Kong		100	%
Guangzhou Huifenghechang Mobile Technology Co., Ltd.	PRC		100	%
Guangzhou Yitongtianxia Software Development Co., Ltd.	PRC		100	%
Huiyou Digital (Shenzhen) Ltd.	PRC		100	%
HYD Holding Limited	BVI		100	%
OWX Hong Kong Limited	Hong Kong		100	%
Shanghai Suiyue Technology Co., Ltd.	PRC		100	%
Shenzhen Douqu Software Co., Ltd	PRC		80	%
Shenzhen Qilewuxian Software Development Co., Ltd.	PRC		100	%
Shenzhen Zhongtuokechuang Technology Co., Ltd.	PRC		100	%
Uni-Force Development Limited	Hong Kong		100	%
Vogins Technology Co. Limited	BVI		91	%
Weili Development Limited	Hong Kong		100	%
Vogins Technology (Shanghai) Co., Ltd.	PRC		100	%

Variable Interest Entities and their Subsidiaries Consolidated in our Financial Statements	Jurisdiction
Guangzhou Yingzheng Information Technology Co., Ltd.	PRC
Shenzhen Lanyue Internet Technology Co., Ltd.	PRC
Chengdu Zhuoxing Technology Co., Ltd.	PRC
Beijing Wuyao Technology Co., Ltd.	PRC
Tianjin Suiyue Technology Co., Ltd.	PRC
Beijing Zhuoyuechenxing Technology Co., Ltd.	PRC

*	Other consolidated entities of China Mobile Games and Entertainment Group Limited have been omitted from this list since, considered in the aggregate as a single entity, they would not constitute a significant subsidiary.

Our Contractual Arrangements with our VIEs

Our PRC operating subsidiaries, are wholly foreign-owned enterprises and are subject to PRC legal restrictions on foreign ownership in the telecommunications sector. See “—B. Business Overview—Regulations.” Accordingly, we conduct business activities relating to the development, operation and marketing of mobile games primarily through our VIEs. The registered shareholders of Yingzheng are Yongchao Wang, De Liang and Feng Zheng and the registered shareholders of Lanyue are Ken Jian Xiao and Xiongfei Liu. We established Lanyue in 2013 through entering into contracts that were substantially identical to the contracts we had previously entered into with respect to Yingzheng. Through these contractual arrangements with our VIEs

and their registered shareholders, we bear the economic risks and receive the economic benefits of our VIEs. Although we do not have an equity interest in our VIEs, due to the nature of these contractual arrangements, we have consolidated the financial results of our VIEs into our financial statements in order to fairly present our financial position and results of operations. Contractual arrangements with our VIEs and their registered shareholders enable us to:

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have the power to direct the activities of our VIEs that most significantly impact our VIEs’ economic performance;

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have the right to receive substantially all of the economic benefits from our VIEs;

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have an exclusive option to purchase all of the equity interest in our VIEs when and to the extent permitted by PRC law; and

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exercise effective control over our VIEs.

Exclusive Call Option Agreements

We entered into option agreements with our VIEs’ registered shareholders, pursuant to which our VIEs and their respective designated persons have the exclusive option to purchase, when and to the extent permitted under PRC law, all of the equity interests in our VIEs. The exercise price for the options to purchase all of the equity interests in our VIEs is the minimum amount of consideration permissible under PRC law. These option agreements provide, among other things, that without the prior written consent of our WFOEs, Yitongtianxia or Huiyou, as the case may be, the registered shareholders of our VIEs may not transfer, encumber, grant security interest in, or otherwise dispose of any equity interests in our VIEs.

Exclusive Technology Services and Market Promotion Agreements

Our WFOEs entered into exclusive technology services and market promotion agreements and related supplemental agreements with our VIEs, which provide that our WFOEs have the exclusive right to provide to our VIEs various technology and market promotion services related to the mobile phone games business. In return, our VIEs are required to pay our WFOEs service fees in amounts as determined at the sole discretion of our WFOEs. In addition, without the prior written consent of our WFOEs, our VIEs may not engage in any transaction that may substantially alter their business, assets, operations, employees or other relevant rights and obligations. Unless our WFOEs terminate the agreements, the exclusive technology services and market promotion agreements will remain in effect.

Loan Agreements

Under loan agreements between our WFOEs and the registered shareholders of our VIEs, Yitongtianxia and Huiyou have both agreed to separately extend loans of up to RMB20 million (US$3.3 million) each to the registered shareholders of our VIEs. The registered shareholders obtained the loans to contribute registered capital to our VIEs or provide shareholder’s loans to our VIEs, which funds should be used by our VIEs for their normal business operation and expansion. The terms of the loans are 10 years and will automatically extend for another 10 years unless we, in our sole discretion, object. As of December 31, 2014, Yingzheng’s shareholders had not drawn down any loans from Yitongtianxia.

Equity Pledge Agreements

Under our WFOEs’ equity pledge agreements with our VIEs and their respective registered shareholders, the registered shareholders of our VIEs pledged all of their equity interests in our VIEs to our WFOEs to secure performance of the obligations of the registered shareholders and our VIEs under the various contractual arrangements. If our VIEs or any of their registered shareholders breach any of their respective contractual obligations under these agreements, our WFOEs, as pledgees, will be entitled to exercise certain rights, including

the right to obtain compensation from a sale of the pledged equity interests, with the priority over other creditors. The registered shareholders of our VIEs agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their respective equity interests in our VIEs without our WFOEs’ prior written consent. The above share pledge for our VIEs has been registered with the relevant local branches of the SAIC.

Technology Services Agreements

Under technology services agreements between our WFOEs and our VIEs, as supplemented, our WFOEs agreed to provide our VIEs with technology support and market promotion services related to our VIEs’ mobile game business. our VIEs agreed to distribute 40% of their income generated from the game products developed under the technology services agreements (after deducting taxes and expenses) to our WFOEs on a monthly basis. Under a further supplementary agreement between Yitongtianxia and Yingzheng dated July 15, 2013, the term of the aforesaid technology service arrangement has been extended to July 31, 2014, and during the extended period, Yingzheng agreed to distribute 80% of its income generated from the game products developed under the arrangement (after deducting taxes and expenses) to Yitongtianxia. The term of the technology service arrangement will automatically extend if Yitongtianxia and Yingzheng have no objection to it. The term of the agreement with Lanyue is three years and will automatically extend for another three years (or other term instructed by us) unless we, in our absolute discretion, object.

Agreements for Voting Proxies

Under our agreements for voting proxies, among our WFOEs, our VIEs and their respective registered shareholders, each registered shareholder of Yingzheng has appointed Yitongtianxia, and each registered shareholder of Lanyue has appointed Huiyou, to be his or her attorney, and irrevocably authorizes either Yitongtianxia or Huiyou, as the case may be, to vote on his or her behalf on all matters concerning our VIEs that may require shareholders’ approval. In consideration of our WFOEs’ provision of management services to our VIEs, our VIEs will pay to our WFOEs management fees amounting to our VIEs’ annual revenues net of operating costs, expenses, and applicable taxes. On December 16, 2011 and September 16, 2013, Yitongtianxia and Huiyou re-assigned the rights underlying the agreement for voting proxies to 3GUU BVI and China Wave, respectively.

Supplementary Agreements

Our WFOEs have entered into supplementary agreements with our VIEs and their respective shareholders whereby our VIEs have agreed to pay an annual management fee to our WFOEs based on the annual revenue of our VIEs minus actual operating costs, other costs of our VIEs, which include fees paid under the technology services agreement, and taxes paid by our VIEs.

Our WFOEs have entered into supplementary agreements with our VIEs and their respective shareholders. Under these supplementary agreements: (i) prior to our WFOEs exercising their option to acquire our VIEs, our VIEs’ shareholders cannot declare any dividends or distribute any residual profits without the consent of our WFOEs; (ii) any funds, including dividends distributed out of our VIEs’ residual profits, received by our VIEs’ shareholders or any persons designated by our VIEs’ shareholders, will be remitted in full to our WFOEs; (iii) the consideration received by our VIEs’ shareholders upon the exercising of our WFOEs’ option to acquire our VIEs must be immediately remitted to our WFOEs or any persons designated by our WFOEs; and (iv) our WFOEs have the unilateral right to change the service fee amount under the exclusive technology services and market promotion agreement. In addition, the supplementary agreements clarified that our WFOEs were obligated to provide continuous financial support to our VIEs.

On December 16, 2011, 3GUU BVI agreed to provide financial support to Yingzheng, our VIE, for its operations. In addition, Yitongtianxia re-assigned the right to vote on all of the matters in Yingzheng that require shareholders’ approval irrevocably entrusted to it by shareholders of Yingzheng to 3GUU BVI. Accordingly, as a

result of the power to direct the activities of Yingzheng pursuant to the power of attorney agreements and the obligation to absorb the expected losses of Yingzheng through financial support, Yitongtianxia ceased to be and 3GUU BVI became the primary beneficiary of Yingzheng.

On September 16, 2013, China Wave agreed to provide unlimited financial support to Lanyue for its operations. In addition, pursuant to a power of attorney agreements entered into between Huiyou and China Wave, Huiyou re-assigned the rights to attend Lanyue shareholders’ meetings and to vote on all of the matters in Lanyue that require shareholders’ approval irrevocably entrusted to it by shareholders of Lanyue to China Wave. Accordingly, as a result of the power to direct the activities of Lanyue pursuant to the power of attorney agreements and the obligation to absorb the expected losses of Lanyue through financial support, Huiyou ceased to be and China Wave became the primary beneficiary of Lanyue.

D.	Property, Plant and Equipment

Item 4A. UNRESOLVED STAFF COMMENTS

None.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our audited consolidated financial statements and their related notes included in this annual report. This annual report contains forward-looking statements. See “—G. Safe Harbor.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

A.	Operating Results

Overview

We are the largest publisher and a leading developer of mobile games in China with integrated capabilities across the mobile game value chain. We had the largest market share of all mobile game publishers in China in the fourth quarter of 2014 based on gross billings, according to Analysys. Gross billings measures the total amount spent by players on the games published by a company, which amount can be greater than the revenue derived by the company from its published games. Our market share reached 20.1% of gross billings generated by all mobile game publishers in China in the fourth quarter of 2014, according to Analysys. In addition, according to Analysys, for the fourth quarter of 2014, we ranked among the top ten mobile game developers in China in terms of market share based on gross billings. Our integrated capabilities include the development, licensing, publishing, distribution and operation of mobile games, primarily in China. Our expertise and scale of operations, both as a game publisher and game developer, differentiate us from our competitors. For the year ended December 31, 2014, we had 42.8 million paying users (as measured by the total number of paying user accounts and total subscriptions for game bundles), including 21.1 million paying users of social games.

and our net income in 2014 was RMB227.9 million (US$36.7 million). Our non-GAAP net income, which excludes share-based compensation expenses, internal investigation costs, impairment of goodwill and intangible assets and listing expenses, was RMB61.3 million, RMB43.4 million and RMB267.9 million (US$43.2 million) for 2012, 2013 and 2014. See “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Information” for important information about non-GAAP financial measures.

Factors Affecting Our Results of Operations

Our results of operations and financial condition have been, and will continue to be, affected by general factors affecting the mobile game industry in China, including China’s overall economic growth, growth of the mobile handset and mobile communications industries in China, demand for mobile games and entertainment, government laws and policies affecting the heavily-regulated telecommunications and mobile games industries, and competition in the mobile game industry in China.

Our results of operations are more directly affected by the following company-specific factors, including:

•

Our ability to continuously develop and license popular games. Our ability to continuously develop and license popular games is a major factor that will allow us to retain and expand our player base. As of December 31, 2014, our portfolio consisted of 751 mobile games of which 215 were developed in-house and 536 were licensed from mobile game developers, compared to 717 mobile games as of December 31, 2013, of which 196 were developed in-house and 521 were licensed from mobile game developers. These games include a mix of single-player and social games of many genres. We believe the increase in the diversity and quality of our game portfolio has increased the size of our total paying player base and contributed to growth in our net revenues in the past. Our ability to continue to enlarge our portfolio with attractive games that target different types of users will be critical to retaining and expanding our player base.

•

Our ability to expand our publishing platform. The growth of our player base depends on our ability to make our games available for download to mobile game players. To distribute our games, we cooperate with a number of business partners, including chipset manufacturers, handset companies, app stores, web platforms, advertisers and mobile network operators. Our ability to maintain and expand our publishing platform is critical to our continuing success.

•

Our ability to monetize our player base. Our results of operations are also dependent on our ability to convert our players into paying users or subscribers. Most of our mobile games are offered on either a free-for-trial or free-to-play basis. We believe that the free-for-trial and free-to-play models enable us to quickly establish an active player base, opening up access to a pool of potential players to purchase our virtual products and services and allowing those players to experience our games before deciding if they want to purchase additional chances to play, access to additional stages in the game or other premium features. Our games are designed to maximize user playtime as well as the overall game life span, in order to convert a higher percentage of players into paying users or subscribers. Moreover, the engaging features of our games are designed to encourage players to spend money on in-game items such as additional chances to play, the right to play additional stages, or performance-enhancing items such as weapons, accessories and pets.

•

Our ability to integrate the operations, technologies, services and personnel of our business units. We plan to integrate and centralize certain functions of the companies we acquire. The extent to which we will further integrate these acquired companies into our business in terms of customer service, growth strategy and corporate culture could impact our results of operations.

•

Our ability to control our operating costs and expenses and improve operational efficiency. Our profitability is significantly affected by our cost of revenues and operating expenses. Our cost of revenue increased from 2012 to 2014, primarily due to an increase in amortization of intangible assets, including game licensing fees, and in increase in amounts paid to payment channels. Our operating expenses increased from 2012 to 2014, primarily due to (i) an increase in our publishing business

which required greater selling expenses to market our games, (ii) an increase in our employee headcount to support the growing scale of our business which required greater general and administrative expenses, and (iii) an increase in research and development expenses to support our product development activities. Our ability to manage fees to third-party distribution channels will affect our cost of revenues, as will our ability to reduce pre-installation fees as we transition to developing and licensing a greater number of smartphone games. We expect our operating expenses to increase in the future as we seek to expand our player base. Our ability to control such costs and expenses directly impacts our profitability.

Descriptions of Certain Statements of Comprehensive Income Items

Net Revenues

We mainly use the following revenue models for our mobile games:

•

Item purchase fee. Mobile users can download and play the basic version of the game for free. We charge mobile players of both social and single-player games when they purchase in-game items, such as additional chances to play, the right to play additional stages, or performance-enhancing items such as weapons, accessories and pets.

•

Subscription fee. We also promote some single-player games using game bundles available through China Mobile. For instance, for a monthly fee of RMB10 to RMB12, players can download six to eight games, respectively, in a bundle and we replace two games in the bundle every quarter.

•

One-time fee. Some of our single-player games are available in various app stores for a one-time download fee.

Substantially all of our revenues are generated in China. For more details on revenue recognition, see “—Critical Accounting Policies—Revenue Recognition.”

The following table sets forth the breakdown of our net revenues for the periods indicated:

For the Year Ended December 31,

2012

2013

2014

RMB

US$

(in thousands)

Net revenues

Games

172,185

319,218

1,264,695

203,832

Handset design

15,408

33,789

—

Total net revenues

187,593

353,007

1,264,695

203,832

We separate our games into three types: social games, single-player games, and game bundles.

Social Games

We received approximately 73.2% of our total net revenues through social games in 2014 compared to 62.9% in 2013. In 2013 and 2014, our licensed social games contributed 31.9% and 36.9% of our total net revenues, and our self-developed social games contributed 31.0% and 36.3% of our total net revenues, respectively. Our social games are available on a free-to-play basis. Players are required to register at the website that hosts the game application and download our games online, both of which are free of charge to players. We generate revenues from social games primarily through the sale of game points, which can be used to purchase virtual items and in-game premium features in our social games, such as weapons, accessories and pets.

Players purchase game points by debiting their mobile accounts directly or by buying prepaid cards issued by mobile network operators or payment processing agents. Players can also pay for the game points with credit cards and debit cards which are generally settled by the banks and other billing channels. Game points can be

used to purchase in-game premium features to provide an enhanced game-playing experience. We have entered into agreements with China Mobile and certain payment processing agents for proceeds collection, pursuant to which the collected proceeds are allocated between us and either China Mobile or the payment processing agents in agreed-upon percentages. A portion of our sales proceeds for social games are collected directly through China Mobile’s billing channels and the remaining portion is collected directly through payment processing agents, such as Yeepay, Alipay and credit cards. Proceeds we collect from players do not include the fees earned by the payment processing agents and China Mobile.

We have entered into agreements with mobile service providers for proceeds collection, and these service providers in turn contract with mobile network operators, such as China Mobile, who provide billing and collection services. Pursuant to these agreements, we share a certain percentage of the proceeds collected from the players by service providers. Net proceeds payable to us are calculated monthly based on the prescribed percentages and are evidenced by monthly statements issued by the service providers and agreed to by both parties. Proceeds we collect from players do not include the fees earned by the service providers and mobile network operators.

The process of purchasing game points, allocation of proceeds from players and the agreements we enter into with mobile service providers are substantially the same for our licensed social games and self-developed social games.

Growth in net revenues from social games is driven by the increase in the size of our total paying player base, which is dependent on the diversity and quality of our game portfolio and the expansion of users of our Game Center application store. Increase in ARPU is driven by enhancements of our game content and in-game promotions and in-game events that further attract user spending. Paying users are accounts that have purchased in-game items during the relevant period, adjusted to eliminate double-counting of the same users. The table below sets forth the total number of paying users and ARPU for the periods indicated.


	For the Year Ended December 31,
	2012		2013		2014
Social games
Number of games (as of the end of the period)		7		72		83
Total new registered users⁽¹⁾		21,460,178		113,075,858		230,785,097
Total paying users⁽²⁾		303,613		7,686,498		21,125,926
ARPU (in RMB)		108.5		28.9		43.8

(1)

Represents the number of new users (as measured by user accounts) registered to play our social games within the relevant period. The number of new registered users is included for social games as not all registered users are paying users. We believe the number is meaningful as it indicates the general interest in our games and forms the base of players that may become paying users.

(2)	Represents the number of users (as measured by user accounts) that have purchased in-game items for the relevant period, adjusted to eliminate double-counting of the same users.

Total paying users. Our total paying users for social games increased from 303,613 in 2012 to 7.7 million in 2013 due primarily to an increase in our number of social games from 7 to 72 and because of the success in the build-up of our licensed social games and self-developed social games such as Joyful Da Ying Jia. Our total paying user for social games increased from 7.7 million in 2013 to 21.1 million in 2014 due primarily to an increase in the number of games we published.

ARPU. Our ARPU in social games decreased from RMB108.5 in 2012 to RMB28.9 in 2013 due to a change in our mix of games, such as the increased popularity of our self-developed game, Joyful Da Ying Jia, which has a lower average ARPU. Our ARPU in social games increased from RMB28.9 in 2013 to RMB43.8 (US$7.1 million) in 2014 due to more effective marketing and promotion activities and enhanced player experience. Our revenue from social games increased from RMB222.0 million in 2013 to RMB925.4 million (US$149.1 million) in 2014. ARPU may continue to fluctuate depending on our mix of games.

Single-player Games

We received approximately 21.1% of our total net revenues through single-player games in 2014 compared to 16.7% in 2013. In 2013 and 2014, our licensed single-player games contributed 10.1% and 14.4% of our total net revenues, and our self-developed single-player games contributed 6.6% and 6.7% of our total net revenues, respectively. We generate revenues from single-player games primarily through the sale of virtual items and in-game premium features such as weapons, accessories, additional chances to play or the right to play additional stages. We also generate a smaller portion of revenue through the one-time activation fees for some of our games. Our players that purchase games through app stores make payments to the operators of the store, who in turn make payments to us. Our players can also pay for our mobile games, including all games purchased through our Game Center application, with credit cards, debit cards and game cards of third-party companies, such as Shenzhoufu, Alipay and Yeepay.

We have entered into agreements with mobile service providers for proceeds collection, and these service providers in turn contract with mobile network operators, such as China Mobile, who provide billing and collection services. Pursuant to these agreements, we share a certain percentage of the proceeds collected from the players by service providers. Net proceeds payable to us are calculated monthly based on the prescribed percentages and are evidenced by monthly statements issued by the service providers and agreed to by both parties. Proceeds we collect from players do not include the fees earned by the service providers and mobile network operators.

The process of purchasing virtual items and in-game features, the allocation of proceeds collected from players and the agreements we enter into with mobile service providers are substantially the same for our licensed single-player games and self-developed single-player games.

Growth in net revenues from single-player games is driven by the increase in the size of our total paying player base, which is dependent on the expansion of the diversity and quality of our game portfolio and the installed base of our Game Center application. Increase in ARPU is driven by enhancements of our game content and in-game promotions and in-game events that further attract user spending. Paying users for smartphones represent the total number of games that have been purchased through app stores during the relevant period and for feature phones are accounts that have purchased in-game items during the relevant period, adjusted to eliminate double-counting of the same users. The table below sets forth the total number of paying users and ARPU for the periods indicated.


	For the Year Ended December 31,
	2012		2013		2014
Single-Player Games
Number of games (as of the end of the period)		175		215		238
Total paying users⁽¹⁾		31,665,050		13,711,235		18,454,732
ARPU (in RMB)		3.6		4.3		14.4

(1)	Represents (i) the number of users (as measured by user accounts) that have purchased in-game items for the relevant period, adjusted to eliminate double-counting of the same users, and (ii) the total number of games purchased through app stores.

Total paying users. Our total paying users for single-player games decreased from 31.7 million in 2012 to 13.7 million in 2013 due to the fact that a majority of our single-player games target feature phones and there has been a general decline in the popularity of feature phone games. Our total paying user for single-player games increased from 13.7 million in 2013 to 18.5 in 2014 due primarily to an increase in the number of single-player games we launched in 2014.

ARPU. Our ARPU for single-player games increased from RMB3.6 in 2012 to RMB4.3 in 2013 due to an increasing proportion of smartphone games which generally have higher ARPU. Our ARPU in single-player games increased from RMB4.3 in 2013 to RMB14.4 (US$2.32 million) in 2014 due to our shifting from feature

phone single-player games in 2013 to smartphone single-player games in 2014 and the fact that smartphone single-player games have more game functions than feature phone single-player games, which results in higher payments per user.

Game Bundles

We received approximately 1.0% of our total net revenues through game bundles in 2014 compared to 8.9% in 2013. We generate revenues from our one game bundle through monthly subscription fees. We promote games in game bundles that are offered through China Mobile. Players can subscribe to the game package from China Mobile for RMB10 or RMB12 per month and access our new games and updates.

We believe that our net revenues from game bundles is driven by the total number of subscriptions, which is in turn driven by the diversity and quality of our game portfolio. Average revenue per subscription is driven by enhancing game content, which allows us to increase subscription fees, and a greater number of social game offerings, which tend to result in higher fees. The table below sets forth the number of total subscriptions and the average revenue per subscription for the periods indicated. When calculating the number of total subscriptions for our game bundles, we count each monthly subscription as one subscription. A monthly subscription gives a subscriber the right to download only the limited number of games included in the bundle to which he or she subscribed and does not include all of the games we offer. A user who pays two subscription fees during one month to subscribe to different game bundles would be counted as two subscriptions.


	For the Year Ended December 31,
	2012		2013		2014
Game Bundles
Number of games (as of the end of the period)		315		430		430
Total subscriptions⁽¹⁾		5,906,564		6,141,868		3,241,815
Average revenue per subscription (in RMB)		4.5		5.1		4.1

(1)	Represents the total number of monthly subscriptions to our game bundles offered through mobile network operators. A user who pays two subscription fees during one month to subscribe to different game bundles would be counted as two subscriptions.

Total subscriptions. Our total subscriptions for game bundles remained relatively stable between 2012 and 2013. Our total subscriptions for game bundles decreased from 6.1 million in 2013 to 3.2 million in 2014, primarily due to a decline in the popularity of game bundles as social games and other single-player games became more attractive.

Average revenue per subscription. The average revenue per subscription for game bundles increased from RMB4.5 in 2012 to RMB5.1 in 2013 due to an increase in the number of bundles that were sold for RMB12 over bundles sold for RMB10 and a change in the mix of payment channels with lower costs. The average revenue per subscription for game bundles decreased from RMB5.1 in 2013 to RMB4.1 (US$0.66) in 2014 due primarily to the lowering of the unit price to attract more players.

Going forward, the amount of banner and pop-up advertisements China Mobile uses could vary, and any further decrease could reduce the amount of traffic to our websites and the number of game bundle subscriptions.

Handset Design

Our net revenues from handset design amounted to RMB15.4 million in 2012, RMB33.8 million in 2013 and nil in 2014, as we shifted our focus away from handset design to focus our resources on game development and publishing starting from the second quarter of 2013.

Cost of Revenues

The following table sets forth the breakdown of our cost of revenues for the periods indicated:


	For the Year Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
	(in thousands)
Cost of revenues
Games		(74,878	)		(124,506	)		(483,943	)		(77,997	)
Handset design		(16,852	)		(31,491	)		—			—

Total cost of revenues		(91,730	)		(155,997	)		(483,943	)		(77,997	)

Our cost of revenues primarily consists of (i) fees paid to payment channels, (ii) fees paid to handset companies and design houses or their agents for pre-installation of mobile games and (iii) amortization of intangible assets, including game licensing fees.

Our cost of revenues also includes staff salaries, utilities, infrastructure maintenance fees, depreciation of equipment, and operating expenses directly related to the operation of the mobile game platforms. Staff salaries and benefits cost primarily comprise compensation to operational staff. We expect costs of sales to increase as we continue to expand our operations.

Operating Expenses

Our operating expenses primarily consist of selling expenses, general and administrative expenses and research and development expenses. Our selling expenses primarily consist of (i) user acquisition fees paid to web platforms, app stores and advertising agents who promote our games on a variety of platforms, and (ii) costs of marketing activities, including cost of advertising in industry publications and through traditional media and cost of hosting events and exhibitions related to our games. Selling expenses accounted for 8.4% of our total net revenue in 2012, 31.4% of our total net revenue in 2013 and 25.4% of our total net revenue in 2014. The decrease in our selling expenses as a percentage of revenue in 2014 was primarily due to an increase of revenue that outpaced the increase in marketing and promotion expenses. The increase in the absolute amounts of our selling expenses from RMB111.0 million in 2013 to RMB 320.9 million (US$51.7 million) in 2014 relates to our transition to developing and publishing a greater number of smartphone games, which are generally downloaded through various online platforms, rather than being pre-installed on handsets, as is the case for feature phones.

Our general and administrative expenses primarily consist of salaries and benefits, including share-based compensation, for our general and administrative, finance and human resources personnel, office rentals, depreciation and amortization expenses relating to property and equipment used in general and administrative functions and other expenses incurred in connection with general corporate purposes.

Our research and development expenses primarily consist of payroll, employee benefits and other headcount-related expenses associated with product development.

Taxation

Cayman Islands

Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gains. In addition, upon payments of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.

British Virgin Islands

Under the current laws of the British Virgin Islands, our BVI incorporated subsidiaries are not subject to tax on income or capital gains. In addition, upon payments of dividends by these companies to their respective shareholders, no British Virgin Islands withholding tax will be imposed.

Hong Kong

The Hong Kong profits tax rate is 16.5%. Our Hong Kong incorporated subsidiaries are subject to Hong Kong profits tax only on profits arising in or derived from Hong Kong under the territorial tax regime. In addition, upon payments of dividends by the Hong Kong subsidiaries to their shareholders, no Hong Kong withholding tax will be imposed.

China

Effective from January 1, 2008, China’s statutory enterprise income tax, or EIT, rate is 25%. Our PRC subsidiaries and VIEs are subject to EIT at 25% unless otherwise specified.

Pursuant to CaiShui [2008] No.1, qualified new software development enterprises are each entitled to a tax holiday of 2-year full EIT exemption followed by 3-year 50% EIT reduction (“2+3 tax holiday”) starting from their respective first profit-making year. Lanyue, Chengdu Zhouxing, Huiyou and Yitongtianxia, each being a qualified new software development enterprise, are each entitled to a 2+3 tax holiday and their first profit-making year was year 2014, year 2014, year 2012 and year 2011, respectively. Accordingly, both Lanyue and Chengdu Zhouxing are tax exempted for years 2014 and 2015 and subject to EIT at 12.5% from years 2016 to 2018. Huiyou is tax exempted for years 2012 and 2013 and subject to EIT at 12.5% from 2014 to 2016. Yitongtianxia’s first profit-making year was 2011, but received the 2+3 tax holiday approval in April 2012. As a result, the 2+3 tax holiday is effective retroactively from year 2011 and is tax exempted for years 2011 and 2012 and subject to EIT at 12.5% from 2013 to 2015.

Under the prevailing EIT law and its relevant regulations, a qualified high and new technology enterprise is entitled to a preferential tax rate of 15%. In May 2012, Yingzheng obtained the approval to enjoy the high and new technology enterprise preferential tax rate of 15% effective retroactively from year 2011 for a period of three years.

The prevailing EIT law and its relevant regulations treat enterprises established outside of China with “effective management and control” located in China as PRC resident enterprises for tax purposes. The term “effective management and control” is generally defined as exercising management and control over the business, personnel, accounting and properties of an enterprise. We and our subsidiaries located in jurisdictions outside of China, if considered PRC resident enterprises for tax purposes, would be subject to the PRC enterprise income tax at the rate of 25% on their worldwide income. We do not currently consider our Company or any of our overseas subsidiaries to be a PRC resident enterprise. We will continue to monitor the tax status with regards to the PRC tax resident enterprise regulation of its non-PRC entities. For a detailed discussion, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be classified as a ‘resident enterprise’ for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.”

Under the EIT law and its relevant regulations, dividends paid by PRC enterprises out of profits earned after December 31, 2007 to non-PRC tax resident investors are subject to PRC withholding tax of 10%. A lower withholding tax rate may be applied based on applicable tax treaty with certain countries. For a detailed discussion, see “Item 3. Key Information—D. Risk factors—Risks Related to Doing Business in China—The New EIT Law will affect tax exemptions on dividends to be paid by our PRC subsidiaries to us through our Hong Kong subsidiaries and we may not be able to obtain certain treaty benefits under the relevant tax treaty.”

Aggregate undistributed earnings of our subsidiaries and the VIEs located in China that are available for distribution to non-PRC tax resident parent companies and primary beneficiary company at December 31, 2013 and 2014 are considered to be indefinitely reinvested under ASC subtopic 740-30, or ASC 740-30, Income Taxes: Other Considerations or Special Areas. Whereas for remittance of the undistributed earnings of the VIEs, the distribution chain may involve (i) a taxable dividend from our VIEs to their respective registered shareholders and (ii) a taxable contribution to 3GUU BVI or China Wave or their designated entities when the proceeds are remitted by the registered shareholders. Accordingly, the management considered that the amount of unrecognized deferred tax liabilities for temporary differences related to investments in the PRC subsidiaries and the VIEs is not determined because such a determination is not practical.

The registered shareholders of our VIEs are contractually required to remit dividends received from our VIEs to our WFOEs. This distribution chain results in (i) a taxable dividend from our VIEs to their respective registered shareholders and (ii) a taxable contribution to our WFOEs when the proceeds are remitted to our WFOEs by the registered shareholders. The tax impact on the future cash distribution is recognized in deferred tax liabilities as an outside basis difference. On December 16, 2011, 3GUU BVI, a BVI entity, replaced Yitongtianxia, a PRC entity, as the primary beneficiary of Yingzheng and on September 16, China Wave, a BVI entity, replaced Huiyou, a PRC entity, as the primary beneficiary of Lanyue. As management is asserting indefinite reinvestment of undistributed earnings of our foreign subsidiaries located in China, the deferred tax liabilities arising from the aggregate undistributed earnings of Yingzheng and the difference between the book basis and the tax basis in the investment in Yingzheng were reversed during the year ended December 31, 2011.

Korea

The basic Korean corporate income tax rate is 10% on the first KRW200,000, 20% for the tax base between KRW200,000 and KRW20 million and 22% for amounts in excess of KRW20 million. For the year 2014, CMGE Korea was subject to a tax rate of 10% as it derived taxable profit of less than KRW200,000.

Taiwan

The Taiwan corporate income tax rate is 17%. Under the Taiwan tax regime, corporate income tax is assessed only on the profits of the Taiwan branch of a foreign company. The Taiwan branches of Majesty Enterprises Limited (HK) and SuperNova Overseas Limited (HK) are subject to a corporate income tax rate at 17% on their assessable profits.

Unrecognized Tax Benefits

As of December 31, 2012, 2013 and 2014, we have unrecognized tax benefits of RMB20.6 million, RMB7.2 million and RMB9.8 million (US$1.6 million), respectively, of which RMB4.0 million, RMB1.6 million and RMB1.0 million (US$0.2 million), respectively, are presented on a net basis against the deferred tax assets related to tax loss carryforwards on the face of the consolidated balance sheets. As a result, the amounts of unrecognized tax benefits included in the consolidated balance sheets as of December 31, 2012, 2013 and 2014 were RMB16.5 million, RMB5.6 million and RMB8.7 million (US$1.4 million), respectively. RMB16.4 million, RMB4.0 million and RMB4.3 million (US$0.7 million) as of December 31, 2012, 2013 and 2014, respectively, of unrecognized tax benefits would impact the effective tax rate, if recognized. We do not expect the amount of unrecognized tax benefits will change significantly in the next twelve months. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Any change in the tax treatment we currently enjoy in the PRC may materially and adversely impact our net income.”

Share-Based Compensation Expenses

Total share-based compensation expenses of equity and liability awards granted to our employees and directors were recorded in “general and administrative expenses” in the consolidated statements of income and comprehensive income and were RMB14.1 million in 2012, RMB14.0 million in 2013 and RMB37.4 million (US$6.0 million) in 2014. See “—Critical Accounting Policies—Share-Based Compensation” for more details.

Segmentation

Prior to 2012, because of our internal organization resulting from the series of acquisitions that formed our business operations, we divided our business into three segments, namely feature phone games, smartphone games and handset design. For the 2012 fiscal year, management classified our business as two reportable segments, namely games and handset design. Our handset design segment included revenue derived from the development and design of handsets and also included a portion of revenue derived from game distribution generated by our subsidiary that was primarily engaged in handset design. In the fourth quarter of 2013, we shifted our focus away from handset design to focus our resources on game development and publishing. Accordingly, our chief operating decision maker decided to combine the portion of revenue derived from game publishing, that was previously categorized under handset design, together with revenue from games, beginning in the fourth quarter of 2013. In 2014, we did not derive any revenue from our handset design business. In accordance with ASC subtopic 280-10, “Segment Reporting: Overall,” our chief operating decision maker has been identified as our chief executive officer, who reviews the consolidated operating results to make decisions about allocating resources and assessing performance for the entire group. We generate substantially all of our revenues from players in China. Accordingly, no geographical segments are available.

Critical Accounting Policies

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of our contingent assets and liabilities. We continually evaluate these judgments, estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated combined financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated combined financial statements and other disclosures included in this annual report.

When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Consolidation

Our consolidated financial statements include the financial statements of us, our subsidiaries, the VIEs and the VIEs’ subsidiaries. The results of the subsidiaries are consolidated from the date on which we obtained control and are continued to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when we hold a majority of the voting equity interest in an entity. However, if we demonstrate our ability to control the entity through the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity, then the entity is consolidated. All significant intercompany balances and transactions among us, our subsidiaries, the VIEs and the VIEs’ subsidiaries have been eliminated upon consolidation.

Business Acquisitions

We account for our business combinations using the acquisition method of accounting in accordance with ASC topic 805 (“ASC 805”): Business Combinations. The acquisition method of accounting requires all of the following steps: (i) identifying the acquirer, (ii) determining the acquisition date, (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and (iv) recognizing and measuring goodwill or a gain from a bargain purchase. The consideration transferred in a business combination is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of comprehensive income as a gain.

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

Revenue Recognition

Revenues are derived from the development, operation and sale of in-game premium feature of mobile phone games as well as the provision of handset design products and services. For each of the significant sources of revenue stated below, revenue is recognized only when the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the goods have been delivered or the services have been rendered; (iii) the price or fees are fixed or determinable; and (iv) collectability is reasonably assured.

Games

Single-player games and social games

We generate (i) single player games revenues principally from the sale of in-game premium features of mobile phone games that are operated under the free-for-trial model and the sale of self-developed and purchased mobile games under the subscription-based model or the one-time fee model; and (ii) social games revenues from the sale of in-game premium features of self-developed social games that are operated under the free-to-play model.

We enter into service arrangements with mobile phone manufacturers to pre-install our self-developed and purchased single player games or application platform onto the mobile phones before they reach mobile phone game players. Mobile phone game players can access the pre-installed single player games directly or download the single player games through the pre-installed application platform without additional charges. Single player games are offered on a free-for-trial basis where the mobile phone game players may purchase in-game premium features to extend the duration of the game or to enjoy additional functions of the game. All chargeable in-game premium features are considered consumed immediately upon purchase. Any unused premium features cannot be carried forward after the mobile phone game players exit the game. When mobile phone game players leave the game they are currently playing and perform other functions on the feature phones, the previously purchased but

unused premium features can no longer be accessed and are therefore completely consumed. Single player games are also available for mobile phone game players to download through mobile network operators and software websites. Under the subscription based model, mobile phone game players can subscribe to a monthly plan to download a fixed number of single player games from mobile network operators for a fixed subscription fee per month. Under the one-time fee model, mobile phone game players can download each single player game based on a fixed price per game.

Under the free-to-play model for social games, mobile phone game players can download mobile phone games, obtain game accounts and play the basic functions of the mobile games free of charge but may purchase game points for in-game premium features to enhance their game-playing experience. The purchased in-game premium features can be freely traded amongst game players within the applicable game as long as consumption of the items has not commenced. Mobile phone game players can purchase game points by either charging their account with mobile network operators directly or buying prepaid cards issued by mobile network operators. The prepaid cards can be converted into a pre-specified number of game points for consumption. Upon delivery of game points purchased directly from mobile network operators or converted from prepaid cards to mobile phone game players, we initially classify these amounts as deferred revenue. For purposes of determining when the service has been provided to the mobile phone game players, we have determined that an implied obligation exists to the mobile phone game players who purchased game points to provide an enhanced game-playing experience over the average playing period of the mobile phone game players.

For single player games, we establish direct contractual relationship with mobile game players to allow mobile game players to download the games from our game platform or contract with mobile network operators, third-party payment platforms and mobile phone service providers for billing, collection and transmission services offered to mobile phone game players who have purchased games, game points or in-game premium features. We also contract with mobile application and software websites to distribute our social games by providing platforms for mobile phone game players to download such games. Under the contractual arrangement with mobile network operators, third-party payment platforms and mobile phone service providers, the mobile network operators, third-party payment platforms and mobile phone service providers are entitled to profit sharing based on a prescribed percentage of the gross amount charged by the mobile network operators to the mobile phone game players, while the mobile phone service providers are entitled to profit sharing based on a prescribed percentage of the net proceeds collected from the mobile network operators. For single player and social games, we have information generated from our internal system on the number of in-game premium features sold, monthly plan subscriptions and single player games downloaded each month to estimate the amount of collectable net proceeds and to recognize single player and social games revenues. Differences between our estimates and the actual amounts confirmed by the mobile network operators, third-party payment platforms or mobile phone service providers have historically been insignificant. Generally, we receive billing confirmations from each of the mobile network operators, third-party payment platforms or mobile phone service providers confirming the net proceeds to be received by us within 30 to 120 days after the end of each month. Collectability is considered reasonably assured as the we deal with only reputable mobile network operators, third-party payment platforms or mobile phone service providers and perform thorough credit assessment prior to entering into a business relationship with them. Historically, we have not experienced any significant defaults for payment.

We determine whether to record single player and social games revenues using the gross or net method of reporting in accordance with ASC subtopic 605-45, or ASC 605-45, Revenue Recognition: Principal Agent Considerations. Determining whether revenue should be reported gross or net is based on an assessment of various factors, the primary factors being whether we are acting as the principal in offering services to the customer or whether we are acting as an agent in the transaction. We have determined that we are acting as the principal in offering services as we (i) are the primary obligor in the arrangement; (ii) have latitude in establishing the selling price; (iii) have discretion in suppliers selection; and (iv) have involvement in the determination of product specifications. Therefore, we have the primary responsibility of fulfillment and acceptability of the single-player and social games. For the contractual arrangements with mobile network

operators, third-party payment platforms and mobile phone service providers, we recognize the net proceeds to be received from the mobile network operators, mobile phone service providers or third-party payment platforms as games revenue on a gross basis. For the direct contractual arrangements with mobile game players, we recognize the gross proceeds from the mobile game players as revenue and the amount attributable to mobile network operators, mobile phone service providers or third-party payment platforms in the forms of service fees are recognized as cost of revenues. Under both arrangements, we pay content fees to third-party game developers, which are recognized as cost of revenues, based on a prescribed percentage of the net proceeds confirmed by the mobile network operators. We pay service fees, which are recognized as cost of revenues, to the mobile phone manufacturers based on a prescribed percentage of the estimated net proceeds or a prescribed fixed fee per mobile phone activated by mobile phone game players. We also pay service fees to the mobile application and software websites which are recognized as cost of revenues.

We, using data generated from our internal system, estimate the average playing period from the first time the mobile phone game players purchase game points through the period when the game players have not logged into the game for over two consecutive months. Mobile phone game players are deemed to be inactive if they have not logged into the game for two consecutive months. As the social games are under a free-to-play model and revenue is only generated from paying mobile phone game players when they purchase game points for in-game premium features, we focus solely on the playing period of paying mobile phone game players when estimating the period over which revenue is being recognized. We determine the estimated average playing period of paying mobile phone game players, which is the time period between the paying mobile phone game players’ first purchase and last log in, for each significant game based on historical player usage patterns and game playing behavior. Our internal system tracks each of the paying mobile phone game players’ purchase and log in history for each significant game to generate data to estimate the average playing period for our population of paying mobile phone game players. Future usage patterns may differ from the historical usage patterns on which our revenue recognition policy is based. We monitor the operational statistics and usage patterns of our online game and modifies the expected life span when materially different.

Game points can be purchased at a discount if mobile phone game players purchase the game points with prepaid cards issued by mobile network operators or during promotional activities organized by us. We account for such discounts in accordance with ASC 605-50, Revenue Recognition: Customer Payments and Incentives. Such discounts are initially accounted for as a reduction of deferred revenue. As a result, deferred revenue includes the value of both discounted and undiscounted game points, which are subsequently recognized as revenue on a weighted average basis when we provide future services to enhance mobile phone game players’ playing experience.

Based on the above, we recognize (i) single player games revenue when the goods are delivered based on download of games or consumption of in-game premium features by mobile phone game players, or at the end of subscription period and (ii) deferred revenue on social games upon delivery of game points to mobile phone game players. Deferred revenue is recognized as social games revenue ratably over the estimated average playing period of the paying mobile phone game players, which ranges from one to three months, starting from the point in time when game points are delivered to the mobile phone game players. The difference between the estimated proceeds and the actual amounts confirmed by the mobile network operators, third-party payment platforms or mobile phone service providers is recognized in the consolidated statements of comprehensive income when we receive billing confirmations.

Licensed games

We generate licensed games revenues from publishing mobile games developed by third-party game developers on our game platform or third-party app stores and entering into arrangements with third parties to co-publish mobile games developed by third-party game developers on the co-publishers’ game platforms or third-party app stores.

We enter into contracts with and pay fixed license fees to third-party game developers to obtain licenses to publish or co-publish the third-party developed games on our game platform, co-publishers’ game platforms or third-party app stores. Licensed games are published on our game platform, co-publishers’ game platforms or third-party app stores for download without charges. Mobile phone game players can purchase game points for in-game premium features to enhance their game-playing experience. We contract with third-party payment platforms or third-party app stores for billing, collection and transmission services offered to mobile phone game players who have purchased game points. The third-party game developers, third-party payment platforms, third-party app stores and the co-publishers are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the mobile phone game players. Our obligation in the licensed games publishing and the co-publishing servicesis completed upon the purchase of game points by the mobile game players. We determine whether to record licensed games revenues using the gross or net method of reporting in accordance with ASC 605-45. Determining whether revenue should be reported gross or net is based on an assessment of various factors, the primary factors being whether we are acting as the principal in offering services to the customer or whether we are acting as an agent in the transaction. We have determined that we are acting as the agent in the licensed games publishing and co-publishing arrangements as we are not involved in the operation of the licensed game whilst the third-party game developer is the primary obligor in the arrangement, has latitude in establishing the selling price and has involvement in the determination of product specifications. Therefore, the net proceeds after deducting the amounts shared by the third-party game developers, third-party payment platforms and third-party app stores represent the amount of revenue to be recognized by us. The fixed license fees paid to the third-party game developers to obtain the publishing license are recognized as cost of revenues on a straight-line basis over the license period.

