Indicate the number of outstanding shares of each of the Issuers classes of capital or common stock as of the close of the period covered
by the annual report: 58,995,186 Class A ordinary shares, par value US$0.0001 per share, and 141,435,672 Class B ordinary shares, par value US$0.0001 per share, were outstanding as of December 31, 2013.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
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):
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing:
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
¨
Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:
This annual report contains forward-looking statements that involve risks and uncertainties. All statements other than statements of
historical facts are forward-looking statements. These forward-looking statements are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements by words or phrases such as may, will, expect, is
expected to, anticipate, aim, estimate, intend, plan, believe, 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,
but are not limited to, statements about:
You should thoroughly read this
annual report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. Other sections of this annual report, including the Risk Factors and
Operating and Financial Review and Prospects sections, discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not
possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in
any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
You should not rely upon
forward-looking statements we make as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We undertake no
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
PART I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|
Not applicable.
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
A.
Selected Financial Data
The following table presents selected consolidated statements of comprehensive income (loss) data for the years ended December 31, 2011,
2012 and 2013 and the selected consolidated balance sheets data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. The selected
consolidated balance sheets data as of December 31, 2011 have been derived from our audited consolidated financial statements for the year ended December 31, 2011, which are not included in this annual report. Our consolidated financial
statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future
period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under Item 5. Operating and Financial Review and Prospects included
elsewhere in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Selected Consolidated Statements of Comprehensive Income (Loss) Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
96,594,538
|
|
|
|
185,218,681
|
|
|
|
328,843,318
|
|
|
|
54,321,046
|
|
Cost of revenues
(1)
|
|
|
(46,617,793
|
)
|
|
|
(74,813,098
|
)
|
|
|
(94,144,743
|
)
|
|
|
(15,551,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,976,745
|
|
|
|
110,405,583
|
|
|
|
234,698,575
|
|
|
|
38,769,442
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
(1)
|
|
|
(30,190,352
|
)
|
|
|
(34,041,250
|
)
|
|
|
(46,641,102
|
)
|
|
|
(7,704,561
|
)
|
Selling and marketing expenses
(1)
|
|
|
(35,305,268
|
)
|
|
|
(45,914,065
|
)
|
|
|
(47,293,583
|
)
|
|
|
(7,812,343
|
)
|
General and administrative expenses
(1)
|
|
|
(23,224,454
|
)
|
|
|
(25,614,849
|
)
|
|
|
(51,246,338
|
)
|
|
|
(8,465,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(38,743,329
|
)
|
|
|
4,835,419
|
|
|
|
89,517,552
|
|
|
|
14,787,246
|
|
Change in fair value of warrants
|
|
|
(2,356,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of losses of equity method investments
|
|
|
(3,744,390
|
)
|
|
|
(1,072,946
|
)
|
|
|
|
|
|
|
|
|
Impairment loss on equity method investments
|
|
|
(389,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of an equity method investment
|
|
|
|
|
|
|
4,182,485
|
|
|
|
|
|
|
|
|
|
Investment income on short-term investment
|
|
|
2,251,269
|
|
|
|
124,862
|
|
|
|
360,750
|
|
|
|
59,592
|
|
Interest income
|
|
|
205,715
|
|
|
|
194,643
|
|
|
|
279,777
|
|
|
|
46,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(42,776,042
|
)
|
|
|
8,264,463
|
|
|
|
90,158,079
|
|
|
|
14,893,054
|
|
Income tax benefit
|
|
|
|
|
|
|
6,903,561
|
|
|
|
1,656,813
|
|
|
|
273,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
15,166,740
|
|
Basic earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.28
|
|
|
|
0.05
|
|
Diluted earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.27
|
|
|
|
0.04
|
|
Weighted average ordinary shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
51,880,468
|
|
|
|
51,880,468
|
|
|
|
67,653,340
|
|
|
|
|
|
Diluted
|
|
|
51,880,468
|
|
|
|
51,880,468
|
|
|
|
70,950,210
|
|
|
|
|
|
3
(1)
|
The amount of share-based compensation costs for the years ended December 31, 2011, 2012 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Cost of revenues
|
|
|
74,458
|
|
|
|
76,111
|
|
|
|
639,246
|
|
|
|
105,596
|
|
Research and development expenses
|
|
|
111,716
|
|
|
|
164,374
|
|
|
|
1,944,824
|
|
|
|
321,262
|
|
Selling and marketing expenses
|
|
|
52,355
|
|
|
|
124,850
|
|
|
|
728,459
|
|
|
|
120,333
|
|
General and administrative expenses
|
|
|
53,365
|
|
|
|
60,748
|
|
|
|
14,510,015
|
|
|
|
2,396,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
291,894
|
|
|
|
426,083
|
|
|
|
17,822,544
|
|
|
|
2,944,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Selected Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
81,011,002
|
|
|
|
83,598,378
|
|
|
|
759,388,415
|
|
|
|
125,442,030
|
|
Accounts receivable, net
|
|
|
33,167,598
|
|
|
|
46,341,590
|
|
|
|
84,344,499
|
|
|
|
13,932,719
|
|
Total Assets
|
|
|
135,853,500
|
|
|
|
164,318,473
|
|
|
|
903,003,569
|
|
|
|
149,165,563
|
|
Total liabilities
|
|
|
33,894,056
|
|
|
|
46,632,878
|
|
|
|
68,013,032
|
|
|
|
11,234,952
|
|
Redeemable convertible preferred shares
|
|
|
390,097,630
|
|
|
|
447,127,915
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
42,360
|
|
|
|
42,360
|
|
|
|
133,483
|
|
|
|
22,050
|
|
Accumulated deficit
|
|
|
(327,181,409
|
)
|
|
|
(369,820,097
|
)
|
|
|
(321,423,826
|
)
|
|
|
(53,095,434
|
)
|
Total shareholders equity (deficit)
|
|
|
(288,138,186
|
)
|
|
|
(329,442,320
|
)
|
|
|
834,990,537
|
|
|
|
137,930,611
|
|
Exchange Rate Information
Our business is primarily conducted in China and most of our revenues are denominated in RMB. Unless otherwise noted, all translations from RMB
to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.0537 to US$1.00, the exchange rate on December 31, 2013 as set forth in the H.10 statistical release published by the Federal Reserve Board. We make
no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in
part through direct regulation of the conversion of RMB into foreign currency and through restrictions on foreign exchange activities. On April 25, 2014, the exchange rate, as set forth in the H.10 statistical release of the Federal Reserve Board,
was RMB6.2534 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for
the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our other periodic reports or any other information to be
provided to you.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certified Exchange Rate
|
|
Period
|
|
Period End
|
|
|
Average
(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB per US$1.00)
|
|
2008
|
|
|
6.8225
|
|
|
|
6.9193
|
|
|
|
7.2946
|
|
|
|
6.7800
|
|
2009
|
|
|
6.8259
|
|
|
|
6.8295
|
|
|
|
6.8470
|
|
|
|
6.8176
|
|
2010
|
|
|
6.6000
|
|
|
|
6.7603
|
|
|
|
6.8330
|
|
|
|
6.6000
|
|
2011
|
|
|
6.2939
|
|
|
|
6.4475
|
|
|
|
6.6364
|
|
|
|
6.2939
|
|
2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.3879
|
|
|
|
6.2221
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
October
|
|
|
6.0943
|
|
|
|
6.1032
|
|
|
|
6.1209
|
|
|
|
6.0815
|
|
November
|
|
|
6.0922
|
|
|
|
6.0929
|
|
|
|
6.0993
|
|
|
|
6.0903
|
|
December
|
|
|
6.0537
|
|
|
|
6.0738
|
|
|
|
6.0927
|
|
|
|
6.0537
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.0590
|
|
|
|
6.0509
|
|
|
|
6.0600
|
|
|
|
6.0402
|
|
February
|
|
|
6.1448
|
|
|
|
6.0816
|
|
|
|
6.1448
|
|
|
|
6.0591
|
|
March
|
|
|
6.2164
|
|
|
|
6.1728
|
|
|
|
6.2273
|
|
|
|
6.1183
|
|
April (through April 25, 2014)
|
|
|
6.2534
|
|
|
|
6.2196
|
|
|
|
6.2534
|
|
|
|
6.1966
|
|
(1)
|
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
|
4
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 GO series products and GO platform are relatively new, and the continued growth of our business is subject to a high degree of uncertainty.
Our GO series products and GO platform are relatively new and have only a short operating history, and the core elements of our GO
platform are unique and rapidly evolving. Our GO series products have rapidly achieved global popularity since the launch of GO Launcher EX in November 2010. However, due to the relatively short history of GO series products and services, the
sustainability of user demand and the continued growth of our GO series products and GO platform are subject to a high degree of uncertainty. There are few proven methods of projecting user demand or industry trends on which we can rely, and we
cannot assure you that we will be successful in the future. As the mobile internet industry is experiencing constant changes and innovation, many of the determining factors for the future of our GO series products and our GO platform are beyond our
control, including our ability to anticipate and adapt to rapid changes in industry trends and the tastes and preferences of our users, our ability to develop a larger portfolio of GO series products and services that will continue to be popular
among users, our ability to integrate a large number of third party mobile internet products and services into our GO platform to serve a wider range of our users needs, the continued worldwide growth in the use of our mobile internet
products, and the availability and popularity of other competing mobile internet products.