For the licensed games published on the Group’s game platform, we collect information generated from our internal system on the number of game points sold each month to estimate the amount of collectable net proceeds and to recognize revenues. For the licensed games published on the co-publishers’ game platforms or third-party app stores, we are granted access to the co-publishers’ or third-party app stores’ internal systems to obtain information on the number of game points sold each month to estimate the amount of collectable net proceeds and to recognize revenues. Differences between our estimates and the actual amounts confirmed by the third-party payment platforms, co-publishers or third-party app stores have historically been insignificant. Generally, within 30 to 120 days after the end of each month, we receive billing confirmations from each of the third-party payment platforms, co-publishers or third-party app stores confirming the amount of net proceeds to be received by us. We further share profits with the third-party game developers and recognizes licensed games revenues based on the net amount retained by us.

Collectability is considered reasonably assured as we deal with only reputable third-party payment platforms, third-party app stores and co-publishers and performs thorough credit assessment prior to entering into a business relationship with them. Historically, we have not experienced any significant defaults for payment.

Based on the above, we recognize the estimated net proceeds to be received from the third-party payment platforms and third-party app stores or the co-publishers for the sale of game points of the licensed games net of the amount to be shared with the third-party game developers and the co-publishers, using data generated from our internal system, as licensed games revenues upon delivery of game points to mobile phone game players.

Handset design

We ceased our handset design business in the forth quarter of 2013. Prior to this, we generated handset design revenues from the provision of comprehensive handset design solutions to mobile phone manufacturers and mobile phone content providers. Handset design solutions included printed circuit board with operating system software and optional assembly service and mobile phone contents installation service. Printed circuit boards with operating system software were sold to mobile phone manufacturers for a fixed unit price. Mobile phone contents installation services were rendered to mobile phone content providers for a prescribed percentage of the mobile phone content providers’ net profits.

Printed circuit board with operating system software and optional assembly service

Printed circuit boards with operating system software and optional assembly services were multiple element arrangements comprising printed circuit boards, assembly services and operating system software specifically designed for the printed circuit boards. Since the operating system software was essential to the functionality of the printed circuit board, the transaction was outside the scope of software accounting guidance in ASC subtopic 985-605, or ASC 985-605, Software: Revenue Recognition, in accordance with ASU No. 2009-14, or ASU 2009-14, Certain Revenue Arrangements that Include Software Elements. Accordingly, we accounted for the sale of printed circuit boards with operating system software and optional assembly service as a multiple deliverables arrangement in accordance with ASU No. 2009-13, or ASU 2009-13, Revenue Recognition—Multiple-Deliverable Revenue Arrangements. Each of the printed circuit board, operating system software and assembly service represented a separate unit of accounting.

The mobile phone manufacturers sign an agreement with us, containing the significant terms of the sale of printed circuit board with operating system software to evidence that an arrangement existed. The agreement also stipulated whether the mobile phone manufacturers engaged us to perform assembly service on the printed circuit board. We delivered the assembled printed circuit boards together with the operating system software installed to mobile phone manufacturers if we were engaged to perform assembly service; whereas we normally delivered the operating system software prior to the printed circuit board to the mobile phone manufacturers if we were not engaged to perform assembly service. Therefore, delivery of printed circuit boards with operating system software and optional assembly services occurred upon receipt and acceptance of all deliverables by the mobile phone manufacturers. We performed credit assessment on the mobile phone manufacturers prior to signing the agreements to ensure collectability is reasonably assured. The purchase price was fixed because the unit price was stipulated in the signed sales agreement and no concessions such as discounts, rebates, refunds or other price changes were provided subsequently. However, the mobile phone manufacturers only paid the agreed purchase price upon receipt of all of the deliverables in the arrangement. We outsourced the assembly of printed circuit boards and installation of operating system software to original equipment manufacturers, or OEM, and paid manufacturing fees, which were recognized as cost of revenues, based on a prescribed fixed fee per unit manufactured.

In accordance with ASU 2009-13 and ASC subtopic 605-25, or ASC 603-25, Revenue Recognition: Multiple-Element Arrangements, the amount allocable to the delivered units or units of accounting was limited to the amount that was not contingent upon the delivery of additional items or meeting other specified performance conditions. Since the amount allocable to the operating system software was contingent upon the delivery of printed circuit board and the related assembly service, if any, revenues from the sale of printed circuit board with operating system software and optional assembly service were recognized only upon delivery of the final deliverable.

Mobile phone contents installation service

Mobile phone contents installation service did not require significant production, modification or customization of the mobile phone contents received from the mobile phone content providers. Persuasive evidence of the arrangement was documented in a contract signed by the mobile phone content providers and us. Delivery of mobile phone contents installation service occurred when the mobile phone contents were installed on the mobile device circuit boards by the OEM. The mobile phone contents installation service fees were fixed and non-refundable once the mobile phone content providers confirmed their monthly net profits to us. Collectability was considered reasonably assured as we dealt with only reputable mobile phone content providers and performed thorough credit assessment on the mobile phone content providers prior to entering into a business relationship with them. Historically, we had not experienced any significant defaults for payment. Accordingly, we recognized revenues from mobile phone contents installation services when the services were delivered and the fees were fixed upon receipt of the monthly net profits confirmations from mobile phone content providers.

Business taxes, value-added taxes and surcharges

We are subject to business taxes, value-added taxes and surcharges levied on services provided in the PRC. Business taxes, value-added taxes and surcharges for the years ended December 31, 2012, 2013 and 2014 were RMB9.1 million, RMB4.3 million and RMB25.1 million (US$4.0 million), respectively. In accordance with ASC 605-45, we recognized revenues net of all such business taxes, value-added taxes and surcharges.

Share-Based Compensation

In accordance with ASC topic 718, or ASC 718, Compensation—Stock Compensation, we determine whether a share option, a warrant or a restricted share unit, or RSU, should be classified and accounted for as a liability award or an equity award. All grants of share options, warrants or RSUs to our employees classified as equity awards are measured at the grant date based on the fair value of the awards and are recognized as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. All grants of share options to employees of V1 Group classified as equity awards are measured at fair value at the grant date and recognized as a one-time deemed dividend distribution to shareholder. All grants of share options, warrants or RSUs to employees classified as liability awards are remeasured at the end of each reporting period until the date of settlement, with an adjustment for fair value recorded to the current period expenses in order to properly reflect the cumulative expense based on the current fair value of the vested options, warrants or RSUs. We have elected to recognize share-based compensation for all awards with only service conditions using the straight-line method over the requisite service period. For share-based awards with performance conditions, compensation cost is recognized only if it is probable that the performance conditions will be achieved. We recognize share-based compensation for awards with performance or market conditions using the accelerated method if the awards are subject to graded vesting. For share-based awards that contain a market condition, the effect of the market condition is reflected in the grant-date fair value of the awards. Compensation cost is recognized for an award with a market condition when the requisite service is rendered, regardless of when the market condition is satisfied. We use the Black-Scholes option pricing valuation model, the binomial option pricing valuations model or the Monte Carlo simulation model in determining the fair value of different equity awards and liability awards granted.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and is adjusted to reflect future change in circumstances and facts, if any.

We account for share awards issued to non-employees in accordance with ASC subtopic 505-50, or ASC 505-50, Equity: Equity-Based Payment to Non-employees. Our share-based awards issued to non-employees are subject to graded vesting provisions. We recognize share-based compensation expense for share awards granted to non-employees using the accelerated recognition method over the requisite service period of the award. In accordance with ASC 505-50, we use the Black Scholes option pricing model or the binomial option pricing model to measure the value of options or warrants granted to non-employees at each vesting date to determine the appropriate charge to share-based compensation.

When the vesting conditions of a share-based payment are modified, we first determine whether the original vesting conditions were expected to be satisfied on the modification date. If the original vesting conditions are not expected to be satisfied, the grant-date fair value of the original award essentially is ignored and the fair value of the award measured at the modification date is recognized if the modified award ultimately vests, regardless of whether the fair value of the award on the modification date is greater than or less than the grant-date fair value of the award. The original grant-date fair value is ignored even if the original vesting condition ultimately is satisfied. When a vesting condition that is probable of achievement is modified and the new vesting condition also is probable of achievement, the compensation cost to be recognized if either the original vesting condition or

the new vesting condition is achieved cannot be less than the grant-date fair value of the original award. That compensation cost is recognized if either the original or modified vesting condition is achieved. If the modification also increases the fair value of the award, the incremental compensation cost associated with the modification is recognized only if the modified vesting condition is satisfied.

Income Taxes

We follow the liability method of accounting for income taxes in accordance with ASC topic 740, or ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities, net operating loss and tax credits carryforwards, using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized.

We apply ASC 740 to account for uncertainty in income taxes. ASC 740 provides the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. We estimated liability for unrecognized tax benefits and the related interest and penalties are periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. In future periods, changes in facts, circumstances, and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. We have elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of comprehensive income.

Goodwill

Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of acquired businesses. In accordance with ASC topic 350, or ASC 350, Intangible—Goodwill and other, goodwill is not amortized, but rather is tested for impairment annually or more frequently if indicators of impairment present. We assign and assess goodwill for impairment at the reporting unit level. We determine that each reporting unit is identified at the component level, which is one level below the operating segment. We reassign goodwill to the reporting units affected using a relative fair value allocation approach when there is a change in reporting structure. As of December 31, 2013, the Dragon Joyce Group, OWX Group and 3GUU Group were identified as reporting units, as discrete financial information is available and segment management regularly reviews their operating results. Due to a change in reporting structure, we identified the Dragon Joyce Group and 3GUU Group as reporting units as of December 31, 2014. Changes in the carrying amount of goodwill for the years ended December 31, 2012, 2013 and 2014 are as follows:


	Dragon Joyce Group		3GUU Group		OWX Group			Total
	RMB		RMB		RMB			RMB
Balance as of December 31, 2012		247,373		267,824		49,644			564,841
Goodwill acquired during the year		—		—		—			—
Impairment		—		—		—			—

Balance as of December 31, 2013		247,373		267,824		49,644			564,841

Goodwill acquired during the year		—		—		—			—
Reorganization of reporting units		49,644		—		(49,644	)		—
Impairment		—		—		—			—

Balance as of December 31, 2014		297,017		267,824		—			564,841

Balance as of December 31, 2014 in US$		47,870		43,166		—			91,036

The performance of the impairment test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss. The annual goodwill impairment test is performed on December 31 of each year. In accordance with Accounting Standards Update No. 2011-08, or ASU 2011-08, Intangibles—Goodwill and other (ASC 350), pursuant to which we have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

As of December 31, 2012, 2013 and 2014, we performed the two-step goodwill impairment test on each of the reporting units. In estimating the fair value of each of the reporting units in the first step of the impairment test, significant management judgment was applied. We estimated the fair value of each of the reporting units using the income approach valuation methodology. The market-based valuation methodology is not considered appropriate because of the volatility of general market conditions as well as insufficient comparable companies. Under the income approach valuation methodology, estimates to determine the fair value of the reporting units include future operating results projected by us, discount rates, long-term sustainable growth rates and weighted average cost of capital, or WACC. The underlying assumptions used in the first step of the impairment test considered our market capitalization as of December 31, 2012, 2013 and 2014 as well as any impact from the current local operating environment in the PRC on the fair value of the reporting units. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820.

The fair value estimates as of December 31, 2012 are based on the following assumptions:


	Dragon Joyce Group			OWX Group			3GUU Group
Discount rate		21.62	%		21.77	%		21.62	%
Long-term sustainable growth rate		3	%		3	%		3	%

The fair value estimates as of December 31, 2013 are based on the following assumptions:


	Dragon Joyce Group			OWX Group			3GUU Group
Discount rate		21.87	%		25.03	%		21.87	%
Long-term sustainable growth rate		3	%		3	%		3	%

The fair value estimates as of December 31, 2014 are based on the following assumptions:


	Dragon Joyce Group⁽¹⁾			3GUU Group
Discount rate		21.10	%		21.20	%
Long-term sustainable growth rate		3	%		3	%

(1)

As a result of the transition of our handset design business to mobile phone games promotion business in OWX Group during the year ended December 31, 2014, we reorganized our reporting structure in a manner that changed the composition of our reporting units. Goodwill of OWX Group of RMB49,644 was reassigned to Dragon Joyce Group.

As indicated by the market transition and decline in demand for handset design of feature phones, we determined that, as of December 31, 2012, the estimated fair value of the OWX Group reporting unit was less than its carrying value and performed the second step of the impairment test to determine the implied fair value of goodwill for the OWX Group reporting unit. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets and liabilities including any unrecognized intangible assets of the reporting unit and compared to the carrying value of reporting unit goodwill to quantify the amount of impairment loss. For the year ended December 31, 2012, we recognized a goodwill impairment charge of RMB33.5 million. As we have transitioned away from our handset design business to the mobile phone games business and as the operation of the OWX Group was merged into Dragon Joyce Group for the year 2014, we combined the goodwill disclosure of OWX Group with Dragon Joyce Group as one single segment for the year ended December 31, 2014.

The results of our annual impairment test as of December 31, 2012 indicated that the estimated fair values of the Dragon Joyce Group reporting unit and the 3GUU Group reporting unit exceeded their carrying values by 6.7% and 10.9%, respectively. The results of our annual impairment test as of December 31, 2013 indicated that the estimated fair values of the Dragon Joyce Group reporting unit, the 3GUU Group reporting unit and the OWX Group reporting unit exceeded their carrying values by 22%, 13% and 6%, respectively. The results of our annual impairment test as of December 31, 2014 indicated that the estimated fair values of the Dragon Joyce Group reporting unit and the 3GUU Group reporting unit exceeded their carrying values by 126% and 32%, respectively. We cannot guarantee that we will not record a material impairment charge in the future. Changes in our assumptions or estimates could materially affect the estimation of the fair value of a reporting unit and, therefore, could reduce the excess of fair value over the carrying value of a reporting unit and could result in goodwill impairment. Potential events and circumstances that could negatively affect the key assumption used in determining the fair value of a reporting unit may include (i) deterioration in overall economic conditions in future years (including increase in discount rates), (ii) business conditions or strategies changing from current assumptions, (iii) increased competition or loss of market share, or (iv) investors requiring high rates of return on equity investments in the marketplace.

Fair Value of Financial Instruments

Our financial instruments primarily include cash and cash equivalents, restricted cash, short-term investments, accounts receivables, other receivables, amounts due from related parties, equity method investment, cost method investments, available-for-sale security, short-term bank borrowings, accounts payable, amounts due to related parties and contingently redeemable ordinary shares. As of December 31, 2013 and 2014 the carrying values of these financial instruments, except for equity method investment, cost method investments, available-for-sale security and contingently redeemable ordinary shares, approximated their fair values due to the short-term maturity of these instruments. Available-for-sale security were adjusted to fair value at each reporting date. We determined the fair values of available-for-sale security with the assistance of an independent valuation firm.

We apply ASC topic 820, or ASC 820, Fair Value Measurements and Disclosures, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs which are supported by little or no market activity.

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach, (2) income approach, and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

As of December 31, 2013, we measure the fair value of the contingently returnable consideration assets based on our actual performance results. As of December 31, 2014, we measure the fair value of the available-for-sale security using an income approach based on inputs that are unobservable in the market.

Realized and unrealized gain was recorded as “Changes in fair value of contingently returnable consideration assets” in the consolidated statements of comprehensive income for the years ended December 31, 2012 and 2013, and as “Unrealized gains on available-for-sale security” in other comprehensive income for the year ended December 31, 2014.

Internal Control Over Financial Reporting

During the preparation and external audit of our consolidated financial statements for the year ended December 31, 2014, we identified a material weakness in our internal control over financial reporting. The material weakness identified was identical to the one identified during the audit of our consolidated financial statements for the years ended December 31, 2011, 2012 and 2013. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of our company’s financial statements will not be prevented, or detected and corrected on a timely basis.

The material weakness identified related to insufficient personnel with U.S. GAAP expertise in the preparation and review of the financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. Following the identification of the material weakness, we have taken initiatives to improve our internal control over financial reporting and disclosure controls. For example, we have (i) provided and continue to provide additional training for our new and existing personnel by expanding the training program on U.S. GAAP financial statement preparation and financial reporting and (ii) hired additional staff with financial reporting experience. In particular, since the beginning of 2013 we have hired one finance manager, two assistant finance managers and one internal audit manager. However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. For risks relating to internal control over financial reporting, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements.”

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.


	For the Year Ended December 31,
	2012						2013						2014
	RMB			% of Revenue			RMB			% of Revenue			RMB			US$			% of Revenue
	(in thousands except for percentages)
Net revenues
Games		172,185			91.8			319,218			90.4			1,264,695			203,832			100
Handset design		15,408			8.2			33,789			9.6			—			—			—

Total net revenues		187,593			100.0			353,007			100.0			1,264,695			203,832			100

Cost of revenues
Games		(74,878	)		(39.9	)		(124,506	)		(35.3	)		(483,943	)		(77,997	)		(38.3	)
Handset design		(16,852	)		(9.0	)		(31,491	)		(8.9	)		—			—			—

Total cost of revenues		(91,730	)		(48.9	)		(155,997	)		(44.2	)		(483,943	)		(77,997	)		(38.3	)

Gross profit
Games		97,307			51.9			194,712			55.2			780,752			125,835			61.7
Handset design		(1,444	)		(0.8	)		2,298			0.6			—			—			—

Total gross profit		95,863			51.1			197,010			55.8			780,752			125,835			61.7

Operating expenses
Selling expenses		(15,838	)		(8.4	)		(110,954	)		(31.4	)		(320,887	)		(51,718	)		(25.4	)
General and administrative expenses		(35,633	)		(19.0	)		(55,925	)		(15.8	)		(131,174	)		(21,141	)		(10.4	)
Research and development expenses		(35,071	)		(18.7	)		(54,294	)		(15.4	)		(111,293	)		(17,937	)		(8.8	)
Impairment of goodwill		(33,517	)		(17.9	)		—			—			—			—			—
Impairment of intangible assets		(10,910	)		(5.8	)		(2,613	)		(0.7	)		—			—			—
Listing expenses		(17,307	)		(9.2	)		—			—			—			—			—

Total operating expenses		(148,276	)		(79.0	)		(223,786	)		(63.4	)		(563,354	)		(90,796	)		(44.6	)

Operating (loss) income		(52,413	)		(27.9	)		(26,776	)		(7.6	)		217,398			35,039			17.1
Interest income		1,474			0.8			3,322			0.9			8,241			1,328			0.7
Share of losses in equity method investments		—			—			—			—			(1,809	)		(292	)		(0.1	)
Other income		451			0.2			25,654			7.3			5,238			844			0.4
Changes in fair value of contingently returnable consideration assets		27,326			14.6			24,366			6.9			—			—			—

Income (loss) before income taxes and noncontrolling interest		(23,162	)		(12.3	)		26,566			7.5			229,068			36,919			18.1

Income tax benefit (expense)		8,689			4.6			197			0.1			(1,121	)		(180	)		(0.1	)

Net (loss) income		(14,473	)		(7.7	)		26,763			7.6			227,947			36,739			18.0

Accretion of contingently redeemable ordinary shares		(3,023	)					(3,174	)					—			—

Net (loss) income attributable to shareholders		(17,496	)					23,589						227,947			36,739

Net (loss) income attributable to noncontrolling interests		(135	)					503						(4,177	)		(673	)
Net (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders		(17,361	)					23,086						232,124			37,412

2014 Compared to 2013

Net Revenues. Our net revenues increased by 258.3% to RMB1,264.7 million (US$203.8 million) in 2014 from RMB353.0 million in 2013. This increase was primarily due to greater revenue contribution from both self-developed and licensed social games resulting from our continued marketing efforts, game development, licensing and operation.

•

Games. Our games revenue increased by 296.2% to RMB1,264.7 million (US$203.8 million) in 2014 from RMB319.2 million in 2013, primarily due to continued success of our self-developed games and other popular social games licensed from third party game developers. Total paying users for our social games increased from 7.7 million in 2013 to 21.1 million in 2014 and for our single-player games from 13.7 million in 2013 to 18.5 million in 2014.

•

Handset design. Our handset design revenue decreased to nil in 2014 from RMB33.8 million in 2013 as we shifted our focus away from handset design to focus our resources on game development, game publishing and distribution.

Cost of Revenues. Our cost of revenues increased by 210.2% to RMB483.9 million (US$78.0 million) in 2014 from RMB156.0 million in 2013. This increase was largely in line with our increase in revenues.

•

Games. Our cost of revenues attributable to games increased by 288.7% to RMB483.9 million (US$78.0 million) in 2014 from RMB124.5 million in 2013. This increase was primarily due to an increase in amortization of intangible assets and game licensing fees and an increase in payments made to mobile carrier channels and revenue sharing with distribution channels, primarily for our self-developed games.

•

Handset design. Our cost of revenues attributable to handset design decreased to nil in 2014 from RMB31.5 million in 2013 due to our shift of focus to game development, game publishing and distribution.

Gross Profit and Gross Margin. As a result of the foregoing, our gross profit increased by 296.4% to RMB780.8 million (US$125.8 million) in 2014 from RMB197.0 million in 2013. Our gross margin increased to 61.7% in 2014 from 55.8% in 2013. This increase is attributable primarily to growth in our games publishing business, as we do not record profit sharing amounts retained by third-party payment platforms or third-party app stores under cost of revenue and record revenue from licensed games as net revenue, which results in lower cost of revenue for the year. In addition, the percentage of fixed amortization costs also decreased in relation to the increase in revenue.

•

Games. Our gross profit attributable to games increased by 301.0% to RMB780.8 million in 2014 from RMB194.7 million in 2013. Our gross margin attributable to games increased to 61.7 % in 2014 from 61.0% in 2013.

•

Handset design. Due to our shift in focus to game development, game publishing and distribution, we had nil gross profit attributable to handset design in 2014. The gross profit attributable to handset design was RMB2.3 million in 2013.

Operating Expenses. Our total operating expenses increased by 151.7% to RMB563.4 million (US$90.8 million) in 2014 from RMB223.8 million in 2013. This increase was primarily due to an increase in selling expenses and general and administrative expenses.

•

Selling expenses increased by 189.1% to RMB320.9 million (US$51.7 million) in 2014 from RMB111.0 million in 2013. This increase was primarily due to an increase of revenue and an expansion of online advertising activities, including increased game promotion through web platforms, application stores and agents. Selling expenses as a percentage of net revenues decreased to 25.4% in 2014 from 31.4% in 2013.

•

General and administrative expenses increased by 134.7% to RMB131.2 million in 2014 from RMB55.9 million in 2013 as a result of increased share-based compensation to motivate and reward our staff and the increased headcount to support our growing operations. General and administrative expenses as a percentage of net revenues decreased to 10.4% in 2014 from 15.8% in 2013.

•

Research and development expenses increased by 105.0% to RMB111.3 million in 2014 from RMB54.3 million in 2013 primarily because additional research and development personnel were hired for developing a greater number of smartphone social games. Research and development expenses as a percentage of net revenues decreased to 8.8% in 2014 from 15.4% in 2013 due to a substantial year-over-year increase in revenues.

Operating Income (Loss). We had an operating income of RMB217.4 million (US$35.0 million) in 2014, compared to an operating loss of RMB26.8 million in 2013. As a result of the foregoing, our operating margin increased to 17.2% in 2014 from -7.6% in 2013.

Other Income. We had other income of RMB5.2 million (US$0.8 million) in 2014, compared to other income of RMB25.7 million in 2013. Other income in 2014 mainly represented government grants and foreign exchange gain arising from a stronger RMB exchange rate against the US dollar. In comparison, other income in 2013 mainly represented (i) gain on disposal of a subsidiary engaged in the sale and development of mobile games, (ii) gain on an acquisition for which the purchase consideration was lower than the fair value of the net assets acquired and liabilities assumed, and (iii) government grants.

Changes in Fair Value of Contingently Returnable Consideration Assets. Our changes in fair value of contingently returnable consideration assets were nil in 2014. The amount for 2013 was a gain of RMB24.4 million, which was primarily due to an increase in the fair value of consideration shares to be returned to V1 Group pursuant to the conditions related to the acquisitions of the 3GUU Group. Beginning in 2014, we no longer have changes in fair value of contingently returnable consideration assets related to our historical reorganization as the contingently returnable consideration assets were fully settled as of December 31, 2013.

Income Tax. We had an income tax expense of RMB1.1 million (US$0.2 million) in 2014, compared to an income tax benefit of RMB0.2 million in 2013. Our effective tax rate was 0.49% in 2014, compared to -0.75% in 2013, primarily due to our increased profitability.

Net Income. As a result of the foregoing, we recorded a net income of RMB227.9 million (US$36.7 million) in 2014, representing an increase of RMB750.4% from RMB26.8 million in 2013. Our non-GAAP net income, excluding (i) share-based compensation expenses, (ii) internal investigation costs, (iii) goodwill and intangible assets impairment loss and (iv) listing expenses was RMB267.9million (US$43.2 million) in 2014, compared with RMB43.4 million in 2013. See “Item 3. Key Information—A. Selected Financial and Operating Data—Non-GAAP Financial Information” for important information about non-GAAP financial measures.

Net Income Attributable to CMGE Shareholders. As a result of the foregoing, we recorded net income attributable to CMGE shareholders of RMB232.1 million (US$37.4 million) in 2014, representing an increase of 904.8% from the net income attributable to CMGE shareholders of RMB23.1 million in 2013.

2013 Compared to 2012

Net Revenues. Our net revenues increased by 88.2% to RMB353.0 million in 2013 from RMB187.6 million in 2012. This increase was primarily due to greater revenue contribution from both self-developed and licensed social games resulting from our continued marketing efforts, game development, licensing and operation.

•

Games. Our games revenue increased by 85.4% to RMB319.2 million in 2013 from RMB172.2 million in 2012, primarily due to (i) an increase in the number of social games from 7 in 2012, to 72 in 2013, which drove an increase in the number of paying users. The increase in games revenue also related to

our transition from developing feature phone games to developing and publishing successful smartphone games. The increase also reflected the growing popularity of smartphone games and also the success of our Joyful Da Ying Jia poker game and other of our popular light social games and card games; and (ii) an increase in revenue from licensed games from RMB33.1 million in 2012 to RMB179.6 million in 2013.

•

Handset design. Our handset design revenue increased by 119.3% to RMB33.8 million in 2013 from RMB15.4 million in 2012, primarily due to a greater number of smartphones produced which had a higher unit price than feature phones.

Cost of Revenues. Our cost of revenues increased by 70.1% to RMB156.0 million in 2013 from RMB91.7 million in 2012. This increase was largely in line with the increase in revenues.

•

Games. Our cost of revenues attributable to games increased by 66.2% to RMB124.5 million in 2013 from RMB74.9 million in 2012. This increase was primarily because of an increase in amortization of intangible assets, including game licensing fees, and an increase in amounts paid to payment channels.

•

Handset design. Our cost of revenues attributable to handset design increased by 86.4% to RMB31.5 million in 2013 from RMB16.9 million in 2012, primarily due to costs related to our increased production of smartphone handsets.

Gross Profit and Gross Margin. As a result of the foregoing, our gross profit increased by 105.4% to RMB197.0 million in 2013 from RMB95.9 million in 2012. Our gross margin increased to 55.8% in 2013 from 51.1% in 2012. This increase is attributable primarily to growth in the games publishing business, as the amount paid to mobile game developers is netted off against revenue and not booked under cost of revenues. Moreover, the percentage of fixed amortization costs also decreased in relation to the increase in revenue.

•

Games. Our gross profit attributable to games increased by 100.1% to RMB194.7 million in 2013 from RMB97.3 million in 2012. Our gross margin attributable to games increased to 61.0% in 2013 from 56.5% in 2012.

•

Handset design. We had a gross profit attributable to handset design of RMB2.3 million in 2013, as compared to a gross loss of RMB1.4 million in 2012.

Operating Expenses. Our total operating expenses increased by 50.9% to RMB223.8 million in 2013 from RMB148.3 million in 2012. This increase was primarily because of an increase in selling expenses.

•

Selling expenses increased by 602.5% to RMB111.0 million in 2013 from RMB15.8 million in 2012. This was primarily due to an expansion of online advertising activities, including increased game promotion through web platforms, app stores and agents. Selling expenses as a percentage of net revenues increased to 31.4% in 2013 from 8.4% in 2012.

•

General and administrative expenses increased by 57.0% to RMB55.9 million in 2013 from RMB35.6 million in 2012 primarily because of increased headcount to support our growing operations. General and administrative expenses as a percentage of net revenues decreased to 15.8% in 2013 from 19.0% in 2012.

•

Research and development expenses increased by 54.7% to RMB54.3 million in 2013 from RMB35.1 million in 2012 primarily because of increased research costs to support our transition into developing a greater number of smartphone social games. Research and development expenses as a percentage of net revenues decreased to 15.4% in 2013 from 18.7% in 2012.

Operating Loss. We had an operating loss of RMB26.8 million in 2013 and RMB52.4 million in 2012.

Other Income. We had other income of RMB25.7 million in 2013, compared to other income of RMB0.5 million in 2012. Other income in 2013 mainly represented (i) gain on a disposal of Douwan, a subsidiary

engaged in the sale and development of mobile games, in 2013, (ii) gain on bargain purchase, relating to our acquisition of Vogins, for which the purchase consideration was lower than the fair value of the net assets acquired and liabilities assumed, and (iii) government grants.

Changes in Fair Value of Contingently Returnable Consideration Assets. Our changes in fair value of contingently returnable consideration assets was a gain of RMB24.4 million in 2013, primarily due to an increase in the fair value of the consideration shares to be returned to V1 Group pursuant to the contingent conditions related to the acquisitions of the 3GUU Group. Beginning in 2014, we will no longer have changes in fair value of contingently returnable consideration assets related to our historical reorganization as the contingently returnable consideration assets were fully settled as of December 31, 2013.

Income Tax. We had an income tax benefit of RMB0.2 million in 2013, compared to an income tax benefit of RMB8.7 million in 2012. Our effective tax rate was -0.75% in 2013, compared to 37.5% in 2012, primarily because we became profitable in 2013.

Net Income (Loss). As a result of the foregoing, we recorded a net income of RMB26.8 million in 2013, representing an increase of RMB41.3 million from the net loss of RMB14.5 million in 2012. Our non-GAAP net income, excluding (i) share-based compensation expenses, (ii) internal investigation costs, (iii) goodwill and intangible assets impairment loss and (iv) listing expenses was RMB43.4 million in 2013, compared with RMB61.3 million in 2012. See “Item 3. Key Information—A. Selected Financial and Operating Data—Non-GAAP Financial Information” for important information about non-GAAP financial measures.

Net Income (Loss) Attributable to CMGE Shareholders. As a result of the foregoing, we recorded net income attributable to CMGE shareholders of RMB23.1 million in 2013 compared to net loss to CMGE shareholders of RMB17.4 million in 2012.

B.	Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods indicated.


	For the Year Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
	(in thousands)
Net cash generated from (used in) operating activities		47,815			(60,663	)		(20,160	)		(3,250	)
Net cash generated from (used in) investing activities		(100,051	)		(77,561	)		(365,268	)		(58,870	)
Net cash generated from (used in) financing activities		(6,272	)		260,427			488,590			78,747
Exchange rate effect on cash and cash equivalents		7			(1,813	)		(2,945	)		(475	)
Net (decrease)/increase in cash and cash equivalents		(58,501	)		120,390			100,217			16,152
Cash and cash equivalents at beginning of the period		187,237			128,736			249,126			40,152
Cash and cash equivalents at end of the period		128,736			249,126			349,343			56,304

We have financed our operations primarily through cash from operations. We did not have any short-term or long-term bank borrowings outstanding as of December 31, 2012. As of December 31, 2013 and 2014, we had RMB14.0 million and nil in outstanding short-term borrowings, respectively. As of December 31, 2012, 2013 and 2014, we had RMB128.7 million, RMB249.1 million and RMB349.3 million (US$56.3 million), respectively, in cash and cash equivalents. Our principal uses of cash historically consisted of working capital. Our cash position improved from 2012 to 2013 primarily due to proceeds raised through private offerings of equity. Our cash position improved from 2013 to 2014 primarily due to proceeds raised through our follow-on public offering. Our cash and cash equivalents consist of cash on hand and bank deposits placed with commercial banks in China and Hong Kong. As of December 31, 2014, RMB93.4 million of cash and cash equivalents and RMB10.7 million of short-term investments were held by our VIEs in China, and RMB58.6 million of cash and

cash equivalents and RMB31.7 million of short-term investments were held by our other PRC entities in China. As of December 31, 2014, we held RMB166.5 million, US$1.7 million and HKD15.7 million of cash and cash equivalents in Hong Kong, TWD18.6 million of cash and cash equivalents in Taiwan, JPY33.8 million of cash and cash equivalents in Japan, and KRW495.0 million of cash and cash equivalents in Korea.

We believe that our current levels of cash balances and cash flows from operations will be sufficient to meet our anticipated cash needs to fund our operations for at least the next 12 months. In addition, we may need additional cash resources in the future if we experience adverse business conditions or other developments or if we find and wish to pursue opportunities for investment, acquisitions, strategic cooperations or other similar actions.

Since we are a holding company, our ability to pay dividends and meet other cash needs relies principally on the dividends paid by our PRC subsidiaries. A part of our business also depends on service fees and management fees payable by our VIEs, to our WFOEs under the technology services agreements, market promotion agreements and supplementary agreements between our VIEs and our WFOEs. Earnings of our PRC subsidiaries would be paid to our offshore intermediate holding companies, and from these companies to us, mainly through dividend distributions. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. As of December 31, 2014, our PRC subsidiaries had an aggregate accumulated profit of RMB507.7 million (US$81.8 million) as determined under the applicable Chinese accounting standards, consisting of RMB70.7 million (US$11.4 million) accumulated losses from certain PRC subsidiaries. The primary difference between accumulated profits calculated pursuant to PRC accounting standards and regulations as compared to accumulated profits calculated pursuant to U.S. GAAP as presented in the Company’s financial statements relates to the recognition of liabilities for unrecognized tax benefits and the related interest and penalties in accordance with ASC 740 under U.S. GAAP. Our relevant PRC subsidiaries are not able to distribute dividends to us until the accumulated losses have been made up.

The aggregate undistributed earnings of our PRC subsidiaries that are available for distribution to non-PRC tax resident parent companies are considered to be indefinitely reinvested under ASC 740 and, therefore, we did not incur a tax liability charge for these undistributed earnings. As of December 31, 2014, the amount of such undistributed earnings was RMB578.4 million (US$93.2 million). If our PRC subsidiaries were to distribute all of these earnings to their respective non-PRC tax resident parent companies, such distributions would be subject to PRC withholding tax of up to 10%. The undistributed earnings generated before January 1, 2008 are exempt from PRC withholding tax if distributed to the foreign investor in 2008 or later. For a detailed discussion with respect to the PRC withholding tax impact associated with the repatriation of undistributed earnings of our PRC subsidiaries, see “Item 3. Key Information—D. Risk factors—Risks Related to Doing Business in China—The New EIT Law will affect tax exemptions on dividends to be paid by our PRC subsidiaries to us through our Hong Kong subsidiaries and we may not be able to obtain certain treaty benefits under the relevant tax treaty.”

In addition, each of our subsidiaries and our VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The amounts restricted include paid-in capital and general or statutory reserve funds of our PRC subsidiaries and the net assets of the VIEs, as determined pursuant to PRC generally accepted accounting principles, totaled RMB548.9 million (US$88.5 million) as of December 31, 2014. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our PRC subsidiaries to pay dividends and make other distributions to us.

Under PRC law, the foreign currency loans borrowed by our PRC subsidiaries from us or other foreign lenders should not exceed the differences between their respective approved total investment amount and registered capital, and must be registered with SAFE. Furthermore, any capital contributions we make to our

PRC subsidiaries must be approved by MOFCOM or its local counterparts. These limits may be increased in correspondence with the increases of the total investment amounts and registered capitals of our PRC subsidiaries, subject to the PRC governmental approvals and registrations. Currently, we do not expect that the amount of foreign exchange loans to be incurred by our PRC subsidiaries will exceed the above limit in the foreseeable future. However, should the amount of foreign currency loans we need to borrow exceed the limit, we cannot assure you that we will be able to obtain these governmental approvals or registrations on a timely basis, if at all. Failure to obtain these governmental approvals or registrations could limit our ability to fund our PRC operations, which could adversely and materially affect our liquidity and our ability to fund and expand our business. We may need to seek alternative funding sources. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using the proceeds of any offering to make loans or capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and ability to fund and expand our business.”

In addition, our PRC legal counsel, Guantao Law Firm, is of the opinion that prior CSRC approval for the distribution was not required because we are not an offshore special purpose vehicle controlled directly or indirectly by PRC companies or individuals as defined by the New M&A Rules. If the CSRC or other PRC regulatory agencies subsequently determine that prior CSRC approval was required under the M&A Rules for the listing and trading of the ADSs on the Nasdaq Global Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies, which could materially adversely affect the timing of any future registered offering and our ability to fund our PRC subsidiaries. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission, or the CSRC, might have been required in connection with the listing and trading the ADSs on the Nasdaq Global Market.”

Operating Activities

Net cash used in operating activities was RMB20.1 million (US$3.3 million) in 2014, while our net income was RMB227.9 million (US$36.7 million). The difference was primarily due to increases in prepayments and other current assets of RMB 105.3 million (US$17.0 million) related to prepaid marketing expenses as well as prepayments made to content providers for additional games, as well as increase in accounts receivable of RMB413.1 million (US$66.6 million) corresponding with increases in revenue. These were partially offset by increases in accounts payable and accrued expenses and other liabilities of RMB130.3 million (US$21.0 million) and RMB49.5 million (US$8.0 million), respectively, related to increases in revenue and the expansion of our publishing business, share-based payment of RMB37.4 million (US$6.0 million) as well as amortization of intangible assets of RMB59.5 million (US$9.6 million). The amortization of intangible assets primarily reflects the amortization of game license fees.

Net cash used in operating activities was RMB60.7 million in 2013, while our net income was RMB26.8 million. The difference was primarily due to increases in prepayments and other current assets of RMB72.2 million related to prepaid marketing expenses as well as prepayments made to content providers for additional games, as well as increase in accounts receivable of RMB88.3 million corresponding with increases in revenue. These were partially offset by an increase in accounts payable of RMB53.8 million related to increases in revenue and the expansion of our publishing business, as well as amortization of intangible assets of RMB22.7 million. The amortization of intangible assets primarily reflects the amortization of game license fees.

Net cash from operating activities was RMB47.8 million in 2012, while our net loss was RMB14.5 million. The difference was primarily due to adjustments for a loss on impairment of goodwill of RMB33.5 million and a loss on impairment of intangible assets of RMB10.9 million, as well as an adjustment of amortization of intangible assets of RMB23.6 million. Both the impairments of goodwill and intangible assets reflect a decline in the fair value of OWX Holding resulting largely from transitioning our handset design business from feature phone to smartphone design. These were partially offset by changes in the fair value of contingently returnable

consideration assets of RMB27.3 million due to an increase in the fair value of the consideration shares to be returned to V1 Group pursuant to the contingent conditions related to the acquisitions of the 3GUU Group and the OWX Holding Group.

Investing Activities

Net cash used in investing activities was RMB365.3 million (US$58.9 million) in 2014 primarily due to acquisition of intangible assets of RMB171.6 million (US$27.7 million) relating to the acquisition of additional games, the acquisition of property and equipment of RMB19.7 million (US$3.2 million) for business expansion, as well as acquisition of long-term investments and equity method investments of RMB150.5 million (US$24.3 million).

Net cash used in investing activities was RMB77.6 million in 2013 primarily due to acquisition of intangible assets of RMB50.1 million relating to the acquisition of additional games, the acquisitions of property and equipment of RMB14.3 million relating to the purchases of additional equipment and establishment of new offices, and an outflow of RMB6.8 million relating to purchases of short-term investments netted off of the maturity of short-term investments.

Net cash used in investing activities was RMB100.1 million in 2012 primarily due to purchases of short-term investment of RMB45.0 million, which consisted of short-term fixed rate bank deposits, and investments in long-term assets of RMB40.0 million, which consisted largely of prepayment for the use of distribution channels.

Financing Activities

Net cash from financing activities was RMB488.6 million (US$78.7 million) in 2014, due to proceeds from issuance of ordinary shares of RMB484.1 million (US$78 million) related to shares offering.

Net cash from financing activities was RMB260.4 million in 2013, due to proceeds from issuance of ordinary shares of RMB256.3 million related to private placements of our ordinary shares. See “Item 4. Information on the Company—A. History and Development of the Company—Share Purchase Agreement and Private Placements and Follow-on Public Offering.”

Net cash used in financing activities was RMB6.3 million in 2012, due to dividends paid of RMB63.0 million in February 2012 and payment for listing costs of RMB17.3 million, relating to the listing of our ordinary shares on the Nasdaq Global Market in September 2012, and were partially offset by cash received from the issuance of contingently redeemable ordinary shares of RMB73.8 million, relating to shares issued to Core Tech and PVG for subscription of our ordinary shares pursuant to the share purchase agreement with MediaTek.

Capital Expenditures

We had capital expenditures of RMB42.0 million in 2012, RMB64.5 million in 2013 and RMB191.2 (US$30.8 million) in 2014. In 2014, our capital expenditures related to purchases of property and equipment for business expansion and an increase in the acquisition of intangible assets related to game licensing fees.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 , or ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of the promised goods or services to customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period within that reporting period. Early adoption is not permitted. We are in the process of evaluating the effect of the update on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

C.	Research and Development, Patents and Licenses

Product Development

See “Item 4. Information on the Company—B. Business Overview—Game Development.”

Intellectual Property

D.	Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for 2012, 2013 and 2014 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.	Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated combined financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F.	Contractual Obligations

The following table sets forth our contractual commitments as of December 31, 2014.

Payment Due by Period

Contractual Obligations

Total

Less
than
1 year

1 - 3 years

3 - 5 years

More
than
5 years

(In thousands of RMB)

Operating lease commitments

108,635

—

91,515

17,120

—

The operating lease obligations relate to lease agreements with lessors of our offices in China, including offices in Beijing, Guangzhou and Shenzhen, under leases with terms ranging from one to five years. Other than the contractual obligations set forth above, we do not have other material commitments or long-term obligations as of December 31, 2014.

G.	Safe Harbor

This annual report contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995.

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

•

our growth strategies as well as our business plans;

•

our future development, results of operations and financial condition;

•

our ability to continue to develop new and attractive products and services;

•

our ability to continue to develop new technologies and/or upgrade our existing technologies;

•

our ability to attract and retain players and further enhance our brand recognition;

•

the expected growth of and trends in the mobile game industry in China;

•

PRC governmental policies and regulations relating to the mobile game industry in China;

•

competition in the mobile game industry; and

•

general economic and business conditions in China.

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

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

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

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.	Directors and Senior Management

The following table sets forth information about our directors and executive officers as of the date of this annual report. The business address of all of our directors and executive officers is Block A, 15/F Huajian Building 233, Tianfu Road, Tianhe District, Guangzhou, PRC.


Name	Age		Position
Lijun Zhang		51	Chairman of the board
Hendrick Sin		40	Vice-chairman of the board
Yongchao Wang		41	Vice-chairman of the board
Ken Jian Xiao		35	Director and chief executive officer
Ken Fei Fu Chang		40	Director and chief financial officer
Estella Yi Kum Ng		57	Independent director
Chen-Wen Tarn		54	Independent director
David Ku		45	Independent director
Joel Chang		46	Independent director
Shuling Ying		33	Chief operating officer

Lijun Zhang has been our chairman since the completion of our reorganization in August 2011. He has been the chairman of V1 Group, our principal shareholder, since its inception. He is the chairman of China APEC Development Council, vice chairman of the China Internet Association, council member of the Association for Relations Across the Taiwan Strait, vice chairman of China Social Workers Association, vice president of China WTO Research Institute, honorary president of the Council of Beijing Association of Online Media, and a standing member of China Copyright Council. Dr. Zhang is also a professor of Nankai University in China, an honorary professor of the University of Sydney in Australia and an experienced expert in China’s Internet media. Dr. Zhang holds a doctorate degree in economics from Nankai University in July 2002.

Hendrick Sin has been our vice-chairman since the completion of our reorganization in August 2011. Mr. Sin has approximately 17 years of experience in finance and investment banking. He was V1 Group’s executive director and chief financial officer from 2009 until 2012. Prior to joining V1 Group, he was a director of investment banking advisory at HSBC and advised on a wide range of notable equity fund raisings and merger and acquisition transactions involving PRC and Hong Kong corporations. He graduated from Stanford University in 1997 with a master’s degree in engineering-economic systems and operations research. He also holds three bachelor’s degrees in computer science/mathematics, economics and industrial management with honors from Carnegie Mellon University. Mr. Sin is a member of the Hong Kong Institute of Directors.

Yongchao Wang became our vice-chairman in August 2012. Mr. Wang founded Yingzheng and became its chief executive officer in 2004. He has more than 15 years of experience in the mobile value-added services

industry in China, holding management positions with a number of telecommunications companies in China. Mr. Wang has extensive experience in market development, operations and team management. Mr. Wang graduated from Guangdong Provincial Academy of Social Science with a master of science degree in economics in 2002. He also holds a bachelor’s degree in business management from Jinan University in 1994.