We have devoted, and expect to continue to
devote, substantial resources to the development of our GO platform and the expansion of the products and services offered on this platform, but we cannot guarantee that we will be able to continuously improve the functionality and performance of
our GO series products so that they continue to appeal to our users, advertisers, third-party developers or other business partners.
There are
significant uncertainties in the revenue potential of our GO series products and GO platform.
There is no proven revenue model for
our GO series products and GO platform, as the fast growth of the mobile internet industry is a very recent phenomenon and we offer a unique, innovative portfolio of products and services that redefines the Android user experience. Leveraging the
large user base of our GO series products, we have been experimenting with various revenue models, including user purchases of premium themes and premium launcher product, in-app purchases of advanced functionalities, and advertisers payments
for different forms of advertising on our GO platform either through direct sales or through advertising agencies and mobile advertising networks such as GetJar, which we acquired in February 2014, and Google AdMob. We also intend to enter into
arrangements with more third-party mobile internet products and services providers for their offerings on our GO platform. We cannot assure you that our existing revenue streams can continue to grow as we expected or that we can successfully
identify new significant revenue streams, nor can we guarantee that we will be successful in developing and building an effective revenue model for our GO platform. As a result, there is significant uncertainty in our revenue potential.
Our business is increasingly subject to the risks relating to international operations, which could adversely affect our financial conditions and
results of operations.
Our business has rapidly expanded internationally since we released our GO Launcher EX and other GO series
products. The international market forms an important component of our growth strategy, but expanding our business internationally exposes us to a number of risks, including:
|
|
|
Difficulty in identifying appropriate local or international third-party business partners and establishing and maintaining a good working relationship with them;
|
5
|
|
|
Difficulty in selecting appropriate geographical regions for overseas expansion;
|
|
|
|
Difficulty in understanding local markets and culture;
|
|
|
|
Fluctuations in currency exchange rates;
|
|
|
|
Compliance with applicable foreign laws and regulations, including internet content requirements, foreign exchange controls, cash repatriation restrictions, intellectual property protection rules and data privacy
requirements; and
|
|
|
|
Increased costs associated with doing business in foreign jurisdictions.
|
Our financial
condition and results of operations could be adversely affected by these and other risks associated with conducting international operations.
Our
GO series products and GO platform are built on the Android operating system and are highly reliant on third-party mobile internet products distribution platforms such as Google Play. Our revenues may suffer if the market demand for Android
smartphones decreases, or if any of the distribution platforms that help make our GO series products available for download changes its standard terms and conditions in a way that is detrimental to us.
We built up our GO series products and GO platform on the Android operation system. Any significant downturn in the overall demand for Android
smartphones or the use of Android smartphones could significantly and adversely affect the demand for our launcher products, which in turn would materially affect our revenues generated from GO series products. Although the Android smartphone market
has grown rapidly in recent years, it is uncertain whether the Android smartphone market will remain growing at a similar rate in the future. In addition, due to the constantly evolving nature of the smartphone industry, another operating system for
smartphones may eclipse the Android operating system and send the Android system into a decline in popularity. To the extent that our GO series products continue to be operated on Android smartphones and to the extent that our future revenues
substantially depend on the use and sales of Android smartphones, our business would be vulnerable to any downturns in the Android smartphone market.
In addition, we rely upon third-party mobile internet products distribution platforms such as Google Play to make our GO series products
available for user download. Google Play, a global application distribution platform on Android smartphones, is currently the main distribution channel for our GO series products outside of China. In China, where Google Play is not available, we
work with other similar local distribution platforms to make our GO series products available to users in the country. We expect to continue to derive a substantial number of downloads of our GO series products from such distribution platforms,
especially Google Play. As such, the promotion, distribution and operation of our platform products are subject to Google Plays and other similar distribution platforms standard terms and policies for application developers, which are
very broad and subject to the interpretation of, and frequent changes by, Google Play and these other distribution platforms. If Google Play, or any of the major distribution platforms that help make our GO series products available for download,
changes its standard terms and conditions in a way that is detrimental to us, or terminates its existing relationship with us, revenues from our GO series products and services could be materially and adversely affected.
We may not be able to continually meet user demand and retain or expand our user base.
Although we constantly monitor and research user needs, we may be unable to meet user demand on a continual basis or anticipate future user
demands. A decrease in the number of users may reduce our monetization opportunities and have a material and adverse effect on our business, financial condition and results of operations. In order to attract and retain users and remain competitive,
we must continue to innovate our products and services, improve user experience, and implement new technologies and functionalities.