Ken Jian Xiao became our chief executive officer in April 2012 and became our director in August 2012. Before becoming our chief executive officer, Mr. Xiao served as our chief operating officer from our inception. Mr. Xiao founded Huiyou in 2007 and is the chairman of Dragon Joyce. Prior to founding Huiyou, he founded Infomobile, a company acquired by Samsung in August 2003. He was an initial key member of A8 Digital Music, a company listed on the Hong Kong Stock Exchange. Mr. Xiao graduated from South China Normal University in 2008 with a bachelor’s degree in law.

Ken Fei Fu Chang has been our chief financial officer since May 2011 and became our director in August 2012. Mr. Chang has worked for 15 years in a number of leading international investment banks and asset management companies with extensive experience in research, product structuring, financial analysis, asset management and equity capital markets. Ken’s most recent position was director and senior strategist at Barclays Capital from 2010. From 2005 to 2010, based in Tokyo, Mr. Chang worked as senior analyst and fund manager for the Silverstone Fund in Tokyo, a US$400 million global equity hedge fund. Prior to that, from 1998 to 2005 (four years in Tokyo and three years in Hong Kong), Mr. Chang was the head of the Asia Pacific and Japan equity linked and convertible strategy group of Merrill Lynch. Mr. Chang graduated from Stanford University with a master’s degree in engineering economic systems in 1996. He also holds a bachelor’s degree in electrical engineering from the University of Michigan.

Estella Yi Kum Ng became our director in September 2012. Until April 2014, Ms. Ng had served as the chief financial officer of Country Garden Holdings Company Limited, a China-based property development company listed on the Hong Kong Stock Exchange, since 2008. Prior to that, she worked at Hang Lung Properties Limited, a property development company listed on the Hong Kong Stock Exchange, from 2003 to 2007, including as an executive director. She has worked at the Hong Kong Stock Exchange in various senior positions, including as senior vice president of the listing division, and at Deloitte Touche Tohmatsu, where she gained substantial auditing experience. Ms. Ng is an associate of the Institute of Chartered Accountants in England and Wales, a fellow of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants and a member of the American Institute of Certified Public Accountants. She has also fulfilled public service appointments, including as a co-opted member of the audit committee of the Hospital Authority of Hong Kong. Ms. Ng was voted the best chief financial officer in the property sector by sell-side analysts who participated in the 2012, 2013 and 2014 All-Asia Executive Team Survey organized by the Institutional Investor magazine. Ms. Ng received a master’s of business administration degree from the Hong Kong University of Science and Technology in 1995.

Chen-Wen Tarn became our director in May 2012. He is a general partner and a member of the investment committee at Pacific Venture Partners, an affiliate of PVG. Dr. Tarn has been engaged in academic research and higher education for over fifteen years. He has worked at the National Taiwan University of Science and Technology as professor in the department of electrical engineering from September 1991 to January 2004 and as a professor at the Graduate Institute of Electro-Optical Engineering since February 2009. Dr. Tarn has also held senior positions in various telecommunication, Internet and technology firms, including as a consultant of Pacific Venture Partners from February 2004 to August 2007, as the executive vice president of GigaMedia Limited and as the president of Koos Broadband Telecom Inc. from February 2004 to October 2008. He also served as the chairman of the Taiwan Internet Association from 2006 to 2009. Mr. Tarn received a Ph.D. degree in electrical engineering from Syracuse University in 1991.

David Ku became our director in July 2013. Mr. Ku serves as the chief financial officer of MediaTek. Prior to that, he worked in the JPMorgan Investment Bank as a Vice President. Mr. Ku received a master’s of business administration degree from the University of Illinois at Urbana Champaign.

Joel Chang became our director in September 2013. Mr. Chang is the Managing Partner of AID Partners, or AID, and one of its original founders. He has considerable strategic, financial and advisory experience. Prior to founding AID, he was the Chief Investment Officer at Investec Asia, a direct investment house initiated by Investec Bank (UK). Prior to that, he was the managing director of an investment banking unit of China Everbright Capital Ltd. Previous to that, he worked with BNP Paribas Peregrine for seven years and prior his departure, was an executive director of BNP Paribas Peregrine and the first managing director of Changjiang BNP Peregrine, one of the first Sino-foreign securities joint ventures in China. Joel also worked for Societe Generale, UOB Hong Kong and Arthur Andersen & Co. in the 1990s. Mr. Chang was also an independent non-executive director of Kingsoft Corporation Ltd. (3888.HK) and was previously an executive director and chief financial officer of Orange Sky Golden Harvest Entertainment Holding Co. Ltd. (1132.HK). He is also a member of the People’s Political Consultative Committee of the PRC (Beihai Guangxi). He is a certified public accountant and member of the Australian Society of Public Accountants and the Hong Kong Institute of Certified Public Accountants.

Shuling Ying joined us in July, 2013 and served as our president from October 2013 to August 2014, when he was appointed as our chief operating officer. He has extensive experience in the licensing, publishing, operation and marketing of mobile games and helps manage our publishing business. Prior to joining our company, Mr. Ying was one of the founders of and served as chief executive officer of Shenzhen Zhongzheng Ruanyin Science & Technology Co., Ltd. from 2009 to June 2013.

B.	Compensation of Directors and Executive Officers

Compensation of Directors and Executive Officers

For the year ended December 31, 2012, 2013 and 2014, we paid an aggregate of RMB2.3 million, RMB6.5 million and RMB6.6 million (US$1.1 million), respectively, in cash compensation to our executive officers. Our PRC subsidiaries and VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory benefits. Other than the above-mentioned statutory contributions mandated by applicable PRC law, we have not set aside or accrued any amount of cash to provide pension, retirement or other similar benefits to our officers and directors.

Share Options

On February 6, 2012, we granted options to purchase 25,835,712 ordinary shares to directors, executive officers and other employees. 25% of these options vested on the first anniversary of the grant date. The remaining 75% of these options will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these options is US$8.47 per ADS (US$0.605 per share).

On February 8, 2013, we granted options to purchase 17,160,895 ordinary shares to directors, executive officers and other employees. 25% of these options vested on the first anniversary of the grant date. The remaining 75% of these options will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these options is US$6.50 per ADS (US$0.464 per share) for options awarded as ADSs and US$8.47 per ADS ($0.605 per share) for options awarded as shares. 2,739,495 of the 17,160,895 options were awarded as shares.

On January 13, 2014, we granted options to purchase 5,851,482 Class A ordinary shares to directors, executive officers and other employees. 25% of these options vested on the first anniversary of the grant date. The remaining 75% of these options will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these options is US$29.03 per ADS (US$2.07 per share).

On January 13, 2014, we granted options to purchase 25,365,956 Class A ordinary shares to directors and executive officers. The options would have vested in three equal annual tranches beginning March 15, 2015,

subject to our company reaching certain profit targets set forth in the option grant agreement. The exercise price of these options was US$29.03 per ADS (US$2.07 per share). We have modified the share awards by cancelling the options, accompanied by a concurrent grant of warrants to the same persons with modifications relating to certain profit targets and the exercise price, which were intended to provide additional motivation to the relevant directors and officers. The exercise price of the warrants is US$20.23 per ADS (US$1.445 per share).

On October 8, 2014, we granted options to purchase 1,462,860 Class A ordinary shares to directors, executive officers and other employees. 25% of these options will vest on the first anniversary of the grant date. The remaining 75% of these options will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these options is US$20.23 per ADS (US$1.445 per share).

On February 12, 2015, we granted options to purchase 9,660,000 Class A ordinary shares to directors, executive officers and other employees. 25% of these options will vest on the first anniversary of the grant date. The remaining 75% of these options will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these options is US$15.76 per ADS (US$1.126 per share).

Share Option Scheme

We adopted the Share Option Scheme in November 2011 to motivate, attract, and retain employees, directors and consultants, and to promote the success of our business. The maximum number of ordinary shares which may be issued pursuant to all options under the Share Option Scheme was initially 30,394,955. We may seek separate shareholders’ approval, as well as approval of V1 Group’s shareholders, to grant options beyond this limit. We obtained approval of V1 Group’s shareholders on May 30, 2014 and approval from the Company’s shareholders on December 11, 2014 to issue an additional 26,072,129 Class A ordinary shares without regard to shares previously issued.

Term of the Scheme. The Share Option Scheme is valid for ten years.

Plan Administration. Our board of directors will administer the Share Option Scheme, and may delegate its administrative authority to a committee of one or more members of our board or one or more of our officers, subject to certain restrictions. Any proposed grant of options to a director (other than independent directors), chief executive or substantial shareholder must be approved by all independent directors.

Eligibility. We may grant awards to our employees, directors, consultants or service recipients, which include those of our subsidiaries or any VIEs.

Vesting Schedule. In general, the board determines the vesting schedule of the options. The board may require a particular option holder to achieve certain performance targets specified at the time of grant before any option grant can be exercised. The options shall be valid for ten years after the initial grant.

Option Price. The option price shall be determined by the board on a fair and reasonable basis, taking into consideration the prevailing market conditions, our performance and the performance and/or future potential contribution of the eligible person to the success of our business, which shall be no less than the nominal value of our share on the grant date.

Acceleration of Vesting upon Corporate Transaction. If a general offer is made to all of our shareholders or, for so long as we remain a subsidiary of V1 Group, to all shareholders of V1 Group, holders of our options may be entitled to exercise the option in full or in part regardless of any vesting period requirements.

Lapse of Options. Any unexercised option shall lapse, to the extent not already exercised, automatically on the earliest of, among other things: (a) the expiry of the option period; (b) the date of termination of employment by us for cause; (c) expiry of the 30-day period from the date of voluntary resignation of the holder; (d) the date of termination of a service contract due to breach; and (e) expiry of the six-month period due to ill-health, injury, disability, death or retirement.

100

Amending the Share Option Scheme. No amendments to the Share Option Scheme shall be made which would have the effect of abrogating or altering adversely any of the subsisting rights of holders except with the consent of the holders. Subject to the above, the board may from time to time in its absolute discretion waive or amend any of the rules of the Share Option Scheme as it deems desirable, provided that, material amendments would require approval of our shareholders and, for so long as we remain a subsidiary of V1 Group, shareholders of V1 Group in general meetings.

The table below sets for the option grants made to our directors and executive officers pursuant to the Share Option Scheme.


Name	Ordinary Shares Underlying Outstanding Options			Exercise Price (US$/Share)		Date of Grant		Expiration Date
Lijun Zhang		3,039,494	⁽¹⁾	$	0.605		February 6, 2012		February 5, 2017
		1,656,200		$	0.464		February 8, 2013		February 7, 2018
Hendrick Sin		3,039,495		$	0.605		February 6, 2012		February 5, 2017
		1,656,200		$	0.464		February 8, 2013		February 7, 2018
		1,890,000		$	2.074		January 13, 2014		January 12, 2019
		472,500		$	1.445		October 8, 2014		October 7, 2019
Yongchao Wang		2,339,733		$	0.605		February 6, 2012		February 5, 2017
		1,656,200		$	0.464		February 8, 2013		February 7, 2018
		1,400,000		$	2.074		January 13, 2014		January 12, 2019
		350,000		$	1.445		October 8, 2014		October 7, 2019
Ken Jian Xiao		3,039,495		$	0.605		February 6, 2012		February 5, 2017
		1,656,200		$	0.464		February 8, 2013		February 7, 2018
		12,682,978	⁽²⁾	$	2.074		January 13, 2014		January 12, 2019
Ken Fei Fu Chang		3,039,495		$	0.605		February 6, 2012		February 5, 2017
		1,656,200		$	0.464		February 8, 2013		February 7, 2018
		1,400,000		$	2.074		January 13, 2014		January 12, 2019
		350,000		$	1.445		October 8, 2014		October 7, 2019
Estella Yi Kum Ng		331,800		$	0.464		February 8, 2013		February 7, 2018
		420,000		$	1.126		February 12,2015		February 11,2020
Chen-Wen Tarn		1,656,200		$	0.464		February 8, 2013		February 7, 2018
		1,092,000		$	2.074		January 13, 2014		January 12, 2019
		273,000		$	1.445		October 8, 2014		October 7, 2019
		420,000		$	1.126		February 12, 2015		February 11,2020
Joel Chang		420,000		$	1.126		February 12, 2015		February 11,2020
Shuling Ying		12,682,978	⁽²⁾	$	2.074		January 13, 2014		January 12, 2019

(1)	Includes options held by Dr. Zhang’s wife, Chun Wang.

(2)	These options were cancelled on October 8, 2014.

101

Restricted Share Units

On August 24, 2011 and March 16, 2012, we issued 1,220,000 and 639,000 ordinary shares, respectively, to certain of our directors and officers at par value. Pursuant to the restricted share units subscription agreements, 25% of the restricted share units will vest upon each of the completion, the first, the second and the third anniversary of our listing. Prior to vesting, the restricted share units may not be transferred. Each of our directors and executive officers purchased shares that represent less than 1% of our total outstanding voting securities.


Name	Restricted Share Units		Purchase Price (US$/Share)		Date of Grant	End of Vesting Period
Lijun Zhang		258,790	$	0.001	August 24, 2011	September 25, 2015
		213,000	$	0.001	March 16, 2012	September 25, 2015
Hendrick Sin		258,790	$	0.001	August 24, 2011	September 25, 2015
		213,000	$	0.001	March 16, 2012	September 25, 2015
Ken Fei Fu Chang		258,790	$	0.001	August 24, 2011	September 25, 2015
		213,000	$	0.001	March 16, 2012	September 25, 2015

Warrants

On January 26, 2014, we granted warrants representing 1,911,000 Class A ordinary shares to Dr. Zhang. Dr. Zhang can exercise these warrants in four equal annual tranches beginning the first anniversary of the date of grant. The exercise price of these warrants was initially US$29.34 per ADS (US$2.10 per share), which was amended to US$20.23 per ADS (US$1.445 per share) in October 2014. The warrants were awarded to incentivize Dr. Zhang and further align his interests with our company. In January 2014, we also granted to an employee warrants to purchase 1,092,000 Class A ordinary shares which will be exercisable in three equal tranches beginning on January 1, 2015. The exercise price of these warrants was initially $29.03 per ADS (US$2.07 per share), which was amended to US$20.23 per ADS (US$1.445 per share) in October 2014.

On April 1, 2014, we granted warrants representing 8,400,000 Class A ordinary shares to Hendrick Sin, vice-chairman of the board. Mr. Sin can exercise these warrants in four equal annual tranches beginning the first anniversary of the date of grant. The exercise price of these warrants was initially US$29.03 per ADS (US$2.07 per share), which was amended to US$20.23 per ADS (US$1.445 per share) in October 2014. The warrants were awarded to incentivize Mr. Sin and further align his interests with our company.

On October 8, 2014, we granted warrants representing 25,365,956 Class A ordinary shares to directors and executive officers. These warrants will be exercisable in three equal annual tranches beginning March 15, 2015, subject to performance conditions. The exercise price of these warrants is US$20.23 per ADS (US$1.445 per share). The warrants were awarded to incentivize the officers and further align their interests with our company.

On February 13, 2015, we granted warrants representing 13,020,000 Class A ordinary shares to directors. 25% of these warrants will vest on the first anniversary of the grant date. The remaining 75% of these warrants will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these warrants is US$15.76 per ADS (US$1.13 per share). In February 2015, we also granted to an employee warrants to purchase 420,000 Class A ordinary shares. 25% of these warrants will vest on the first anniversary of the grant date. The remaining 75% of these warrants will vest in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. The exercise price of these warrants is US$15.76 per ADS (US$1.13 per share).

102


Name	Ordinary Shares Underlying Outstanding Warrants		Exercise Price (US$/Share)		Date of Grant	Expiration Date
Lijun Zhang		1,911,000	$	1.445	January 26, 2014	January 25, 2019
		2,604,000	$	1.126	February 13, 2015	February 12, 2020
Hendrick Sin		8,400,000	$	1.445	April 1, 2014	March 31, 2019
		2,604,000	$	1.126	February 13, 2015	February 12, 2020
Yongchao Wang		2,604,000	$	1.126	February 13, 2015	February 12, 2020
Ken Jian Xiao		12,682,978	$	1.445	October 8, 2014	September 14, 2017
		2,604,000	$	1.126	February 13, 2015	February 12, 2020
Ken Fei Fu Chang		2,604,000	$	1.126	February 13, 2015	February 12, 2020
Shuling Ying		12,682,978	$	1.445	October 8, 2014	September 14, 2017

C.	Board Practices

Board of Directors

Currently, we have nine directors on our board of directors. Pursuant to our memorandum and articles of association, at each general meeting one-third of the directors for the time being retire from office by rotation. A director is not required to hold any shares to qualify for appointment. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested as long as he or she has made a declaration of the nature of such interest. Our board of directors may exercise all the powers of the company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whether outright or as security for any debt, liability or obligation of our company or of any third-party.

Committees of the Board of Directors

We have established an audit committee, a compensation committee and a corporate governance and nominating committee.

Audit Committee

Our audit committee consists of Mr. Joel Chang, Ms. Estella Yi Kum Ng and Mr. Chen-Wen Tarn all of whom satisfy the “independence” requirements of Section 5605(a)(2) of the Nasdaq Listing Rules and under Rule 10A-3 under the Exchange Act. Ms. Ng is the chair of our audit committee.

The purpose of the audit committee is to assist our board of directors with its oversight responsibilities regarding: (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence and (iv) the performance of our internal audit function and independent auditor.

The audit committee is responsible for, among other things:

•

appointing the independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors;

•

reviewing with the independent auditors any audit problems or difficulties and management’s response;

•

discussing the annual audited financial statements with management and the independent auditors;

•

reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and

•

meeting separately and periodically with management and the independent auditors.

In 2014 our audit committee met five times.

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Compensation Committee

Our compensation committee consists of Ms. Estella Yi Kum Ng, Mr. Chen-Wen Tarn and Mr. Hendrick Sin. Our board of directors has determined that Ms. Ng and Mr. Tarn are each an “independent director” within the meaning of Section 5605(a)(2) of the Nasdaq Listing Rules.

Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of our compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any compensation committee meeting during which his compensation is deliberated. Our compensation committee is responsible for, among other things:

•

approving and overseeing the compensation package for our executive officers;

•

reviewing and making recommendations to our board with respect to our compensation policies and the compensation of our directors; and

•

reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

In 2014 our compensation committee met five times.

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee consists of Mr. Hendrick Sin, Ms. Estella Yi Kum Ng and Mr. Chen-Wen Tarn. Our board of directors has determined that Ms. Ng and Mr. Tarn are each an “independent director” within the meaning of Section 5605(a)(2) of the Nasdaq Listing Rules.

Our corporate governance and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

•

identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;

•

reviewing annually with the board the current composition of the board in light of the characteristics of independence, skills, experience and availability of service to us;

•

identifying and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as the corporate governance and nominating committee itself;

•

advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and

•

monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

In 2014, our corporate governance and nominating committee met one time.

Duties of Directors

Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and

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diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure that we comply with our memorandum and articles of association, as amended from time to time. Our company has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors include, among others:

•

convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

•

declaring dividends and distributions;

•

appointing officers and determining the term of office of officers;

•

exercising the borrowing powers of our company and mortgaging the property of our company; and

•

approving the transfer of shares of our company, including the registering of such shares in our share register.

Employment Agreements

We have entered into an employment agreement with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, conviction of a crime, material violation of our rules and regulations, or other misconduct that cause material damage to us. Furthermore, an executive officer may terminate the employment at any time upon prior written notice to us.

Each of our executive officers has agreed to hold in strict confidence any trade secrets or confidential information of our company or trade secrets of any third-party received by us. Each executive officer has agreed that the intellectual property rights related to all work products, inventions, computer software, or other technological information which he has developed while performing his duties at our company or through mainly using our resources shall belong to us. Each executive officer has agreed to assist us to obtain and exercise all such intellectual property rights.

In addition, some of our officers have entered into employment agreements with certain of our subsidiaries pursuant to which they serve as officers of those subsidiaries. The terms of these employment agreements include, among other things, duration, remuneration, the treatment of confidential information, social insurance and employment benefits.

Indemnification Agreements

We have entered into indemnification agreements with each of our directors to indemnify them against certain liabilities and expenses arising from their being a director. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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Employees

Employees

We had 418, 1,211 and 1,788 full-time employees as of December 31, 2012, 2013 and 2014, respectively. The following table sets forth the number of our employees categorized by areas of operations as of December 31, 2014:


Function	Number of Employees
Research and game development		541
Management and general administration		212
Operations, sales and marketing, and technology support		1,035

Total		1,788

Substantially all of our employees are based in the PRC. In accordance with PRC laws, our full-time employees in China participate in various employee benefit plans required by the government, including pension, medical benefit plans, unemployment insurance, work-related injury insurance and maternity insurance. The increase in the number of employees from December 31, 2013 to December 31, 2014 reflects the growing scope of our business operations.

Compensation for our full-time employees typically consists of base salary, seniority pay and other subsidies. In addition, based on our results of operations, we may award bonuses to our employees solely at our discretion.

E.	Share Ownership

The following table sets forth information with respect to beneficial ownership of our ordinary shares as of March 27, 2015 by:

•

each of our directors and executive officers; and

•

each person known to us to beneficially own 5% and more of our total outstanding Class A and Class B ordinary shares.

Pursuant to our Second Amended and Restated Memorandum and Articles of Association, our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to five votes per share. Only V1 Group and its affiliates, namely Dragon Joyce, OWX Holding and Action King, hold our Class B ordinary shares.

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Except as otherwise noted, the business address of each person listed in the table is c/o China Mobile Games and Entertainment Group Limited, Block A, 15/F Huajian Building 233, Tianfu Road, Tianhe District, Guangzhou, PRC.


	Class A Ordinary Shares Beneficially Owned⁽¹⁾					Class B Ordinary Shares Beneficially Owned⁽¹⁾					Total Shares Beneficially Owned⁽¹⁾⁽²⁾			Total Voting Power⁽¹⁾
Name	Number		Percent⁽³⁾			Number		Percent⁽³⁾			Percent⁽³⁾			Percent⁽³⁾
Directors and Senior Officers:
Lijun Zhang⁽⁴⁾		22,949,089		8.8	%		180,821,228		100	%		46.0	%		79.5	%
Hendrick Sin⁽⁵⁾		16,672,771		6.3	%		—		—			3.7	%		1.4	%
Yongchao Wang⁽⁶⁾		28,838,224		11.0	%		—		—			6.5	%		2.5	%
Ken Jian Xiao⁽⁷⁾		8,818,866		3.3	%		—		—			2.0	%		0.8	%
Ken Fei Fu Chang		*		*			—		—			*			*
Estella Yi Kum Ng		*		*			—		—			*			*
Chen-Wen Tarn⁽⁸⁾		12,308,680		4.8	%		—		—			2.8	%		1.1	%
David Ku⁽⁹⁾		15,450,144		6.0	%		—		—			3.5	%		1.3	%
Joel Chang		—		—			—		—			—			—
Shuling Ying⁽¹⁰⁾		4,721,878		1.8	%		—		—			1.1	%		0.4	%
All Directors and Executive Officers as a group		114,256,782		43.7	%		180,821,228		100	%		66.7	%		87.3	%

Other Principal Shareholders
V1 Group Limited⁽¹¹⁾		8,795,864		3.4	%		180,821,228		100	%		43.3	%		78.6	%
Trilogic Investments Limited⁽⁶⁾		24,999,522		9.7	%		—		—			5.7	%		2.2	%
Champion Plus Group Limited⁽¹²⁾		29,400,000		11.4	%		—		—			6.7	%		2.5	%

*	Less than 1% of our total outstanding Class A and Class B ordinary shares.

(1)

Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act, and includes voting or investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

(2)	Represents the total shares beneficially owned as a percentage of our total outstanding Class A and Class B ordinary shares as of March 27, 2015.

(3)

Assumes 438,345,157 ordinary shares outstanding as of March 27, 2015, comprised of 257,523,929 Class A ordinary shares and 180,821,228 Class B ordinary shares. Each holder of our Class B ordinary shares is entitled to five votes per Class B common share. Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a share-for-share basis.

(4)

Consists of (a) 3,296,660 Class A ordinary shares held by Dr. Lijun Zhang personally, including 2,291,828 Class A ordinary shares in the form of ADSs and 117,925 restricted shares units that will become Class A ordinary shares once the restrictions are removed in September 2015; (b) 6,977,614 Class A ordinary shares held by Big Step Group Limited and beneficially owned by Dr. Zhang due to that Dr. Zhang is the sole shareholder of Big Step Group Limited; (c) 3,878,951 Class A ordinary shares that Dr. Zhang and his wife have the right to acquire within 60 days of March 27, 2015; and (d) 8,795,864 Class A ordinary shares and 180,821,228 Class B ordinary shares held directly and indirectly by V1 Group Limited. As chairman and a director of V1 Group Limited, Dr. Zhang has shared voting and investment control over all the shares held by V1 Group Limited and may be deemed to have beneficial ownership of the shares of the Issuer held by V1 Group Limited. Dr. Zhang disclaims beneficial ownership of all of the ordinary shares of the Issuer held by V1 Group Limited except to the extent of his pecuniary interest therein.

(5)

Consists of (a) 1,004,832 Class A ordinary shares held by Mr. Sin personally, including 117,925 restricted shares units that will become Class A ordinary shares once the restrictions are removed in September 2015; (b) 6,091,827 Class A ordinary shares that Mr. Sin has the right to acquire within 60 days of March 27,

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2015; and (c) 9,576,112 Class A ordinary shares held by Silver Joyce International Limited, or Silver Joyce, and beneficially owned by Mr. Sin due to that Silver Joyce is controlled by Mr. Sin.

(6)

Consists of (a) 3,838,702 Class A ordinary shares that Mr. Wang has the right to acquire within 60 days of March 27, 2015; and (b) 24,999,522 Class A ordinary shares held by Trilogic Investments Limited, or Trilogic, including 8,193,248 Class A ordinary shares in the form of ADSs. Mr. Wang is the sole director of Trilogic, having voting and investment control over all the shares held by Trilogic and therefore may be deemed to share beneficial ownership of the shares held by Trilogic by virtue of his status as its controlling person. The registered address of Trilogic is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin Islands.

(7)	Consists of (a) 1,190,000 Class A ordinary shares held by Mr. Xiao personally; (b) 7,628,866 Class A ordinary shares that Mr. Xiao has the right to acquire within 60 days of March 27, 2015.

(8)

Consists of (a) 1,272,863 Class A ordinary shares that Mr. Tarn has the right to acquire within 60 days of March 27, 2015; and (b) 11,035,817 Class A ordinary shares, including 11,035,808 Class A ordinary shares in the form of ADSs, held by PVG, a company organized under the laws of the People’s Republic of China, which we issued pursuant to a stock purchase agreement dated March 21, 2012. Mr. Tarn is an executive manager and a member of the investment committee at PVG, and disclaims beneficial ownership of the ordinary shares owned by PVG.

(9)

Consists of 15,450,144 Class A ordinary shares, including 15,450,134 Class A ordinary shares in the form of ADSs, held by Core Tech, a company incorporated under the laws of the British Virgin Islands, which we issued pursuant to a stock purchase agreement dated March 21, 2012. Mr. Ku is the chief financial officer of MediaTek, the parent company of Core Tech, and disclaims beneficial ownership of the ordinary shares owned by Core Tech.

(10)	Consists of (a) 494,228 Class A ordinary shares held by Mr. Ying personally; (b) 4,227,650 Class A ordinary shares that Mr. Ying has the right to acquire within 60 days of March 27, 2015.

(11)

Consists of Class A and Class B ordinary shares held by V1 Group, Action King, Dragon Joyce and OWX Holding. As 100% shareholder of each of Action King, Dragon Joyce and OWX Holding, V1 Group has voting and investment control over all the shares held by each of them and therefore may be deemed beneficial owner of their respective shares. The registered address of V1 Group is Canon’s Court, 22 Victoria Street, Hamilton HM12, Bermuda. The registered address of Action King is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The registered address of Dragon Joyce is Newhaven Trustees (BVI) Limited of P.O. Box 933, 3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The registered address of OWX Holding is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

(12)

Consists of 28,000,000 Class A ordinary shares held by Champion Plus Group Limited in the form of ADSs and 1,400,000 Class A ordinary shares that may be issued upon the exercise of warrants. Champion Plus Group Limited is beneficially owned by Zennon Capital Partners, L.P. Zennon Capital Limited, a Cayman Islands company, is the general partner of Zennon Capital Partners, L.P. Ms. Lee Pui Ah and Mr. Cheung Wing Hong Shannon are the directors of Zennon Capital Limited with the power make all decisions on behalf of Zennon Capital Limited, including decisions as general partner of Zennon Capital Partners, L.P. Under the limited partnership agreement of Zennon Capital Partners, L.P., Ms. Lee Pui Ah and Mr. Cheung Wing Hong Shannon are the sole persons entitled to vote with respect to any decisions relating to the Class A ordinary shares held by Champion Plus Group and therefore may be deemed to have beneficial ownership of the shares held by Champion Plus Group Limited by virtue of their status as its controlling persons. The registered address of Champion Plus Group Limited is Columbus Centre, Suite 210, Road Town, Tortola, British Virgin Islands.

As of March 27, 2015, 438,345,157 of our total Class A and Class B ordinary shares were issued and outstanding. Based on a review of the register of members maintained by our Cayman Islands registrar, we believe that 201,376,812 Class A ordinary shares, or approximately 45.9% of our issued and outstanding Class A and Class B shares, were held by record shareholders in the United States, represented by 14,384,050 ADSs held of record by The Bank of New York Mellon, the depositary of our ADS program.

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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.	Major Shareholders

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

B.	Related Party Transactions

Acquisition of, and Contractual Relations with, Vogins

In November, 2013, we entered into a share purchase agreement with the shareholders of Vogins to acquire 90.6% equity interest in Vogins, of which 82.6% was acquired from Gaintech Co. Limited, a company controlled by Core Tech, one of our principal shareholders, at a purchase price of RMB1.1 million in cash. Vogins previously held 49% equity interest in one of our subsidiaries. The acquisition was completed and we took effective control of Vogins and its subsidiaries in November 2013. The acquisition of Vogins and its subsidiaries meets the definition of a business acquisition and the results of operations of the acquired business have been included in our consolidated financial statements since November 29, 2013. As a result of the acquisition, we expect to better manage our billing and collection process and further expand our mobile phone games business in China.

Prior to the acquisition, we had several preexisting relationships with Vogins and its subsidiary Woqin Network Technology (Shanghai) Limited, or Vogins Shanghai. Vogins Shanghai obtained two loans from us which amounted to RMB4.5 million. These loans were unsecured, non-interest bearing and repayable on demand. We also entered into several contracts with Vogins Shanghai for its service as a mobile phone service provider for billing and collection services offered to mobile phone game players who have purchased in-game premium features. In addition, we entered into a technology service agreement, pursuant to which, we will provide Vogins Shanghai a self-developed mobile phone technology platform software and related technical services for a contractual term of three years and in return, Vogins Shanghai obtained 49% of noncontrolling interest in one of our subsidiaries, and Vogins Shanghai will pay a service fee calculated based on the number of downloads by the mobile phone users multiplied by a pre-determined unit price for each download through the mobile phone technology platform on a monthly basis.

In accordance with Accounting Standard Codification topic 810, we accounted for the 49% noncontrolling interest of our subsidiary obtained indirectly through the acquisition of Vogins as an equity transaction. The consideration transferred, including settlements of the preexisting relationships with Vogins, was allocated between the business acquired and the noncontrolling interest obtained based on their relative fair values. As a result, RMB12.9 million and RMB2.1 million of the consideration were allocated to the business acquired and the noncontrolling interest obtained, respectively. The difference of RMB1.5 million between the fair value of the consideration paid of RMB2.1 million and the carrying value of the 49% noncontrolling interest of RMB0.5 million was recorded as an adjustment in additional paid-in capital.

The acquisition date fair value of the consideration transferred including settlements of the preexisting relationships with Vogins and the 9.4% noncontrolling interest in Vogins amounted to RMB14.3 million, which consisted of the following:


	RMB
Cash		1,097
Settlements of the preexisting relationships with Vogins		13,894
Less: Consideration allocated to the 49% noncontrolling interest obtained		(2,063	)
Fair value of 9.4% noncontrolling interest in the Vogins		1,416

		14,344

In connection with the transaction, we recognized gain on bargain purchase of RMB9.7 million. The gain on bargain purchase represents the excess of the fair value of the identifiable net assets acquired above the

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consideration transferred. We performed a comprehensive reassessment of the bargain purchase gain by verifying that all assets acquired and liabilities assumed were properly identified. The gain on bargain purchase was primarily attributable to the transaction not being subject to a competitive bidding process as a result of the original shareholders’ inexperience in the industry and their inability to market Vogins BVI to multiple potential buyers. The resulting gain on bargain purchase has been recorded in the consolidated statements of comprehensive income for the year ended December 31, 2013. No gain on bargain purchase was recorded for the year ended December 31, 2014.

During the year ended December 31, 2013, we provided temporary funding to Vogins Shanghai of an aggregate amount of RMB4.5 million to be used as working capital. The temporary funding is unsecured, interest-free and repayable on demand. We did not provide any temporary funding to Vogins Shanghai during the year ended December 31, 2014.

We entered into an agreement with Vogins Shanghai in May 2013, pursuant to which we provided Vogins Shanghai a self-developed mobile phone technology platform software, which was used in the mobile phone value added service business of Vogins Shanghai, as well as related technical support service to MediaTek for a contractual term of three years. In return, Vogins Shanghai was required to pay a service fee which was calculated based on the number of downloads at a pre-determined per download unit price.

We entered into an agreement with Vogins Shanghai in August 2013, pursuant to which, Vogins Shanghai acted as the service provider for billing and collection of revenue generated from selling in-game premium features of our mobile games. Pursuant to the agreement, we are entitled to profit sharing based on prescribed percentages ranging from 55% to 95% of the after tax net proceeds that Vogins Shanghai collected from the mobile network operators.

Agreement with MediaTek

We entered into an agreement with MediaTek in May 2013, pursuant to which we engaged MediaTek to customize and install our Game Center application onto its self-developed mobile phone chips.

Sale of Handset Inventories at Cost

In December 2013, we sold all inventories to Mr. Yixun Kuang and Mr. Zhengning Hu, who are employees of our company, at cost, due to the business transition from handset design business to game development and distribution. No gain or loss was resulted from the sale of inventories.

Transactions with V1 Group

During the year ended December 31, 2013, the 3GUU Group failed to meet the predetermined performance target as stipulated in its purchase agreement. As a result, V1 Group shares amounting to RMB37.2 million were returned to V1 Group by the original shareholders of the 3GUU Group, which was accounted for as deemed distribution to V1 Group.

During the year ended December 31, 2014, we entered into a revenue sharing arrangement with V1 Group, our controlling shareholder, pursuant to which we resell the video products of V1 Group in exchange for a portion of the revenues generated from such product.

Acquisitions and Restructuring

See “Item 4. Information on the Company—C. Organizational Structure—Our Contractual Arrangements with our VIEs.”

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Contractual Arrangements

As to our contractual arrangements with our VIEs and its shareholders, please see “Item 4. Information on the Company—C. Organizational Structure” for a description of these contractual arrangements.

Employment Agreements

See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”

Share Options

See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Options.”

C.	Interests of Experts and Counsel

Not applicable.

Item 8. FINANCIAL INFORMATION

A.	Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal and Administrative Proceedings

We may from time to time become a party to various legal, arbitral or administrative proceedings arising in the ordinary course of our business.

Beginning in June 2014, we were named as a defendant in two putative securities class actions filed in the United States District Court for the Southern District of New York, and in the United States District Court for the Southern District of New York, which have since been consolidated into one suit in the same court, In re China Mobile Games & Entertainment Group, Ltd. Securities Litigation, in the United States District Court for the Southern District of New York, Civ. No. 14-4471. The primary allegations are that certain Company filings with the Securities and Exchange Commission were false and/or misleading about the Company’s internal controls and compliance with U.S. GAAP. On November 20, 2014, the court consolidated the cases and appointed Miran Segregated Portfolio Company/Miran Long Short Equity Segregated Portfolio as the lead plaintiff. Plaintiffs filed their amended complaint on February 2, 2015, and on March 19, 2015 we moved to dismiss the complaint in full. We believe that we have meritorious defenses to the complaint and we intend to vigorously defend ourselves against the claim.

Dividend Policy

Our board of directors has complete discretion whether to pay dividends. If our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our directors may deem relevant. On March 26, 2015, our board of directors declared annual cash dividends in the aggregate amount of approximately US$4.4 million to the our shareholders of record as of the close of business on April 17, 2015, at US$0.01 per Class A or Class B ordinary share, or US$0.14 per ADS. The cash dividends are expected to be distributed on or about May 15, 2015.

As an offshore holding company, we may rely on dividends from our subsidiaries in China for our cash requirements, including to pay dividends or make other distributions to our shareholders. PRC regulations permit

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our subsidiaries to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

Holders of the ADSs are 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, and the depositary will distribute them to the holders of ADSs according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.

B.	Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9. THE OFFER AND LISTING

A.	Offering and Listing Details

Our ADSs are listed on the Nasdaq Global Market under the symbol “CMGE.” Every ADS represents 14 of our Class A ordinary shares. For the period from September 25, 2012 to April 27, 2015, the trading price of our ADSs on the Nasdaq Global Market has ranged from $3.00 to $40.31 per ADS.

The following table provides the high and low trading prices for our ADSs on the Nasdaq Global Market for the periods specified.


	Sales Price ($)
	High		Low
Annual High and Low
2012 (from September 25, 2012)		16.50		3.20
2013		25.25		3.00
2014		40.31		12.58
Quarterly High and Low
First Quarter 2013		10.50		3.00
Second Quarter 2013		18.50		7.79
Third Quarter 2013		16.97		10.88
Fourth Quarter 2013		25.25		11.39
First Quarter 2014		40.31		18.51
Second Quarter 2014		23.94		12.60
Third Quarter 2014		29.7		12.58
Fourth Quarter 2014		26.93		16.66
First Quarter 2015		19.89		15.30
Monthly High and Low
November 2014		26.93		21.29
December 2014		25.82		17.53
January 2015		19.57		15.44
February 2015		18.65		15.30
March 2015		19.89		16.64
April 2015 (through April 27, 2015)		22.61		16.56

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B.	Plan of Distribution

Not Applicable.

Markets

Our ADSs, each representing 14 Class A ordinary shares, have been listed on the Nasdaq Global Market since September 25, 2012 under the symbol “CMGE.”

D.	Selling Shareholders

Not applicable.

Dilution

Not applicable.

F.	Expenses of the Issue

Not applicable.

Item 10. ADDITIONAL INFORMATION

A.	Share Capital

Not applicable.

B.	Memorandum and Articles of Association

We incorporate by reference into this annual report our memorandum and articles of association filed as Exhibit 3.2 to our F-1 registration statement (File No. 333-183423), as amended, initially filed with the SEC on August 20, 2012.

C.	Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report.

D.	Exchange Controls

See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Currency Exchange” and “—Regulations on Dividend Distribution.”

Taxation

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

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Pursuant to Section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, we may obtain an undertaking from the Governor-in-Council:

•

that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations; and

•

that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.

Prospective investors should consult their professional advisers on the possible tax consequences of buying, holding or selling any ADSs under the laws of their country of citizenship, residence or domicile.

The following is a discussion on certain Cayman Islands tax consequences of an investment in the ADSs. The discussion is a general summary of present law, which is subject to prospective and retroactive change. It is not intended as tax advice, does not consider any investor’s particular circumstances, and does not consider tax consequences other than those arising under Cayman Islands law. Under existing Cayman Islands laws, payments of dividends and capital in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our shares or ADSs, nor will gains derived from the disposal of our shares or ADSs be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.

People’s Republic of China Taxation

On March 16, 2007, the National People’s Congress, the PRC legislature, enacted the New EIT Law which became effective on January 1, 2008, and on December 6, 2007, the State Council promulgated the Implementation Rules to the Enterprise Income Tax Law, or the Implementation Rules, which also became effective on January 1, 2008. Under the New EIT Law and its Implementation Rules, foreign-invested enterprises and domestic companies are subject to a uniform enterprise income tax rate of 25%, unless otherwise specified.

In addition, dividends payable to foreign investors by PRC resident enterprises are subject to a PRC withholding tax at the rate of 10% unless the foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a preferential withholding arrangement. Pursuant to the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, the withholding tax may be lowered to 5% if the PRC enterprise is at least 25% directly held by a Hong Kong enterprise. According to Circular 601, non-resident enterprises that cannot provide valid supporting documents as to “beneficial ownership” may not be approved to enjoy tax treaty benefits. As a result, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiaries may be subject to a reduced withholding tax rate of 5% if our Hong Kong subsidiaries are determined to be Hong Kong tax residents and beneficial owners under the Double Taxation Arrangement (Hong Kong). See “Item 3. Key Information—D. Risk factors—Risks Related to Doing Business in China—The New EIT Law will affect tax exemptions on dividends to be paid by our PRC subsidiaries to us through our Hong Kong subsidiaries and we may not be able to obtain certain treaty benefits under the relevant tax treaty.”

Under the New EIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Implementation Rules define the term “de facto management body” as the management body that exercises substantial and overall control and management over the business, personnel, accounts and properties of an enterprise. Circular 82 sets out certain specific criteria for determining the location of the “de facto management bodies” of an enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors, or a Chinese Controlled Enterprise. Under Circular 82, a Chinese Controlled Enterprise shall be considered a resident enterprise if all of the following applies:

i. the Chinese Controlled Enterprise’s major management department and personnel who are responsible for carrying out daily operations are located in the PRC;

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ii. the department or the personnel who have the right to decide or approve the Chinese Controlled Enterprise’s financial and human resource matters are located in the PRC;

iii. the major assets, account book, company seal and meeting minutes of the Chinese Controlled Enterprise are located or stored in the PRC; and

iv. the directors or management personnel holding no less than 50% voting rights of the Chinese Controlled Enterprise habitually reside in the PRC.

Since the Company is not controlled by a PRC enterprise or a PRC enterprise group, it remains unclear whether the standards set out in the Circular 82 will apply or be cited for reference when considering whether the “de facto management bodies” of the Company and its overseas subsidiaries are in the PRC or not. Furthermore, we do not believe that any of our offshore entities meet all of the conditions detailed above, as the key assets and records for these entities, including the resolutions of their respective board of directors and the resolutions of their respective shareholders, are located and maintained outside of the PRC. While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company or any of our overseas subsidiaries as a PRC resident enterprise since a substantial majority of the members of our management team as well as the management team of some of our offshore holding companies are located in China. If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. For example, a 10% withholding tax may be imposed on dividends we pay to our non-PRC enterprise shareholders and, with respect to gains derived by our non-PRC enterprise shareholders, from transferring our shares or ADSs. It is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC Shareholders.”

Pursuant to the New EIT Law, if a non-resident enterprise derives China-sourced income, such as dividends or capital gains, that income is subject to EIT, in the form of a withholding tax. The SAT issued the Interim Measures for Administration of Withholding EIT for Non-Resident Enterprise, effective from January 1, 2009. According to the measures, the entity or individual with the legal or contractual obligation to remit income to the non-resident enterprise is deemed as a withholding agent. The withholding agent must withhold the EIT at the time the relevant payment is made or due to be made and pay the tax within seven days from the date of withholding. Noncompliance with the prescribed procedures by a PRC withholding agent and failure of the non-resident enterprise to pay the applicable EIT must be rectified within a designated period and could result in a fine.

United States Federal Income Taxation

The following discussion describes the material United States federal income tax consequences to a United States Holder (as defined below), under current law, of the ownership and the disposition of the ADSs or ordinary shares. For purposes of this discussion, any reference to an “ordinary share” means our Class A ordinary shares. This discussion is based on the federal income tax laws of the United States as of the date of this annual report, including the United States Internal Revenue Code of 1986, as amended, or the Code, existing and proposed United States Treasury Regulations promulgated thereunder, judicial authority, published administrative positions of the United States Internal Revenue Service, or IRS, and other applicable authorities, all as of the date of this annual report. All of the foregoing authorities are subject to change, which change could apply retroactively and could significantly affect the tax consequences described below. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following discussion and there can be no assurance that the IRS or a court will agree with our statements and conclusions.

This discussion applies only to a United States Holder that holds ADSs or ordinary shares as capital assets for United States federal income tax purposes (generally, property held for investment). The discussion neither

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addresses the tax consequences to any particular holder nor describes all of the tax consequences applicable to persons in special tax situations, such as:

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banks;

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certain financial institutions;

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insurance companies;

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regulated investment companies;

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real estate investment trusts;

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brokers or dealers in stocks and securities, or currencies;

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traders that elect to use a mark-to-market method of accounting;

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certain former citizens or residents of the United States subject to Section 877 of the Code;

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entities subject to the United States anti-inversion rules;

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tax-exempt organizations and entities;

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persons subject to the alternative minimum tax provisions of the Code;

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persons whose functional currency is other than the United States dollar;

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persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction;

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persons holding ADSs or ordinary shares through a bank, financial institution or other entity, or a branch thereof, located, organized or resident outside the United States;

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persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;

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persons who acquired ADSs or ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

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partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities.