The
mobile internet business is characterized by constant changes, including but not limited to rapid technological evolution, continual shifts in user demands, frequent introductions of new products and services and constant emergence of new industry
standards and practices. As a result, users may leave us for our competitors products and services more quickly than in other sectors. Thus our success will depend, in part, on our ability to respond to these changes on a timely and
cost-effective basis, including improving and marketing our existing products and services and developing and pricing new products and services in response to evolving user needs. Our ability to successfully retain or expand our user base will
depend on our ability to achieve the following, among others:
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Anticipate and effectively respond to the growing number of mobile internet users in general and GO platform and GO series product users in particular;
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Attract, retain and motivate talented application designers, product managers and engineers who have experience developing our GO series products or other mobile internet products and services;
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Effectively market our existing and new mobile internet products and price them in response to evolving user needs;
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Timely develop and launch new Go series products and other mobile internet products cost-effectively;
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Further improve our GO platform to provide a compelling and optimal user experience through integration of products and services provided by existing and new third-party developers or business partners as well as our
3G.cn mobile portal and mobile reading base; and
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Further provide quality content to attract and retain visitors, advertisers and readers to 3G.cn and our mobile reading base.
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We cannot assure you that our existing products and services will continue to be sufficiently popular with our users. We may be unsuccessful
in adding compelling new products and services to further diversify our product offerings. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of our new products or services.
Moreover, we cannot be sure that any of our new products and services will achieve widespread market acceptance or generate incremental revenue the way our existing GO series products have done. If we fail to continue to achieve sufficient user
satisfaction through our products or services or our products and services fail to meet our expectation to maintain and expand our user base, our business, results of operations and financial condition will be materially and adversely affected.
We may not be able to effectively manage our growth or implement our future business strategies, in which case our business and results of operations
may be materially and adversely affected.
We anticipate continuous expansion in our business, both through internal growth and
strategic cooperation with third party partners. We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. We cannot assure you that this level of
significant growth will be sustainable or achieved at all in the future. We believe that our continued growth will depend on our ability to develop and enhance our products and services, attract new users, retain existing users, encourage additional
purchases by existing users, continue developing innovative technologies in response to user demand, maintain an open platform for Android smartphone products and services from third party developers, increase brand awareness through marketing and
promotional activities, react to changes in market trends, expand into new market segments, integrate our products onto our platform, attract new advertisers and retain existing advertisers and take advantage of the growth in the relevant markets.
We cannot assure you that we will achieve any of the above.
To manage our growth and attain and maintain profitability, we will also need
to further expand, train, manage and motivate our workforce and manage our relationships with users, third party developers, business partners and advertisers. We anticipate that we will need to implement a variety of enhanced and upgraded
operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. All of these endeavors involve risks and will require substantial management efforts and skills and
significant additional expenditures. In addition, we currently derive revenues for GO series products primarily from outside of China, whereas our revenues from 3G.cn and our mobile reading services are primarily derived from China; this geographic
diversification in the sources of our revenues may raise the level of difficulty in managing our growth and profitability. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our
future operations. In addition, we cannot assure you that we will be able to effectively manage our growth or implement our future business strategies effectively, and failure to do so may materially and adversely affect our business and results of
operations.
7
We have limited relevant operating history and it may be difficult to evaluate our business and prospects.
We commenced operations in 2003, and our business has undergone significant changes with the development of different mobile
internet products, from the establishment of 3G.cn in 2004 to the beginning of charging fees for our mobile reading services in 2010 and, most recently, the launch of GO Launcher EX in November 2010. Given our history and our diversified sources of
revenues, including the relatively new GO series products, and given the risks frequently encountered by fast-growing companies in relatively new and rapidly evolving industries such as the mobile internet industry, it may be difficult for you to
evaluate our business, financial performance and prospects. Our historical growth rate may not be indicative of our future performance. We cannot assure you that we will grow at the same rate as we did in the past. You should consider our prospects
in light of the risks and uncertainties that fast-growing companies in a relatively new and rapidly evolving market may encounter or to which such companies may be exposed.
If we fail to attract advertisers or if our advertisers reduce their spending with us, our revenues, profitability and prospects may be materially and
adversely affected.
In the years ended December 31, 2011, 2012 and 2013, our marketing revenues from mobile portal and mobile
application products and services accounted for 49.3%, 37.5% and 43.0%, respectively, of our total revenues. Although our other services have experienced significant growth in recent years, we expect to derive an increasing percentage of revenues
from marketing service, especially from our mobile application products and services, and our profitability and prospects will partly depend on the continued development of the advertising industry and advertisers allocation of budgets to
mobile internet advertising. Companies that advertise on mobile internet may utilize other methods or channels that are more established than the marketing solutions we offer. If the mobile advertising market size does not increase from current
levels, or if we are unable to capture and retain a sufficient share of that market, our ability to maintain or increase our current level of marketing revenues and our profitability and prospects could be materially and adversely affected.
We generate our marketing revenues from working with mobile advertising networks, advertising agencies and direct advertisers. Currently, a
small number of advertising customers contribute a significant portion of our marketing revenues. One of our direct advertisers contributed approximately 19.8% of our marketing revenue, or 8.5% of our total revenues for the year ended
December 31, 2013. We cannot assure you that we will be able to retain this and other existing direct advertisers, maintain relations with existing advertising agencies or mobile advertising networks, attract new direct advertisers or work with
new advertising agencies and mobile advertising networks. In addition, if any direct advertisers or advertising agencies determine that their expenditures on advertising with us do not generate expected returns, for reasons such as the amount and
quality of content on our GO platform or 3G.cn fail to attract a sufficient number of users, such direct advertisers or advertising agencies may allocate a greater portion or all of their advertising budgets to other channels and reduce or
discontinue doing business with us. Since our arrangements with third-party advertising agencies typically involve short-term framework or project-based agreements, we cannot assure you that we can continue cooperating with such advertising agencies
in the future. Although we intend to reduce reliance on third-party advertising networks by developing our own advertising network in the future, failure to retain existing advertisers, enhance relations with existing advertising agencies and mobile
advertising networks, attract new direct advertisers, work with new advertising agencies and mobile advertising networks or efficiently manage advertising inventory may materially and adversely affect our business, financial condition and results of
operations.
We face competition in all aspects of our business. If we fail to compete effectively or if our reputation is damaged, our business,
financial condition and results of operations may be materially and adversely affected.
Although we currently have a leading
presence in the smartphone launcher platform products market, we cannot guarantee that we will be able to maintain our leading position in the future. We may face potential competition from leading mobile internet companies or smartphone
manufacturers if they start to allocate resources and focus on the development in this business sector, and new competitors may also emerge. With more entrants into the smartphone launcher platform products business, aggressive price cutting by
competitors may result in downward pressure on our gross margins in the future. We may then have to take actions to retain and attract users, such as cutting the price of our product and service offerings, which could adversely affect our
profitability. If we fail to compete effectively, our market share would decrease and our results of operations would be materially and adversely affected.
8
We also face competition in other aspects of our business, particularly from companies that
provide mobile portal services and mobile reading services. Some of our competitors have longer operating histories and significantly greater financial, technical and marketing resources than we do, and in turn have an advantage in attracting and
retaining users and advertisers. In addition, many of our competitors that provide mobile portal and mobile reading services have significantly larger user bases and more established brand names than we do and may be able to more effectively
leverage their user bases and brand names to provide integrated products and services, and thereby increase their respective market shares.
If we are not able to effectively compete in any aspect of our business or if our reputation is harmed by rumors or allegations regarding our
business, our overall user base may decrease, which could reduce our paying users or make us less attractive to advertisers. We may be required to spend additional resources to further increase our brand recognition and promote our products and
services, and such additional spending could adversely affect our profitability. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity relating to us, such disputes, regardless of their veracity or
outcome, may harm our reputation or brand image and in turn lead to reduced number of users and advertisers. Any legal proceedings or measures we take in response to such disputes may be expensive, time-consuming and disruptive to our operations and
divert our managements attention.
We may incur net losses and experience negative cash flow from operating activities in the future and may
not be able to obtain additional capital in a timely manner or on acceptable terms, or at all.
We have incurred net losses
historically and we may incur losses in the future as we grow our business. In addition, we experienced negative cash flow from operating activities of RMB29.5 million in 2011; although we generated positive cash flow from operating activities in
the amount of RMB12.3 million in 2012 and RMB69.9 million (US$11.5 million) in 2013, we may experience negative cash flows again in the future.
Our ability to achieve and maintain profitability and positive cash flow from operating activities depends on various factors, including but
not limited to, the acceptance of our products and services by mobile internet users, the growth and maintenance of our user base, our ability to control our costs and expenses and grow our revenues and the effectiveness of our selling and marketing
activities. We may not be able to achieve or sustain profitability or positive cash flow from operating activities, and if we achieve positive operating cash flow, it may not be sufficient to satisfy our anticipated capital expenditures and other
cash needs. As such, we may not be able to fund our operating expenses and expenditures and may be unable to fulfill our financial obligations as they become due, which may result in voluntary or involuntary dissolution or liquidation proceeding of
our company and a total loss of your investment.
Our mobile reading services historically generated a substantial portion of our revenues. Our
business and results of operations may be adversely affected if we fail to identify, attract and retain promising authors to generate popular literary content and support the continued growth of our mobile reading services.