The discussion below does not describe any tax consequences arising out of the Medicare tax on certain “net investment income” pursuant to the Health Care and Education Reconciliation Act of 2010.

If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds the ADSs or ordinary shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership holding the ADSs or ordinary shares should consult its own tax advisors regarding the tax consequences of holding the ADSs or ordinary shares.

THE FOLLOWING DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX LAWS OR THE LAWS OF ANY STATE, LOCAL OR NON-UNITED STATES TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

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For purposes of the discussion below, a “United States Holder” is a beneficial owner of the ADSs or ordinary shares that is, for United States federal income tax purposes:

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an individual who is a citizen or resident of the United States;

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a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

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an estate, the income of which is subject to United States federal income taxation regardless of its source; or

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a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more United States persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under applicable Treasury regulations to treat such trust as a domestic trust.

The discussion below assumes that the representations contained in the deposit agreement and any related agreement are true and that the obligations in such agreements will be complied with in accordance with their terms.

ADSs

If you own the ADSs, then you should be treated as the owner of the underlying ordinary shares represented by those ADSs for United States federal income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs should not be subject to United States federal income tax.

The United States Treasury Department and the IRS have expressed concerns that United States holders of American depositary shares may be claiming foreign tax credits in situations where an intermediary in the chain of ownership between the holder of an American depositary share and the issuer of the security underlying the American depositary share has taken actions that are inconsistent with the ownership of the underlying security by the person claiming the credit. Such actions (for example, a pre-release of an ADS by a depositary) also may be inconsistent with the claiming of the reduced rate of tax applicable to certain dividends received by non-corporate United States Holders of ADSs, including individual United States Holders. Accordingly, the availability of foreign tax credits or the reduced tax rate for dividends received by non-corporate United States Holders, each discussed below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.

Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution that we make to you with respect to the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as a dividend, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld taxes) will be includable in your gross income on the day actually or constructively received by you, if you own the ordinary shares, or by the depositary, if you own ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid generally will be reported as a “dividend” for United States federal income tax purposes. Such dividends will not be eligible for the dividends-received deduction allowed to qualifying corporations under the Code.

Dividends received by a non-corporate United States Holder may qualify for the lower rates of tax applicable to “qualified dividend income,” if the dividends are paid by a “qualified foreign corporation” and other conditions discussed below are met. A non-United States corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares (or American depositary shares backed

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by such shares) (i) that are readily tradable on an established securities market in the United States or (ii) if such non-United States corporation is eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program. However, a non-United States corporation will not be treated as a qualified foreign corporation if it is a passive foreign investment company in the taxable year in which the dividend is paid or the preceding taxable year.

Under a published IRS Notice, ordinary shares, or American depositary shares representing such shares, are considered to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq Global Market, as the ADSs (but not our ordinary shares) are. Based on existing guidance, it is unclear whether the ordinary shares will be considered to be readily tradable on an established securities market in the United States, because only the ADSs, and not the underlying ordinary shares, are listed on a securities market in the United States. We believe, but we cannot assure you, that dividends we pay on the ordinary shares that are represented by ADSs, but not on the ordinary shares that are not so represented, will, subject to applicable limitations, be eligible for the reduced rates of taxation. In addition, if we are treated as a PRC resident enterprise under the PRC tax law (see “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation”), then we may be eligible for the benefits of the income tax treaty between the United States and the PRC. If we are eligible for such benefits, then dividends that we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would, subject to applicable limitations, be eligible for the reduced rates of taxation.

Even if dividends would be treated as paid by a qualified foreign corporation, non-corporate United States Holders will not be eligible for reduced rates of taxation if they do not hold the ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or if such United States Holders elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign corporation if the non-corporate United States Holder receiving the dividend is obligated to make related payments with respect to positions in substantially similar or related property.

You should consult your own tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividends that we pay with respect to the ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report.

Any PRC withholding taxes imposed on dividends paid to you with respect to ADSs or ordinary shares generally will be treated as foreign taxes eligible for credit against your United States federal income tax liability, subject to the various limitations and disallowance rules that apply to foreign tax credits generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the ADSs or ordinary shares will be treated as income from sources outside the United States and generally will constitute passive category income. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances.

Disposition of the ADSs or Ordinary Shares

You will recognize gain or loss on a sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or exchange and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” below, such gain or loss generally will be capital gain or loss. Capital gains of a non-corporate United States Holder, including an individual, that has held the ADS or ordinary share for more than one year are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.

Any gain or loss that you recognize on a disposition of the ADSs or ordinary shares generally will be treated as United States-source income or loss for foreign tax credit limitation purposes. However, where we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax is imposed on gain from the disposition of ADSs or ordinary shares (see “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation”),

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then a United States Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC-source income for foreign tax credit purposes. If such an election is made, the gain so treated will be treated as a separate class or “basket” of income for purposes of the foreign tax credit under Section 865(h) of the Code. You should consult your tax advisors regarding the proper treatment of gain or loss, as well as the availability of a foreign tax credit, in your particular circumstances.

Passive Foreign Investment Company

Based on the market value of our ADSs, the value of our assets and the composition of our income and assets, we do not believe we were a passive foreign investment company for United States federal income tax purposes, or PFIC, for the taxable year ended December 31, 2014, and we do not expect to be a PFIC for our current taxable year ending December 31, 2015. However, the determination of PFIC status is based on an annual determination that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty in several respects. Accordingly, we cannot assure you that we will not be treated as a PFIC for any taxable year or that the IRS will not take a contrary position.

A non-United States corporation such as ourselves will be treated as a PFIC for United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either:

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at least 75% of its gross income for such year is passive income; or

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at least 50% of the value of its assets (determined based on a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income.

For this purpose, passive income generally includes dividends, interest, royalties and rents (other than certain royalties and rents derived in the active conduct of a trade or business and not derived from a related person). The classification of certain of our income as active or passive and certain of our assets as producing active or passive income, and hence whether we expect to be or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations, including certain regulations relating to royalty income and income from intangible assets, as well as certain IRS guidance relating to the classification of assets as producing active or passive income and certain IRS guidance relating to the distinction between services and royalties for United States federal income tax purposes. Such regulations and guidance are potentially subject to different interpretations. If the percentage of our assets treated as producing passive income increases, we may be a PFIC for the taxable year ended December 31, 2014, or we may become a PFIC for the current or one or more future taxable years.

The determination of whether we expect to be or will become a PFIC will depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may depend upon the market value or the ADSs or ordinary shares) and also will be affected by how, and how quickly, we spend our liquid assets. In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our current market capitalization. Among other matters, if our market capitalization decreases below our current market capitalization, we may become a PFIC for the current or future taxable years because our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the Internal Revenue Service may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being classified as a PFIC for the taxable year ended December 31, 2014, or becoming classified as a PFIC for the current or one or more future taxable years.

We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% by value of the stock. Although the law in this regard is unclear, we treat our VIEs as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also

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because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated United States GAAP financial statements. If it were determined, however, that we are not the owner of our VIEs for United States federal income tax purposes, the composition of our income and assets would change and we may be more likely to be treated as a PFIC.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we were to cease to be a PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares, as applicable. If such election is made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value determined on the last day of the last taxable year during which we were a PFIC and any gain from such deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as we do not become a PFIC in a subsequent taxable year, your ADSs or ordinary shares with respect to which such election was made will not be treated as shares in a PFIC and, as a result, you will not be subject to the rules described below with respect to any “excess distribution” you receive from us or any gain from an actual sale or other disposition of the ADSs or ordinary shares. You are strongly urged to consult your tax advisors as to the possibility and consequences of making a deemed sale election if we are and then cease to be a PFIC and such an election becomes available to you.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, then, unless you make a “mark-to-market” election (as discussed below), you generally will be subject to special and adverse tax rules with respect to any “excess distribution” that you receive from us and any gain that you recognize from a sale or other disposition, including a pledge, of the ADSs or ordinary shares. For this purpose, distributions that you receive in a taxable year that are greater than 125% of the average annual distributions that you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these rules:

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the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary shares;

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the amount of the excess distribution or recognized gain allocated to the current taxable year, and to any taxable years in your holding period prior to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and

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the amount of the excess distribution or recognized gain allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the resulting tax will be subject to the interest charge generally applicable to underpayments of tax.

If we are a PFIC for any taxable year during which a United States Holder holds the ADSs or ordinary shares and any of our non-United States subsidiaries (including any VIEs) is also a PFIC, such United States Holder would be treated as owning a proportionate amount (by value) of the shares of each such non-United States subsidiary classified as a PFIC (each such subsidiary, a lower tier PFIC) for purposes of the application of these rules. United States Holders should consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, then in lieu of being subject to the tax and interest-charge rules discussed above, you may make an election to include gain on the ADSs or ordinary shares as ordinary income under a mark-to-market method, provided that the ADSs or ordinary shares constitute “marketable stock” (as defined below). If you make a mark-to-market election for the ADSs or ordinary shares, you will include in income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a

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mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss from the actual sale or other disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts.

Marketable stock is stock that is regularly traded on a qualified exchange or other market, as defined in applicable Treasury regulations. Our ADSs, but not our ordinary shares, are currently listed on the Nasdaq Global Market, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs continue to be listed on the Nasdaq Global Market and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available to you if we became a PFIC, but no assurances are given in this regard.

Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a United States Holder may continue to be subject to the PFIC rules with respect to such United States Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.

In certain circumstances, a United States Holder of shares in a PFIC may avoid the adverse tax and interest-charge regime described above by making a “qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual information statement as specified in the applicable Treasury regulations. We currently do not intend to prepare or provide the information that would enable you to make a qualified electing fund election.

A United States Holder that holds the ADSs or ordinary shares in any year in which we are classified as a PFIC will be required to file an annual report containing such information as the United States Treasury Department may require. You should consult your own tax advisor regarding the application of the PFIC rules to your ownership and disposition of the ADSs or ordinary shares and the availability, application and consequences of the elections discussed above.

Information Reporting and Backup Withholding

Information reporting to the IRS and backup withholding (at a rate of 28%) generally will apply to dividends in respect of the ADSs or ordinary shares, and the proceeds from the sale or exchange of the ADSs or ordinary shares, that are paid to you within the United States (and in certain cases, outside the United States), unless you furnish a correct taxpayer identification number and make any other required certification generally on IRS Form W-9 or you otherwise establish an exemption from information reporting and backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding generally are allowed as a credit against your United States federal income tax liability, and you may be entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file an appropriate claim for refund with the IRS and furnish any required information in a timely manner.

United States Holders who are individuals generally are required to report our name, address and such information relating to an interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which your ADSs or ordinary shares are a part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions and an exception applicable if the aggregate value of all “specified foreign financial assets” (as defined in the Code) does not exceed certain specified thresholds.

United States Holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules.

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F.	Dividends and Paying Agents

None.

G.	Statement by Experts

Not applicable.

H.	Documents on Display

We have previously filed with the Commission our registration statement on Form F-1 (File Number 333-183423), as amended.

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the regional office of the SEC located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

In accordance with Rule 5250(d) of the Nasdaq Listing Rules, we will post this annual report on Form 20-F on our website www.cmge.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.

I.	Subsidiary Information

For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our revenues and purchases from our PRC subsidiaries and our VIEs are primarily denominated in Renminbi. Our assets and liabilities are also denominated in Renminbi, except for cash held in other currencies, which included US$1.7 million as of December 31, 2014. As a result, fluctuations in the exchange rates between the U.S. dollar and Renminbi may affect our results of operations and financial condition, but not significantly. The Renminbi’s exchange rate with the U.S. dollar is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign

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currencies. For almost two years after reaching a high against the U.S. dollar in July 2008, the Renminbi traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase the Renminbi exchange rate flexibility and since that time the Renminbi has gradually appreciated against the U.S. dollar. On March 14, 2014, the People’s Bank of China announced the widening of the daily trading band for Renminbi against U.S. dollar. Since most of our revenues and costs are denominated in Renminbi, while a portion of cash and cash equivalents are denominated in U.S. dollars, any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position.

To the extent that we need to convert U.S. dollars we receive from financing activities into the Renminbi for our operations or other uses within the PRC, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. On the other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of ADSs. As of December 31, 2014, we had U.S. dollar-denominated cash balances of US$1.7 million. Assuming we had converted the US$1.7 million into the Renminbi at the exchange rate of US$1.00 for RMB6.2046 as of December 31, 2014, this cash balance would have been RMB10.5 million. Assuming a 5% appreciation of the RMB against the U.S. dollar, this cash balance would have decreased to RMB10.0 million (US$1.7 million).

Interest Rate Risk

Our exposure to interest rate risk primarily relates to finance income generated by excess cash invested in demand deposits with original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future finance income may be lower than expected due to changes in market interest rates.

Inflation Risk

In recent years, inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, China’s Consumer Price Index increased by 2.6%, 2.6% and 2.0% in 2012, 2013 and 2014, respectively. If inflation rises, it may materially and adversely affect our business.

Credit Risk

As of December 31, 2014, substantially all of our cash and cash equivalents and short-term investments were deposited in financial institutions located in the PRC, which management believes are of high credit quality. We have not experienced any losses on deposits of cash and cash equivalents.

Accounts receivable are typically unsecured and derived from revenue earned from customers and agents in the PRC, which are exposed to credit risk. The risk is mitigated by credit evaluations we perform on our counterparties and our ongoing monitoring process of outstanding balances. Approximately 14% of total net revenues were derived from one customer, namely China Mobile Communications Corporation Jiangsu Ltd., for the year ended December 31, 2012. Approximately 10% and 10% of total net revenues were derived from two customers, namely China Mobile Communications Corporation Jiangsu Ltd., and Shenzhen Vichit Technology Co., Ltd., for the year ended December 31, 2013, respectively. Approximately 19% of total net revenues were derived from one customer, namely China Mobile Communications Corporation Guangdong Ltd for the year ended December 31, 2014.

123

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.	Debt Securities

Not applicable.

B.	Warrants and Rights

Not applicable.

C.	Other Securities

Not applicable.

D.	American Depositary Shares

According to our Deposit Agreement with our ADS depositary, The Bank of New York Mellon, the depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.


Persons depositing or withdrawing shares or ADS holders must pay:		For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)		• Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

		• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

$.05 (or less) per ADS		• Any cash distribution to ADS holders

A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs		• Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders

$.05 (or less) per ADSs per calendar year		• Depositary services

Registration or transfer fees		• Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares

Expenses of the depositary		• Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

		• converting foreign currency to U.S. dollars

Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes		• As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities		• As necessary

The fees described above may be amended from time to time.

124

PART II

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.

Use of Proceeds

For the period from the effective date of the registration statement on Form F-1, as amended (File Number 333-183423) relating to the listing of 1,574,741 ADSs, representing 22,046,374 Class A ordinary shares, on September 20, 2012 to December 31, 2014, we did not incur any expenses in connection with the distribution and listing of the ADSs, as we did not receive any net proceeds from the distribution or listing.

The following “use of proceeds” information relates to the registration statement on Form F-3, as amended (File number: 333-194387) for our public offering of 3,442,000 ADSs, representing 48,188,000 Class A ordinary shares, for a maximum aggregate offering price of $82.6 million. The registration statement was declared effective by the SEC on March 20, 2014. We completed the public offering on March 26, 2014. For the period from the effective date of the registration statement on Form F-3 to December 31, 2014, in connection with the issuance and distribution of the ADSs we incurred expenses and paid to others US$3.9 million for underwriting discounts and commissions and US$0.9 million for other expenses. We received net proceeds of approximately $77.8 million from the public offering. Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Jefferies LLC, Nomura Securities International, Inc. and Brean Capital, LLC were the underwriters for the public offering. For the period from the effective date of the registration statement on Form F-3 to December 31, 2014, we used the net proceeds received from follow-on public offering as follows:

•

approximately US$30.9 million for acquisition of game licenses and IP,

•

approximately US$24.3 million for strategic investments in businesses in the mobile game value chain; and

•

approximately US$3.6 million to for investment in game development.

Item 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our management has concluded that our disclosure controls and procedures as of December 31, 2014 were not effective due to the material weaknesses in internal control over financial reporting described below and in “Item 3. Key Information. D—Risk Factors—If we fail to maintain an effective system of internal control over financial reporting, we may lose investor confidence in the reliability of our financial statements.”

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Rule 13a-15(f) under the Exchange Act, for our company. Internal control

125

over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 using criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As a result of management’s evaluation of our internal control over financial reporting, management identified a material weakness in our internal control over financial reporting. Specifically, the material weakness identified related to insufficient personnel with U.S. GAAP expertise in the preparation and review of the financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. As a result of the material weakness, management has concluded that our internal control over financial reporting was ineffective as of December 31, 2014.

To remediate the material weakness described above and enhance our internal control over financial reporting, management has implemented the following changes: (i) provided and continue to provide additional training for our new and existing personnel by expanding the training program on U.S. GAAP financial statement preparation and financial reporting and (ii) hired additional staff with financial reporting experience. In particular, since the beginning of 2013 we have hired one finance manager, two assistant finance managers and one internal audit manager.

Attestation Report of the Registered Public Accounting Firm

This annual report does not include a report of an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the SEC for emerging growth companies.

Changes in Internal Control Over Financial Reporting

Management has evaluated, with the participation of our chief executive officer and chief financial officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Based on the evaluation we conducted, management has concluded that only those changes implemented by management and described under “—Management’s Annual Report on Internal Control over Financial Reporting” above occurred during the period covered by this annual report on Form 20-F. Management believes the measures that have been implemented to remediate the material weakness identified have had a material impact on our internal control over financial reporting, and anticipates that these measures and other ongoing enhancements will continue to have a material impact on our internal control over financial reporting in future periods.

126

Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Ms. Estella Yi Kum Ng qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F. Ms. Estella Yi Kum Ng, Mr. Chen-Wen Tarn and Mr. Joel Chang satisfy the “independence” requirements of Section 5605(a)(2) of the Nasdaq Listing Rules and under Rule 10A-3 under the Exchange Act.

Item 16B. CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents and any other persons who perform similar functions for us. We are filing our amended and restated code of business conduct and ethics as Exhibit 11.1 to this annual report and you can also find the code on our website http://www.cmge.com. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.

Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young Hua Ming LLP, our principal external auditors, for the periods indicated.


	2012	2013	2014
	RMB	RMB	RMB	US$
Audit fees⁽¹⁾	1,580	1,554	3,262	526
Audit-related fees⁽²⁾	1,196	1,207	1,807	291
Tax fees⁽³⁾	—	—	—	—
All other fees	—	—	—	—

(1)	“Audit fees” means the aggregate fees billed for each of the fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements.

(2)	“Audit-related fees” means the aggregate fees billed in each of the fiscal years for interim review, agreed-upon procedures performed in relation to interim financial information and professional services associated with SEC filings.

(3)	“Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax compliance, tax advice, and tax planning.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming LLP, including audit services, audit-related services, tax services and other services as described above.

Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable

Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

127

Item 16G. CORPORATE GOVERNANCE

We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. In addition, because our ADSs are listed on the Nasdaq Global Market, we are subject to corporate governance requirements of the Nasdaq. However, Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home country practice” with respect to certain corporate governance matters, and we may decide to follow the “home country practice” on a case-by-case basis.

In addition, because V1 Group owns more than 50% of the total voting rights in our company, we are a “controlled company” under the Nasdaq Listing Rules. As a controlled company under the Nasdaq Listing Rules, we are not required to comply with certain Nasdaq corporate governance requirements, including the requirements:

•

that a majority of our board of directors consist of independent directors;

•

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

•

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

•

for an annual performance evaluation of the nominating and governance committee and the compensation committee.

We are not required to and will not voluntarily meet the requirement that (i) we have a majority of our board of directors consisting of independent directors, (ii) our corporate governance and nominating committee be composed entirely of independent directors, and (iii) our compensation committee be composed entirely of independent directors. As a result of our use of the “controlled company” exemption, you will not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements. See “Item 3. Key Information—Risk Factors—Risks Related to the ADSs—As a ‘controlled company’ under the Nasdaq Listing Rules, we rely on exemptions from certain corporate governance requirements, and therefore our shareholders may have less protection than if we did not rely on the controlled company exception.”

Item 16H. MINE SAFETY DISCLOSURE

Not Applicable.

128

PART III

Item 17. FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

Item 18. FINANCIAL STATEMENTS

The consolidated financial statements of China Mobile Games and Entertainment Group Limited, its subsidiaries and its variable interest entity are included at the end of this annual report.

Item 19. EXHIBITS


Exhibit Number		Description of Document

1.1		Second Amended and Restated Memorandum and Articles of Association of China Mobile Games and Entertainment Group Limited (incorporated by reference to Exhibit 3.2 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

2.1		Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)

2.2		Registrant’s Specimen Certificate for ordinary shares (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

2.3		Form of Deposit Agreement, among China Mobile Games and Entertainment Group Limited, the depositary and the owners and holders of American Depositary Shares (incorporated by reference to Exhibit 4.3 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.1		Form of Employment Agreement (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.2		Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.3		English translation of Supplementary Agreement to Technology Services Agreement between Guangzhou Yitongtianxia Software Development Co., Ltd. and Guangzhou Yingzheng Information Technology Co., Ltd. dated December 30, 2011 (incorporated by reference to Exhibit 10.18 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.4		English translation of Supplementary Agreement to Loan Agreement among Guangzhou Yitongtianxia Software Development Co., Ltd., Yongchao Wang, De Liang and Feng Zheng dated December 30, 2011 (incorporated by reference to Exhibit 10.25 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.5		English translation of Supplementary Agreement between Guangzhou Yitongtianxia Software Development Co., Ltd., Guangzhou Yingzheng Information Technology Co., Ltd., Yongchao Wang, De Liang and Feng Zheng dated August 23, 2011 (incorporated by reference to Exhibit 10.27 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

129


Exhibit Number		Description of Document

4.6		English translation of Supplementary Agreement between 3GUU Mobile Entertainment Industrial Co., Ltd. and Guangzhou Yingzheng Information Technology Co., Ltd. dated December 16, 2011 (incorporated by reference to Exhibit 10.29 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.7		English translation of Agreement on Issues regarding Shareholder Voting Proxy among Guangzhou Yingzheng Information Technology Co., Ltd., Guangzhou Yitongtianxia Software Development Co., Ltd., 3GUU Mobile Entertainment Industrial Co., Ltd., Yongchao Wang, Feng Zheng and De Liang dated December 16, 2011 (incorporated by reference to Exhibit 10.30 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.8		Share Option Scheme (incorporated by reference to Exhibit 10.47 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.9		Form of Amended and Restated Subscription Agreement between China Mobile Games and Entertainment Group Limited and directors or executive officers (incorporated by reference to Exhibit 10.48 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.10		Non-compete Agreement between China Mobile Games and Entertainment Group Limited and V1 Group Limited dated October 21, 2011 (incorporated by reference to Exhibit 10.49 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.11		Amendment to Non-compete Agreement between China Mobile Games and Entertainment Group Limited and V1 Group Limited dated August 15, 2012 (incorporated by reference to Exhibit 10.50 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.12		Share Purchase Agreement among V1 Group Limited, China Mobile Games and Entertainment Group Limited, Core Tech Resources Inc., MediaTek Inc. and PVG Venture Capital Partners (Wuxi), Limited Partnership dated March 21, 2012 (incorporated by reference to Exhibit 10.55 from our F-1 registration statement (File No. 333-183423), as amended, initially filed publicly with the Commission on August 20, 2012)

4.13		Share Purchase Agreement between Champion Plus Group Limited and China Mobile Games and Entertainment Group Limited, dated July 26, 2013 (incorporated by reference to Exhibit 4.13 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.14		Share Purchase Agreement between Grand Synergy Limited and China Mobile Games and Entertainment Group Limited, dated July 26, 2013 (incorporated by reference to Exhibit 4.14 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.15		Share Purchase Agreement between ICBC Credit Suisse Asset Management (International) Company Limited, acting as the Investment Manager for the National Council for Social Security Fund and China Mobile Games and Entertainment Group Limited, dated November 15, 2013 (incorporated by reference to Exhibit 4.15 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.16		English translation of Supplementary Agreement among Shenzhen Lanyue Internet Technology Co, Ltd. and China Wave Group Limited dated September 1, 2013 (incorporated by reference to Exhibit 4.16 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

130


Exhibit Number		Description of Document

4.17		English translation of Exclusive Technology and Market Promotion Services Agreement among Huiyou Digital (Shenzhen) Ltd. and Shenzhen Lanyue Internet Technology Co, Ltd. dated September 13, 2013 (incorporated by reference to Exhibit 4.17 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.18		English translation of Technology Services Agreement among Huiyou Digital (Shenzhen) Ltd. and Shenzhen Lanyue Internet Technology Co, Ltd. dated September 13, 2013 (incorporated by reference to Exhibit 4.18 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.19		English translation of Supplementary Agreement to Technology Services Agreement among Huiyou Digital (Shenzhen) Ltd. and Shenzhen Lanyue Internet Technology Co, Ltd. dated September 13, 2013(incorporated by reference to Exhibit 4.19 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.20		English translation of Personal Loan Agreement among Huiyou Digital (Shenzhen) Ltd. and Ken Jian Xiao dated September 10, 2013(incorporated by reference to Exhibit 4.20 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.21		English translation of Supplementary Agreement to Personal Loan Agreement among Huiyou Digital (Shenzhen) Ltd. and Ken Jian Xiao dated September 10, 2013 (incorporated by reference to Exhibit 4.21 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.22		English translation of Voting Proxy Agreement among Huiyou Digital (Shenzhen) Ltd., Shenzhen Lanyue Internet Technology Co, Ltd., Ken Jian Xiao and Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.22 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.23		English translation of Supplementary Agreement to Voting Proxy Agreement among Huiyou Digital (Shenzhen) Ltd., Shenzhen Lanyue Internet Technology Co, Ltd., Ken Jian Xiao and Xiongfei Liu dated September 16, 2013(incorporated by reference to Exhibit 4.23 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.24		English translation of Agreement on Matters Regarding Voting Proxy among Huiyou Digital (Shenzhen) Ltd., Shenzhen Lanyue Internet Technology Co, Ltd., China Wave Group Limited, Ken Jian Xiao and Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.24 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.25		English translation of Option Agreement among Huiyou Digital (Shenzhen) Ltd., Ken Jian Xiao and Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.25 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.26		English translation of Equity Pledge Agreement among Huiyou Digital (Shenzhen) Ltd., Shenzhen Lanyue Internet Technology Co, Ltd., Ken Jian Xiao and Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.26 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.27		English translation of Supplementary Agreement among Huiyou Digital (Shenzhen) Ltd., Shenzhen Lanyue Internet Technology Co, Ltd., Ken Jian Xiao and Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.27 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

4.28		English translation of the Letter of Undertaking by Xiongfei Liu dated September 16, 2013 (incorporated by reference to Exhibit 4.28 of our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 7, 2014)

131


Exhibit Number		Description of Document

8.1*		Subsidiaries of China Mobile Games and Entertainment Group Limited

11.1*		Code of Business Conduct and Ethics of China Mobile Games and Entertainment Group Limited

12.1*		CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

12.2*		CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

13.1**		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13.2**		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15.1*		Consent of Ernst & Young Hua Ming LLP, an independent registered public accounting firm

15.2*		Consent of Guantao Law Firm

101*		Financial information from registrant for the year ended December 31, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2013 and 2014; (ii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014; (iii) Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2013 and 2014; (iv) Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2012, 2013 and 2014; and (v) Notes to Consolidated Financial Statements

*	Filed with this annual report on Form 20-F.

**	Furnished with this Form 20-F.

132

SIGNATURES

China Mobile Games and Entertainment Group Limited hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

China Mobile Games and Entertainment Group Limited

/s/ Ken Jian Xiao

Name: Ken Jian Xiao

Title: Chief Executive Officer

Date: April 29, 2015

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2013 and 2014		F-3
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2013 and 2014		F-7
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2012, 2013 and 2014		F-9
Notes to the Consolidated Financial Statements		F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of China Mobile Games and Entertainment Group Limited

We have audited the accompanying consolidated balance sheets of China Mobile Games and Entertainment Group Limited (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Mobile Games and Entertainment Group Limited at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young Hua Ming LLP

Shenzhen, the People’s Republic of China

April 29, 2015

F-2

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares)


		As of December 31,
	Notes	2013		2014		2014
		RMB		RMB		US$
ASSETS
Current assets:
Cash and cash equivalents			249,126		349,343		56, 304
Restricted cash			15,725		—		—
Short-term investments			51,772		42,361		6,827
Accounts receivable	5		140,049		553,157		89,153
Prepayments and other current assets	6		91,585		192,855		31,083
Amounts due from related parties	22		6,097		6,087		981
Deferred tax assets, net	20		1,100		2,880		464

Total current assets			555,454		1,146,683		184,812

Non-current assets:
Property and equipment, net	8		13,085		23,602		3,804
Goodwill	9		564,841		564,841		91,036
Intangible assets, net	10		86,891		212,560		34,258
Prepayments	11		23,000		17,400		2,804
Equity method investments, net	7		—		17,311		2,790
Long-term investments, net	7		2,000		128,888		20,773
Deferred tax assets, net	20		2,714		5,105		822
Other non-current assets	12		5,139		71,225		11,479

Total non-current assets			697,670		1,040,932		167,766

TOTAL ASSETS			1,253,124		2,187,615		352,578

LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term bank borrowing	13		14,000		—		—
Accounts payable (including accounts payable of the variable interest entities (“VIEs”) without recourse to the Company of RMB35,178 and RMB164,495 (US$26,512) as of December 31, 2013 and 2014, respectively)			59,170		189,491		30,540
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the VIEs without recourse to the Company of RMB23,618 and RMB78,434 (US$12,641) as of December 31, 2013 and 2014, respectively)	14		41,174		90,697		14,618
Deferred revenue (including deferred revenue of the VIEs without recourse to the Company of RMB1,722 and RMB17,819 (US$2,872) as of December 31, 2013 and 2014, respectively)			12,413		17,824		2,873
Income tax payable			1,851		2,829		456
Amounts due to related parties	22		—		9,560		1,541

Total current liabilities			128,608		310,401		50,028

F-3


		As of December 31,
	Notes	2013		2014			2014
		RMB		RMB			US$
Non-current liabilities:
Unrecognized tax benefits (including unrecognized tax benefits of the VIEs without recourse to the Company of RMB4,702 and RMB7,833 (US$1,262) as of December 31, 2013 and 2014, respectively)	20		9,970		16,270			2,622
Deferred tax liabilities	20		7,793		4,464			719
Other non-current liabilities (including other non-current liabilities of the VIEs without recourse to the Company of RMB2,000 and RMB2,000 (US$322) as of December 31, 2013 and 2014, respectively)			2,000		2,000			322

Total non-current liabilities			19,763		22,734			3,663

Total liabilities			148,371		333,135			53,691

Commitments and contingencies	24
Mezzanine equity:
Contingently redeemable ordinary shares (US$0.001 par value, 26,485,961 shares authorized; 26,485,961 and nil shares issued and outstanding as of December 31, 2013 and 2014, respectively; aggregate liquidation preference amount of RMB75,899 and nil as of December 31, 2013 and 2014, respectively; aggregate redemption amount of RMB77,677 and nil, respectively, as of December 31, 2013 and 2014)	17		77,677		—			—
Shareholders’ equity:
Class A ordinary shares (US$0.001 par value, 750,000,000 shares authorized; 178,034,362 and 257,523,929 shares issued and outstanding as of December 31, 2013 and 2014, respectively)	18		1,121		1,610			259
Class B ordinary shares (US$0.001 par value, 250,000,000 shares authorized; 180,821,228 and 180,821,228 shares issued and outstanding as of December 31, 2013 and 2014, respectively)	18		1,179		1,179			190
Additional paid-in capital			1,003,417		1,604,851			258,655
Retained earnings			19,635		251,759			40,576
Accumulated other comprehensive income (loss)	18		122		(2,735	)		(441	)

Total China Mobile Games and Entertainment Group Limited’s equity			1,025,474		1,856,664			299,239
Noncontrolling interests			1,602		(2,184	)		(352	)

Total shareholders’ equity			1,027,076		1,854,480			298,887

TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY			1,253,124		2,187,615			352,578

The accompanying notes are an integral part of the consolidated financial statements.

F-4

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)


		For the Years Ended December 31,
	Notes	2012			2013			2014			2014
		RMB			RMB			RMB			US$
Net revenues (a)
Games			172,185			319,218			1,264,695			203,832
Handset design			15,408			33,789			—			—

Total net revenues			187,593			353,007			1,264,695			203,832

Cost of revenues (b)
Games			(74,878	)		(124,506	)		(483,943	)		(77,997	)
Handset design			(16,852	)		(31,491	)		—			—

Total cost of revenues			(91,730	)		(155,997	)		(483,943	)		(77,997	)

Gross profit			95,863			197,010			780,752			125,835
Operating expenses:
Selling expenses			(15,838	)		(110,954	)		(320,887	)		(51,718	)
General and administrative expenses			(35,633	)		(55,925	)		(131,174	)		(21,141	)
Research and development expenses			(35,071	)		(54,294	)		(111,293	)		(17,937	)
Impairment of goodwill	9		(33,517	)		—			—			—
Impairment of intangible assets	10		(10,910	)		(2,613	)		—			—
Listing expenses	15		(17,307	)		—			—			—

Total operating expenses			(148,276	)		(223,786	)		(563,354	)		(90,796	)

Operating (loss) income			(52,413	)		(26,776	)		217,398			35,039
Interest income			1,474			3,322			8,241			1,328
Share of losses in equity method investments			—			—			(1,809	)		(292	)
Other income (c)	16		451			25,654			5,238			844
Changes in fair value of contingently returnable consideration assets			27,326			24,366			—			—

(Loss) income before income taxes and noncontrolling interests			(23,162	)		26,566			229,068			36,919
Income tax benefit (expense)	20		8,689			197			(1,121	)		(180	)

Net (loss) income			(14,473	)		26,763			227,947			36,739

Accretion of contingently redeemable ordinary shares	17		(3,023	)		(3,174	)		—			—

Net (loss) income attributable to shareholders			(17,496	)		23,589			227,947			36,739

Net (loss) income attributable to noncontrolling interests			(135	)		503			(4,177	)		(673	)
Net (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders			(17,361	)		23,086			232,124			37,412

Other comprehensive income (loss):
Foreign currency translation adjustments			7			542			(3,332	)		(537	)
Unrealized gains on available-for-sale security			—			—			475			77

Other comprehensive income (loss)			7			542			(2,857	)		(460	)

Comprehensive (loss) income			(17,489	)		24,131			225,090			36,279

F-5


		For the Years Ended December 31,
	Notes	2012			2013			2014			2014
		RMB			RMB			RMB			US$
Comprehensive (loss) income attributable to noncontrolling interests			(135	)		451			(4,177	)		(673	)
Comprehensive (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders			(17,354	)		23,680			229,267			36,952

(Loss) earnings per share for Class A and Class B ordinary shares:
Basic	25		(0.06	)		0.07			0.55			0.09
Diluted	25		(0.06	)		0.06			0.52			0.08
(Loss) earnings per ADS:
Basic	25		(0.84	)		0.98			7.67			1.24
Diluted	25		(0.84	)		0.84			7.22			1.16
Weighted average number of Class A and Class B ordinary shares outstanding:
Basic	25		302,853,059			319,576,830			423,638,426			423,638,426
Diluted	25		302,853,059			333,580,269			449,823,005			449,823,005
Weighted average number of ADS:
Basic	25		21,632,361			22,826,916			30,259,888			30,259,888
Diluted	25		21,632,361			23,827,162			32,130,215			32,130,215
(a) Net revenues from related parties
Games			—			7,444			—			—

(b) Cost of revenues to related parties
Games			—			(1,571	)		(546	)		(88	)

(c) Other income from related parties			—			12,013			—			—

The accompanying notes are an integral part of the consolidated financial statements.

F-6

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”))


	For the Years Ended December 31,
	2012			2013			2014			2014
	RMB			RMB			RMB			US$
Cash flows from operating activities:
Net (loss) income		(14,473	)		26,763			227,947			36,739
Adjustments to reconcile net income to net cash generated from (used in) operating activities:
Depreciation of property and equipment		2,462			4,288			8,860			1,428
Amortization of intangible assets		23,583			22,707			59,488			9,588
Amortization of non-current prepayments		1,400			5,600			5,600			903
Loss on disposal of property and equipment		4			22			1,184			191
Loss on disposal of intangible assets		275			—			—			—
Impairment of intangible assets		10,910			2,613			—			—
Impairment of goodwill		33,517			—			—			—
Share of losses in equity method investments		—			—			1,809			292
Share-based compensation expenses		14,075			14,020			37,385			6,025
Listing expenses		17,307			—			—			—
Write-off of obsolete inventories		669			—			—			—
Write-off of accounts receivable		553			—			—			—
Changes in fair value of contingently returnable consideration assets		(27,326	)		(24,366	)		—			—
Deferred tax benefit		(2,720	)		(3,474	)		(7,499	)		(1,209	)
Gain on disposal of a subsidiary		—			(14,332	)		—			—
Gain on bargain purchase		—			(9,654	)		—			—
Changes in operating assets and liabilities:
Accounts receivable		13,842			(88,287	)		(413,108	)		(66,581	)
Prepayments and other current assets		(622	)		(72,197	)		(105,278	)		(16,969	)
Inventories		(925	)		2,359			—			—
Amounts due from related parties		1,349			(6,097	)		10			2
Other non-current assets		—			(7,244	)		(38,670	)		(6,233	)
Accounts payable		(5,461	)		53,773			130,321			21,004
Amounts due to related parties		(5,551	)		(991	)		9,560			1,541
Income tax payable		(11,039	)		1,775			976			157
Accrued expenses and other current liabilities		3,632			19,943			49,544			7,985
Unrecognized tax benefits		(5,449	)		1,400			6,300			1,015
Deferred revenue		(2,197	)		10,716			5,411			872

Net cash generated from (used in) operating activities		47,815			(60,663	)		(20,160	)		(3,250	)

Cash flows from investing activities:
Acquisition of equity method investments		—			—			(24,120	)		(3,888	)
Acquisition of a subsidiary, net of cash acquired		—			104			—			—
Loans to a third party		(3,040	)		(1,443	)		(5,500	)		(886	)
Acquisition of property and equipment		(1,845	)		(14,342	)		(19,679	)		(3,172	)
Purchases of long-term investments		—			(2,000	)		(126,413	)		(20,374	)
Acquisition of intangible assets		(7,666	)		(50,134	)		(171,557	)		(27,650	)
Prepayment for an intangible asset		(2,500	)		—			—			—

F-7


	For the Years Ended December 31,
	2012			2013			2014			2014
	RMB			RMB			RMB			US$
Prepayments for non-current assets		(30,000	)		—			(27,395	)		(4,415	)
Receivables from game developers		(10,000	)		(3,600	)		—			—
Purchase of short-term investments		(45,500	)		(62,849	)		(79	)		(13	)
Maturity of short-term investments		500			56,077			9,490			1,530
Net proceeds from disposal of a subsidiary		—			4			(15	)		(2	)
Proceeds from disposal of property and equipment		—			622			—			—

Net cash used in investing activities		(100,051	)		(77,561	)		(365,268	)		(58,870	)

Cash flows from financing activities:
Proceeds from short-term bank borrowing		—			14,000			—			—
Repayment of short-term bank borrowing		—			—			(14,000	)		(2,256	)
Repayment of loan from a third-party		—			(2,000	)		—			—
Dividends paid		(63,000	)		—			—			—
Restricted cash		—			(15,725	)		15,725			2,534
Proceeds from government grants		—			2,000			—			—
Proceeds from issuance of contingently redeemable ordinary shares		75,648			—			—			—
Proceeds from issuance of ordinary shares		—			256,265			484,072			78,018
Payment of issuance costs of ordinary shares		—			(5,840	)		(9,833	)		(1,584	)
Capital contribution from noncontrolling interests		200			138			391			63
Proceeds from exercise of share-based awards		—			11,589			12,235			1,972
Payment of issuance costs of contingently redeemable ordinary shares		(1,813	)		—			—			—
Payment of listing expenses		(17,307	)		—			—			—

Net cash (used in) generated from financing activities		(6,272	)		260,427			488,590			78,747

Exchange rate effect on cash and cash equivalents		7			(1,813	)		(2,945	)		(475	)

Net (decrease) increase in cash and cash equivalents		(58,501	)		120,390			100,217			16,152
Cash and cash equivalents, beginning of the year		187,237			128,736			249,126			40,152

Cash and cash equivalents, end of the year		128,736			249,126			349,343			56,304

Supplemental disclosure of cash flows information:
Income taxes paid		11,192			105			1,452			234

Interest paid		—			20			37			6

Non-cash activities:
Acquisition of noncontrolling interests		—			1,543			—			—

Equity issuance costs incurred from issuance of ordinary shares (Note 21(c))		—			3,582			4,176			673

Deemed dividend to V1 Group Limited (previously known as VODone Limited, “V1 Group”)		32,929			38,014			—			—

Settlement of unrecognized tax benefits from disposal of a subsidiary		—			13,374			—			—

Settlement of loan to a third party in business acquisition		—			4,483			—			—

The accompanying notes are an integral part of the consolidated financial statements.

F-8

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”), except for number of shares)


	Total China Mobile Games and Entertainment Group Limited’s equity
	Number of shares					Ordinary shares		Additional paid-in capital			Retained earnings			Accumulated other comprehensive (loss) income			Noncontrolling interests			Total shareholders’ equity
	Class A		Class B			RMB		RMB			RMB			RMB			RMB			RMB
Balance as of December 31, 2011		113,112,458		189,617,092			1,937		709,815			84,853			(427	)		—			796,178
Net loss for the year		—		—			—		—			(14,338	)		—			(135	)		(14,473	)
Other comprehensive income		—		—			—		—			—			7			—			7
Accretion of contingently redeemable ordinary shares		—		—			—		—			(3,023	)		—			—			(3,023	)
Deemed dividend to V1 Group		—		—			—		2,313			(32,929	)		—			—			(30,616	)
Capital contribution from noncontrolling interests		—		—			—		—			—			—			200			200
Share-based compensation expenses		—		—			—		14,075			—			—			—			14,075
Exercise of share-based awards		464,750		—			3		(3	)		—			—			—			—

Balance as of December 31, 2012		113,577,208		189,617,092			1,940		726,200			34,563			(420	)		65			762,348

Net income for the year		—		—			—		—			26,260			—			503			26,763
Other comprehensive income		—		—			—		—			—			542			—			542
Accretion of contingently redeemable ordinary shares		—		—			—		—			(3,174	)		—			—			(3,174	)
Deemed dividend to V1 Group		—		—			—		—			(38,014	)		—			—			(38,014	)
Recognition of noncontrolling interests		—		—			—		—			—			—			1,416			1,416
Acquisition of noncontrolling interests (Note 4)		—		—			—		1,543			—			—			(520	)		1,023
Conversion of Class B to Class A ordinary shares (Note 18)		8,795,864		(8,795,864	)		—		—			—			—			—			—
Issuance of ordinary shares		50,866,900		—			322		246,521			—			—			—			246,843
Issuance of warrants (Note 21)		—		—			—		10,139			—			—			—			10,139
Capital contribution from noncontrolling interests		—		—			—		—			—			—			138			138
Share-based compensation expenses		—		—			—		7,463			—			—			—			7,463
Exercise of share-based awards		4,794,390		—			38		11,551			—			—			—			11,589

Balance as of December 31, 2013		178,034,362		180,821,228			2,300		1,003,417			19,635			122			1,602			1,027,076

Net income for the year		—		—			—		—			232,124			—			(4,177	)		227,947
Other comprehensive loss		—		—			—		—			—			(2,857	)		—			(2,857	)
Conversion of contingently redeemable ordinary shares to Class A ordinary shares		26,485,961		—			162		77,902			—			—			—			78,064
Issuance of ordinary shares		48,188,000		—			296		473,943			—			—			—			474,239
Issuance of warrants (Note 21)		—		—			—		25,125			—			—			—			25,125
Capital contribution from noncontrolling interests		—		—			—		—			—			—			392			392
Share-based compensation expenses		—		—			—		12,260			—			—			—			12,260
Exercise of share-based awards		4,815,606		—			31		12,204			—			—			—			12,235

Balance as of December 31, 2014		257,523,929		180,821,228			2,789		1,604,851			251,759			(2,735	)		(2,184	)		1,854,480

Balance as of December 31, 2014 in US$		257,523,929		180,821,228			449		258,655			40,576			(441	)		(352	)		298,887

The accompanying notes are an integral part of the consolidated financial statements.

F-9

CHINA MOBILE GAMES AND ENTERTAINMENT GROUP LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of Renminbi (“RMB”), U.S. Dollars (“US$”) and Hong Kong Dollars (“HK$”),

except for number of shares and per share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

China Mobile Games and Entertainment Group Limited (the “Company”) was incorporated as an exempted company with limited liability in the Cayman Islands on January 20, 2011 by V1 Group, a company listed on the Main Board of the Stock Exchange of Hong Kong Limited (the “HK Stock Exchange”). The Company is considered a foreign entity under the laws of the People’s Republic of China (the “PRC”). On September 25, 2012, the Company completed a listing on the Nasdaq Global Market (the “Listing”), with each offered American depositary share (“ADS”) representing fourteen Class A ordinary shares of the Company.

The Company does not conduct any substantive operations on its own but instead conducts its primary business operations through its subsidiaries, two variable interest entities (“VIEs”) and the VIEs’ subsidiaries, which are all located in the PRC and Hong Kong. The Company, its subsidiaries, the VIEs and the VIEs’ subsidiaries are hereinafter collectively referred to as the “Group”. The Group is principally engaged in the development, operation and sale of mobile phone games. The Company’s principal geographic market is in the PRC.

As of December 31, 2014 the Company’s significant subsidiaries consisted of the following entities:

Name

Place of
incorporation

Date of
establishment /
acquisition

Percentage of
ownership

Principal activities

Beauty Wave Limited (“Beauty Wave”)

British Virgin Islands (“BVI”)

October 27, 2009

100

Investment holding

China Wave Group Limited (“China Wave”)

BVI

October 27, 2009

100

Investment holding

Uni-Force Development Limited (“Uni-Force”)

Hong Kong

October 27, 2009

100

Investment holding

Huiyou Digital (Shenzhen) Ltd. (“Huiyou”)

The PRC

October 27, 2009

100

Development, operation and sale of mobile phone games

OWX Hong Kong Limited (“OWX HK”)

Hong Kong

December 28, 2009

100

Provision of handset design products and services

Shenzhen Qilewuxian Software Development Co. Ltd. (“Qilewuxian”)

The PRC

April 19, 2010

100

Development, operation and sale of mobile phone games

Shenzhen Zhongtuokechuang Technology Co., Ltd. (“Zhongtuo”)

The PRC

November 18, 2010

100

Provision of handset design products and services

3GUU Mobile Entertainment Industrial Co., Ltd. (“3GUU BVI”)

BVI

December 31, 2010

100

Investment holding

3GUU Mobile Entertainment Co. Limited (“3GUU HK”)

Hong Kong

December 31, 2010

100

Investment holding

F-10

Name

Place of
incorporation

Date of
establishment /
acquisition

Percentage of
ownership

Principal activities

Guangzhou Yitongtianxia Software Development Co., Ltd. (“Yitongtianxia”)

The PRC

December 31, 2010

100

Development, operation and sale of mobile phone games

OWX Group Limited (“OWX Holding”)

BVI

February 14, 2012

100

Investment holding

HYD Holding Limited (“HYD Holding”)

BVI

February 14, 2012

100

Investment holding

3GUU Holding Limited (“3GUU Holding”)

BVI

February 14, 2012

100

Investment holding

Shenzhen Douqu Software Co., Ltd (“Shenzhen Douqu”)

The PRC

September 5, 2012

Development, operation of mobile phone games

China Mobile Games and Entertainment Group (HK) Limited (“CMGE HK”)

Hong Kong

October 11, 2012

100

Investment holding

Shanghai Suiyue Technology Co., Ltd. (“Shanghai Suiyue”)

The PRC

April 9, 2013

100

Development, operation of mobile phone games

Weili Development Limited (“Weili”)

Hong Kong

June 4, 2013

100

Investment holding

CMGE Investment Limited (“CMGE Investment”)

Hong Kong

June 4, 2013

100

Investment holding

China Perfect Investment Limited (“China Perfect”)

Hong Kong

August 6, 2013

100

Investment holding

Guangzhou Huifenghechang Technology Co., Ltd. (“Huifenghechang”)

The PRC

July 11, 2013

100

Development, operation of mobile phone games

Vogins Technology Co.Limited (“Vogins BVI”)

BVI

November 22, 2013

90.62

Investment holding

Vogins Technology (Shanghai) Co.,Ltd. (“Vogins Shanghai”)

The PRC

November 22, 2013

100

Provision of billing and collection services

F-11

As of December 31, 2014, the Company consolidated the following VIEs and VIEs’ subsidiaries:

Name

Place of
incorporation

Date of
establishment /
acquisition

Percentage of
ownership

Principal activities

Guangzhou Yingzheng Information Technology Co., Ltd. (“Yingzheng”)

The PRC

December 31, 2010

—

Development, operation and
sale of mobile phone games

Shenzhen Lanyue Internet Technology Co., Ltd. (“Lanyue”)

The PRC

September 16, 2013

—

Development, operation and

sale of mobile phone games

Chengdu Zhuoxing Technology Co., Ltd. (“Chengdu Zhuoxing”)*

The PRC

September 16, 2013

—

Development, operation and

sale of mobile phone games

Beijing Wuyao Technology Co., Ltd. (China) (“Beijing Wuyao”)*

The PRC

September 16, 2013

—

Development, operation and

sale of mobile phone games

Beijing Zhuoyuechenxing Technology Co., Ltd. (“Beijing Zhuoyuechenxing”)**

The PRC

July 7, 2014

—

Development, operation and

sale of mobile phone games

Tianjin Suiyue Technology Co., Ltd. (“Tianjin Suiyue”)*

The PRC

July 16, 2014

—

Development, operation and

sale of mobile phone games

*	A subsidiary of Lanyue

**	A subsidiary of Chengdu Zhuoxing

VIE arrangements

Prior to being acquired by V1 Group on December 31, 2010, Yitongtianxia, a wholly-owned subsidiary of 3GUU BVI, entered into a series of contractual arrangements with Yingzheng and its shareholders on October 28, 2009, whereby Yitongtianxia obtained effective control over Yingzheng. On September 1, 2013, Huiyou, a wholly-owned subsidiary of China Wave, entered into a series of contractual arrangements with Lanyue and its shareholders, whereby Huiyou obtained effective control over Lanyue. Yitongtianxia and Huiyou are hereinafter referred to as the “WFOEs”, and Yingzheng and Lanyue are hereinafter referred to as the “VIEs”. The series of contractual arrangements and their supplemental agreements contain similar provisions regarding obligations and rights of the WFOEs and the VIEs (collectively, the “VIE Arrangements”) whereby the WFOEs obtained effective control over the VIEs through (i) the ability to exercise all the rights of the VIEs’ shareholders pursuant to the exclusive call option agreement, the equity pledge agreement and the agreement for voting proxies, (ii) the rights to absorb substantially all of the economic residual benefits of the VIEs pursuant to the exclusive management, technology services and market promotion agreement, the technology services agreement and supplementary agreements, and (iii) the obligation to fund all of the expected losses of the VIEs pursuant to the loan agreement and supplementary agreements. As a result, the WFOEs have been determined to be the primary beneficiaries of the VIEs.

On December 16, 2011, 3GUU BVI agreed to provide unlimited financial support to Yingzheng for its operations. In addition, pursuant to a power of attorney agreement entered into between Yitongtianxia and 3GUU BVI, Yitongtianxia re-assigned the rights to attend Yingzheng shareholders’ meetings and to vote on all of the matters in Yingzheng that require shareholders’ approval irrevocably entrusted to it by shareholders of Yingzheng to 3GUU BVI. As a result of the reassignment of power of attorney from Yitongtianxia to 3GUU BVI and the provision of unlimited financial support from 3GUU BVI to Yingzheng, 3GUU BVI replaced Yitongtianxia to have the power to direct the activities of Yingzheng that most significantly impact Yingzheng’s

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economic performance and the obligation to absorb the expected losses of Yingzheng. Yitongtianxia essentially only retains the right to receive the expected residual returns of Yingzheng. 3GUU BVI and Yitongtianxia, as a group of related parties, have held all of the variable interests of Yingzheng since December 16, 2011. 3GUU BVI has been determined to be the most closely associated with Yingzheng within the group of related parties and replaced Yitongtianxia as the primary beneficiary of Yingzheng on December 16, 2011.

On September 16, 2013, China Wave agreed to provide unlimited financial support to Lanyue for its operations. In addition, pursuant to a power of attorney agreement entered into between Huiyou and China Wave, Huiyou re-assigned the rights to attend Lanyue shareholders’ meetings and to vote on all of the matters in Lanyue that require shareholders’ approval irrevocably entrusted to it by shareholders of Lanyue to China Wave. As a result of the reassignment of power of attorney from Huiyou to China Wave and the provision of unlimited financial support from China Wave to Lanyue, China Wave replaced Huiyou to have the power to direct the activities of Lanyue that most significantly impact Lanyue’s economic performance and the obligation to absorb the expected losses of Lanyue. Huiyou essentially only retains the right to receive the expected residual returns of Lanyue. China Wave and Huiyou, as a group of related parties, have held all of the variable interests of Lanyue since September 16, 2013. China Wave has been determined to be the most closely associated with Lanyue within the group of related parties and replaced Huiyou as the primary beneficiary of Lanyue on September 16, 2013.

Accordingly, the Company consolidates Yingzheng and Lanyue in accordance with SEC Regulation S-X Rule 3A-02 and Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”), Consolidation. The reason for entering into the VIE Arrangements is to comply with PRC laws and regulations that (i) prohibit direct foreign control in companies involved in Internet content provision and telecommunication businesses and (ii) restrict an offshore company controlled or established by a PRC enterprise or natural person to acquire its PRC affiliates.

The significant terms of the VIE Arrangements are listed below:

Exclusive call option agreements

Pursuant to the exclusive call option agreements, the VIEs and their shareholders irrevocably granted the WFOEs, or their designated persons, an exclusive option to purchase, when and to the extent permitted under PRC law, part of or the entire equity interests of the VIEs. The exercise price is the minimum price permitted by PRC law. The exclusive option agreements will remain effective until the exclusive option is exercised to purchase the entire equity interest of the VIEs.

Equity pledge agreements

Pursuant to the equity pledge agreements between the WFOEs and the VIEs’ shareholders, the VIEs’ shareholders have pledged their entire equity interest in the VIEs to the WFOEs to guarantee the performance of the VIEs’ obligations under the exclusive technology services and market promotion agreements. If the VIEs breach their contractual obligations under the exclusive technology services and market promotion agreements, the WFOEs, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interest. The VIEs’ shareholders agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their equity interest in the VIEs without the prior consent of the WFOEs. Unless the WFOEs terminate the agreements, the equity pledge agreements will remain effective until (i) the VIEs fulfill all the obligations prescribed in the exclusive call option agreements, the exclusive management, technology services and market promotion agreements, the agreements for voting proxies and the loan agreements or (ii) the WFOEs acquire the entire equity interest of the VIEs.

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Exclusive technology services and market promotion agreements

Pursuant to the exclusive technology services and market promotion agreements between the WFOEs and the VIEs, the WFOEs have the exclusive and irrevocable right to provide to the VIEs various technology and market promotion services related to the mobile phone games business. In return, the VIEs are required to pay the WFOEs a service fee in an amount as determined at the sole discretion of the WFOEs. Unless the WFOEs terminate the agreements, the exclusive technology services and market promotion agreements will remain effective until the dissolution of the WFOEs in accordance with the applicable PRC laws. Business taxes and value-added taxes relating to technology services and market promotion fees charged by the WFOEs are recorded as cost of revenues in the consolidated statements of comprehensive income.

Technology services agreements

Pursuant to the technology services agreements between the WFOEs and the VIEs and the supplementary agreements, the WFOEs agreed to provide the VIEs with technology support and market promotion services related to the VIEs’ smartphone games business. The VIEs agreed to distribute 40% of their income generated from the game products developed under the technology services agreements, after deducting taxes and expenses, to the WFOEs on a monthly basis. Upon expiration, the technology services agreements will be automatically renewed unless the WFOEs, in their sole discretion, disagree.

Agreements for voting proxies

Pursuant to the agreements for voting proxies among the WFOEs, the VIEs and their shareholders, the VIEs’ shareholders irrevocably assign their full voting rights in the VIEs to the WFOEs. The VIEs’ shareholders entrusted the WFOEs their rights to attend shareholders’ meetings and to vote on their behalf on all of the matters that require shareholders’ approval. Unless the WFOEs terminate the agreements, the agreements for voting proxies will remain effective in the same effective period as the exclusive call option agreements, the equity pledge agreements, the exclusive technology services and market promotion agreements and the loan agreements. On December 16, 2011 and September 16, 2013, Yitongtianxia and Huiyou re-assigned the rights underlying the agreements for voting proxies to 3GUU BVI and China Wave, respectively.

Loan agreements

Pursuant to the loan agreements between the WFOEs and the VIEs’ shareholders, the WFOEs extended loans to the VIEs’ shareholders to enable them to pay the registered capital of the VIEs. The VIEs’ shareholders will repay the loans by transferring their legal ownership in the VIEs to the WFOEs when permitted by PRC law. The loan agreements are effective for 10 years and will automatically extend for another 10 years unless the WFOEs, in their sole discretion, disagree. As of December 31, 2014, the VIEs’ shareholders have drawn down loans of an aggregate amount of RMB10,000 from the WFOEs.

Supplementary agreements

The WFOEs entered into supplementary agreements with the VIEs and their shareholders to determine the calculation of management fee to be paid to the WFOEs. Pursuant to the supplementary agreements, the VIEs have agreed to pay an annual management fee to the WFOEs based on annual revenue of the VIEs minus actual operating costs, other costs of the VIEs, which include fees paid under the technology services agreement, and taxes paid by the VIEs.

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The WFOEs entered into supplementary agreements with the VIEs and their shareholders to memorialize certain terms previously agreed amongst the WFOEs, the VIEs and their shareholders. While the supplementary agreements were signed, the terms, intent and substance of all the agreements above remained unchanged. Pursuant to the supplementary agreements: (i) before the WFOEs can legally exercise the options to acquire the VIEs, the VIEs’ shareholders cannot declare any dividends or distribute any residual profits without the consent of the WFOEs; (ii) any funds, including but not limited to dividends distributed out of the VIEs’ residual profits, received by the VIEs’ shareholders or any persons designated by the VIEs’ shareholders, shall be remitted in full to the WFOEs; (iii) the consideration received by the VIEs’ shareholders upon the exercise of the exclusive call option agreements by the WFOEs must be immediately remitted to the WFOEs or any persons designated by the WFOEs; (iv) the WFOEs are obligated to provide continuous financial support to the VIEs for operations; and (v) the WFOEs have the unilateral right to change the service fee amount under the exclusive technology services and market promotion agreements. The carrying amounts of the assets and liabilities of the VIEs are as follows:


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
ASSETS
Current assets:
Cash and cash equivalents		17,778		93,441		15,060
Short-term investments		20,680		10,692		1,723
Accounts receivable		84,718		496,815		80,072
Prepayments and other current assets		55,491		159,093		25,641
Deferred tax assets		—		1,713		276

Total current assets		178,667		761,754		122,772

Non-current assets:
Long-term investment		2,000		42,311		6,819
Property and equipment, net		5,843		19,184		3,092
Intangible assets, net		39,037		169,118		27,257
Deferred tax assets		27		2,268		366
Other non-current assets		4,481		36,701		5,915

Total non-current assets		51,388		269,582		43,449

Total assets		230,055		1,031,336		166,221

LIABILITIES
Current liabilities:
Accounts payable		35,178		164,495		26,512
Technology services and market promotion fees payable to the WFOEs		67,084		83,593		13,473
Accrued expenses and other current liabilities		23,618		78,434		12,641
Deferred revenue		1,722		17,819		2,872
Amounts due to related parties		—		568		92

Total current liabilities		127,602		344,909		55,590

Non-current liabilities:
Unrecognized tax benefits		4,702		7,833		1,262
Other non-current liabilities		2,000		2,000		322

Total non-current liabilities		6,702		9,833		1,584

Total liabilities		134,304		354,742		57,174

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The financial performance and cash flows of the VIEs are as follows:


	For the Years Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
Net revenues		35,686			153,990			1,099,868			177,267

Net loss		(17,742	)		(37,334	)		335,664			54,099

Net cash generated from operating activities		18,517			43,201			326,349			52,598

Net cash used in investing activities		(37,987	)		(43,546	)		(250,686	)		(40,403	)

Net cash generated from financing activities		—			10,098			—			—

The technology services and market promotion fees charged by the WFOEs to the VIEs were RMB16,750, RMB19,067 and RMB23,404 (US$3,772) during the years ended December 31, 2012, 2013 and 2014, respectively.

As of December 31, 2014, there was no pledge or collateralization of the assets of the VIEs and the Company has not provided any financial support that it was not previously contractually required to provide to the VIEs. There were no assets of the VIEs that can only be used to settle their own obligations. Creditors of the VIEs have no recourse to the general credit of their respective primary beneficiary. The VIEs held revenue-producing mobile games and mobile game licenses acquired from third-party game developers as well as registered copyrights, trademarks and domain names developed internally for the Group’s operations.

Basis of presentation

The consolidated financial statements present the consolidated financial position, results of operations and cash flows in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and the VIEs’ subsidiaries. The results of the subsidiaries are consolidated from the date on which the Group obtained control and are continued to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when the Company holds a majority of the voting equity interest in an entity. However, if the Company demonstrates its ability to control the entity through the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity, then the entity is consolidated.

All significant intercompany balances and transactions among the Company, its subsidiaries, the VIEs and the VIEs’ subsidiaries have been eliminated upon consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in the consolidated financial

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statements include, but are not limited to, revenue recognition, allowance for doubtful accounts, estimates of useful life for property and equipment, intangible assets and non-current prepayments, impairment of goodwill and long-lived assets, valuation allowance for deferred tax assets, allocation of purchase price, uncertain tax positions, share-based compensation, fair value of contingently redeemable ordinary shares and consolidation of variable interest entity. Actual results could differ significantly from those estimates.

Foreign currency

Based on the criteria of ASC topic 830 (“ASC 830”), Foreign Currency Matters, the Company determined its functional currency to be the United States Dollars (“US$”). The Company’s subsidiaries located in the BVI determined their functional currency to be the US$. The Company’s subsidiaries located in Hong Kong determined their functional currency to be the Hong Kong Dollars (“HK$”), with the exception of CMGE Investment which determined its functional currency to be the RMB and OWX HK, 3GUU HK and C&V HK which determined their functional currency to be the US$. The Company’s subsidiaries located in Taiwan determined its function currency to be the Taiwanese Dollars (“TWD”). The Company’s subsidiary located in Japan determined its functional currency to be the Japanese Yen (“JPY”). The Company’s subsidiary located in Korea determined its functional currency to be the Korean Won (“KRW”). The Company’s subsidiaries, VIEs and VIEs’ subsidiaries located in the PRC determined their functional currency to be the RMB. The Company uses the RMB as its reporting currency.

Each entity in the Group maintains its financial records in its own functional currency. Transactions denominated in foreign currencies are measured at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities denominated in foreign currencies are remeasured at the exchange rates prevailing at the balance sheet date. Exchange gains and losses are included in the consolidated statements of comprehensive income. Non-monetary items that are measured in terms of historical cost in foreign currency are remeasured using the exchange rates at the dates of the initial transactions.

The assets and liabilities of the Company’s subsidiaries located outside of the PRC are translated into RMB at the exchange rates prevailing at the balance sheet date. The consolidated statements of comprehensive income of these entities are translated into RMB at the weighted average exchange rates for the year. The resulting translation gains (losses) are recorded in accumulated other comprehensive income as a component of shareholders’ equity.

For the purpose of the consolidated statements of cash flows, cash flows of the Company’s subsidiaries located outside of the PRC are translated into RMB at the exchange rates prevailing on the dates of the cash flows. Frequently recurring cash flows of these entities which arise throughout the year are translated into RMB at the weighted average exchange rates for the year.

Convenience translation

Amounts in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB6.2046 on December 31, 2014 in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

Business combinations

The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC topic 805 (“ASC 805”): Business Combinations. The acquisition method of accounting requires all of the following steps: (i) identifying the acquirer, (ii) determining the acquisition date, (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and (iv) recognizing and measuring goodwill or a gain from a bargain purchase. The

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consideration transferred in a business combination is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of comprehensive income as a gain.

The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets, forecasted life cycle and forecasted cash flows over that period.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and demand deposits placed with banks or other financial institutions with original maturity of three months or less at the date of purchase and are unrestricted as to withdrawal and use.

Restricted cash

Restricted cash represents cash pledged to a financial institution as collateral for the Group’s short-term bank borrowing (Note 13). The restricted cash is not available for withdrawal or the Group’s general use until after the corresponding bank borrowing is repaid.

Short-term investments

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments. Investments that are expected to be realized in cash during the next 12 months are also included in short-term investments. As of December 31, 2013 and 2014, the Group held fixed time deposits amounting to RMB51,772 and RMB42,361 (US$6,827) in commercial banks with original maturities of greater than three months but less than a year, respectively. Interest income for short-term investments of RMB560, RMB1,351 and RMB1,487 (US$240) was recognized in the consolidated statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014, respectively.

Equity method investments

Investments in entities in which the Group can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC topic 323 (“ASC 323”), Investments-Equity Method and Joint Ventures. Under the equity method, the Group initially records its investment at cost and the difference between the cost of the equity investee and the fair value of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill, which is included in the equity method investment on the consolidated balance sheets. The Group subsequently adjusts the carrying amount of the investment to recognize the Group’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Group will discontinue applying the equity method if an investment (and additional financial supports to the investee, if any) has been reduced to zero. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary.

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Long-term investments

The Group’s long-term investments consist of cost method investments and available-for-sale security.

In accordance with ASC subtopic 325-20 (“ASC 325-20”), Investments-Other: Cost Method Investments, for investments in an investee over which the Group does not have significant influence and which do not have readily determinable fair value, the Group carries the investment at cost and only adjusts for other-than-temporary declines in fair value and distributions of earnings that exceeds the Group’s share of earnings since its investment. Management regularly evaluates the impairment of the cost method investment based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.

In accordance with ASC topic 320 (“ASC 320”), Investments – Debt and Equity Securities, the Group classifies its investments in debt and equity securities as “held to maturity”, “trading” or “available-for-sale”, whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all categories of investments in securities are included in earnings. Any realized gains or losses on the sale of the debt and equity securities are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.

The securities that the Group has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost. For individual securities classified as held-to-maturity securities, the Group evaluates whether a decline in fair value below the amortized cost basis is other-than-temporary in accordance with the Group’s policy and ASC 320. When the Group intends to sell an impaired debt security or it is more-likely-than-not that it will be required to sell prior to recovery of its amortized cost basis, an other-than-temporary impairment is deemed to have occurred. In these instances, the other-than-temporary impairment loss is recognized in earnings equal to the entire excess of the debt security’s amortized cost basis over its fair value at the balance sheet date of the reporting period for which the assessment is made. When the Group does not intend to sell an impaired debt security and it is more-likely-than-not that it will not be required to sell prior to recovery of its amortized cost basis, the Group must determine whether or not it will recover its amortized cost basis. If the Group concludes that it will not, an other-than-temporary impairment exists and that portion of the credit loss is recognized in earnings, while the portion of loss related to all other factors is recognized in other comprehensive income.

The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized holding gains and losses for trading securities are included in earnings.

Investments not classified as trading or as held-to-maturity are classified as available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Realized gains or losses are included in earnings during the period in which the gain or loss is realized. An impairment loss on the available-for-sale securities would be recognized in the consolidated statements of comprehensive income when the decline in value is determined to be other-than-temporary.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are carried at net realizable value. In general, collateral is not required and interest is not charged on accounts receivable. An allowance for doubtful accounts is recorded when collection of the full amount is no longer probable. In evaluating the collectability of receivable balances, the Group considers specific evidence

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including the aging of the receivable, the customer’s payment history, its current credit-worthiness and current economic trends. Accounts receivable are written off after all collection efforts have ceased. Accounts receivable of RMB553, nil and nil were written off during the years ended December 31, 2012, 2013 and 2014, respectively.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:


Office equipment			3 – 5 years
Motor vehicles			4 years
Leasehold improvement			shorter of lease terms or 3 years

Repair and maintenance costs are charged to expense when incurred, whereas the costs of renewals and betterment that extend the useful life of property and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of comprehensive income.

Goodwill

As of December 31, 2013, HYD Holding and its subsidiaries (collectively referred to as the “Dragon Joyce Group”), OWX Holding and its subsidiaries (collectively referred to as the “OWX Group”) and 3GUU BVI and its subsidiaries (collectively referred to as the “3GUU Group”) were identified as reporting units, as discrete financial information is available and segment management regularly reviews their operating results. Due to a change in reporting structure, the Group identified the Dragon Joyce Group and 3GUU Group as reporting units as of December 31, 2014.

The performance of the impairment test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Group performs the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss. The annual goodwill impairment test is performed on December 31 of each year. In accordance with Accounting Standards Update (“ASU”) No. 2011-08 (“ASU 2011-08”), Intangibles—Goodwill and Other (ASC 350), the Group has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test. If the Group believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.

The Group recognized goodwill impairment loss of RMB33,517, nil and nil for the years ended December 31, 2012, 2013 and 2014, respectively (Note 9).

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Intangible assets

Intangible assets, including computer software, mobile games and platforms, acquired customer relationships, mobile game licenses, capitalized mobile game product development costs and acquired contract with mobile network operator, are carried at cost less accumulated amortization. Intangible assets acquired in a business combination are recognized initially at fair value at the date of acquisition. Intangible assets with a finite useful life are amortized using the straight-line method over the estimated economic lives of the intangible assets as follows:


Computer software			5 years
Mobile games and platforms			1 – 6 years
Acquired customer relationships			7 years
Mobile game product development costs			3 years
Mobile game licenses			2 – 6 years
Acquired contract with mobile network operator			3 years

Computer software purchased from third-party vendors is capitalized and amortized on a straight-line basis over the estimated useful life of five years.

Mobile games and platforms purchased from third-party vendors are capitalized and amortized on a straight-line basis over the estimated economic lives which range from one to five years while mobile games and platforms acquired in business combinations are recorded at fair value at the date of acquisition and amortized on a straight-line basis over the remaining estimated economic lives which range from one to six years.

Customer relationships acquired in business combinations are related to the ability to sell existing services to existing customers of the acquiree. Acquired customer relationships are recognized at fair value at the date of acquisition using a valuation technique based on expected income and amortized on a straight-line basis over the remaining estimated economic life of seven years.

Mobile game licenses represent the exclusive rights obtained to publish the mobile games developed by third-party game developers on the Group’s game platform or third-party app stores and are capitalized and amortized on a straight-line basis over the shorter of the contractual terms or the estimated economic lives, which range from two to six years.

Contract with mobile network operator acquired in business combination represents a co-operation agreement with a mobile network operator which allows the Group to act as a service provider for billing and collection services. The acquired contract with mobile network operator is recognized at fair value at the date of acquisition using a valuation technique based on expected income and amortized on a straight-line basis over the remaining contractual term of three years.

The Group recognizes costs to develop its mobile game products in accordance with ASC topic 985 (“ASC 985”), Software. Mobile game product development costs consist primarily of payroll, depreciation and other overhead expenses incurred by the Group to develop, maintain, monitor and manage the Group’s mobile gaming products. Costs incurred for the development of mobile game products prior to the establishment of technological feasibility are expensed when incurred and are included in product development expenses. Once a mobile game product has reached technological feasibility, all subsequent mobile game product development costs are capitalized until the product is available for marketing. Technological feasibility is evaluated on a product-by-product basis, but typically encompasses both technical design and game design documentation and only occurs when the mobile games have a proven ability to operate in a mobile game environment. The amount of mobile game development costs qualifying for capitalization as intangible assets was amortized over the estimated life of the corresponding mobile games, which is determined to be three years.

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Impairment of long-lived assets

The Group evaluates its long-lived assets, including property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances, such as a significant adverse change to market conditions that will impact the future use of the assets, indicate that the carrying amount of an asset may not be fully recoverable in accordance with ASC topic 360 (“ASC 360”), Property, Plant and Equipment and ASC 350. When these events occur, the Group evaluates the recoverability of long-lived assets by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Group recognizes an impairment loss based on the excess of the carrying amount of the assets over their fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows and are largely independent of the cash flows of the other assets when assessing impairment.

The Group recognized impairment loss on long-lived assets of RMB10,910, RMB2,613 and nil for the years ended December 31, 2012, 2013 and 2014, respectively (Note 10).

Fair Value Measurements

(i) Fair value of financial instruments

Financial instruments of the Group primarily include cash and cash equivalents, restricted cash, short-term investments, accounts receivable, other receivables, amounts due from related parties, equity method investments, cost method investments, available-for-sale security, short-term bank borrowing, accounts payable, amounts due to related parties and contingently redeemable ordinary shares. As of December 31, 2013 and 2014, the carrying values of these financial instruments, except for equity method investments, cost method investments, available-for-sale security and contingently redeemable ordinary shares, approximated their fair values due to the short-term maturity of these instruments. Available-for-sale security was adjusted to fair value at each reporting date. The Group determined the fair values of available-for-sale security with the assistance of an independent valuation firm.

The Group applies ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures, in measuring fair value. ASC 820 defines fair value, establishes a framework for measuring fair value and requires disclosures to be provided on fair value measurement.

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs which are supported by little or no market activity.

ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

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As of December 31, 2014, the Group measure the fair value of the available-for-sale security using an income approach based on inputs that are unobservable in the market (level 3), which are based on (i) a discount rate of 24.20%, (ii) long-term sustainable growth rate of 3%, (iii) financial multiples of companies in the same industry as the investee and (iv) adjustment because of the lack of marketability that market participants would consider when estimating the fair value of the investee.

The following table sets forth assets measured at fair value on a recurring basis as of December 31, 2014:

Quoted price in
active markets for
identical assets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

RMB

US$

Available-for-sale security (Note 7)

—

18,888

3,044

No asset was measured at fair value on a recurring basis as of December 31, 2013.

The following table presents a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2014.


	Available-for-sale security
	RMB
Balance as of January 1, 2014		—

Recognized during the year		18,413
Realized or unrealized gain		475
Settlement		—

Balance as of December 31, 2014		18,888

Balance as of December 31, 2014 in US$		3,044

The amount of total gain for the year ended December 31, 2014 included in earnings		475

The amount of total gain for the year ended December 31, 2014 included in earnings, in US$		77

The following table sets forth assets measured at fair value on a nonrecurring basis as of December 31, 2013:

Fair value at December 31, 2013
measured using

Carrying
value at
December 31,
2013

Quoted price in
active markets for
identical assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total
loss in
2013

RMB

Intangible assets—Computer software

2,613

—

2,613

Total assets measured at fair value on nonrecurring basis

2,613

In accordance with ASC 360-10, computer software with a carrying amount of RMB2,613 was written down to its fair value of zero on December 31, 2013, resulting in an impairment charge of RMB2,613, which was included in the statements of comprehensive income for the year ended December 31, 2013 (Note 10).

The Group had no assets measured on a nonrecurring basis as of December 31, 2014.

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Revenue Recognition

Revenues of the Group are derived from the development, operation and sale of in-game premium feature of mobile phone games as well as the provision of handset design products and services. For each of the significant sources of revenue stated below, revenue is recognized only when the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the goods have been delivered or the services have been rendered; (iii) the price or fees are fixed or determinable; and (iv) collectability is reasonably assured.

(i) Games

(a) Single player games and social games

The Group generates (i) single player games revenues principally from the sale of in-game premium features of mobile phone games that are operated under the free-for-trial model and the sale of self-developed and purchased mobile games under the subscription-based model or the one-time fee model; and (ii) social games revenues from the sale of in-game premium features of self-developed social games that are operated under the free-to-play model.

The Group enters into service arrangements with mobile phone manufacturers to pre-install its self-developed and purchased single player games or application platform onto the mobile phones before they reach mobile phone game players. Mobile phone game players can access the pre-installed single player games directly or download the single player games through the pre-installed application platform without additional charges. Single player games are offered on a free-for-trial basis where the mobile phone game players may purchase in-game premium features to extend the duration of the game or to enjoy additional functions of the game. All chargeable in-game premium features are considered consumed immediately upon purchase. Any unused premium features cannot be carried forward after the mobile phone game players exit the game. When mobile phone game players leave the game they are currently playing and perform other functions on the feature phones, the previously purchased but unused premium features can no longer be accessed and are therefore completely consumed. Single player games are also available for mobile phone game players to download through mobile network operators and software websites. Under the subscription based model, mobile phone game players can subscribe to a monthly plan to download a fixed number of single player games from mobile network operators for a fixed subscription fee per month. Under the one-time fee model, mobile phone game players can download each single player game based on a fixed price per game.

Under the free-to-play model for social games, mobile phone game players can download mobile phone games, obtain game accounts and play the basic functions of the mobile games free of charge but may purchase game points for in-game premium features to enhance their game-playing experience. The purchased in-game premium features can be freely traded amongst game players within the applicable game as long as consumption of the items has not commenced. Mobile phone game players can purchase game points by either charging their account with mobile network operators directly or buying prepaid cards issued by mobile network operators. The prepaid cards can be converted into a pre-specified number of game points for consumption. Upon delivery of game points purchased directly from mobile network operators or converted from prepaid cards to mobile phone game players, the Group initially classifies these amounts as deferred revenue. For purposes of determining when the service has been provided to the mobile phone game players, the Group has determined that an implied obligation exists to the mobile phone game players who purchased game points to provide an enhanced game-playing experience over the average playing period of the mobile phone game players.

For single player and social games, the Group establishes direct contractual relationship with mobile game players to allow mobile game players to download the games from the Group’s game platform or contracts with mobile network operators, third-party payment platforms and mobile phone service providers for billing, collection and transmission services offered to mobile phone game players who have purchased games, game points or in-game premium features. The Group also contracts with mobile application and software websites to distribute its social games by providing platforms for mobile phone game players to download such games.

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Under the contractual arrangement with mobile network operators, third-party payment platforms and mobile phone service providers, the mobile network operators, third-party payment platforms and mobile phone service providers are entitled to profit sharing based on a prescribed percentage of the gross amount charged by the mobile network operators to the mobile phone game players while the mobile phone service providers are entitled to profit sharing based on a prescribed percentage of the net proceeds collected from the mobile network operators.

For single player and social games, the Group has information generated from its internal system on the number of in-game premium features sold, monthly plan subscriptions and single player games downloaded each month to estimate the amount of collectable net proceeds and to recognize single player and social games revenues. Differences between its estimates and the actual amounts confirmed by the mobile network operators, third-party payment platforms or mobile phone service providers have historically been insignificant. Generally, the Group receives billing confirmations from each of the mobile network operators, third-party payment platforms or mobile phone service providers confirming the net proceeds to be received by the Group within 30 to 120 days after the end of each month.

Collectability is considered reasonably assured as the Group deals with only reputable mobile network operators, third-party payment platforms or mobile phone service providers and performs thorough credit assessment prior to entering into a business relationship with them. Historically, the Group has not experienced any significant defaults for payment.

The Group determines whether to record single player and social games revenues using the gross or net method of reporting in accordance with ASC subtopic 605-45 (“ASC 605-45”), Revenue Recognition: Principal Agent Considerations. Determining whether revenue should be reported gross or net is based on an assessment of various factors, the primary factors being whether the Group is acting as the principal in offering services to the customer or whether the Group is acting as an agent in the transaction. The Group has determined that it is acting as the principal in offering services as the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in suppliers selection; and (iv) has involvement in the determination of product specifications. Therefore, the Group has the primary responsibility of fulfillment and acceptability of the single-player and social games. For the contractual arrangements with mobile network operators, third-party payment platforms and mobile phone service providers, the Group recognizes the net proceeds to be received from the mobile network operators, mobile phone service providers or third-party payment platforms as games revenue on a gross basis. For the direct contractual arrangements with mobile game players, the Group recognizes the gross proceeds from the mobile game players as revenue and the amount attributable to mobile network operators, mobile phone service providers or third-party payment platforms in the forms of service fees are recognized as cost of revenues. Under both arrangements, the Group pays content fees to third-party game developers, which are recognized as cost of revenues, based on a prescribed percentage of the net proceeds confirmed by the mobile network operators. The Group pays service fees, which are recognized as cost of revenues, to the mobile phone manufacturers based on a prescribed percentage of the estimated net proceeds or a prescribed fixed fee per mobile phone activated by mobile phone game players. The Group also pays service fees to the mobile application and software websites which are recognized as cost of revenues.

The Group, using data generated from its internal system, estimates the average playing period from the first time the mobile phone game players purchase game points through the period when the game players have not logged into the game for over two consecutive months. Mobile phone game players are deemed to be inactive if they have not logged into the game for two consecutive months. As the social games are under a free-to-play model and revenue is only generated from paying mobile phone game players when they purchase game points for in-game premium features, the Group focuses solely on the playing period of paying mobile phone game players when estimating the period over which revenue is being recognized. The Group determines the estimated average playing period of paying mobile phone game players, which is the time period between the paying mobile phone game players’ first purchase and last log in, for each significant game based on historical player

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usage patterns and game playing behavior. The Group’s internal system tracks each of the paying mobile phone game players’ purchase and log in history for each significant game to generate data to estimate the average playing period for the Group’s population of paying mobile phone game players. Future usage patterns may differ from the historical usage patterns on which the Group’s revenue recognition policy is based. The Group monitors the operational statistics and usage patterns of its online game and modifies the expected life span when materially different.

Game points can be purchased at a discount if mobile phone game players purchase the game points with prepaid cards issued by mobile network operators or during promotional activities organized by the Group. The Group accounts for such discounts in accordance with ASC 605-50, Revenue Recognition: Customer Payments and Incentives. Such discounts are initially accounted for as a reduction of deferred revenue. As a result, deferred revenue includes the value of both discounted and undiscounted game points, which are subsequently recognized as revenue on a weighted average basis when the Group provides future services to enhance mobile phone game players’ playing experience.

Based on the above, the Group recognizes (i) single player games revenue when the goods are delivered based on download of games or consumption of in-game premium features by mobile phone game players, or at the end of subscription period and (ii) deferred revenue on social games upon delivery of game points to mobile phone game players. Deferred revenue is recognized as social games revenue ratably over the estimated average playing period of the paying mobile phone game players, which ranges from one to three months, starting from the point in time when game points are delivered to the mobile phone game players. The difference between the estimated proceeds and the actual amounts confirmed by the mobile network operators, third-party payment platforms or mobile phone service providers is recognized in the consolidated statements of comprehensive income when billing confirmations are received by the Group.

(b) Licensed games

The Group generates licensed games revenues from publishing mobile games developed by third-party game developers on the Group’s game platform or third-party app stores and entering into arrangements with third parties to co-publish mobile games developed by third-party game developers on the co-publishers’ game platforms or third-party app stores.

The Group enters into contracts with and pays fixed license fees to third-party game developers to obtain licenses to publish or co-publish the third-party developed games on the Group’s game platform, co-publishers’ game platforms or third-party app stores. Licensed games are published on the Group’s game platform, co-publishers’ game platforms or third-party app stores for download without charges. Mobile phone game players can purchase game points for in-game premium features to enhance their game-playing experience. The Group contracts with third-party payment platforms or third-party app stores for billing, collection and transmission services offered to mobile phone game players who have purchased game points. The third-party game developers, third-party payment platforms, third-party app stores and the co-publishers are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the mobile phone game players. The Group’s obligation in the licensed games publishing and co-publishing services is completed upon the purchase of game points by the mobile game players. The Group determines whether to record licensed games revenues using the gross or net method of reporting in accordance with ASC 605-45. Determining whether revenue should be reported gross or net is based on an assessment of various factors, the primary factors being whether the Group is acting as the principal in offering services to the customer or whether the Group is acting as an agent in the transaction. The Group has determined that it is acting as the agent in the licensed games publishing and co-publishing arrangements as the Group is not involved in the operation of the licensed game whilst the third-party game developer is the primary obligor in the arrangement, has latitude in establishing the selling price and has involvement in the determination of product specifications. Therefore, the net proceeds after deducting the

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amounts shared by the third-party game developers, third-party payment platforms, third-party app stores and co-publishers represent the amount of revenue to be recognized by the Group. The fixed license fees paid to the third-party game developers to obtain the publishing license was recognized as cost of revenues on a straight-line basis over the license period.

For the licensed games published on the Group’s game platform, the Group has information generated from its internal system on the number of game points sold each month to estimate the amount of collectable net proceeds and to recognize revenues. For the licensed games published on the co-publishers’ game platforms or third-party app stores, the Group is granted access to the co-publishers’ or third-party app stores’ internal systems to obtain information on the number of game points sold each month to estimate the amount of collectable net proceeds and to recognize revenues. Differences between its estimates and the actual amounts confirmed by the third-party payment platforms, co-publishers or third-party app stores have historically been insignificant. Generally, within 30 to 120 days after the end of each month, the Group receives billing confirmations from each of the third-party payment platforms, co-publishers or third-party app stores confirming the amount of net proceeds to be received by the Group. The Group further shares profits with the third-party game developers and recognizes licensed games revenues based on the net amount retained by the Group.

Collectability is considered reasonably assured as the Group deals with only reputable third-party payment platforms, third-party app stores and co-publishers and performs thorough credit assessment prior to entering into a business relationship with them. Historically, the Group has not experienced any significant defaults for payment.

Based on the above, the Group recognizes the estimated net proceeds to be received from the third-party payment platforms, third-party app stores or the co-publishers for the sale of game points of the licensed games net of the amount to be shared with the third-party game developers and co-publishers, using data generated from its internal system, as licensed games revenues upon delivery of game points to mobile phone game players.

(ii) Handset design

The Group ceased its handset design business in the fourth quarter of 2013. Prior to the cessation, the Group generated handset design revenues from the provision of comprehensive handset design solutions to mobile phone manufacturers and mobile phone content providers. Handset design solutions included printed circuit board with operating system software and optional assembly service and mobile phone contents installation service. Printed circuit boards with operating system software were sold to mobile phone manufacturers for a fixed unit price. Mobile phone contents installation services were rendered to mobile phone content providers for a prescribed percentage of the mobile phone content providers’ net profits.

(a) Printed circuit board with operating system software and optional assembly service

Printed circuit boards with operating system software and optional assembly services were multiple element arrangements comprising printed circuit boards, assembly services and operating system software specifically designed for the printed circuit boards. Since the operating system software was essential to the functionality of the printed circuit board, the transaction was outside the scope of software accounting guidance in ASC subtopic 985-605 (“ASC 985-605”), Software: Revenue Recognition, in accordance with ASU No. 2009-14 (“ASU 2009-14”), Certain Revenue Arrangements that Include Software Elements. Accordingly, the Group accounted for the sale of printed circuit boards with operating system software and optional assembly service as a multiple deliverables arrangement in accordance with ASU No. 2009-13 (“ASU 2009-13”), Revenue Recognition—Multiple-Deliverable Revenue Arrangements. Each of the printed circuit board, operating system software and assembly service represented a separate unit of accounting.

The Group and the mobile phone manufacturers signed an agreement containing the significant terms of the sale of printed circuit board with operating system software to evidence that an arrangement existed. The

F-27

agreement also stipulated whether the mobile phone manufacturers engaged the Group to perform assembly service on the printed circuit board. The Group delivered the assembled printed circuit boards together with the operating system software installed to mobile phone manufacturers if the Group was engaged to perform assembly service; whereas the Group normally delivered the operating system software prior to the printed circuit board to the mobile phone manufacturers if the Group was not engaged to perform assembly service. Therefore, delivery of printed circuit boards with operating system software and optional assembly services occurred upon receipt and acceptance of all deliverables by the mobile phone manufacturers. The Group performed credit assessment on the mobile phone manufacturers prior to signing the agreements to ensure collectability was reasonably assured. The purchase price was fixed because the unit price was stipulated in the signed sales agreement and no concessions such as discounts, rebates, refunds or other price changes were provided subsequently. However, the mobile phone manufacturers only paid the agreed purchase price upon receipt of all of the deliverables in the arrangement. The Group outsourced the assembly of printed circuit boards and installation of operating system software to original equipment manufacturers (“OEM”) and paid manufacturing fees, which were recognized as cost of revenues, based on a prescribed fixed fee per unit manufactured.

In accordance with ASU 2009-13 and ASC subtopic 605-25 (“ASC 605-25”), Revenue Recognition: Multiple-Element Arrangements, the amount allocable to the delivered units or units of accounting was limited to the amount that was not contingent upon the delivery of additional items or meeting other specified performance conditions. Since the amount allocable to the operating system software was contingent upon the delivery of printed circuit board and the related assembly service, if any, revenues from the sale of printed circuit board with operating system software and optional assembly service were recognized only upon delivery of the final deliverable.

(b) Mobile phone contents installation service

Mobile phone contents installation service did not require significant production, modification or customization of the mobile phone contents received from the mobile phone content providers. Persuasive evidence of the arrangement was documented in a contract signed by the mobile phone content providers and the Group. Delivery of mobile phone contents installation service occurred when the mobile phone contents were installed on the mobile device circuit boards by the OEM. The mobile phone contents installation service fees were fixed and non-refundable once the mobile phone content providers confirmed their monthly net profits to the Group. Collectability was considered reasonably assured as the Group dealt with only reputable mobile phone content providers and performed thorough credit assessment on the mobile phone content providers prior to entering into a business relationship with them. Historically, the Group had not experienced any significant defaults for payment. Accordingly, the Group recognized revenues from mobile phone contents installation services when the services were delivered and the fees were fixed upon receipt of the monthly net profits confirmations from mobile phone content providers.