In the years ended December 31, 2011, 2012 and 2013, mobile reading services accounted for 34.7%, 39.3% and 30.3%, respectively, of our
total revenues. We expect that our mobile reading services will continue to be an important revenue generating source and we rely on our authors to produce attractive literary content and drive the continued growth of our mobile reading services. We
may not be able to identify, attract and retain promising authors to produce popular literary content on a scale sufficient to support the continued growth of our mobile reading services. We may lose our most successful authors to competitors who
may offer our authors more favorable terms that we are unable to match. Our popular authors may request more favorable terms or higher prices for licensing or transferring the proprietary rights of their literary works to us. We cannot guarantee
that the content created by our authors will be popular enough to help us increase the number of paying users or increase their spending with our mobile reading services. Although some of our authors agree to create literary content exclusively for
us, we cannot control their productivity or the quality of their works produced within the contract term. We cannot be certain that the authors will continue to prefer to publish their literary works with our mobile reading services. In the event of
any decline in our authors productivity or the quality of the literary works they produce, or if we are unable to attract or retain qualified authors, we may incur substantial costs to procure suitable replacement authors and content, which
could have a negative impact on the number of our readers for our mobile reading services, and ultimately, on our business, financial condition and results of operations.
9
Our business depends substantially on the continuing efforts of our management team and key employees, and
our business operations may be severely disrupted if we lose their services.
Our future success depends substantially on the
continued efforts of our management team and key employees, in particular, Mr. Yuqiang Deng, our chief executive officer, Mr. Xiangdong Zhang, our president, Mr. Yingming Chang, our chief operating officer, and Mr. Aihua Huang,
our vice president of technology. The loss of any of our management team members could harm our business. In addition, if any of our key employees were unable or unwilling to continue their services with us, we might not be able to replace them
easily, in a timely manner, or at all, which could result in significant disruptions to our business, and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business. If any of our
core management team members or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff members.
In addition, if we are unable to attract or retain qualified employees to achieve a high level of success, we may not be able to grow our
business or execute our business strategy and as a result, our revenues and profitability may decline. Each of our executive officers and key employees has made undertakings relating to non-competition obligations. However, these undertakings may
not be enforceable in China, where our executives and key employees reside, in light of uncertainties with Chinas legal system. See Item 3. Key InformationD. Risks Related to Doing Business in ChinaUncertainties in the
interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us. In addition, if one or more of our executives or other key personnel do not act in the best interests of our company when
a conflict of interest arises, our business, prospects and reputation may be harmed.
The performance and functionality of our GO platform may be
impacted by third party developers internet mobile products offered via our GO platform.
We have published a development kit
for our GO platform to encourage third parties to develop themes for our GO series products. Over 10,000 third-party developed themes for our GO series products are currently available to suit our users diverse needs and preferences, in
addition to the over 1,000 themes we have developed internally. We intend to expand our GO platform by cooperating with more third parties to offer their products and services on our platform. Although currently no single third-party developer is
critical to our GO platform and we continue to develop our core GO series products and services internally, if the number of high quality third-party developers on our GO platform decreases, the overall quality of third-party developed products and
services declines or the products from the third-party developers fail to be compatible with our GO platform, our ability to monetize the GO platform may be negatively impacted and we may have to allocate more resources to internally develop the
relevant products, which could have a material and adverse effect on our financial results. In addition, if we fail to integrate 3G.cn, the mobile reading services or other GO series products into our GO platform, the business potential for the
sustainable growth of our GO platform could be substantially limited.
We contract with third parties to provide content for 3G.cn and our mobile
reading services and we may lose users and revenues if these arrangements are terminated or if the quality of their content deteriorates.
We have arrangements with a number of third parties to provide content to our 3G.cn, for example, news agencies and publishers, entertainment
and sports program providers, and our mobile reading services, and we have relied and will continue to rely on third parties for a significant portion of the content and materials (including all news-related content and materials) that we offer on
3G.cn and on our mobile reading services. If a large number of these content providers terminate relationships with us, materially change our existing arrangements, or fail to deliver high-quality content that meets users needs, or if we fail
to find other content providers to maintain or expand the content we offer, we may lose our users and suffer significant revenue losses.
In addition, the PRC government has the ability to restrict or prevent state-owned media from cooperating with us in providing certain content
to us, which will result in a decline in the amount and scope of content we offer on 3G.cn, in which case our revenues will be negatively impacted. Certain state-owned media companies from whom we currently procure content have built their own
portal websites and may discontinue the cooperation with us in the future.
We cannot assure you that we will be able to retain our third
party content providers or attract new third-party providers to provide sufficient and popular content or materials, which may materially and adversely affect our business, financial condition and results of operations.
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We depend on revenue-sharing arrangements with major mobile network carriers in China for a significant
portion of our revenues from mobile reading.
A significant portion of our revenues from mobile reading services is derived from
our revenue-sharing arrangements with major mobile network carriers in China, such as China Mobile, which run their own mobile reading base. We provide content to the mobile reading libraries of these mobile network carriers and receive a percentage
of the fees paid by their users. For example, in 2011, 2012 and 2013, we derived approximately 63%, 59% and 51%, respectively, of our net revenues related to our mobile reading services from revenue-sharing arrangements with China Mobile. Our
agreements with these major mobile network carriers generally have a term of one year and there can be no assurance that the agreements will be extended or renewed upon the expiration of their respective terms or that we will be able to extend or
renew such agreements on terms and conditions favorable to us or at all. If any of the major mobile network carriers breaches its obligations under its agreement with us or refuses to extend such agreement when the term expires, we may lose all or a
portion of the users of the relevant mobile network carrier. Our mobile reading services will suffer if our relationship with any of the major mobile network carriers terminates or deteriorates, or if there are material changes to terms and
conditions of the agreements which are detrimental to us.
We face risks relating to third parties billing and payment systems.
We depend on the billing and payment systems of third parties such as wireless carriers, mobile payment service providers (such as Google Play)
and third-party payment processors to maintain accurate records of payments of sales proceeds by users and collect such payments. We receive periodic statements from these third parties which indicate the aggregate amount of fees that were charged
to users of our products and services. Our business and results of operations could be adversely affected if these third parties fail to accurately account for or calculate the revenues generated from the sales of our products and services. If there
are security breaches or failure or errors in the payment process of these third parties, user experience may be affected and our business results may be negatively impacted.
Failure to timely collect our receivables from third parties whose billing and payment systems we use and third-party payment processors may
adversely affect our cash flows. Our wireless carriers and third-party payment processors may from time to time experience cash flow difficulties. Consequently, they may delay their payments to us or fail to pay us at all. Any delay in payment or
inability of current or potential wireless carriers and third-party payment processors to pay us may significantly harm our cash flow and results of operations.
In addition, we rely on the billing statements provided by third party wireless carriers and third-party payment service providers in order to
recognize a substantial portion of our revenues from our products and services. We may not be able to recognize revenue from our products and services from these third parties in the period in which the services are performed if we do not receive
the billing statements from these third parties. Due to the delays in receiving such billing statements, our revenues may fluctuate between periods and may not reflect the actual performance of our services.
We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online
payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment
systems that we use. If a well-publicized internet or mobile network security breach were to occur, users concerned about the security of their online payments may become reluctant to purchase our products through payment service providers even if
the publicized breach did not involve payment systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence in these payment systems. If any of the above were to occur and damage our
reputation or the perceived security of the payment systems we use, we may lose paying users and users may be discouraged from purchasing our internal mobile products, which may have an adverse effect on our business and results of operations.
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Non-compliance on the part of third parties with which we conduct business could disrupt our business and
adversely affect results of our operation.
Our third-party content providers or other business partners may be subject to
regulatory penalties or punishments because of their regulatory compliance failures, which may disrupt our business. Although we conduct a rigid review of legal formalities and certifications before entering into contractual relationships with our
business partners, such as third party content providers, application developers and landlords, we cannot be certain whether any such third party has infringed or will infringe any third parties legal rights or violate any regulatory
requirements. The legal liabilities and regulatory actions on our commercial partners may affect our business activities and reputation and in turn, our results of operations. For example, according to PRC regulations, all lease agreements are
required to be registered with the local housing authorities. We presently lease properties at five different locations in China, and any failure to complete these required registrations by our landlords may expose our landlords and us to potential
monetary fines. In addition, we intend to cooperate with selected mobile game publishers and developers to operate their mobile games on our GO platform. The online game industry, including online mobile games, is highly regulated in China and each
online game operator is required to obtain licenses and permits and complete filing procedures for specific mobile games as well as to comply with various requirements when conducting business. We require our partners in the mobile game industry to
provide their licenses, permits or filing documents in respect of the relevant online games before entering into cooperation arrangements with them, but we cannot assure you that such commercial partners or other developers who distribute online
games and other applications through our platform without entering into cooperation arrangements with us will maintain all applicable permits and approvals, and any noncompliance on the part of such commercial partners may cause potential
liabilities to us and in turn disrupt our operations.
If we fail to keep up with rapid technological changes in the internet and smartphone
industries, our future growth may be adversely affected.