(iii) Business taxes, value-added taxes and surcharges

The Group is subject to business taxes, value-added taxes and surcharges levied on services provided in the PRC. Business taxes, value-added taxes and surcharges for the years ended December 31, 2012, 2013 and 2014 were RMB9,115, RMB4,274 and RMB25,124 (US$4,049), respectively. In accordance with ASC 605-45, the Group recognized revenues net of all such business taxes, value-added taxes and surcharges.

Cost of revenues

Cost of revenues primarily consists of service fees paid to mobile phone manufacturers for the installation of the Group’s self-developed mobile phone games or application platforms onto the manufactures’ mobile phones, service fees paid to mobile network operators, mobile phone service providers or third party payment platforms for collection of fees paid by game players with whom the Group establishes a direct contractual relationship,

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purchase costs of printed circuit boards and manufacturing fees paid to OEMs for the assembly of printed circuit boards and mobile phone contents installation service, service fees paid to mobile application and software websites for the distribution of the Group’s social games and single player games by providing platforms for mobile phone game players to download such games, content fees paid to third-party game developers for the development of the Group’s single player games and license fees paid to third-party game developers for the right to publish the third-party developed games. These costs are expensed as incurred except for the portion that is based on a prescribed percentage of the Group’s revenues, which are recorded as cost of revenues upon revenue recognition by the Group when billing confirmations are received as more fully described above.

In addition, cost of revenues includes staff salaries, network infrastructure fee, utilities, amortization of intangible assets, operating expenses directly related to the development, operation and sale of mobile phone games as well as the provision of handset design products and services, and the 5% business tax for periods before October 2012 and the 6% value-added tax for periods after November 2012 for technology services and market promotion fees charged by the WFOEs to the VIEs.

Research and development

Research and development expenses include payroll, employee benefits and other headcount-related expenses associated with product development. Research and development expenses recorded in the consolidated statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014 were RMB35,071, RMB54,294 and RMB111,293 (US$17,937), respectively.

Leases

In accordance with ASC topic 840 (“ASC 840”), Leases, leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exists: (a) ownership is transferred to the lessee by the end of the lease term, (b) there is a bargain purchase option, (c) the lease term is at least 75% of the property’s estimated remaining economic life or (d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed on a straight-line basis over their lease term. The Group had no capital leases for any of the years presented. The Group leases certain office facilities under non-cancelable operating leases and recorded total rental expenses of RMB5,326, RMB9,851 and RMB25,644 (US$4,133) for the years ended December 31, 2012, 2013 and 2014, respectively.

Income taxes

The Group follows the liability method of accounting for income taxes in accordance with ASC topic 740 (“ASC 740”), Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities, net operating loss and tax credits carryforwards, using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized.

The Group applies ASC 740 to account for uncertainty in income taxes. ASC 740 provides the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Group’s estimated liability for unrecognized tax benefits and the related interest and penalties are periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. In future periods, changes in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax

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positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. The Group has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as part of income tax expense in the consolidated statements of comprehensive income.

Share-based compensation

In accordance with ASC topic 718 (“ASC 718”), Compensation—Stock Compensation, the Company determines whether a share option, a warrant or a restricted share unit (“RSU”) should be classified and accounted for as a liability award or an equity award. All grants of share options, warrants or RSUs to employees of the Group classified as equity awards are measured at the grant date based on the fair value of the awards and are recognized as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. All grants of share options to employees of V1 Group classified as equity awards are measured at fair value at the grant date and recognized as a one-time deemed dividend distribution to shareholder. All grants of share options, warrants or RSUs to employees classified as liability awards are remeasured at the end of each reporting period until the date of settlement with an adjustment for fair value recorded to the current period expenses in order to properly reflect the cumulative expense based on the current fair value of the vested options, warrants or RSUs. The Group has elected to recognize share-based compensation for all awards with only service conditions using the straight-line method over the requisite service period. For share-based awards with performance conditions, compensation cost is recognized only if it is probable that the performance conditions will be achieved. The Group recognizes share-based compensation for awards with performance or market conditions using the accelerated method if the awards are subject to graded vesting. For share-based awards that contain a market condition, the effect of the market condition is reflected in the grant-date fair value of the awards. Compensation cost is recognized for an award with a market condition when the requisite service is rendered, regardless of when the market condition is satisfied. The Company uses the Black-Scholes option pricing valuation model, the binomial option pricing valuations model or the Monte Carlo simulation model in determining the fair value of different equity awards and liability awards granted.

The Company accounts for share awards issued to non-employees in accordance with ASC subtopic 505-50 (“ASC 505-50”), Equity: Equity-Based Payment to Non-employees. The Company’s share-based awards issued to non-employees are subject to graded vesting provisions. The Group recognizes share-based compensation expense for share awards granted to non-employees using the accelerated recognition method over the requisite service period of the award. In accordance with ASC 505-50, the Company uses the Black Scholes option pricing model or the binomial option pricing model to measure the value of options or warrants granted to non-employees at each vesting date to determine the appropriate charge to share-based compensation.

When the vesting conditions of a share-based payment are modified, the Company first determines whether the original vesting conditions were expected to be satisfied on the modification date. If the original vesting conditions are not expected to be satisfied, the grant-date fair value of the original award essentially is ignored and the fair value of the award measured at the modification date is recognized if the modified award ultimately vests, regardless of whether the fair value of the award on the modification date is greater than or less than the grant-date fair value of the award. The original grant-date fair value is ignored even if the original vesting condition ultimately is satisfied. When a vesting condition that is probable of achievement is modified and the new vesting condition also is probable of achievement, the compensation cost to be recognized if either the original vesting condition or the new vesting condition is achieved cannot be less than the grant-date fair value of the original award. That compensation cost is recognized if either the original or modified vesting condition is

F-30

achieved. If the modification also increases the fair value of the award, the incremental compensation cost associated with the modification is recognized only if the modified vesting condition is satisfied.

Earnings (loss) per share

The Company computes earnings (loss) per Class A and Class B ordinary shares in accordance with ASC 260, Earnings Per Share, using the two class method. Under the two-class method, net income is allocated between Class A and Class B ordinary shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. The Company’s contingently redeemable ordinary shares were participating securities because they had contractual rights to share in the profits of the Company.

Basic earnings (loss) per ordinary share is computed by dividing income (loss) attributable to holders of ordinary shares by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. For the purposes of calculating the Company’s basic and diluted earnings (loss) per Class A and Class B ordinary shares the ordinary shares relating to share-based awards that were exercised are assumed to have been outstanding from the date of exercise of such awards. Ordinary share equivalents are excluded from the computation of diluted earnings (loss) per share if their effects would be anti-dilutive. Ordinary share equivalents consist of the incremental ordinary shares issuable upon the exercise of share options, RSUs and warrants subject to forfeiture, and contracts that may be settled in the Company’s stock or cash. The dilutive effect of outstanding share options, RSUs and warrants is reflected in diluted earnings per share by application of the treasury stock method. Securities issued by a subsidiary that enable their holders to obtain the subsidiary’s ordinary shares are included in the consolidated earnings per share computations based on the Group’s holding of the subsidiary’s securities. The computation of diluted earnings (loss) per share of Class A ordinary shares assumes the conversion of Class B ordinary shares, whilst diluted earnings (loss) per share of Class B ordinary shares does not assume the conversion of those shares.

The liquidation and dividend rights of the holders of the Company’s Class A and Class B ordinary shares are identical, except with respect to voting. As a result, and in accordance with ASC 260, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B ordinary shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B ordinary shares is assumed in the computation of diluted earnings (loss) per share of Class A ordinary shares, the undistributed earnings are equal to net income for that computation.

Comprehensive income

Comprehensive income is defined as the changes in equity of the Group during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Among other disclosures, ASC topic 220 (“ASC 220”), Comprehensive Income, requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For each of the periods presented, the Group’s comprehensive income includes net income (loss), cumulative foreign currency translation adjustments and unrealized gains on available-for-sale security and is presented in the consolidated statements of comprehensive income.

Government grants

Government grants are recognized where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized in the

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consolidated statements of comprehensive income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognized as deferred income and released to the consolidated statements of comprehensive income in proportion to the depreciation of the related assets. The Group received government grants of nil, RMB2,570 and RMB1,182 (US$191) during the years ended December 31, 2012, 2013 and 2014, respectively, for the development of mobile network game platforms from several PRC municipal government authorities. A government grant of RMB150 and RMB946 (US$153) was recognized as other income for the years ended December 31, 2013 and 2014, respectively. As of December 31, 2014, government grants of RMB2,000 (US$322) were classified as other non-current liabilities, as the Group did not expect all considerations attached to the government grants will be complied with during the succeeding twelve-month period from the balance sheet date; whilst government grants of RMB386 (US$62) were classified as other current liabilities, as the Group expects all considerations attached to the government grants will be complied with during the succeeding twelve-month period from the balance sheet date.

Segment reporting

In accordance with ASC topic 280 (“ASC 280”), Segment Reporting, the Group’s chief operating decision maker (“CODM”) has been identified as the chief executive officer, who reviews operating results of the business when making decisions about allocating resources and assessing performance for the Group. The Group consisted of two segments as of and for the years ended December 31, 2012. During the year ended December 31, 2013, the Group implemented a business transition from handset design business to mobile phone games promotion business. As a result, the Group operated and managed its business as a single operating segment starting from 2013. Additional segment information has not been presented for the years ended December 31, 2012, 2013 and 2014, as the corresponding items of segment information for earlier periods should be restated when the composition of the Group’s reportable segments is changed in accordance with ASC 280. As substantially all of the Group’s long-lived assets and revenues are located in and derived from the PRC, geographical segments are not presented.

Contingencies

The Group records accruals for certain of its outstanding legal proceedings or claims arising out of normal course of business when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Group periodically evaluates developments in legal proceedings or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. The Group discloses the amount of the accrual if it is material.

When a loss contingency is not both probable and estimable, the Group does not record an accrued liability but discloses the nature and the amount, if material. However, if the loss (or an additional loss in excess of the accrual) is at least reasonably possible, then the Group discloses an estimate of the loss or range of loss, if such estimate can be made and material, or states that such estimate is immaterial if it can be estimated but immaterial, or discloses that an estimate cannot be made. The assessments of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involve complex judgments about future events. Management is often unable to estimate the loss or a range of loss, particularly where (i) the damages sought are indeterminate, (ii) the proceedings are in the early stages, or (iii) there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including eventual loss, fine, penalty or business impact, if any.

Recent accounting pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of the guidance is that an entity

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should recognize revenue to depict the transfer of the promised goods or services to customers in an amount that reflects the consideration to which entity expects to be entitled to in exchange for goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim period within that reporting period. Early adoption is not permitted. On April 1, 2015, the FASB decided to propose a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under U.S. GAAP. The Company is in the process of evaluating the effect of the update on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

3. CONCENTRATION OF RISKS

Concentration of credit risk

Assets that potentially subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, short-term investments, accounts receivable and amounts due from related parties. As of December 31, 2014, substantially all of the Group’s cash and cash equivalents and short-term investments were deposited in financial institutions located in the PRC and Hong Kong, which management believes are of high credit quality.

Accounts receivable are typically unsecured and derived from revenue earned from customers in the PRC, Hong Kong and the overseas, which are exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances. The Group maintains reserves for estimated credit losses, which have generally been within its expectations.

Amounts due from related parties are typically unsecured, interest-free and repayable on demand. In evaluating the collectability of the amounts due from related parties balance, the Group considers many factors, including the related parties’ repayment history and their credit-worthiness. An allowance for doubtful accounts is made when collection of the full amount is no longer probable.

Concentration of customers

Approximately 14% of total net revenues were derived from one customer, namely China Mobile Communications Corporation Jiangsu Ltd., for the years ended December 31, 2012. Approximately 10% and 10% of total net revenues were derived from two customers, namely China Mobile Communications Corporation Jiangsu Ltd., and Shenzhen Vichit Technology Co., Ltd., for the year ended December 31, 2013, respectively. Approximately 19% of total net revenues were derived from one customer, namely China Mobile Communications Corporation Guangdong Ltd. for the year ended December 31, 2014.

Approximately 58% and 10% of the Group’s prepayments were made to three third-party game developers in connection with the arrangements to obtain licenses to publish the third-party developed games on the Group’s game platform or third-party app stores as of December 31, 2013 and 2014, respectively. Any disruption in the publishing licenses with these third-party game developers may adversely affect the Group’s business, financial condition and results of operations.

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Concentration of games

Approximately 46% and 47% of the Group’s total revenues were derived from the top five games for the years ended December 31, 2013 and 2014, respectively. Among the top 5 games, Joyful Da Ying Jia contributed approximately 30% and 27% of the Group’s total revenues for the years ended December 31, 2013 and 2014, respectively.

Current vulnerability due to certain other concentrations

The Group’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 30 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

Currency convertibility risk

The Group transacts the majority of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “PBOC”). However, the unification of the exchange rates does not imply that the RMB may be readily convertible into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

Foreign currency exchange rate risk

From July 21, 2005, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The appreciation (depreciation) of the RMB against US$ was approximately (0.2%), 3% and (0.4%) for the years ended December 31, 2012, 2013 and 2014, respectively. On June 19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to US$, a policy which was instituted in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB exchange rate flexibility. On March 15, 2014, the People’s Bank of China announced the widening of the daily trading band for RMB against US$. Most of revenues and costs of the Company are denominated in RMB, while a portion of cash and cash equivalents are denominated in US$. Any significant revaluation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings and financial position.

Other business risk

The PRC laws and regulations require that an entity obtain an Internet Publishing License and an Online Culture Operation License from the relevant PRC government authorities in order to operate in online mobile game business. One of the Company’s subsidiaries, Huiyou, has historically operated in the development of online mobile games without obtaining the required licenses from the relevant PRC government authorities. The developed online mobile games were licensed to Yingzheng, a VIE, which operated the online mobile games in its own name and paid commissions to Huiyou in return. The relevant PRC governmental authorities may deem the activities of Huiyou to be the operation of online games without obtaining the required licenses, which may subject the Group to penalties, and require the Group to make costly changes to its business model and materially disrupt its business. However, in the opinion of management, Huiyou’s current business model does not violate applicable PRC laws and regulations and the likelihood of penalties is remote.

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4. BUSINESS ACQUISITIONS

(a) Acquisition of Vogins BVI

On November 22, 2013, the Group entered into a share purchase agreement with the shareholders of Vogins Technology Co. Limited (“Vogins BVI”) to acquire 90.6% equity interest in Vogins BVI, of which 82.6% was acquired from Gaintech Co. Limited (“Gaintech”), a company controlled by a shareholder of the Company, at a purchase price of RMB1,097 cash. Vogins BVI held 49% equity interest in one of the subsidiaries of the Group prior to the acquisition as further described below. The acquisition was completed and the Group took effective control of Vogins BVI and its subsidiaries on November 29, 2013. The acquisition of Vogins BVI and its subsidiaries meets the definition of a business acquisition and the results of operations of the acquired business have been included in the Company’s consolidated financial statements since November 29, 2013. As a result of the acquisition, the Group is expected to effectively manage its billing and collection process and further expand its mobile phone games business in the PRC.

Prior to the acquisition, the Group had several preexisting relationships with Vogins BVI and one of its subsidiaries, Vogins Network Technology (Shanghai) Limited (“Vogins Shanghai”). Vogins Shanghai obtained two loans from the Group amounting to RMB4,483 in aggregate due to shortage of working capital. These loans were unsecured, non-interest bearing and repayable on demand. In addition, the Group entered into several contracts with Vogins Shanghai for its service as a mobile phone service provider for billing and collection services offered to mobile phone game players who have purchased in-game premium features. Furthermore, the Group entered into a technology service agreement with Vogins Shanghai, pursuant to which the Group would provide a self-developed mobile phone technology platform software and related technical services to Vogins Shanghai for a contractual term of three years in exchange for a service fee calculated based on the number of download by mobile phone users multiplied by a pre-determined unit price for each download through the mobile phone technology platform. The Group transferred 49% noncontrolling interest in one of its subsidiaries to Vogins BVI as an inducement for Vogins Shanghai to sign the technology service agreement. The Group treated the settlement of these preexisting relationships amounting to RMB13,894 as additional consideration transferred.

In accordance with ASC 810, the Group accounted for the 49% noncontrolling interest of its subsidiary obtained indirectly through the acquisition of Vogins BVI as an equity transaction. The consideration transferred, including settlements of the preexisting relationships with Vogins BVI, was allocated between the business acquired and the noncontrolling interest obtained based on their relative fair values. As a result, RMB12,928 and RMB2,063 of the consideration transferred were allocated to the business acquired and the noncontrolling interest obtained, respectively. The difference between the fair value of the consideration transferred of RMB2,063 and the carrying value of the 49% noncontrolling interest of RMB520, which amounted to RMB1,543, was recorded as an adjustment in additional paid-in capital.

The acquisition date fair value of the consideration transferred for the business acquired and the 9.4% noncontrolling interest in Vogins BVI amounted to RMB14,344, which consisted of the following:


	RMB
Cash		1,097
Settlements of the preexisting relationships with Vogins BVI		13,894
Less: Consideration allocated to the 49% noncontrolling interest obtained		(2,063	)
Fair value of 9.4% noncontrolling interest in Vogins BVI		1,416

		14,344

The fair value of the 9.4% noncontrolling interest in the Vogins BVI of RMB1,416 was estimated by deriving the fair value of the acquired business as a whole and then subtracting the considerations transferred by the Group for the 90.6% controlling interest. The Group determined the fair value of the acquired business using

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the income approach with the assistance of an independent valuation firm. As Vogins BVI is a private entity, the fair value measurement is based on significant inputs that are not observable in the market and represents a Level 3 measurement as defined in ASC 820. The fair value estimates are based on (i) a discount rate of 27.74%, (ii) long-term sustainable growth rate of 3%, (iii) financial multiples of companies in the same industry as Vogins BVI and (iv) adjustments due to the lack of marketability that market participants would consider when estimating the fair value of Vogins BVI.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition on November 29, 2013.


	November 29, 2013
	RMB
Cash and cash equivalents		1,201
Accounts receivable		10,036
Prepayment and other current assets		158
Property and equipment		171
Intangible assets		16,374
Deferred tax assets, non-current portion		2,536

Total identifiable assets acquired		30,476

Accounts payable		(1,708	)
Accrued expenses and other current liabilities		(234	)
Other non-current liabilities		(2,000	)
Deferred tax liabilities		(2,536	)

Total liabilities assumed		(6,478	)

Net identifiable assets acquired		23,998
Less:
Fair value of considerations transferred		(14,344	)

Gain on bargain purchase		9,654

The acquired intangible assets of RMB16,374 mainly consisted of a contract with mobile network operator with an estimated useful life of three years.

The gain on bargain purchase represents the excess of the fair value of the identifiable net assets acquired above the consideration transferred. The Group has performed a comprehensive reassessment of the bargain purchase gain by verifying that all assets acquired and liabilities assumed were properly identified. The gain on bargain purchase was primarily attributable to (i) the transaction not being subject to a competitive bidding process as a result of the original shareholders’ inexperience in the industry and their inability to market Vogins BVI to multiple potential buyers; and (ii) the purchase price was agreed prior to the closing date of the transaction and the fair value of the net identifiable assets acquired increased during the intervening period. The resulting gain on bargain purchase of RMB9,654 has been recorded in the consolidated statements of comprehensive income for the year ended December 31, 2013.

The Group recognized RMB30 of acquisition-related costs that were expensed in the year ended December 31, 2013. These costs are included in “General and administrative expenses” in the consolidated statements of comprehensive income. The amounts of revenue and net income of Vogins BVI included in the Company’s consolidated statements of comprehensive income from November 29, 2013, the acquisition date, to December 31, 2013 were RMB1,337 and RMB851, respectively.

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(b) Pro forma consolidated financial information

The following unaudited pro forma consolidated financial information reflects the results of the operations of the Group for the years ended December 31, 2012 and 2013, as if the acquisition of Vogins BVI described above had been completed as of January 1, 2012. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on the date indicated and may not be indicative of future operating results. These amounts have been calculated after applying the Company’s accounting policies and the pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.


	For the Years Ended December 31
	2012			2013
	RMB (unaudited)			RMB (unaudited)
Net revenues		193,794			357,758
Net (loss) income		(15,659	)		12,523
Basic (loss) earnings per share		(0.05	)		0.04
Diluted (loss) earnings per share		(0.05	)		0.04

5. ACCOUNTS RECEIVABLE

Accounts receivable and the related allowance for doubtful accounts are summarized as follows:


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
Accounts receivable		140,049		553,157		89,153
Less: Allowance for doubtful accounts		—		—		—

Accounts receivable, net		140,049		553,157		89,153

The Group does not offer extended payment terms and all accounts receivable are unsecured and non-interesting bearing. The Group offers credit terms ranging from three to nine months to customers with long-term relationship and good credit history. For the years ended December 31, 2012, 2013 and 2014, accounts receivable of RMB553, nil and nil were written off after all collection efforts have ceased. No allowance for doubtful accounts was recognized as of December 31, 2013 and 2014.

6. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consist of the following:


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
Indemnification assets from a business acquisition		4,911		4,519		728
Deposits		4,776		286		46
Advances to employees		786		2,344		378
Receivables from game developers		13,600		—		—
Interests receivable		528		543		88
Prepaid expenses		62,086		176,117		28,385
Others		4,898		9,046		1,458

Total		91,585		192,855		31,083

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Indemnification assets represent the indemnification provided by the selling shareholders of the 3GUU Group for uncertainties about the settlement amount of unrecognized tax benefits related to the pre-acquisition period. A gain of RMB451, RMB451 and a loss of RMB392 (US$63) resulted from the change in fair value of the indemnification assets was recognized in the consolidated statements of comprehensive income for the years ended December 31, 2012, 2013 and 2014, respectively.

Receivables from game developers as of December 31, 2013 represented the financial support provided to two third-party game developers to each develop a social game according to the Group’s request and specifications. During the year ended December 31, 2014, the Group obtained the game licenses to the social games developed by the game developers by agreeing to waive the collection of the receivables.

Prepaid expenses mainly represent prepayments to third-party game developers in connection with the arrangements to obtain licenses to publish the third-party developed games on the Group’s game platform or third-party app stores. The third-party game developers are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the mobile phone game players under the licensed games publishing arrangement. The shared profits earned by the third-party game developers will initially be offset against the prepayments until the balance is reduced to zero.

7. INVESTMENTS

(a) Equity method investments

Equity method investments are as follows:


	Percentage Holding			As of December 31,
				2013		2014		2014
				RMB		RMB		US$
Angel Fund Success Capital		49	%		—		13,905		2,241
Beijing Qiwen Internet Technology Co. Ltd		50	%		—		1,845		297
Beijing Tianyu Internet Technology Co. Ltd		25	%		—		1,561		252

Total					—		17,311		2,790

No impairment loss on the equity method investments was recognized by the Group for the years ended December 31, 2013 and 2014.

(b) Cost method investments

The carrying amount of cost method investments was RMB2,000 and RMB110,000 (US$17,729) as of December 31, 2013 and 2014, respectively. The increase was primarily due to additional investments during the year ended December 31, 2014. No impairment loss on the cost method investments was recognized by the Group for the years ended December 31, 2013 and 2014.

Available-for-sale security as of December 31, 2014 consisted of the following debt securities:


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Fair value
	RMB		RMB		RMB		RMB		US$
Redeemable convertible preference shares of InPlay Interactive Co., Ltd.		18,413		475		—		18,888		3,044

Total		18,413		475		—		18,888		3,044

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During the years ended December 31, 2012, 2013 and 2014, the net adjustment to unrealized holding gains on available-for-sale security in other comprehensive income totaled nil, nil and RMB475, respectively. The redeemable convertible preference shares classified as available-for-sale debt security are redeemable on November 25, 2019, which is the fifth anniversary of the subscription date. No impairment loss on the available-for-sale security was recognized by the Group for the years ended December 31, 2012, 2013 and 2014.

8. PROPERTY AND EQUIPMENT, NET

Property and equipment and the related accumulated depreciation are summarized as follows:


	As of December 31,
	2013			2014			2014
	RMB			RMB			US$
Office equipment		16,376			32,047			5,165
Leasehold improvement		3,633			6,583			1,061
Motor vehicles		88			88			14

Property and equipment, cost		20,097			38,718			6,240
Less: Accumulated depreciation		(7,012	)		(15,116	)		(2,436	)

Property and equipment, net		13,085			23,602			3,804

Depreciation expenses for the years ended December 31, 2012, 2013 and 2014 were RMB2,462, RMB4,288 and RMB8,860 (US$1,428), respectively.

9. GOODWILL

Changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2014 are as follows:


	Dragon Joyce Group		3GUU Group		Owx Group			Total
	RMB		RMB		RMB			RMB
Balance as of December 31, 2012		247,373		267,824		49,644			564,841
Goodwill acquired during the year		—		—		—			—
Impairment		—		—		—			—

Balance as of December 31, 2013		247,373		267,824		49,644			564,841

Goodwill acquired during the year		—		—		—			—
Reorganization of reporting units		49,644		—		(49,644	)		—
Impairment		—		—		—			—

Balance as of December 31, 2014		297,017		267,824		—			564,841

Balance as of December 31, 2014 in US$		47,870		43,166		—			91,036

Goodwill is not deductible for tax purposes and is not amortized but tested for impairment at least annually.

As of December 31, 2013 and 2014, the Company performed the two-step goodwill impairment test on each of its reporting units. In estimating the fair value of each of the reporting units in the first step of the impairment test, significant management judgment was applied. The Company estimated the fair value of each of the reporting units using the income approach valuation methodology. The market-based valuation methodology is not considered as appropriate because of volatility of the general market condition as well as insufficient number of comparable companies. In using the income approach methodology of valuation, estimates to determine the fair value of the reporting units included management’s judgment related to forecasts of future operating results,

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discount rates and expected future growth rates. The underlying assumptions used in the first step of the impairment test considered the market capitalization as of December 31, 2013 and 2014 as well as the current local operating environment in the PRC and its expected impact on the fair value of the reporting unit.

The Company determines its reporting unit at one level below the operating segment. As a result of the transition of the handset design business to mobile phone games promotion business in OWX Group during the year ended December 31, 2014, the Group reorganized its reporting structure in a manner that changed the composition of its reporting units. Goodwill of the OWX Group amounting to RMB49,644 was reassigned to the Dragon Joyce Group accordingly.

As of December 31, 2012, due to the market transition and decline in demand for handset design of feature phones, the Company determined that the fair value of the OWX Group reporting unit was less than its carrying value and performed the second step of the impairment test. The Company performed the second step of the impairment test to determine if the implied fair value of goodwill of the OWX Group reporting unit is less than the carrying value. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets and liabilities including any unrecognized intangible assets of the reporting unit. This implied fair value was compared to the carrying value of reporting unit goodwill to quantify the amount of impairment loss. For the year ended December 31, 2012, the Company recognized a goodwill impairment charge of RMB33,517.

As of December 31, 2013 and 2014, the Company determined that the fair value of each reporting unit exceeds its carrying value based on the results of the first step of the impairment test. No goodwill impairment charge was recognized for the years ended December 31, 2013 and 2014.

10. INTANGIBLE ASSETS, NET

Intangible assets and the related accumulated amortization and impairment loss are summarized as follows:


	As of December 31, 2013,
	Cost or fair value at acquisition		Accumulated amortization			Impairment			Net value
	RMB		RMB			RMB			RMB
Computer software		5,152		(2,029	)		(2,613	)		510
Mobile games and platforms		66,203		(47,852	)		—			18,351
Acquired customer relationships		43,234		(16,763	)		—			26,471
Mobile game licenses		45,998		(4,868	)		—			41,130
Mobile game product development costs		2,679		(2,250	)		—			429

Total		163,266		(73,762	)		(2,613	)		86,891


	As of December 31, 2014,
	Cost or fair value at acquisition		Accumulated amortization			Impairment		Net value		Net value
	RMB		RMB			RMB		RMB		US$
Computer software		2,793		(2,186	)		—		607		98
Mobile games and platforms		87,337		(60,801	)		—		26,536		4,277
Acquired customer relationships		43,234		(26,058	)		—		17,176		2,768
Mobile game licenses		202,728		(39,606	)		—		163,122		26,290
Mobile game product development costs		6,888		(3,467	)		—		3,421		551
Domain name		2,830		(1,132	)		—		1,698		274

Total		345,810		(133,250	)		—		212,560		34,258

During the year ended December 31, 2012, the Company recognized a full impairment charge of RMB10,910 on the acquired customer relationships of the OWX Group attributable to the handset design business, as the intangible asset was no longer expected to generate any further economic benefits for the Group.

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During the year ended December 31, 2013, the Company recognized a full impairment charge of RMB2,613 on the feature phone middleware platform of the 3GUU Group due to changes in business strategy by management in light of the downward trend in the feature phone market. The intangible asset was no longer expected to generate any further economic benefits for the Group. No impairment charge was recognized for the year ended December 31, 2014.

Amortization expenses, which were recorded in cost of revenues, for the years ended December 31, 2012, 2013 and 2014 were RMB23,583, RMB22,707 and RMB59,488 (US$9,588), respectively.

The estimated annual amortization expenses for each of the five succeeding fiscal years are as follows:


	RMB		US$
2015		75,434		12,157
2016		53,910		8,689
2017		33,370		5,378
2018		25,761		4,152
2019		21,405		3,450
Thereafter		2,680		432

Total		212,560		34,258

11. NON-CURRENT PREPAYMENTS

During the year ended December 31, 2012, the Group paid upfront payments of RMB30,000 to certain mobile phone service providers as a form of sales incentives in exchange for an exclusive channel for billing and collection services (the “Channel”) offered by the mobile service providers to mobile phone game players who purchase the Group’s in-game premium features. The upfront payments are amortized over the useful life of the Channels, which is estimated to be 5 to 6 years depending on the historical relationship between the Group and the mobile phone service providers. The Group accounts for the sales incentives as a reduction of revenues in accordance with ASC 605-50, Revenue Recognition: Customer Payments and Incentives. For the years ended December 31, 2012, 2013 and 2014, upfront payments amounting to RMB1,400, RMB5,600 and RMB5,600 (US$903), respectively, were amortized and recognized as a reduction of revenues in the consolidated statements of comprehensive income. As of December 31, 2013 and 2014, the unamortized portion of the upfront payments amounting to RMB23,000 and RMB17,400 (US$2,804), respectively, was classified as non-current prepayments on the consolidated balance sheets.

12. OTHER NON-CURRENT ASSETS

Other non-current assets consist of the following:


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
Prepaid expenses		5,139		9,259		1,492
Loan to a third-party		—		5,500		886
Development service fees		—		26,604		4,288
Technical supporting fees		—		18,664		3,008
Rental deposits		—		8,746		1,410
Others		—		2,452		395

Total		5,139		71,225		11,479

Loan to a third-party represents a RMB denominated loan of RMB5,500 (US$886) provided to an unrelated third-party. The loan is unsecured, interest-free and has repayment term of more than one year.

Development service fees represent prepayments to third-party game developers for the research and development of certain mobile phone games on behalf of the Group.

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Technical supporting fees represent payments to a third-party for technical services relating to the operation of action mobile phone games. The technical supporting fees are amortized over the service period of 5 years.

13. SHORT-TERM BANK BORROWING

The short-term bank borrowing outstanding as of December 31, 2013 represents a RMB denominated loan of RMB14,000 obtained from a financial institution in the PRC for working capital purposes. The short-term bank borrowing has a term of three months at a fixed interest rate of 5.60% per annum and is pledged by a letter of credit of RMB15,725 from a subsidiary of the Company. The short-term bank borrowing was fully repaid by the Company on January 7, 2014.

14. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
Advances from customers		529		424		68
Accrued payroll and welfare payable		28,438		53,362		8,600
Business tax, value-added tax and other taxes payable		6,661		30,629		4,937
Government grant		2,720		2,956		476
Others		2,826		3,326		537

Total		41,174		90,697		14,618

15. DEFERRED INITIAL PUBLIC OFFERING COSTS

Direct costs incurred by the Company attributable to its initial public offering of ordinary shares in the United States were deferred until September 25, 2012 and expensed off to the consolidated statements of comprehensive income upon the Listing of the Company (Note 1). Such deferred costs included legal and other professional fees related to the offering.

16. OTHER INCOME

Other income consists of the following:


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Gain on bargain purchase (Note 4)		—		9,654		—		—
Gain on disposal of a subsidiary		—		14,332		—		—
Foreign exchange gain		—		220		2,322		374
Government subsidy		—		150		946		153
Others		451		1,298		1,970		317

		451		25,654		5,238		844

On June 5, 2013, the Company entered into an equity purchase and sale agreement with a third-party to dispose 100% equity interest in Shenzhen Douwan Network Technology Co., Ltd. (“Shenzhen Douwan”) for a total cash consideration of RMB750. Shenzhen Douwan was engaged in the development, operation and sale of mobile phone games in the PRC. In April 2012, Shenzhen Douwan transferred substantially all of its operating assets to another subsidiary of the Company and ceased operations. The disposal date was June 5, 2013, which was the date the Company lost effective control over Shenzhen Douwan. At the time of disposal, Shenzhen Douwan has net liabilities of RMB15,082, which primarily consisted of RMB13,374 unrecognized tax benefits.

F-42

A gain on disposal of RMB14,332 was recognized for the year ended December 31, 2013. The operating results of Shenzhen Douwan have not been presented as discontinued operations in the consolidated statements of comprehensive income for all years presented, as Shenzhen Douwan had no operation and did not meet the definition of a component of an entity under ASC topic 205 (“ASC 205”), Presentation of Financial Statements—Discontinued Operation.

17. CONTINGENTLY REDEEMABLE ORDINARY SHARES

On May 11, 2012 (the “Issuance Date”), the Company issued 26,485,961 contingently redeemable ordinary shares (“Contingently Redeemable Ordinary Shares”) for an aggregate purchase price of US$12,000 (the “Purchase Price”), or US$0.45307 per share (the “Initial Per Share Price”).

The key features of the Contingently Redeemable Ordinary Shares are as follows:

Redemption

The holders of the Contingently Redeemable Ordinary Shares may require the Company to redeem all but not less than all of the Contingently Redeemable Ordinary Shares held by the holders upon (i) an IPO is consummated on or prior to May 11, 2013 and the market capitalization of the IPO is below US$300,000 or (ii) the IPO has not been consummated on or prior to May 11, 2013 (“Target IPO Date”). The redemption price shall equal to the Purchase Price plus any interest accrued on the Purchase Price based on an interest rate of 3% per annum on the Issuance Date. If the Company completes an IPO on or prior to May 11, 2013 and the market capitalization of the IPO is in excess of US$300,000 (“Qualified IPO”), the redemption right is forfeited and the Contingently Redeemable Ordinary Shares shall automatically be converted into ordinary shares.

On May 11, 2013, the Company entered into a supplemental agreement with the holders of the Contingently Redeemable Ordinary Shares to postpone the Target IPO Date from May 11, 2013 to December 31, 2013. In addition, the annual redemption interest rate has been revised to be 5% per annum for the period from May 10, 2013 to December 31, 2013.

Voting rights

Each Contingently Redeemable Ordinary Share is entitled to the number of votes equal to the number of ordinary shares then issuable upon its conversion into ordinary shares.

Dividends

Each Contingently Redeemable Ordinary Share is entitled to receive dividends in an amount equal to that of dividends declared or paid for all ordinary shares such Contingently Redeemable Ordinary Share could be converted into.

Liquidation preference

In the event of any liquidation, dissolution or winding up of the Company, prior to any distribution or payments to holders of ordinary shares other than the Contingently Redeemable Ordinary Shares, each holder of the Contingently Redeemable Ordinary Shares is entitled to receive an amount equal to 100% of the Initial Per Share Price per Contingently Redeemable Ordinary Share then held by such holder.

F-43

Accounting for the Contingently Redeemable Ordinary Shares

The Contingently Redeemable Ordinary Shares were classified as mezzanine equity as of December 31, 2013 as they can be redeemed at the option of the holders upon the occurrence of certain contingent events outside the sole control of the Company.

The Contingently Convertible Ordinary Shares automatically convert into the Company’s ordinary shares when a Qualified IPO occurs whilst become redeemable by the holders when a Qualified IPO fails to occur. The Company evaluated the embedded conversion and redemption features contained in the Convertible Redeemable Ordinary Shares to determine if these features require bifurcation. Prior to the Listing of the Company on September 25, 2012, the conversion and redemption features were not required to be bifurcated because the underlying ordinary shares are not net settleable, publicly traded or readily convertible into cash. Upon the Listing of the Company on September 25, 2012, the Company re-evaluated whether the embedded features require bifurcation when the underlying ordinary shares became publicly traded. Since the holders of the Contingently Redeemable Ordinary Shares can only require the Company to redeem all but not less than all of the Contingently Redeemable Ordinary Shares and the transaction volume since the Listing had been minimal, the Company determined that the conversion and redemption features would not be deemed to be net settleable because the smallest number of units into which the Contingently Redeemable Ordinary Shares can be converted is not readily convertible to cash. Thus, the conversion and redemption features did not qualify for bifurcation after the Listing.

The initial carrying value of the Contingently Redeemable Ordinary Shares was the issue price on the Issuance Date of RMB75,648 net of issuance costs of RMB1,813. The Company concluded that the Contingently Redeemable Ordinary Shares were not redeemable currently, but it was probable that the Contingently Redeemable Ordinary Shares would become redeemable. The Company elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the Contingently Redeemable Ordinary Shares to equal the redemption value at the end of each reporting period. An accretion charge of RMB3,023, RMB3,174 and nil were recorded as a reduction of income available to ordinary shareholders for the years ended December 31, 2012, 2013 and 2014, respectively.

The Company accounted for the amendments to the Contingently Redeemable Ordinary Shares on May 11, 2013 as a modification using the modified debt model in ASC subtopic 470-50 (“ASC 470-50”), Modifications and Extinguishments, which provides for prospective treatment of the modification of the contractual cash flows by establishing a new effective interest rate to equate the future contractual cash flows to the carrying amount of the debt. As a result, the interest on the Contingently Redeemable Ordinary Shares was accrued at an interest rate of 5% per annum starting from May 10, 2013.

On January 21, 2014, the redemption right of the Contingently Redeemable Ordinary Shares expired without being exercised by the holders. As a result, all of the Contingently Redeemable Ordinary Shares were automatically converted into Class A ordinary shares of the Company. In accordance with ASC 480-10-S99-3A, the Company reclassified the carrying amount of the Contingently Redeemable Ordinary Shares from mezzanine equity to permanent equity without reversing any prior accretions on January 21, 2014.

F-44

The carrying value of the Contingently Redeemable Ordinary Shares as of December 31, 2013 and 2014 is as follows:


	RMB
Balance as of December 31, 2012		76,858
Changes in redemption value		3,174
Exchange rate effect		(2,355	)

Balance as of December 31, 2013		77,677
Changes in redemption value		—
Conversion to Class A ordinary shares		(77,677	)
Exchange rate effect		—

Balance as of December 31, 2014		—

Balance as of December 31, 2014 in US$		—

18. SHAREHOLDERS’ EQUITY

Ordinary shares

Upon the completion of the Listing on September 25, 2012, the Company’s ordinary shares were converted into 113,112,458 Class A ordinary shares and 189,617,092 Class B ordinary shares. The Memorandum and Articles of Association were amended and restated such that the authorized share capital consisted of 750,000,000 Class A and 250,000,000 Class B ordinary shares, respectively, at a par value of US$0.001 per share. The rights of the holders of Class A and Class B ordinary shares are identical, except with respect to voting rights. Each share of Class A ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary shares under any circumstances. Each Class B ordinary share is entitled to five votes per share and is convertible into one Class A ordinary share at any time by its holder. Upon any transfer of Class B ordinary shares by the holder thereof to any person or entity that is not an affiliate of such holder, such Class B ordinary shares would be automatically converted into an equal number of Class A ordinary shares. 8,795,864 Class B ordinary shares were converted into Class A ordinary shares during the year ended December 31, 2013.

On August 5, 2013, the Company issued 28,000,000 Class A ordinary shares, at a par value of US$0.001 per share, to Champion Plus Group Limited (“Champion Plus”), a third-party company, at a consideration of US$20,000 in a private placement.

On August 5, 2013, the Company issued 7,000,000 Class A ordinary shares, at a par value of US$0.001 per share, to Grand Synergy Limited, a third-party company, at a consideration of US$5,000 in a private placement. In connection with this private placement, the Company issued 100,000 warrants to Champion Plus as the payment for its service. Each warrant allows Champion Plus to purchase one ADS of the Company at $10.00 per ADS (Note 21(c)).

On November 29, 2013, the Company issued 14,634,900 Class A ordinary shares, at a par value of US$0.001 per share, to ICBC Credit Suisse Asset Management (International) Company Limited, a third-party company acting as the investment manager for National Council for Social Security Fund, at consideration of US$15,158 in a private placement.

On November 29, 2013, the Company issued 1,232,000 Class A ordinary shares, at a par value of US$0.001 per share, to ICBC Credit Suisse Asset Management Co., Ltd., a third-party company acting as the investment manager for ICBCCS Global China Opportunity Equity Fund, at consideration of US$1,276 in a private placement.

F-45

On February 17, 2014, the Company issued 15,450,144 Class A ordinary shares and 11,035,817 Class A ordinary shares at a par value of US$0.001 per share, to Core Tech Resources Inc. and PVG Venture Capital Partners (Wuxi), Limited, respectively, upon the automatic conversion of the Contingently Redeemable Ordinary Shares (Note 17).

On March 21, 2014, the Company issued 48,188,000 Class A ordinary shares, at a par value of US$0.001 per share, for an aggregate proceeds of US$78,018 in a public offering. The total issuance costs of ordinary shares amounting to RMB9,833 (US$1,584) was recognized and netted against the offering proceeds from the public offering.

As of December 31, 2013 and 2014, 464,750 and 432,402 RSUs were vested and considered to be issued and outstanding Class A ordinary shares, respectively.

As of December 31, 2013, 750,000,000 Class A ordinary shares and 250,000,000 Class B ordinary shares were authorized, respectively, and 178,034,362 Class A ordinary shares and 180,821,228 Class B ordinary shares were issued and outstanding, respectively. As of December 31, 2014, 750,000,000 Class A ordinary shares and 250,000,000 Class B ordinary shares were authorized, respectively, and 257,523,929 Class A ordinary shares and 180,821,228 Class B ordinary shares were issued and outstanding, respectively.

The Company did not pay or declare any dividends on ordinary shares in the years ended December 31, 2012, 2013 and 2014. The payment of dividends in the future will be contingent upon the Group’s revenues and earnings, if any, capital requirements and general financial condition subsequent to the completion of a business combination. The payment of dividends will be subject to the discretion of the Company’s board of directors and subject to the requirements of Cayman Islands’ laws.

Accumulated other comprehensive income (loss)

Changes in the balances of the component of accumulated other comprehensive (loss) income, net of tax of nil, for the years ended December 31, 2012, 2013 and 2014 are as follows:


	Foreign currency translation			Unrealized gains on available-for- sale investment		Total
	RMB			RMB		RMB
Balance as of December 31, 2011		(427	)		—		(427	)
Other Comprehensive income		7			—		7

Balance as of December 31, 2012		(420	)		—		(420	)
Other comprehensive income		542			—		542

Balance as of December 31, 2013		122			—		122
Other comprehensive income		(3,332	)		475		(2,857	)

Balance as of December 31, 2014		(3,210	)		475		(2,735	)

Balance as of December 31, 2014 in US$		(517	)		77		(441	)

19. RESTRICTED NET ASSETS

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries and VIEs. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries and VIEs.

F-46

In accordance with the PRC Regulations on Enterprises with Foreign Investment and their articles of association, a foreign invested enterprise established in the PRC is required to provide certain statutory reserves, namely general reserve fund, the enterprise expansion fund and staff welfare and bonus fund which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A foreign invested enterprise is required to allocate at least 10% of its annual after-tax profit to the general reserve until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Huiyou, Qilewuxian, Shenzhen Douqu, Zhongtuo, Yitongtianxia, Huifenghechang, Huiquwuxian Digital (Shenzhen) Ltd., and Vogins Shanghai, were established as a foreign invested enterprise and therefore are subject to the above mandated restrictions on distributable profits.

Additionally, in accordance with the Company Law of the PRC, a domestic enterprise is required to provide statutory common reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the board of directors, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Yingzheng, Lanyue, Chengdu Zhuoxing, Wuyao, Beijing Zhuoyuechenxing and Tianjin Suiyue were established as a domestic invested enterprise and therefore are subject to the above mandated restrictions on distributable profits.

As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries and the VIEs are restricted in their ability to transfer a portion of their net assets in the form of dividend payments, loans or advances to the Company. The amounts restricted include paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries and the net assets of the VIEs, as determined pursuant to PRC generally accepted accounting principles, totaling RMB548,915 (US$88,469) as of December 31, 2014.

20. INCOME TAXES

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. In addition, upon payments of dividends by the Company’s Cayman Islands subsidiary to their shareholders, no Cayman Islands withholding tax will be imposed.

British Virgin Islands

Under the current laws of the British Virgin Islands, the Company’s BVI incorporated subsidiaries are not subject to tax on income or capital gains. In addition, upon payments of dividends by these entities to their shareholders, no British Virgin Islands withholding tax will be imposed.

Hong Kong

The Hong Kong profits tax rate is 16.5%. The Company’s Hong Kong incorporated subsidiaries are subject to Hong Kong profits tax only on profits arising in or derived from Hong Kong under the territorial tax regime. In addition, upon payments of dividends by the Company’s Hong Kong subsidiaries to their shareholders, no Hong Kong withholding tax will be imposed.

China

Effective from January 1, 2008, the PRC’s statutory enterprise income tax (“EIT”) rate is 25%. The Company’s PRC subsidiaries, the VIEs and the VIEs’ subsidiaries are subject to EIT at 25% unless otherwise specified.

F-47

Pursuant to CaiShui [2008] No.1, qualified new software development enterprises are each entitled to a tax holiday of 2-year full EIT exemption followed by 3-year 50% EIT reduction (“2+3 tax holiday”) starting from their respective first profit-making year. Lanyue, Chengdu Zhouxing, Huiyou and Yitongtianxia, being qualified new software development enterprises, are each entitled to a 2+3 tax holiday and their respective first profit-making years were year 2014, year 2014, year 2012 and year 2011, respectively. Accordingly, both Lanyue and Chengdu Zhouxing are tax exempted for years 2014 and 2015 and subject to EIT at 12.5% from years 2016 to 2018. Huiyou is tax exempted for years 2012 and 2013 and subject to EIT at 12.5% from years 2014 to 2016. Yitongtianxia’s first profit-making year was 2011 but received the 2+3 tax holiday approval in April 2012. As a result, the 2+3 tax holiday is effective retroactively from year 2011 and is tax exempted for years 2011 and 2012 and subject to EIT at 12.5% from years 2013 to 2015.

The prevailing EIT law and its relevant regulations treat enterprises established outside of the PRC but with “effective management and control” located in the PRC as PRC resident enterprises for tax purposes. The term “effective management and control” is generally defined as exercising management and control over the business, personnel, accounting, properties, etc. of an enterprise. The Company and its subsidiaries located in jurisdictions outside of the mainland PRC, if considered PRC resident enterprises for tax purposes, would be subject to the PRC enterprise income tax at the rate of 25% on their worldwide income commencing on January 1, 2008. As of December 31, 2013 and 2014, the Company has not accrued for PRC tax on such basis. The Group will continue to monitor the tax status with regards to the PRC tax resident enterprise regulation of its non-PRC entities.

Japan

In Japan, a company is subject to corporation tax, inhabitants’ tax and enterprise tax (collectively called “Corporate Tax”). The effective statutory Corporate Tax rate for the annual reporting period ended March 31, 2014 and 2015 is 38% and 36%, respectively.

In accordance with the law “Partial Amendment of the Income Tax Act, etc.” (Law No.10 of 2014) in Japan on March 31, 2014, special reconstruction corporation tax was repealed a year ahead of the original schedule and will not be imposed from the annual reporting periods commencing on and after April 1, 2014. As a result of such amendments, the effective statutory Corporate Tax rate of 38% previously applied for calculation of the amount of deferred tax assets and deferred tax liabilities has been reduced to 36% with respect to temporary differences to be realized, if any, during the annual reporting periods commencing on and after April 1, 2014. This tax law change did not have a material impact on the Company’s results of operations.

For the year 2014, CMGE Japan was not subject to Japan corporation tax as it did not derive any taxable profits.

Korea

The basic Korean corporate income tax rate is 10% on the first KRW200,000, 20% for the tax base between KRW200,000 and KRW20,000,000, and 22% for the excess of KRW20,000,000. For the year 2014, CMGE Korea was subject to corporate income tax rate of 10%, as it derived taxable profit of less than KRW200,000.

F-48

Taiwan

The Taiwan corporate income tax rate is 17%. Under Taiwan tax regime, corporate income tax is assessed only on the profits of the Taiwan branch of a foreign company. The Taiwan branches of Majesty Enterprises Limited (HK) and SuperNova Overseas Limited (HK) are subject to corporate income tax at 17% on their assessable profits.

(Loss) income before income taxes consists of:


	For the Years Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
Cayman Islands		(43,486	)		9,008			(54,131	)		(8,724	)
British Virgin Islands		(18,881	)		(591	)		(2,351	)		(379	)
Hong Kong		5,369			(2,783	)		(55,182	)		(8,894	)
The PRC		33,836			20,932			342,683			55,230
Japan		—			—			(813	)		(131	)
Korea		—			—			446			72
Taiwan		—			—			(1,584	)		(255	)

Total		(23,162	)		26,566			229,068			36,919

The current and deferred components of the income tax (benefit) expense appearing in the consolidated statements of comprehensive income are as follows:


	For the Years Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
Current tax (benefit) expense		(5,969	)		3,277			8,620			1,389
Deferred tax benefit		(2,720	)		(3,474	)		(7,499	)		(1,209	)

		(8,689	)		(197	)		1,121			180

A reconciliation of income taxes computed at the PRC statutory tax rate of 25% to the actual income tax (benefit) expense is as follows:


	For the Years Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
(Loss) income before income taxes		(23,162	)		26,566			229,068			36,919

Income tax (benefit) expense computed at the PRC statutory tax rate of 25%		(5,791	)		6,642			57,267			9,230
Foreign tax rate differential		12,081			3,481			10,662			1,718
Non-deductible expenses		1,630			1,096			10,739			1,730
Non-taxable income		—			(6,246	)		(1,952	)		(315	)
Effect of change in tax status		(8,643	)		—			5,715			921
Effect of change in tax rate		—			1,018			(984	)		(158	)
Effect of tax holidays		(17,045	)		(14,499	)		(84,685	)		(13,649	)
Current/deferred rate differential		3,196			(813	)		(1,475	)		(238	)
Increase in valuation allowance		3,184			8,040			2,373			383
Interest and penalties on unrecognized tax benefits		2,643			1,130			3,168			511
Others		56			(46	)		293			47

Income tax (benefit) expense		(8,689	)		(197	)		1,121			180

F-49

The aggregate amount and per share effect of tax holidays are as follows:


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Aggregate amount		17,045		14,499		84,685		13,649

Effect on basic and diluted earnings per share for Class A and Class B ordinary shares:
Basic and Diluted		0.06		0.04		0.19		0.03

The significant components of the Group’s deferred tax assets and deferred tax liabilities are as follows:


	As of December 31,
	2013			2014			2014
	RMB			RMB			US$
Deferred tax assets, current portion:
Accrued expenses		7,480			3,999			645
Excessive advertising expenses		924			—			—
Government grant, current portion		386			386			62
Less: Valuation allowance		(7,690	)		(1,505	)		(243	)

Deferred tax assets, current portion, net		1,100			2,880			464

Deferred tax assets, non-current portion:
Intangible assets and property and equipment		3,569			4,740			763
Government grants, non-current portion		538			347			56
Net operating loss carryforwards		14,242			24,211			3,902
Less: Valuation allowance		(15,635	)		(24,193	)		(3,899	)

Deferred tax assets, non-current portion, net		2,714			5,105			822

Deferred tax liabilities, non-current portion:
Intangible assets		7,793			4,464			719

Deferred tax liabilities, non-current portion, net		7,793			4,464			719

As of December 31, 2013 and 2014, the Group’s total deferred tax assets before valuation allowances were RMB27,139 and RMB33,683 (US$5, 428), respectively. As of December 31, 2013 and 2014, the Group recorded valuation allowances of RMB23,325 and RMB25,698 (US$4,142), respectively, on its deferred tax assets that are sufficient to reduce the deferred tax assets to the amounts that are more-likely-than-not to be realized.

As of December 31, 2014, the Company had net operating losses of RMB120,800 (US$19,469) from several of its subsidiaries, the VIEs and the VIEs’ subsidiaries, which can be carried forward to offset future net profit for income tax purposes. The net operating loss carryforwards of RMB57,922, if not utilized, will expire at various dates between 2015 and 2024. The remaining operating loss carryforwards of RMB62,878 represent tax losses from entities in Hong Kong, which can be carried forward indefinitely. In China, Japan and Taiwan, tax losses can be carried forward up to 5 years, 9 years and 10 years, respectively.

Aggregate undistributed earnings of the Company’s subsidiaries, the VIEs and the VIEs’ subsidiaries located in the PRC that are available for distribution to non-PRC tax resident parent companies and primary beneficiary company at December 31, 2013 and 2014 amounted to RMB229,008 and RMB578,399 (US$93,221), respectively, and are considered to be indefinitely reinvested under ASC subtopic 740-30 (“ASC 740-30”), Income Taxes: Other Considerations or Special Areas. Accordingly, the management considered that the amount of unrecognized

F-50

deferred tax liabilities for temporary differences related to investments in the PRC subsidiaries, the VIEs and the VIEs’ subsidiaries is not determined because such a determination is not practical.

Unrecognized tax benefits

A tabular reconciliation of the Group’s unrecognized tax benefits, excluding interest and penalties, is as follows:


	For the Years Ended December 31,
	2012			2013			2014
	RMB			RMB			RMB			US$
Balance at the beginning of year		25,262			20,570			7,239			1,167
Increase (decrease) related to current year tax positions		4,800			(2,120	)		1,161			187
(Decrease) increase related to prior year tax positions		(9,432	)		—			1,421			229
Decrease from disposal of a subsidiary		—			(11,211	)		—			—
Lapse of statute of limitations		(60	)		—			(59	)		(10	)

Balance at the end of year		20,570			7,239			9,762			1,573

As of December 31, 2013 and 2014, the Company has unrecognized tax benefits of RMB7,239 and RMB9,762 (US$1,573), respectively, of which RMB1,632 and RMB1,023 (US$165), respectively, are presented on a net basis against the deferred tax assets related to tax loss carryforwards on the face of the consolidated balance sheets. As a result, the amounts of unrecognized tax benefits included in the consolidated balance sheets as of December 31, 2013 and 2014 were RMB5,607 and RMB8,739 (US$1,408), respectively. RMB4,031 and RMB4,278 (US$689) as of December 31, 2013 and 2014, respectively, of unrecognized tax benefits would impact the effective tax rate, if recognized. It is possible that the amount of unrecognized tax benefits will change in the next 12 months, pending factors such as changes in PRC tax law or administration practices and procedures or tax authority inquiries. An estimate of the change cannot be reasonably made.

The accrued interest and penalties related to unrecognized tax benefits as of December 31, 2013 and 2014 were RMB4,363 and RMB7,531 (US$1,214), respectively, and are included in the amounts of unrecognized tax benefits on the consolidated balance sheets. For the years ended December 31, 2012, 2013 and 2014, the Company recorded income tax expenses for interest and penalties related to its unrecognized tax benefits of RMB2,643, RMB1,130 and RMB3,168 (US$511), respectively.

For the Company’s PRC subsidiaries, the VIEs and the VIEs’ subsidiaries, their tax years 2009 through 2014 remain open to examination by the PRC tax authorities as of December 31, 2014.

For the Company’s overseas subsidiaries in Taiwan, Japan and Korea, their tax year 2014 remain open to examination by the respective tax authorities as of December 31, 2014.

21. SHARE-BASED PAYMENTS

(a) Options granted by the Group

Options granted to employees of the Group and employees of V1 Group

On October 31, 2011, the Company’s board of directors approved the 2011 Share Option Scheme (the “2011 Share Option Scheme”). On November 15, 2011, the Company’s shareholders approved the 2011 Share Option Scheme. Under the 2011 Share Option Scheme, the Company may issue up to 30,394,955 ordinary shares of the Company to its employees, directors and consultants. The purpose of the 2011 Share Option Scheme is to provide additional incentive and motivation to its employees, directors and consultants, through an equity interest in the Company, to work towards enhancing the value and benefit of the Company. The contractual period of the options granted under the 2011 Share Option Scheme is 10 years.

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On February 6, 2012, the Company granted shares options under the 2011 Share Option Scheme to purchase 23,404,120 and 2,431,592 ordinary shares of the Company to its employees and employees of V1 Group, respectively, at an exercise price of US$0.605 per share. These share options have a contractual life of five years. Pursuant to the share options agreement, (i) 25% of the share options are vested and exercisable by each grantee on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable by each grantee in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. Since V1 Group, the ultimate holding company of the Company, is a publicly listed company on the HK Stock Exchange, it or its subsidiary is prohibited to grant share options with exercise price lower than the new issue price of shares on listing unless otherwise approved or waived by the HK Stock Exchange. Any share option granted by the Company during the period commencing six months before the first confidential filing date on Form F-1, or its equivalent for listing on the HK Stock Exchange or an overseas stock exchange, up to the listing date are subject to the above requirement. Except for any waivers that may be granted by the HK Stock Exchange, the exercise price of any share option granted during such period shall be adjusted to a price not lower than the new issue price as the Company’s board of directors may deem appropriate. The exercise price of the share options shall be adjusted to the price of the listing if the price of the listing exceeds $0.605 per share, whereas the exercise price of the share options shall remain unchanged if the price of the listing is less than $0.605 per share or a listing does not take place.

In accordance with ASC 718, the accounting grant date for these share options was February 6, 2012, as the Company and the grantees reached a mutual understanding of the key terms and conditions of the awards when the grantees began to be adversely affected by subsequent changes in the price of the Company’s ordinary shares. The share options granted to the Group’s employees are classified as equity awards which are measured based on the grant date fair value. As a market condition in which the exercise price varies with the price of the Company’s ordinary shares is attached to the share options, the market condition was considered in the estimate of their grant-date fair value. The fair value of each of the share options granted by the Company was RMB0.95 at the grant date. Compensation cost for these awards with a market condition granted to employees of the Group amounting to RMB22,230 (USD3,568) is recognized ratably for each vesting tranche, using the accelerated attribution method, over the requisite service period regardless of whether the market condition is satisfied. RMB11,277, RMB5,686 and RMB1,995 (US$321) were recorded as compensation cost with a corresponding credit to additional paid-in capital for the years ended December 31, 2012, 2013 and 2014, respectively.

ASC 718 does not apply to awards granted by an entity to employees of its controlling parent company. As a result, ASC 718 is not applicable to the share options granted by the Company to employees of V1 Group on February 6, 2012. However, since V1 Group, as the controlling parent of the Company, can always direct the Company to grant share-based awards to its employees, the Company measured the fair value of the shares options granted to employees of V1 Group at the grant date and recognized that amount as a dividend to V1 Group without regard to whether the options are subject to vesting provisions. While this is not consistent with the measurement model for share-based awards granted to nonemployees described in ASC topic 505-50 (“ASC 505-50”), Equity—Equity-Based Payments to Non-Employees, the Company considered the departure from ASC 505-50 was not unreasonable given that the grant of share options to employees of V1 Group was a capital transaction rather than compensation. Accordingly, the grant-date fair value of the share options granted to employees of V1 Group amounting to RMB2,313 was recorded as a one-time deemed dividend distribution to shareholder for the year ended December 31, 2012.

On February 8, 2013, the Company granted options under the 2011 Share Option Scheme to purchase 970,100 ADS of the Company to certain of its employees as at an exercise price of US$6.50 per ADS with a contractual life of five years. Pursuant to the share options agreement, (i) 25% of the share options are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. There is a service condition attached to the vesting of the option granted to the employees.

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RMB1,070 and RMB1,180 (US$190) were recorded as compensation cost with a corresponding credit to additional paid-in capital for the years ended December 31, 2013 and 2014, respectively.

On February 8, 2013, the Company granted options to purchase 2,539,495 and 200,000 shares with a contractual life of five years to an employee and a consultant who became an employee of the Company on March 20, 2013, respectively, at an exercise price of US$0.605 per share with a contractual life of 5 years. Pursuant to the share option agreement, 25% of the share options are vested and exercisable on each of the first to fourth anniversary of the grant date if the grantees continue to provide service to a subsidiary of the Company and this subsidiary achieves predetermined performance conditions. There is a service condition in addition to a performance condition attached to the vesting of these options. In accordance with ASC 718, share-based compensation cost is not recorded before the performance condition is probable to be met. On March 6, 2013, the Company modified the performance condition for the first 25% of the options. Since the performance condition was probable to achieve both before and after the modification, the modification of the performance condition attached to the options was treated as a Type I probable-to-probable modification in accordance with ASC 718 on March 6, 2013. No incremental cost was resulted from the modification as the fair value of the modified award was the same as the fair value of the original award immediately before its performance condition was modified. RMB399 and RMB318 (US$51) were recorded as compensation cost with a corresponding credit to additional paid-in capital for the years ended December 31, 2013 and 2014, respectively.

On January 13, 2014, the Company granted options under the 2011 Share Option Scheme to purchase 417,963 ADS of the Company to certain of its employees as at an exercise price of US$29.03 per ADS with a contractual life of five years. Pursuant to the share options agreement, (i) 25% of the share options are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. There is a service condition attached to the vesting of the option granted to the employees. RMB6,985 (US$1,126) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

On January 13, 2014, the Company granted options under the 2011 Share Option Scheme to purchase 1,811,854 ADS of the Company to certain of its employees at an exercise price of US$29.03 per ADS share with a contractual life of three years and eight months. Pursuant to the share option agreement, 33% of the share options are vested and exercisable on each of the first to third anniversary of the grant date if the grantees continue to provide service to the Group and the Group achieves predetermined annual profit targets in 2014, 2015 and 2016. There is a service condition in addition to a performance condition attached to the vesting of these options. In accordance with ASC 718, share-based compensation cost is not recorded before the performance condition is probable to be met. On October 8, 2014 and October 9, 2014, the Company modified the share-based awards through the cancellation of the options accompanied by the concurrent grant of warrants to the same employees with higher predetermined annual profit targets for years 2014, 2015 and 2016 at a lower exercise price (Note 21(c)). Each warrant allows the holder to purchase one ADS of the Company at US$20.23 per ADS with a contractual life of three years. Pursuant to the warrant agreements, 33% of the warrants are vested and exercisable on each of the first to third anniversary of the grant date if the grantees continue to provide service to the Group and the Group achieves predetermined annual profit targets in 2014, 2015 and 2016. There is a service condition in addition to a performance condition attached to the vesting of these warrants. The modification of vesting conditions and exercise price was intended to provide additional motivation to the employees.

In accordance with ASC 718, share-based compensation cost is not recorded before the performance condition is probable to be met. As the performance conditions are subject to external market factors which are outside the control of the Company, the Company concluded that it was not probable for the original and the modified vesting conditions to be achieved at the grant date and the modification date, respectively. As a result, the modification of the annual profit targets attached to the options granted on January 13, 2014 was treated as a

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Type IV improbable-to-improbable modification in accordance with ASC 718 on October 8, 2014 and October 9, 2014. For a Type IV improbable-to-improbable modification, the original award is treated as cancelled in exchange for a new award. Accordingly, the grant-date fair values of the options were ignored and the modification-date fair value of the warrants of RMB3.43 (US$0.55) was measured, and the recognition of compensation cost was deferred until the predetermined annual profit target in 2014 was achieved on December 31, 2014. RMB12,750 (US$2,055) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

On October 8, 2014, the Company granted options under the 2011 Share Option Scheme to purchase 104,490 ADS of the Company to certain of its employees as at an exercise price of US$20.23 per ADS with a contractual life of five years. Pursuant to the share options agreement, (i) 25% of the share options are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. There is a service condition attached to the vesting of the option granted to the employees. RMB793 (US$128) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

The following table summarizes the share options granted to the Group’s employees during the year ended December 31, 2014:


Options granted to employees	Number of shares			Weighted-average exercise price per share		Weighted-average grant-date fair value per share		Weighted-average remaining contractual term		Aggregate intrinsic value
				RMB		RMB		Years		RMB
Outstanding, January 1, 2014		35,547,177			3.47		2.50		3.56		267,320
Granted		32,680,298			12.47		4.03
Forfeited		(1,946,755	)		3.81		0.95
Exercised		(3,114,524	)		3.47		2.55
Cancelled		(25,365,956	)		12.64		3.75

Outstanding, December 31, 2014		37,800,240			5.08		3.06		2.92		108,282

Vested and expected to vest at December 31, 2014		37,800,240			5.08		3.06		2.92		108,282
Exercisable at December 31, 2014		13,116,822			3.48		2.44		2.49		58,526

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The following table summarizes the share options granted to the employees of V1 Group during the year ended December 31, 2014:


Options granted to employees of V1 Group	Number of shares			Weighted-average exercise price per share		Weighted-average grant-date fair value per share		Weighted-average remaining contractual term		Aggregate intrinsic value
				RMB		RMB		Years		RMB
Outstanding, January 1, 2014		2,194,163			3.81		0.95		3.10		15,749
Granted		—			—		—
Forfeited		—			—		—
Exercised		(168,476	)		3.81		0.95

Outstanding, December 31, 2014		2,025,687			3.81		0.95		2.10		8,379

Vested and expected to vest at December 31, 2014		2,025,687			3.81		0.95		2.10		8,379
Exercisable at December 31, 2014		1,436,786			3.81		0.95		2.10		5,943

Options granted to non-employees of the Group

On February 8, 2013, the Company granted options under the 2011 Share Option Scheme to purchase 60,000 ADS to a third-party individual consultant who provides consultancy service to the Company, at an exercise price of US$6.50 per ADS with a contractual life of five years. Pursuant to the share options agreement, (i) 25% of the share options are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. Although the options have an explicit vesting condition, there are no service, performance or market conditions attached to the vesting of these options. As a result, the vesting condition is merely a delayed exercisability provision. RMB308 was fully recorded as compensation cost with a corresponding credit to additional paid-in capital on the grant date during the year ended December 31, 2013.

The following table summarizes the share options granted to non-employees of the Group during the year ended December 31, 2014:


Options granted to non-employees	Number of shares		Weighted-average exercise price per share		Weighted-average grant-date fair value per share		Weighted-average remaining contractual term		Aggregate intrinsic value
			RMB		RMB		Years		RMB
Outstanding, January 1, 2014		840,000		2.92		5.12		4.10		6,781
Granted		—
Forfeited		—
Exercised		—

Outstanding, December 31, 2014		840,000		2.92		5.12		3.10		4,226

Vested and expected to vest at December 31, 2014		840,000		2.92		5.12		3.10		4,226
Exercisable at December 31, 2014		367,500		2.92		5.12		3.10		1,849

The aggregate intrinsic value is calculated as the difference between the exercise prices of the underlying awards and the fair value of the Company’s ordinary shares as of December 31, 2014, for those awards that have an exercise price below the fair value of the Company’s ordinary shares.

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As of December 31, 2014, total unrecognized share-based compensation cost of RMB32,406 (US$5,223), net of estimated forfeitures, is expected to be recognized over a weighted-average period of 3.14 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. To the extent the actual forfeiture rate is different from original estimate, actual share-based compensation costs related to these awards may be different from expectation.

The grant date fair value of the equity awards granted during the years ended December 31, 2012, 2013 and 2014 was estimated using the Monte Carlo simulation model, the binomial option pricing model and the binomial option pricing model, respectively, with the following assumptions:


	February 6, 2012	February 8, 2013	January 13, 2014	January 13, 2014 (performance based)	October 8, 2014
Risk-free interest rate	0.75%	0.79%~0.84%	1.58%	0.27%~1.02%	1.55%
Dividend yield	2.00%	—	—	—	—
Expected volatility rate	51.64%	49.43%~ 50.02%	49.36%	44.77%~ 48.68%	55.73%
Weighted-average expected life	5.00	5.00	5.00	1.67~3.67	5.00
Estimated forfeiture rate	—	—	—	—	—
Suboptimal exercise factor	Not applicable	2	2	2	2.5
Fair value of the Company’s ordinary shares	RMB3.25	US$0.24~US$0.66	US$2.07	US$2.07	US$1.45

(b) Restricted share units

On August 24, 2011, the Company granted 1,220,000 RSUs, with a performance condition of an IPO attached, to certain senior management and directors at the subscription price of US$0.001 per share. On March 16, 2012, the Company granted 639,000 RSUs, with a performance condition of an IPO attached, to certain senior management and directors at a subscription price of US$0.001 per share. The transferability of the 1,220,000 and 639,000 RSUs is restricted. Pursuant to the RSU subscription agreements, 25% of the RSUs will vest and become transferable upon each of: (i) the consummation of the IPO of the securities of the Company on an internationally recognized stock exchange (the “IPO Date”); (ii) the first anniversary of the IPO Date; (iii) the second anniversary of the IPO Date; and (iv) the third anniversary of the IPO Date. If the IPO is not consummated by December 31, 2014, the Company is required to repurchase all of the RSUs at the purchase price of US$0.001 per share. There is a service condition in addition to the performance condition attached to the vesting of the RSUs, as the unvested restricted shares shall be subject to repurchase in the event of the termination of service unless otherwise agreed by the Company and the grantees. Since a performance condition of an IPO is attached with the vesting of the RSUs, share based compensation cost is not recorded before the performance condition of an IPO is met.

On August 20, 2012, the Company modified the original vesting conditions of the RSUs granted on August 24, 2011 and March 16, 2012 to be: 25% of the RSUs will vest upon each of (i) the consummation of the Listing (the “Listing Date”); (ii) the first anniversary of the Listing Date; (iii) the second anniversary of the Listing Date; and (iv) the third anniversary of the Listing Date. Except for the vesting conditions, other conditions of the RSUs remained unchanged. The modification of vesting conditions was intended to provide additional motivations to the employees. On September 25, 2012, the Company completed the Listing and the performance condition attached to the RSUs was met.

As both the IPO and the Listing are outside of the control of the Company, management concluded at the grant date and the modification date that it is not probable that the original vesting conditions and the modified vesting conditions will be achieved, respectively. As a result, the modification of the performance condition attached to the RSUs was treated as a Type IV improbable-to-improbable modification in accordance with

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ASC 718 on August 20, 2012. For a Type IV improbable-to-improbable modification, the original award is treated as cancelled in exchange for a new award. Accordingly, the grant-date fair values of the RSUs were ignored and the modification-date fair value of RMB3.68 (US$0.59) was measured, and the recognition of compensation cost was deferred until the performance condition of the Listing was met on September 25, 2012. RMB2,798, RMB2,460 and RMB989 (US$159) were recorded as compensation cost with a corresponding credit to additional paid-in capital for the years ended December 31, 2012, 2013 and 2014, respectively.

The following table summarizes the RSUs granted by the Company for the year ended December 31 2014:


RSUs granted by the Company	Outstanding RSUs			Weighted average grant date fair value
				RMB
Unvested, January 1, 2014		877,742			3,233
Granted		—			—
Cancelled		—			—
Vested		(432,402	)		(1,593	)
Forfeited		(12,938	)		(48	)

Unvested, December 31, 2014		432,402			1,592

As of December 31, 2014, total unrecognized compensation cost for the RSUs of RMB372 (US$60), net of estimated forfeitures, is expected to be recognized over the weighted average period of 0.73 year.

The total fair value of the RSUs vested during the years ended December 31, 2012, 2013 and 2014 was RMB3,234, RMB2,331 and RMB4,567 (US$736), respectively.

Warrants issued to employees of the Group

On January 13, 2014, the Company issued 78,000 warrants to an employee. Each warrant allows the employee to purchase one ADS of the Company at US$29.03 per ADS with a contractual life of four years. Pursuant to the warrant agreement, (i) 26,000 warrants are exercisable on or after January 1, 2015 and when the Company fulfills certain market conditions; (ii) 26,000 warrants are exercisable on or after January 1, 2016 and when the Company fulfills certain market conditions; and (iii) 26,000 warrants are exercisable on or after January 1, 2017 and when the Company fulfills certain market conditions. RMB3,059 (US$493) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

On January 26, 2014, the Company issued 136,500 warrants to the chairman of the board of directors, Dr. Lijun Zhang. Each warrant allows Dr. Lijun Zhang to purchase one ADS of the Company at US$29.34 per ADS with a contractual life of five years. Pursuant to the warrant agreement, these warrants vest over a four-year period, with 25% of the warrants to vest and become exercisable on each of the first, second, third and fourth anniversaries of the grant date. RMB2,331 (US$376) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

On April 1, 2014, the Company issued 600,000 warrants to the vice-chairman of the board of directors, Mr. Hendrick Sin. Each warrant allows Mr. Hendrick Sin to purchase one ADS of the Company at US$29.03 per ADS with a contractual life of five years. Pursuant to the warrant agreement, these warrants vest over a four-year period, with 25% of the warrants to vest and become exercisable on each of the first, second, third and fourth anniversaries of the grant date. RMB6,334 (US$1,021) was recorded as compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

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On October 8, 2014, the board of directors approved a modification to reduce the exercise price of the 78,000 warrants that were granted to an employee on January 13, 2014 to US$20.23 per ADS, which is the closing price of the Company’s ADSs on October 8, 2014. Other terms of the warrants remain unchanged. In accordance with ASC 718, an incremental compensation cost amounting to RMB763 (US$123), which was the difference between the fair value of the modified award and the fair value of the original award on the modification date, was measure and to be recognized ratably for each vesting tranche over the remaining requisite service period. RMB79 (US$13) was recorded as incremental compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

On October 9, 2014, the board of directors approved a modification to reduce the exercise price of the 736,500 warrants that were granted by the Company to Dr. Lijun Zhang and Mr. Hendrick Sin on January 26, 2014 and April 1, 2014, respectively, to US$20.23 per ADS, which is the closing price of the Company’s ADSs on October 8, 2014. Other terms of the warrants remain unchanged. In accordance with ASC 718, an incremental compensation cost amounting to RMB8,660 (US$1,396), which was the difference between the fair value of the modified award and the fair value of the original award on the modification date, was measured and to be recognized ratably for each vesting tranche over the remaining requisite service period. RMB572 (US$92) was recorded as incremental compensation cost with a corresponding credit to additional paid-in capital for the year ended December 31, 2014.

The following table summarizes the warrants granted to the Group’s employees during the year ended December 31, 2014:


Warrants granted to employees	Number of shares		Weighted-average exercise price per share		Weighted-average grant-date fair value per share		Weighted-average remaining contractual term		Aggregate intrinsic value
			RMB		RMB		Years		RMB
Outstanding, January 1, 2014		—
Granted		36,768,956		8.88		2.72		4.18		—
Forfeited		—
Exercised		—
Cancelled		—

Outstanding, December 31, 2014		36,768,956		8.88		2.72		3.18		—

Vested and expected to vest at December 31, 2014		19,858,314		8.88		2.75		2.69		—
Exercisable at December 31, 2014		—		—		—		—		—

As of December 31, 2014, total unrecognized share-based compensation cost of RMB46,703 (US$7,527), net of estimated forfeitures, is expected to be recognized over a weighted-average period of 4.20 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures. To the extent the actual forfeiture rate is different from original estimate, actual share- based compensation costs related to these awards may be different from expectation.

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The grant date fair value of the warrants granted during the year ended December 31, 2014 was estimated using the binomial option pricing model with the following assumptions:


	January 13, 2014	January 26, 2014	April 1, 2014	October 8, 2014 and October 9, 2014
Risk-free interest rate	0.98%	1.32%	1.38%	0.07%~0.87%
Dividend yield	—	—	—	—
Expected volatility rate	55.17%	55.00%	55.75%	47.88%~52.58%
Weighted-average expected life	3.26	4.30	4.48	0.93~2.93
Estimated forfeiture rate	—	—	—	—
Fair value of the Company’s ordinary shares	US$1.45	US$1.37	US$1.37	US$1.37~US$1.45

Warrants issued to consultants

On February 7, 2013, the Company issued 500,000 warrants to an external consultant in exchange for its financial advisory service. Each warrant allows the consultant to purchase one ADS of the Company at US$8.50 per ADS. The exercise period commences on the date of issuance and expires on February 7, 2018. Pursuant to the warrant agreement, 250,000 warrants immediately vested upon issuance and the remaining 250,000 warrants will be vested on December 31, 2013 if the Company continues to retain the consultant as its financial advisor. However, the Company may, at its sole discretion, terminate the consultant as its financial advisor without cause. On September 23, 2013, the Company terminated the consultant as its financial advisor and cancelled the second batch of the 250,000 unvested warrants. In accordance with ASC 505-50, the measurement date for the vested 250,000 warrants was February 7, 2013. The warrants issued to the consultant are classified as equity awards and measured based on the measurement date fair value of RMB0.01 per warrant. During the year ended December 31, 2013, 166,750 warrants were exercised.

On June 25, 2013, the Company issued 100,000 fully vested warrants to an external consultant in exchange for its financial advisory service. Each warrant allows the consultant to purchase one ADS of the Company at US$12.92 per ADS. The exercise period commences on the date of issuance and expires on June 25, 2015. The exercise of these 100,000 warrants is subject to certain market conditions. In accordance with ASC 505-50, the measurement date for the vested 100,000 warrants was June 25, 2013. The warrants issued to the consultant are classified as equity awards and measured based on the measurement date fair value of RMB0.02 per warrant.

On August 5, 2013, the Company issued 100,000 fully vested warrants to Champion Plus, as payment for services rendered by Champion Plus on the issuance of the Company’s ordinary shares in a private placement. Each warrant allows Champion Plus to purchase one ADS of the Company at US$10 per ADS. The exercise period commences six months after the issuance and expires on August 5, 2015. In accordance with ASC 505-50, the measurement date for the vested 100,000 warrants was August 5, 2013. The warrants issued to Champion Plus are classified as equity awards and are measured based on the measurement date fair value of RMB0.04 per warrant. The total fair value of the warrants amounting to RMB3,582 was recognized as equity issuance cost, which was netted against the offering proceeds from the private placement during the year ended December 31, 2013.

On September 27, 2013, the Company issued 100,000 fully vested warrants to an external consultant in exchange for its financial advisory service. Each warrant allows the consultant to purchase one ADS of the Company at US$15.6 per ADS. The exercise period commences on the date of issuance and expires on September 27, 2015. The exercise of these 100,000 warrants is subject to certain market conditions. In accordance with ASC 505-50, the measurement date for the vested 100,000 warrants was September 27, 2013. The warrants issued to the consultant are classified as equity awards and measured based on the measurement date fair value of RMB0.01 per warrant.

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On April 1, 2014, the Company issued 100,000 fully vested warrants to Champion Plus, as payment for services rendered by Champion Plus for the Company’s public share offering. Each warrant allows Champion Plus to purchase one ADS of the Company at US$24.00 per ADS. The exercise period commences six months after the issuance and expires on September 28, 2016. In accordance with ASC 505-50, the measurement date for the vested 100,000 warrants was April 1, 2014. The warrants issued to Champion Plus are classified as equity awards and are measured based on the measurement date fair value of RMB0.04 per warrant. The total fair value of the warrants amounting to RMB4,176 (US$673) was recognized as equity issuance cost, which was netted against the offering proceeds from the public share offering during the year ended December 31, 2014.

Since all of the warrants granted, except for the 250,000 warrants that were cancelled on September 23, 2013, were fully vested upon issuance, compensation expense of RMB6,557 was immediately recognized with a corresponding credit to additional paid-in capital on the respect grant date of the warrants during the year ended December 31, 2013.

Once performance is complete, the warrants were subject to the requirements of ASC topic 815 (“ASC 815), Derivatives and Hedging, and be reclassified from equity to liability if they met the definition of derivative. In accordance with ASC sub-topic 815-40 (“ASC 815-40”), Derivatives and Hedging: Contracts in Entity’s Own Equity, if a contract could potentially be cash settled, and such settlement is not within the control of the issuer, the derivative is classified as an asset or liability, and changes in fair value are recognized in the statements of comprehensive income. The Company concluded that the warrants could only be physical settled but not net-cash settled. In addition, the Company evaluated ASC 815-40-15 and ASC 815-40-25-7 to ASC 815-40-25-35 and concluded that the warrants are indexed to the Company’s own stock and meet all additional conditions for equity classification. Therefore, the warrants have been classified as equity since their respective issuance date.

The fair value of the warrants granted during the year ended December 31, 2014 at its issuance date was estimated by the Company, with the assistance of an independent valuation firm, using the Black Scholes option pricing model with the following assumptions:


Risk-free interest rate	0.61	%
Expected dividend yield	—
Expected volatility rate	48.03	%
Weighted average expected life	2.50
Estimated forfeiture rate	—

As of December 31, 2014, the Company has warrants outstanding to purchase an aggregate of 483,250 ADS with an aggregate intrinsic value of RMB14,345. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the fair value of the Company’s ADS as of December 31, 2014, for those warrants that have an exercise price currently below the fair value of the Company’s ADS.

(d) Determining fair value of awards

During the year ended December 31, 2014, the Company, with the assistance of two independent valuation firms, estimated the grant date fair value of the options, warrants with a service condition, warrants with a market condition and warrants with a performance condition granted by the Company using the binomial option pricing model or the Black Scholes option pricing model. The binomial model and the Black Scholes model require the input of highly subjective assumptions, including the expected stock price volatility, the expected price multiple at which the holder is likely to exercise share options and the expected employee forfeiture rate. The Company uses historical data and future expectations to estimate forfeiture rate. For expected volatility of the options and warrants granted, the Company has made reference to historical volatilities of several comparable companies. The risk-free rate for periods within the contractual life of the options and warrants is based on the U.S. Treasury Bonds and other market information at the date of grant. The dividend yield is based on the expected pay-out ratio.

F-60

The Company, with the assistance of an independent valuation firm, estimated the grant-date fair value of the options granted to its employees and the employees of V1 Group using the Monte Carlo simulation model. The Monte Carlo simulation model requires the input of highly subjective assumptions, including the expected stock price volatility, risk-free interest rate, dividend yield, weighted-average expected life of the options and expected employee forfeiture rate. The Company uses historical data and future expectations to estimate forfeiture rate. For expected volatility of the options, the Company has made reference to the historical volatilities of several comparable companies. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury Bonds and other market information at the date of grant. The dividend yield is based on the expected pay-out ratio.

Total share-based compensation expense of awards and warrants granted to the Group’s employees, directors and external consultants was recorded in “General and administrative expenses” in the consolidated statements of comprehensive income.

22. RELATED PARTY TRANSACTIONS

(a) Related parties


Name of related parties		Relationship with the Group
V1 Group		The ultimate holding company
Gaintech		A company controlled by a noncontrolling shareholder of the Company
Mr. Yixun Kuang		A director of OWX HK
Mr. Zhenning Hu		A director of OWX HK
Mr. Qun She		A shareholder of Beijing Wuyao
Ms. Kok Keng Wee		A shareholder of Beijing Wuyao
MediaTek Inc. (“MTK”)		The parent company of a noncontrolling shareholder of the Company
Vogins BVI		A company controlled by MTK, which became a subsidiary of the Company on November 29, 2013
Vogins Shanghai		A wholly-owned subsidiary of Vogins BVI

(b) The Group had the following related party transactions for the years presented:


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Gain on bargain purchase of Vogins BVI from:
Gaintech		—		9,654		—		—

		—		9,654		—		—

On November 29, 2013, the Company acquired 90.6% equity interest in Vogins BVI, of which 82.6% was acquired from Gaintech (Note 4). The gain on bargain purchase of RMB9,654 was recorded in the Company’s consolidated statement of comprehensive income for the year ended December 31, 2013.

F-61


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Temporary funding provided to:
Vogins Shanghai		—		4,483		—		—

		—		4,483		—		—

During the year ended December 31, 2013, the Group provided temporary funding of RMB4,500 to Vogins Shanghai to be used as working capital (Note 4). The temporary funding was unsecured, interest-free and repayable on demand.

For the Years Ended
December 31,

2012

2013

2014

RMB

US$

Technology service fee for game platform installation paid to:

MediaTek Inc. (“MTK”)

—

968

The Group entered into an agreement with MTK in May 2013, pursuant to which the Group engaged MTK to customize and install the Group’s game platform onto its self-developed mobile phone chips.


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Revenue from technical support service for mobile phone technology platform software provided to:
Vogins Shanghai		—		1,734		—		—

Cost of sales from technical support service for mobile phone technology platform software provided to:
Vogins BVI		—		603		—		—

The Group entered into a technology service agreement with Vogins Shanghai in May 2013, pursuant to which the Group agreed to provide Vogins Shanghai a self-developed mobile phone technology platform software as well as related technical support service in exchange for a service fee based on the number of download through the mobile phone technology platform at a pre-determined unit price. The Group transferred 49% noncontrolling interest in one of its subsidiaries to Vogins BVI as an inducement for Vogins Shanghai to sign the technology service agreement. The carrying value of the 49% noncontrolling interest was treated as a deferred cost and amortized over the contractual term of the technology service agreement of three years.

For the Years Ended
December 31,

2012

2013

2014

RMB

US$

Mobile games revenue from a related mobile phone service provider:

Vogins Shanghai

—

5,710

—

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The Group entered into an agreement with Vogins Shanghai in August 2013 for billing and collection services as mobile phone service provider in the sale of in-game premium features of the Group’s mobile games. Pursuant to the agreement, the Group is entitled to profit sharing based on prescribed percentages ranging from 55% to 95% of the after-tax net proceeds that Vogins Shanghai collected from mobile network operators.

For the Years Ended
December 31,

2012

2013

2014

RMB

US$

Other income from the sale of inventories to:

Mr. Yixun Kuang and Mr. Zhenning Hu

—

2,359

—

In December 2013, the Group sold all of its inventories to Mr. Kuang Yixun and Mr. Hu Zhengning at cost, due to the business transition of the OWX Group from handset design business to mobile phone games promotion business. No gain or loss was resulted from the sale of inventories.


	For the Years Ended December 31,
	2012		2013		2014
	RMB		RMB		RMB		US$
Temporary funding provided by:
V1 Group		4,104		—		—		—
Mr. Qun She		—		—		2,000		322
Mr. Kok Keng Wee		—		—		7,000		1,128

		4,104		—		9,000		1,450

The temporary funding from V1 Group was unsecured, interest-free and repayable on demand. The proceeds of the temporary funding from V1 Group were injected into OWX Beijing as working capital and were used for payment of expenses relating to the Listing for the year ended December 31, 2012. The temporary fundings from Mr. Qun She and Ms. Kok Keng Wee were unsecured, interest-free and repayable on demand. The fundings were provided to the Group to be used as working capital.

For the Years Ended
December 31,

2012

2013

2014

RMB

US$

Deemed dividend to:

V1 Group

32,929

38,014

—

During the year ended December 31, 2012, the OWX Group and the 3GUU Group failed to meet the predetermined performance target as stipulated in their respective purchase agreement entered into by V1 Group. As a result, V1 Group shares amounting to RMB18,314 and RMB12,302 must be returned to V1 Group by the original shareholders of the OWX Group and the 3GUU Group, respectively, which was accounted for as deemed distribution to V1 Group. In addition, on February 6, 2012, the Company granted shares options to purchase 2,431,592 ordinary shares of the Company to the employees of V1 Group. The grant-date fair value of the share options granted to employees of V1 Group amounting to RMB2,313 was recorded as a one-time deemed dividend distribution to V1 Group.

During the year ended December 31, 2013, the 3GUU Group failed to meet the predetermined performance target as stipulated in its purchase agreement. As a result, V1 Group shares amounting to RMB38,014 must be returned to V1 Group by the original shareholders of the 3GUU Group, which was accounted for as deemed distribution to V1 Group.

F-63

For the Years Ended
December 31,

2012

2013

2014

RMB

US$

Revenue sharing to:

V1 Group

—

536

During the year ended December 31, 2014, the Group entered into a revenue sharing arrangement with V1 Group for the resale of its video products. The amount of revenues to be shared with V1 Group was calculated based on a predetermined percentage and recorded as cost of revenues.


	As of December 31,
	2013		2014		2014
	RMB		RMB		US$
Amounts due from related parties:
MTK		6,097		6,087		981

Total		6,097		6,087		981

Amounts due to related parties:
V1 Group		—		560		91
Mr. Qun She		—		2,000		322
Ms. Kok Keng Wee		—		7,000		1,128

Total		—		9,560		1,541

All balances with related parties as of December 31, 2013 and 2014 were unsecured, non-interest bearing and repayable on demand.

23. EMPLOYEE DEFINED CONTRIBUTION PLAN

Full time employees of the Company’s subsidiaries, the VIEs and the VIEs’ subsidiaries in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries, the VIEs and the VIEs’ subsidiaries of the Company make contributions to the government for these benefits based on a specific percentage of the employees’ salaries up to a maximum of three times the average annual salary for the city in which the subsidiary operates for the prior year. The Company’s subsidiaries, the VIEs and the VIEs’ subsidiaries have no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were RMB6,297, RMB14,875 and RMB30,732 (US$4,953) for the years ended December 31, 2012, 2013 and 2014, respectively.

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24. COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitments

As of December 31, 2014, the Group had minimum lease payments under non-cancelable operating leases with initial terms in excess of one year as follows:


	RMB		US$
2015		32,419		5,225
2016		36,535		5,888
2017		22,561		3,636
2018		17,120		2,759
2019		—		—

		108,635		17,508

The Group’s lease arrangements have no renewal options, rent escalation clauses, restrictions or contingent rents and are all conducted with third parties.

(b) Variable interest entity structure

In the opinion of management, (i) the ownership structure of the Company and its VIEs is in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the VIEs and their shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Group’s business operations are in compliance with existing PRC laws and regulations in all material respects.

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Group and its contractual arrangements with its VIEs are found to be in violation of any existing or future PRC laws and regulations, the Group may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations. Further, should the ownership structure of the Group under the VIE Arrangements are challenged by the PRC authorities while the foreign investment restrictions over the Internet content provision and telecommunication sectors remain effective, the Group would need to restructure its ownership structure. In that case, the Group may still be able to (i) develop mobile games in China and own the copyright for those mobile games; (ii) grant to the VIEs, or any other Chinese company that possesses the necessary regulatory licenses, copyright licenses to operate the Company’s games in China and collect royalties from the VIEs or such other Chinese company; (iii) use the Group’s technology, expertise and experience to provide technological services and support to the VIEs in exchange for service fees; and (iv) require the registered shareholders of the VIEs to pledge their equity interests in the VIEs in favor of the Group to secure the VIEs’ performance under these agreements. However, following such a restructuring, the Group would not be able to adopt or rely on the VIE Arrangements and thus, would not be able to exercise effective control over the VIEs. Such a loss of control could materially and adversely affect the Group’s business, financial condition, results of operations and ability to consolidate the VIEs. In the opinion of management, the likelihood of loss in respect of the Group’s current ownership structure or the contractual arrangements with its VIEs is remote based on current facts and circumstances.

In addition, the registered shareholders of the VIEs are the Company’s officers or employees. If conflicts of interest arise between these shareholders’ duties to the Company and the VIEs, these shareholders may not act in the Company’s best interests and conflicts of interest may not be resolved in the Company’s favor. In addition, these shareholders may breach or cause the VIEs to breach or refuse to renew its existing contractual arrangements that allow the Company to exercise effective control over it and to receive economic benefits from

F-65

it. If certain shareholders of the VIEs do not comply with their fiduciary duties to the Company as its designated directors, or if the Company cannot resolve any conflicts of interest or disputes between the Company and such shareholders or any future beneficial owners of the VIEs, the Company would have to rely on legal proceedings to remedy the situation, which could result in disruption of the Company’s business and substantial uncertainty as to the outcome of any such legal proceedings. Further, these remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. For example, the Company may have to resort to administrative and court proceedings to enforce the legal protection that the Company enjoys either by law or contract. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection the Company enjoys than in more developed legal systems. These uncertainties may impede the Company’s ability to enforce the contracts it has entered into with the VIEs and their shareholders and the Group’s ability to consolidate the VIEs.

(c) Income taxes

As of December 31, 2014, the Group has recognized RMB16,270 (US$2,622) accrual for unrecognized tax benefits (Note 20). The final outcome of the tax uncertainty is dependent upon various matters including tax examinations, interpretation of tax laws or expiration of statute of limitations. However, due to the uncertainties associated with the status of examinations, including the protocols of finalizing audits by the relevant tax authorities, there is a high degree of uncertainty regarding the future cash outflows associated with these tax uncertainties. As of December 31, 2014, the Group classified the accrual for unrecognized tax benefits as a non-current liability.

(d) Legal proceedings

In June 2014, the Company was named as a defendant in two putative securities class actions filed in the United States District Court for the Southern District of New York, which have since been consolidated into one suit. The primary allegations are that certain Company filings with the United States Securities and Exchange Commission were false and/or misleading about the Company’s internal controls and compliance with U.S. GAAP. The plaintiffs filed their amended complaint on February 2, 2015 and the Company moved to dismiss the complaint in full on March 19, 2015. The Company believes that it has meritorious defenses to the complaint and intends to vigorously defend itself against the claim. Management considers the outcome of any judgment of the lawsuit as quite uncertain and any expenditure from the lawsuit is not estimable. Consequently, no provision has been made for any expenses that might arise from the class action lawsuit.

25. (LOSS) EARNINGS PER SHARE

A reconciliation of net (loss) income attributable to the Company’s ordinary shareholders in the consolidated statements of comprehensive income to the numerator for the computation of basic and diluted (loss) earnings per share for the years ended December 31, 2012, 2013 and 2014 is as follows:


	For the Years Ended December 31,
	2012			2013			2014		2014
	RMB			RMB			RMB		US$
Net (loss) income attributable to the Company’s ordinary shareholders		(17,361	)		23,086			232,124		37,412
Undistributed earnings allocated to participating Contingently Redeemable Ordinary Shares		—			(1,765	)		—		—

(Loss) income allocated to Class A and Class B ordinary shares for computing (loss) earnings per share-basic and diluted		(17,361	)		21,321			232,124		37,412

F-66

Basic and diluted earnings (loss) per share for the years ended December 31, 2012, 2013 and 2014 are calculated as follows:


	For the Years Ended December 31,
	2012						2013				2014				2014
	Class A			Class B			Class A		Class B		Class A		Class B		Class A		Class B
	RMB			RMB			RMB		RMB		RMB		RMB		US$		US$
(Loss) earnings per share—basic:
Numerator:
Allocation of net (loss) income attributable to ordinary shareholders used in calculating (loss) earnings per ordinary share—basic		(6,487	)		(10,874	)		8,976		12,345		133,048		99,076		21,444		15,968
Denominator:
Weighted average number of ordinary shares outstanding used in calculating basic (loss) earnings per share		113,235,967			189,617,092			134,538,407		185,038,423		242,817,198		180,821,228		242,817,198		180,821,228

Denominator used for (loss) earnings per share		113,235,967			189,617,092			134,538,407		185,038,423		242,817,198		180,821,228		242,817,198		180,821,228
Denominator used for (loss) earnings per ADS		8,088,283			13,544,078			9,609,886		13,217,030		17,344,086		12,915,802		17,344,086		12,915,802
(Loss) earnings per share—basic		(0.06	)		(0.06	)		0.07		0.07		0.55		0.55		0.09		0.09
(Loss) earnings per ADS—basic		(0.84	)		(0.84	)		0.98		0.98		7.67		7.67		1.24		1.24
(Loss) earnings per share—diluted:
Numerator:
Allocation of net (loss) income attributable to ordinary shareholders used in calculating (loss) earnings per ordinary share—diluted		(6,487	)		(10,874	)		9,494		11,827		138,814		93,310		22,373		15,039
Reallocation of net (loss) income attributable to ordinary shareholders as a result of conversion of Class B to Class A shares		(10,874	)		—			11,827		—		93,310		—		15,039		—
Net (loss) income attributable to ordinary shareholders		(17,361	)		(10,874	)		21,321		11,827		232,124		93,310		37,412		15,039
Denominator:
Weighted average number of ordinary shares outstanding used in calculating basic (loss) earnings per share		113,235,967			189,617,092			134,538,407		185,038,423		242,817,198		180,821,228		242,817,198		180,821,228
Conversion of Class B to Class A ordinary shares		189,617,092			—			185,038,423		—		180,821,228		—		180,821,228		—
Dilutive effect of convertible securities:
Share options		—			—			12,297,251		—		23,642,765		—		23,642,765		—
RSUs		—			—			734,995		—		652,553		—		652,553		—
Warrants		—			—			971,193		—		1,889,261		—		1,889,261		—

Denominator used for (loss) earnings per share		302,853,059			189,617,092			333,580,269		185,038,423		449,823,005		180,821,228		449,823,005		180,821,228
Denominator used for (loss) earnings per ADS		21,632,361			13,544,078			23,827,162		13,217,030		32,130,215		12,915,802		32,130,215		12,915,802
(Loss) earnings per share—diluted		(0.06	)		(0.06	)		0.06		0.06		0.52		0.52		0.08		0.08
(Loss) earnings per ADS—diluted		(0.84	)		(0.84	)		0.84		0.84		7.22		7.22		1.16		1.16

F-67

For the year ended December 31, 2012, the share options and RSUs granted by the Company and the contingently redeemable ordinary shares are excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. For the year ended December 31, 2013, the share options and RSUs granted and the warrants issued by the Company are included in the computation of diluted earnings per share, and the contingently redeemable ordinary shares are excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. For the year ended December 31, 2014, the share options and RSUs granted and the warrants issued by the Company are included in the computation of diluted earnings per share.

The options and warrants granted to employees, directors and consultants of the Company on February 12, 2015, February 13, 2015 and February 16, 2015 (Note 26) would have changed the number of potential ordinary shares outstanding as of December 31, 2014 if the transactions had occurred before December 31, 2014.

26. SUBSEQUENT EVENTS

Share options granted

On February 12, 2015, the Company granted options under the 2011 Share Option Scheme to purchase 690,000 ADSs of the Company to certain of its employees at an exercise price of US$15.76 per ADS, which was the closing price per ADS as of February 12, 2015. Pursuant to the share options agreements, (i) 25% of the share options are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the share options are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant. There is a service condition attached to the vesting of the options granted to the employees.

Warrants granted

On February 12, 2015, the Company granted warrants to purchase 30,000 ADSs to an employee. Each warrant allows the holder to purchase one ADS of the Company at US$15.76. Pursuant to the warrant agreement, (i) 25% of the warrants are vested and exercisable on the first anniversary of the date of grant, and (ii) the remaining 75% of the warrants are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant.

On February 13, 2015, the Company granted warrants to purchase 186,000 ADSs each to Dr. Lijun Zhang, chairman of the Company’s board of directors, Mr. Hendrick Sin, vice-chairman of the Company’s board of directors, Mr. Yongchao Wang, vice-chairman of the Company’s board of directors, Mr. Jian Xiao, chief executive officer and director of the Company’s board of directors and Mr. Fei Fu Chang, chief financial officer and director of the Company’s board of directors. Each warrant allows the holder to purchase one ADS of the Company at US$15.76. Pursuant to the warrant agreements, (i) 25% of the warrants are vested and exercisable on the first anniversary of the date of grant; and (ii) the remaining 75% of the warrants are vested and exercisable in 12 equal quarterly tranches beginning one calendar quarter after the first anniversary of the date of grant.

On February 16, 2015, the Company granted warrants to purchase 100,000 and 150,000 ADSs to two external consultants in exchange for their financial advisory service. Each warrant allows the holder to purchase one ADS of the Company at US$16.13. According to the warrant agreements, (i) 50,000 ADS and 75,000 ADSs, respectively, can be exercised on or after the issuance date; and (ii) 50,000 ADSs and 75,000 ADSs, respectively, can be exercised on or after the first anniversary of the issuance date. There is a market condition attached to the vesting of these warrants.

Declaration of cash dividends

On March 26, 2015, the Company’s board of directors declared cash dividends in the aggregate amount of approximately RMB27,300 (US$4,400) to the Company’s shareholders of record as of the close of business on April 17, 2015, at US$0.01 per Class A or Class B ordinary share, or USD0.14 per ADS. The cash dividends are expected to be distributed on or about May 15, 2015.

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27. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

The following is the condensed financial information of the Company on a non-consolidated basis:

Condensed balance sheets


	As of December 31,
	2013		2014			2014
	RMB		RMB			US$
ASSETS
Current assets:
Cash and cash equivalents		31,831		14,859			2,395
Prepayment and other current assets		4,062		7,387			1,190

Total current assets		35,893		22,246			3,585

Non-current assets:
Property and equipment, net		407		240			39
Goodwill		564,841		564,841			91,036
Long-term investments, net		—		103,412			16,667
Amounts due from subsidiaries and VIEs		249,799		743,076			119,762
Investments in subsidiaries and VIEs		252,875		405,057			65,283
Other non-current assets		—		19,098			3,077

Total non-current assets		1,067,922		1,835,724			295,864

Total assets		1,103,815		1,857,970			299,449

LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities		664		1,306			210

Non-current liabilities		—		—			—

Total liabilities		664		1,306			210

Mezzanine equity:
Contingently redeemable ordinary shares (US$0.001 par value, 26,485,961 shares authorized; 26,485,961 and nil shares issued and outstanding as of December 31, 2013 and 2014, respectively; aggregate liquidation preference amount of RMB75,899 and nil as of December 31, 2013 and 2014, respectively; aggregate redemption amount of RMB77,677 and nil, respectively, as of December 31, 2013 and 2014)		77,677		—			—
Shareholders’ equity:
Class A ordinary shares (US$0.001 par value, 750,000,000 shares authorized; 178,034,362 and 257,523,929 shares issued and outstanding as of December 31, 2013 and 2014, respectively)		1,121		1,610			259
Class B ordinary shares (US$0.001 par value, 250,000,000 shares authorized; 180,821,228 and 180,821,228 shares issued and outstanding as of December 31, 2013 and 2014, respectively)		1,179		1,179			190
Additional paid-in capital		1,003,417		1,604,851			258,655
Retained earnings		19,635		251,759			40,576
Accumulated other comprehensive income (loss)		122		(2,735	)		(441	)

Total shareholders’ equity		1,025,474		1,856,664			299,239

Total liabilities and shareholders’ equity		1,103,815		1,857,970			299,449

F-69

Condensed statements of comprehensive income


	For the Years Ended December 31,
	2012			2013			2014			2014
	RMB			RMB			RMB			US$
Gross profit		—			—			—			—
General and administrative expenses		(2,651	)		(10,515	)		(18,662	)		(3,008	)
Impairment of goodwill		(33,517	)		—			—			—
Impairment of intangible assets		(10,910	)		(2,613	)		—			—
Listing expenses		(17,037	)		—			—			—

Total operating expenses		(64,115	)		(13,128	)		(18,662	)		(3,008	)

Operating loss		(64,115	)		(13,128	)		(18,662	)		(3,008	)
Interest income		—			246			131			21
Equity in profits of subsidiaries and VIEs		22,337			14,776			248,477			40,047
Other income		114			—			2,178			352
Changes in fair value of contingently returnable consideration assets		27,326			24,366			—			—

Net (loss) income		(14,338	)		26,260			232,124			37,412
Accretion of contingently redeemable ordinary shares		(3,023	)		(3,174	)		—			—

Net (loss) income attributable to China Mobile Games and Entertainment Group Limited’s ordinary shareholders		(17,361	)		23,086			232,124			37,412

Other comprehensive income (loss):
Foreign currency translation adjustments		7			594			(3,332	)		(537	)
Unrealized gains on available-for-sale security		—			—			475			77

Other comprehensive income (loss)		7			594			(2,857	)		(460	)

Comprehensive (loss) income		(17,354	)		23,680			229,267			36,952

Condensed statements of cash flows


	For the Years Ended December 31,
	2012			2013			2014			2014
	RMB			RMB			RMB			US$
Net cash used in operating activities		(23,085	)		(25,755	)		(19,278	)		(3,107	)

Net cash used in investing activities		(11,139	)		(240,246	)		(482,546	)		(77,772	)

Net cash provided by financing activities		70,457			261,724			486,862			78,468

(a) Basis of presentation

In the parent-company only financial statements, the Company’s investment in subsidiaries and VIEs is stated at cost plus equity in undistributed earnings of subsidiaries and VIEs since the date of inception. The parent-company only condensed financial statements should be read in conjunction with the Company’s consolidated financial statements.

For the presentation of the parent-company only condensed financial information, the Company records its investment in subsidiaries and VIEs, which it effectively controls through contractual agreements, under the equity method of accounting as prescribed in ASC 323. Such investment is presented as “Investment in subsidiaries and VIEs” in the balance sheets and share of the subsidiaries’ and VIEs’ profits is presented as “Equity in profits of subsidiaries and VIEs” in the statements of comprehensive income.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the parent-company only financial statements.

(b) Commitments

The Company does not have any significant commitments or long-term obligations as of December 31, 2013 and 2014.

F-70

Exhibit 8.1


Significant Subsidiaries*	Jurisdiction	Ownership Interest
3GUU Holding Limited	BVI		100%
3GUU Mobile Entertainment Co. Limited	Hong Kong		100%
3GUU Mobile Entertainment Industrial Co., Ltd.	BVI		100%
Beauty Wave Limited	BVI		100%
China Mobile Games and Entertainment Group (HK) Limited	Hong Kong		100%
China Perfect Investments Limited	Hong Kong		100%
China Wave Group Limited	BVI		100%
CMGE Investment Limited	Hong Kong		100%
Guangzhou Huifenghechang Mobile Technology Co., Ltd.	PRC		100%
Guangzhou Yitongtianxia Software Development Co., Ltd.	PRC		100%
Huiyou Digital (Shenzhen) Ltd.	PRC		100%
HYD Holding Limited	BVI		100%
OWX Hong Kong Limited	Hong Kong		100%
Shanghai Suiyue Technology Co., Ltd.	PRC		100%
Shenzhen Douqu Software Co., Ltd	PRC		80%
Shenzhen Qilewuxian Software Development Co., Ltd.	PRC		100%
Shenzhen Zhongtuokechuang Technology Co., Ltd.	PRC		100%
Uni-Force Development Limited	Hong Kong		100%
Vogins Technology Co. Limited	BVI		91%
Weili Development Limited	Hong Kong		100%
Vogins Technology (Shanghai) Co., Ltd.	PRC		100%

Variable Interest Entities and their Subsidiaries Consolidated in our Financial Statements	Jurisdiction
Guangzhou Yingzheng Information Technology Co., Ltd.	PRC
Shenzhen Lanyue Internet Technology Co., Ltd.	PRC
Chengdu Zhuoxing Technology Co., Ltd.	PRC
Beijing Wuyao Technology Co., Ltd.	PRC
Tianjin Suiyue Technology Co., Ltd.	PRC
Beijing Zhuoyuechenxing Technology Co., Ltd.	PRC

*	Other consolidated entities of China Mobile Games and Entertainment Group Limited have been omitted from this list since, considered in the aggregate as a single entity, they would not constitute a significant subsidiary.

Exhibit 11.1

CODE OF BUSINESS CONDUCT AND ETHICS

of China Mobile Games and Entertainment Group Limited

INTRODUCTION

Purpose

This Code of Business Conduct and Ethics contains general guidelines for conducting the business of China Mobile Games and Entertainment Group Limited, a Cayman Islands company (the “Company”) consistent with the highest standards of business ethics. To the extent this Code requires a higher standard than required by commercial practice or applicable laws, rules or regulations, we adhere to these higher standards.

This Code applies to all of the directors, officers and employees of the Company and its subsidiaries (which, unless the context otherwise requires, are collectively referred to as the “Company” in this Code). We refer to all persons covered by this Code as “Company employees” or simply “employees.” We also refer to our chief executive officer and our chief financial officer as our “principal financial officers.”

Seeking Help and Information

This Code is not intended to be a comprehensive rulebook and cannot address every situation that you may face. If you feel uncomfortable about a situation or have any doubts about whether it is consistent with the Company’s ethical standards, seek help. We encourage you to contact your supervisor for help first. If your supervisor cannot answer your question or if you do not feel comfortable contacting your supervisor, contact the Compliance Officer of the Company, who shall be a person appointed by the Board of Directors of the Company. Loren Cheng has been appointed by the Board of Directors of the Company as the Compliance Officer for the Company. Loren Cheng can be reached at +852 2700 6118 and lorencheng@cmge.com. You may remain anonymous and will not be required to reveal your identity in your communication to the Company.

Reporting Violations of the Code

All employees have a duty to report any known or suspected violation of this Code, including any violation of the laws, rules, regulations or policies that apply to the Company. If you know of or suspect a violation of this Code, immediately report the conduct to your supervisor. Your supervisor will contact the Compliance Officer, who will work with you and your supervisor to investigate the matter. If you do not feel comfortable reporting the matter to your supervisor or you do not get a satisfactory response, you may contact the Compliance Officer directly. Employees making a report need not leave their name or other personal information and reasonable efforts will be used to conduct the investigation that follows from the report in a manner that protects the confidentiality and anonymity of the employee submitting the report. All reports of known or suspected violations of the law or this Code will be handled sensitively and with discretion. Your supervisor, the Compliance Officer and the Company will protect your confidentiality to the extent possible, consistent with law and the Company’s need to investigate your report.

It is the Company policy that any employee who violates this Code will be subject to appropriate discipline, which may include termination of employment. This determination will be based upon the facts and circumstances of each particular situation. An employee accused of violating this Code will be given an opportunity to present his or her version of the events at issue prior to any determination of appropriate discipline. Employees who violate the law or this Code may expose themselves to substantial civil damages, criminal fines and prison terms. The Company may also face substantial fines and penalties and may incur damage to its reputation and standing in the community. Your conduct as a representative of the Company, if it does not comply with the law or with this Code, can result in serious consequences for both you and the Company.

Policy Against Retaliation

The Company prohibits retaliation against an employee who, in good faith, seeks help or reports known or suspected violations. Any reprisal or retaliation against an employee because the employee, in good faith, sought help or filed a report will be subject to disciplinary action, including potential termination of employment.

Waivers of the Code

Waivers of this Code for employees may be made only by an executive officer of the Company. Any waiver of this Code for our directors, executive officers or other principal financial officers may be made only by our Board of Directors or the appropriate committee of our Board of Directors and will be disclosed to the public as required by law or the rules of the Nasdaq Global Market.

CONFLICTS OF INTEREST

Identifying Potential Conflicts of Interest

A conflict of interest can occur when an employee’s private interest interferes, or appears to interfere, with the interests of the Company as a whole. You should avoid any private interest that influences your ability to act in the interests of the Company or that makes it difficult to perform your work objectively and effectively.

Identifying potential conflicts of interest may not always be clear-cut. The following situations are examples of conflicts of interest:

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Outside Employment. No employee should be employed by, serve as a director of, or provide any services not in his or her capacity as a Company employee to a company that is a material customer, supplier or competitor of the Company.

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Improper Personal Benefits. No employee should obtain any material (as to him or her) personal benefits or favors because of his or her position with the Company. Please see “Gifts and Entertainment” below for additional guidelines in this area.

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Financial Interests. No employee should have a significant financial interest (ownership or otherwise) in any company that is a material customer, supplier or competitor of the Company. A “significant financial interest” means (i) ownership of greater than 1% of the equity of a material customer, supplier or competitor or (ii) an investment in a material customer, supplier or competitor that represents more than 5% of the total assets of the employee.

•

Loans or Other Financial Transactions. No employee should obtain loans or guarantees of personal obligations from, or enter into any other personal financial transaction with, any company that is a material customer, supplier or competitor of the Company. This guideline does not prohibit arms-length transactions with banks, brokerage firms or other financial institutions.

•

Service on Boards and Committees. No employee should serve on a board of directors or trustees or on a committee of any entity (whether profit or not-for-profit) whose interests reasonably would be expected to conflict with those of the Company.

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Actions of Family Members. The actions of family members outside the workplace may also give rise to the conflicts of interest described above because they may influence an employee’s objectivity in making decisions on behalf of the Company. For purposes of this Code, “family members” include your spouse or life-partner, brothers, sisters and parents, in-laws and children whether such relationships are by blood or adoption.

For purposes of this Code, a company is a “material” customer if that company has made payments to the Company in the past year in excess of US$100,000 or 10% of the customer’s gross revenues, whichever is greater. A company is a “material” supplier if that company has received payments from the Company in the past year in excess of US$100,000 or 10% of the supplier’s gross revenues, whichever is greater. A company is a “material” competitor if that company competes in the Company’s line of business and has annual gross revenues from such line of business in excess of US$500,000. If you are uncertain whether a particular company is a material customer, supplier or competitor, please contact the Compliance Officer for assistance.

Disclosure of Conflicts of Interest

The Company requires that employees disclose any situations that reasonably would be expected to give rise to a conflict of interest. If you suspect that you have a conflict of interest, or something that others could reasonably perceive as a conflict of interest, you must report it to your supervisor or the Compliance Officer. Your supervisor and the Compliance Officer will work with you to determine whether you have a conflict of interest and, if so, how best to address it. Although conflicts of interest are not automatically prohibited, they are not desirable and may only be waived as described in “Waivers of the Code” above.

CORPORATE OPPORTUNITIES

As an employee of the Company, you have an obligation to advance the Company’s interests when the opportunity to do so arises. If you discover or are presented with a business opportunity through the use of corporate property, information or because of your position with the Company, you should first present the business opportunity to the Company before pursuing the opportunity in your individual capacity. No employee may use corporate property, information or his or her position with the Company for personal gain or should compete with the Company.

You should disclose to your supervisor the terms and conditions of each business opportunity covered by this Code that you wish to pursue. Your supervisor will contact the Compliance Officer and the appropriate management personnel to determine whether the Company wishes to pursue the business opportunity. If the Company waives its right to pursue the business opportunity, you may pursue the business opportunity on the same terms and conditions as originally proposed and consistent with the other ethical guidelines set forth in this Code.

CONFIDENTIAL INFORMATION AND COMPANY PROPERTY

Employees have access to a variety of confidential information while employed at the Company. Confidential information includes all non-public information that might be of use to competitors, or, if disclosed, harmful to the Company or its customers. Every employee has a duty to respect and safeguard the confidentiality of the Company’s information and the information of our suppliers and customers, except when disclosure is authorized or legally mandated. In addition, you must refrain from using any confidential information from any previous employment if, in doing so, you could reasonably be expected to breach your duty of confidentiality to your former employers. An employee’s obligation to protect confidential information continues after he or she leaves the Company. Unauthorized disclosure of confidential information could cause competitive harm to the Company or its customers and could result in legal liability to you and the Company.

Employees also have a duty to protect the Company’s intellectual property and other business assets. The intellectual property, business systems and the security of the Company property are critical to the Company.

Any questions or concerns regarding whether disclosure of Company information is legally mandated should be promptly referred to the Compliance Officer.

Safeguarding Confidential Information and Company Property

Care must be taken to safeguard and protect confidential information and Company property. Accordingly, the following measures should be adhered to:

•

The Company’s employees should conduct their business and social activities so as not to risk inadvertent disclosure of confidential information. For example, when not in use, confidential information should be secretly stored. Also, review of confidential documents or discussion of confidential subjects in public places (e.g., airplanes, trains, taxis, buses, etc.), including the arrangements for keeping confidential documents, should not be conducted so as to allow overhearing or other access by unauthorized persons.

•

Within the Company’s offices, confidential matters should not be discussed within hearing range of visitors or others not working on such matters.

•

Confidential matters should not be discussed with other employees not working on such matters or with friends or relatives including those living in the same household as a Company employee.

•

The Company’s employees are only to access, use and disclose confidential information that is necessary for them to have in the course of performing their duties. They are not to disclose confidential information to other employees or contractors at the Company unless it is necessary for those employees or contractors to have such confidential information in the course of their duties.

•

The Company’s files, personal computers, networks, software, internet access, internet browser programs, emails, voice mails and other business equipment (e.g. desks and cabinets) and resources are provided for business use and they are the exclusive property of the Company. Misuse of such Company property is not tolerated.

Protection and Use of Company Assets

Employees should protect the Company’s assets and ensure their efficient use for legitimate business purposes only. Theft, carelessness and waste have a direct impact on the Company’s profitability. The use of Company funds or assets, whether or not for personal gain, for any unlawful or improper purpose is prohibited.

To ensure the protection and proper use of the Company’s assets, each employee should:

•

Exercise reasonable care to prevent theft, damage or misuse of Company property.

•

Report the actual or suspected theft, damage or misuse of Company property to a supervisor.

•

Use the Company’s telephone system, other electronic communication services, written materials and other property primarily for business-related purposes.

•

Safeguard all electronic programs, data, communications and written materials from inadvertent access by others.

•

Use Company property only for legitimate business purposes, as authorized in connection with your job responsibilities.

Employees should be aware that Company property includes all data and communications transmitted or received to or by, or contained in, the Company’s electronic or telephonic systems. Company property also includes all written communications. Employees and other users of Company property should have no expectation of privacy with respect to these communications and data. To the extent permitted by law, the Company has the ability, and reserves the right, to monitor all electronic and telephonic communication. These communications may also be subject to disclosure to law enforcement or government officials.

COMPETITION AND FAIR DEALING

All employees are obligated to deal fairly with fellow employees and with the Company’s customers, suppliers and competitors. Employees should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice.

Relationships with Customers

Our business success depends upon our ability to foster lasting customer relationships. The Company is committed to dealing with customers fairly, honestly and with integrity. Specifically, you should keep the following guidelines in mind when dealing with customers:

•

Information we supply to customers should be accurate and complete to the best of our knowledge. Employees should not deliberately misrepresent information to customers.

•

Employees should not refuse to sell, service, or maintain products the Company has produced simply because a customer is buying products from another supplier.

•

Customer entertainment should not exceed reasonable and customary business practice. Employees should not provide entertainment or other benefits that could be viewed as an inducement to or a reward for customer purchase decisions. Please see “Gifts and Entertainment” below for additional guidelines in this area.

Relationships with Suppliers

The Company deals fairly and honestly with its suppliers. This means that our relationships with suppliers are based on price, quality, service and reputation, among other factors. Employees dealing with suppliers should carefully guard their objectivity. Specifically, no employee should accept or solicit any personal benefit from a supplier or potential supplier that might compromise, or appear to compromise, their objective assessment of the supplier’s products and prices. Employees can give or accept promotional items of nominal value or moderately scaled entertainment within the limits of responsible and customary business practice. Please see “Gifts and Entertainment” below for additional guidelines in this area.

Relationships with Competitors

The Company is committed to free and open competition in the marketplace. Employees should avoid actions that would be contrary to laws governing competitive practices in the marketplace, including antitrust laws. Such actions include misappropriation and/or misuse of a competitor’s confidential information or making false statements about the competitor’s business and business practices.

GIFTS AND ENTERTAINMENT

The giving and receiving of gifts is a common business practice. Appropriate business gifts and entertainment are welcome courtesies designed to build relationships and understanding among business partners. However, gifts and entertainment should not compromise, or appear to compromise, your ability to make objective and fair business decisions.

It is your responsibility to use good judgment in this area. As a general rule, you may give or receive gifts or entertainment to or from customers or suppliers only if the gift or entertainment would not be viewed as an inducement to or reward for any particular business decision. All gifts and entertainment expenses should be properly accounted for on expense reports. The following specific examples may be helpful:

•

Meals and Entertainment. You may occasionally accept or give meals, refreshments or other entertainment if:

•

The items are of reasonable value;

•

The purpose of the meeting or attendance at the event is business related; and

•

The expenses would be paid by the Company as a reasonable business expense if not paid for by another party.

Entertainment of reasonable value may include food and tickets for sporting and cultural events if they are generally offered to other customers, suppliers or vendors.

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Advertising and Promotional Materials. You may occasionally accept or give advertising or promotional materials of nominal value.

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Personal Gifts. You may accept or give personal gifts of reasonable value that are related to recognized special occasions such as a graduation, promotion, new job, wedding, retirement or a holiday. A gift is also acceptable if it is based on a family or personal relationship and unrelated to the business involved between the individuals.

•

Gifts Rewarding Service or Accomplishment. You may accept a gift from a civic, charitable or religious organization specifically related to your service or accomplishment.

You must be particularly careful that gifts and entertainment are not construed as bribes, kickbacks or other improper payments. See “The Foreign Corrupt Practices Act” below for a more detailed discussion of our policies regarding giving or receiving gifts related to business transactions.

You should make every effort to refuse or return a gift that is beyond these permissible guidelines. If it would be inappropriate to refuse a gift or you are unable to return a gift, you should promptly report the gift to your supervisor. Your supervisor will bring the gift to the attention of the Compliance Officer, who may require you to donate the gift to an appropriate community organization. If you have any questions about whether it is permissible to accept a gift or something else of value, contact your supervisor or the Compliance Officer for additional guidance.

COMPANY RECORDS

Accurate and reliable records are crucial to our business. Our records are the basis of our earnings statements, financial reports and other disclosures to the public and guide our business decision-making and strategic planning. Company records include booking information, payroll, timecards, travel and expense reports, e-mails, accounting and financial data, measurement and performance records, electronic data files and all other records maintained in the ordinary course of our business.

All Company records must be complete, accurate and reliable in all material respects. Undisclosed or unrecorded funds, payments or receipts are inconsistent with our business practices and are prohibited. You are responsible for understanding and complying with our record keeping policy. Ask your supervisor if you have any questions.

ACCURACY OF FINANCIAL REPORTS AND OTHER PUBLIC COMMUNICATIONS

As a public company we are subject to various securities laws, regulations and reporting obligations. These laws, regulations and obligations and our policies require the disclosure of accurate and complete information regarding the Company’s business, financial condition and results of operations. Inaccurate, incomplete or untimely reporting will not be tolerated and can severely damage the Company and result in legal liability.

It is essential that the Company’s financial records, including all filings with the Securities and Exchange Commission (“SEC”) be accurate and timely. Accordingly, in addition to adhering to the conflict of interest policy and other policies and guidelines in this Code, the principal financial officers and other senior financial officers must take special care to exhibit integrity at all times and to instill this value within their organizations. In particular, these senior officers must ensure their conduct is honest and ethical that they abide by all public disclosure requirements by providing full, fair, accurate, timely and understandable disclosures, and that they comply with all other applicable laws and regulations. These financial officers must also understand and strictly comply with generally accepted accounting principles in the U.S. and all standards, laws and regulations for accounting and financial reporting of transactions, estimates and forecasts.

In addition, U.S. federal securities law requires the Company to maintain proper internal books and records and to devise and maintain an adequate system of internal accounting controls. The SEC has supplemented the statutory requirements by adopting rules that prohibit (1) any person from falsifying records or accounts subject to the above requirements and (2) officers or directors from making any materially false, misleading, or incomplete statement to an accountant in connection with an audit or any filing with the SEC. These provisions reflect the SEC’s intent to discourage officers, directors, and other persons with access to the Company’s books and records from taking action that might result in the communication of materially misleading financial information to the investing public.

COMPLIANCE WITH LAWS AND REGULATIONS

Each employee has an obligation to comply with all laws, rules and regulations applicable to the Company’s operations. These include, without limitation, laws covering bribery and kickbacks, copyrights, trademarks and trade secrets, information privacy, insider trading, illegal political contributions, antitrust prohibitions, foreign corrupt practices, offering or receiving gratuities, environmental hazards, employment discrimination or harassment, occupational health and safety, false or misleading financial information or misuse of corporate assets. You are expected to understand and comply with all laws, rules and regulations that apply to your job position. If any doubt exists about whether a course of action is lawful, you should seek advice from your supervisor or the Compliance Officer.

Compliance with Insider Trading Laws

The Company has an insider trading policy, which may be obtained from the Compliance Officer. The following is a summary of some of the general principles relevant to insider trading, and should be read in conjunction with the aforementioned specific policy.

Company employees are prohibited from trading in shares or other securities of the Company while in possession of material, nonpublic information about the Company. In addition, Company employees are prohibited from recommending, “tipping” or suggesting that anyone else buy or sell shares or other securities of the Company on the basis of material, nonpublic information. Company employees who obtain material nonpublic information about another company in the course of their employment are prohibited from trading in shares or securities of the other company while in possession of such information or “tipping” others to trade on the basis of such information. Violation of insider trading laws can result in severe fines and criminal penalties, as well as disciplinary action by the Company, up to and including termination of employment.

Information is “non-public” if it has not been made generally available to the public by means of a press release or other means of widespread distribution. Information is “material” if a reasonable investor would consider it important in a decision to buy, hold or sell stock or other securities. As a rule of thumb, any information that would affect the value of stock or other securities should be considered material. Examples of information that is generally considered “material” include:

•

Financial results or forecasts, or any information that indicates the Company’s financial results may exceed or fall short of forecasts or expectations;

•

Important new products or services;

•

Pending or contemplated acquisitions or dispositions, including mergers, tender offers or joint venture proposals;

•

Possible management changes or changes of control;

•

Pending or contemplated public or private sales of debt or equity securities;

•

Acquisition or loss of a significant customer or contract;

•

Significant write-offs;

•

Initiation or settlement of significant litigation; and

•

Changes in the Company’s auditors or a notification from its auditors that the Company may no longer rely on the auditor’s report.

The laws against insider trading are specific and complex. Any questions about information you may possess or about any dealings you have had in the Company’s securities should be promptly brought to the attention of the Compliance Officer.

Public Communications and Prevention of Selective Disclosure

Public Communications Generally

The Company places a high value on its credibility and reputation in the community. What is written or said about the Company in the news media and investment community directly impacts our reputation, positively or negatively. Our policy is to provide timely, accurate and complete information in response to public requests (media, analysts, etc.), consistent with our obligations to maintain the confidentiality of competitive and proprietary information and to prevent selective disclosure of market-sensitive financial data. To ensure compliance with this policy, all news media or other public requests for information regarding the Company should be directed to the Company’s Investor Relations Department. The Investor Relations Department will work with you and the appropriate personnel to evaluate and coordinate a response to the request.

Prevention of Selective Disclosure

Preventing selective disclosure is necessary to comply with United States securities laws and to preserve the reputation and integrity of the Company as well as that of all persons affiliated with it. “Selective disclosure” occurs when any person provides potentially market-moving information to selected persons before the news is available to the investing public generally. Selective disclosure is a crime under United States law and the penalties for violating the law are severe.

The following guidelines have been established to avoid improper selective disclosure. Every employee is required to follow these procedures:

•

All contact by the Company with investment analysts, the press and/or members of the media shall be made through the chief executive officer, chief financial officer or persons designated by them (collectively, the “Media Contacts”).

•

Other than the Media Contacts, no officer, director or employee shall provide any information regarding the Company or its business to any investment analyst or member of the press or media.

•

All inquiries from third parties, such as industry analysts or members of the media, about the Company or its business should be directed to a Media Contact. All presentations to the investment community regarding the Company will be made by us under the direction of a Media Contact.

•

Other than the Media Contacts, any employee who is asked a question regarding the Company or its business by a member of the press or media shall respond with “No comment” and forward the inquiry to a Media Contact.

These procedures do not apply to the routine process of making previously released information regarding the Company available upon inquiries made by investors, investment analysts and members of the media.

Please contact the Compliance Officer if you have any questions about the scope or application of the Company’s policies regarding selective disclosure.

The Foreign Corrupt Practices Act

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (the “FCPA”) prohibits the Company and its employees and agents from offering or giving money or any other item of value to win or retain business or to influence any act or decision of any governmental official, political party, candidate for political office or official of a public international organization. Stated more concisely, the FCPA prohibits the payment of bribes, kickbacks or other inducements to foreign officials. This prohibition also extends to payments to a sales representative or agent if there is reason to believe that the payment will be used indirectly for a prohibited payment to foreign officials. Violation of the FCPA is a crime that can result in severe fines and criminal penalties, as well as disciplinary action by the Company, up to and including termination of employment.

Certain small facilitation payments to foreign officials may be permissible under the FCPA if customary in the country or locality and intended to secure routine governmental action. Governmental action is “routine” if it is ordinarily and commonly performed by a foreign official and does not involve the exercise of discretion. For instance, “routine” functions would include setting up a telephone line or expediting a shipment through customs. To ensure legal compliance, all facilitation payments must receive prior written approval from the Compliance Officer and must be clearly and accurately reported as a business expense.

Environment, Health and Safety

The Company is committed to providing a safe and healthy working environment for its employees and to avoiding adverse impact and injury to the environment and the communities in which we do business. Company employees must comply with the applicable environmental, health and safety laws, regulations and Company standards. It is your responsibility to understand and comply with the laws, regulations and policies that are relevant to your job. Failure to comply with environmental, health and safety laws and regulations can result in civil and criminal liability against you and the Company, as well as disciplinary action by the Company, up to and including termination of employment. You should contact the Compliance Officer if you have any questions about the laws, regulations and policies that apply to you.

Environment

All Company employees should strive to conserve resources and reduce waste and emissions through recycling and other energy conservation measures. You have a responsibility to promptly report any known or suspected violations of environmental laws or any events that may result in a discharge or emission of hazardous materials. Employees whose jobs involve manufacturing have a special responsibility to safeguard the environment. Such employees should be particularly alert to the storage, disposal and transportation of waste, and handling of toxic materials and emissions into the land, water or air.

Health and Safety

The Company is committed not only to complying with all relevant health and safety laws, but also to conducting business in a manner that protects the safety of its employees. All employees are required to comply with the applicable health and safety laws, regulations and policies relevant to their jobs. If you have a concern about unsafe conditions or tasks that present a risk of injury to you, please report these concerns immediately to your supervisor.

Employment Practices

The Company pursues fair employment practices in every aspect of its business. The following is intended to be a summary of our employment policies and procedures. Copies of our detailed policies are available from your supervisor. Company employees must comply with the applicable labor and employment laws, including anti-discrimination laws and laws related to freedom of association, privacy and collective bargaining. It is your responsibility to understand and comply with the laws, regulations and policies that are relevant to your job. Failure to comply with labor and employment laws can result in civil and criminal liability against you and the Company, as well as disciplinary action by the Company, up to and including termination of employment. You should contact the Compliance Officer if you have any questions about the laws, regulations and policies that apply to you.

Harassment and Discrimination

The Company is committed to providing equal opportunity and fair treatment to all individuals on the basis of merit, without discrimination because of race, color, religion, national origin, gender (including pregnancy), sexual orientation, age, disability, veteran status or other characteristic protected by law. The Company prohibits harassment in any form, whether physical or verbal and whether committed by supervisors, non-supervisory personnel or non-employees. Harassment may include, but is not limited to, offensive sexual flirtations, unwanted sexual advances or propositions, verbal abuse, sexually or racially degrading words, or the display in the workplace of sexually suggestive objects or pictures.

If you have any complaints about discrimination or harassment, report such conduct to your supervisor. All complaints will be treated with sensitivity and discretion. Your supervisor and the Company will protect your confidentiality to the extent possible, consistent with law and the Company’s need to investigate your concern. Where our investigation uncovers harassment or discrimination, we will take prompt corrective action, which may include disciplinary action by the Company, up to and including, termination of employment. The Company strictly prohibits retaliation against an employee who, in good faith, files a complaint.

Any member of management who has reason to believe that an employee has been the victim of harassment or discrimination or who receives a report of alleged harassment or discrimination is required to report it to the Compliance Officer immediately.

CONCLUSION

This Code of Business Conduct and Ethics contains general guidelines for conducting the business of the Company consistent with the highest standards of business ethics. If you have any questions about these guidelines, please contact your supervisor or the Compliance Officer. We expect all Company employees to adhere to these standards.

This Code of Business Conduct and Ethics, as applied to the Company’s principal financial officers, shall be our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This Code and the matters contained herein are neither a contract of employment nor a guarantee of continuing Company policy. We reserve the right to amend, supplement or discontinue this Code and the matters addressed herein, without prior notice, at any time.

Exhibit 12.1

CERTIFICATIONS

I, Ken Jian Xiao, certify that:

1. I have reviewed this annual report on Form 20-F of China Mobile Games and Entertainment Group Limited (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.


Date: April 29, 2015

By:		/s/ Ken Jian Xiao
Name:		Ken Jian Xiao
Title:		Director and Chief Executive Officer

Exhibit 12.2

CERTIFICATIONS

I, Ken Fei Fu Chang, certify that:

1. I have reviewed this annual report on Form 20-F of China Mobile Games and Entertainment Group Limited (the “Company”);

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company and have:

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.


Date: April 29, 2015

By:		/s/ Ken Fei Fu Chang
Name:		Ken Fei Fu Chang
Title		Director and Chief Financial Officer

Exhibit 13.1

CERTIFICATIONS

In connection with the Annual Report of China Mobile Games and Entertainment Group Limited (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ken Jian Xiao, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: April 29, 2015

By:		/s/ Ken Jian Xiao
Name:		Ken Jian Xiao
Title:		Director and Chief Executive Officer

Exhibit 13.2

CERTIFICATIONS

In connection with the Annual Report of China Mobile Games and Entertainment Group Limited (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ken Fei Fu Chang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: April 29, 2015

By:		/s/ Ken Fei Fu Chang
Name:		Ken Fei Fu Chang
Title		Director and Chief Financial Officer

Exhibit 15.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-184378) pertaining to China Mobile Games and Entertainment Group Limited’s Share Option Scheme of our report dated April 29, 2015, with respect to the consolidated financial statements of China Mobile Games and Entertainment Group Limited included in this Annual Report (Form 20-F) for the year ended December 31, 2014.

/s/ Ernst & Young Hua Ming LLP

Shenzhen, the People’s Republic of China

April 29, 2015

Exhibit 15.2

[Letterhead of Guantao Law Firm]

April 29, 2015

China Mobile Games and Entertainment Group Limited

Block A, 15/F Huajian Building

233 Tianfu Road, Tianhe District

Guangzhou, People’s Republic of China

Ladies and Gentlemen:

We hereby consent to the use of our name under the headings “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview—Regulations” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” in China Mobile Games and Entertainment Group Limited’s annual report on Form 20-F for the year ended December 31, 2014 (the “Annual Report”), which will be filed with the Securities and Exchange Commission (the “SEC”) on April 29, 2015. We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report.

Sincerely Yours,

/s/ Guantao Law Firm

Guantao Law Firm

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