The internet industry and the smartphone industry are characterized by
rapid and innovative technological changes. Our future success will depend on our ability to respond to rapidly changing technologies, adapt our products and services to evolving industry standards and improve the performance, functionality and
reliability of our products and services. Our failure to adapt to such changes could harm our business. If we are slow to develop products and services that are compatible with smartphones, or if the products and services we develop are not widely
accepted and used by smartphone users, we may not be able to capture a significant share of this increasingly important market. In addition, the widespread adoption of new internet, networking or telecommunications technologies or other
technological changes for smartphones could require substantial expenditures to modify or adapt our products, services or infrastructure. If we fail to keep up with rapid and innovative technological changes to remain competitive, our future growth
may be adversely affected.
If we fail to maintain and enhance our brands, or if we incur excessive expenses in this effort, our business, results
of operations and prospects may be materially and adversely affected.
We believe that maintaining and enhancing our brands, such
as the GO brand for our GO platform, the GGbook brand for our mobile reading services and the 3G brand for our mobile internet portal, is of significant importance to the success of our business. Maintaining and enhancing the recognition and
reputation of our brands are critical to our success and ability to compete. Since our products and services are relatively new in the mobile internet market, brand maintenance and enhancement may directly affect our ability to maintain our market
position.
Many factors, some of which are beyond our control, are important to maintaining and enhancing our brands and may negatively
impact our brands and reputation if not properly managed, such as:
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our ability to maintain a convenient and reliable user experience as user preferences evolve and as we expand into new service categories and new service lines;
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our ability to increase brand awareness among existing and potential users, readers, authors, content providers and advertisers through various marketing and promotional activities;
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our ability to adopt new technologies or adapt our products and services to meet user needs or emerging industry standards;
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our ability to effectively control the quality of third-party developers that offer their products and services on our GO platform; and
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our ability to distinguish our GO name from other similar names in the market and maintain and enhance such name in the face of potential challenges from third parties.
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Although we have established and developed our brands mostly through word of mouth referrals and
repeat users and, in the case of GO series products, the Google Play distribution platform, as we expand, we may conduct various marketing and brand promotion activities to continue promoting our brands. We cannot assure you, however, that these
activities will be successful or that we will be able to achieve the brand promotion effect we expect. In addition, any negative publicity in relation to our mobile internet products or services, regardless of its veracity, could harm our brands and
reputation.
We have sometimes received, and expect to continue to receive, complaints from users regarding the quality of the products
and services we offer. If our users complaints are not addressed to their satisfaction, our reputation and our market position could be significantly harmed, which may materially and adversely affect our business and prospects.
There are third parties in the mobile internet market with the name Go in their names or brands. These third parties may have
registered similar brands to ours in different jurisdictions. We may be unable to clearly distinguish our GO name from such other similar names in the market, and may encounter difficulties in maintaining our GO name if there are challenges from
third parties holding similar names.
Legal proceedings or allegations of impropriety against us or our management could have a material adverse
impact on our reputation, results of operations, financial condition and liquidity.
We have been, and may be in the future,
subject to allegations or lawsuits brought by our competitors, individuals or other entities against us or our management, including claims of unfair, unethical, fraudulent or otherwise inappropriate business practices. Any such lawsuit or
allegation, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong doing by any key member of our management team could harm our reputation and user base and distract our
management from day-to-day operations of our company. We cannot assure you that we or key members of our management team will not be subject to lawsuits or allegations of a similar nature in the future. Where we can make a reasonable estimate of the
liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we will record a related contingent liability. As additional information becomes available, we will assess the potential
liability and revise estimates as appropriate. In 2011, 2012 and 2013, we did not record any contingent liabilities relating to pending litigation. However, when we record or revise our estimates of contingent liabilities in the future, the amount
of our estimates may be inaccurate due to the inherent uncertainties relating to litigation. In addition, the outcomes of actions we institute against third parties may not be successful or favorable to us. Litigations and allegations against us may
also generate negative publicity that significantly harms our reputation, which may materially and adversely affect our user base and our ability to attract authors and advertisers. In addition to the related cost, managing and defending litigation
and related indemnity obligations can significantly divert managements and the board of directors attention from operating our business. We may also need to pay damages or settle the litigation with a substantial amount of cash. All of
these could have a material adverse impact on our business, results of operation and cash flows.
We may be subject to intellectual property
infringement claims or other allegations, which could require us to pay substantial statutory penalties or other damages and fines, remove relevant content or enter into license agreements which may not be available on commercially reasonable terms.
Some third parties may own technology patents, copyrights, trademarks, trade secrets and internet content, which they may use to
assert claims against us. We require our editors and relevant staff to sign agreements upon joining our company, to undertake to follow certain procedures designed to reduce the likelihood that we may use, develop or make available any content or
applications without the proper licenses or necessary third party consents. However, these procedures may not be effective in completely preventing the unauthorized posting or use of copyrighted material or the infringement of other rights of third
parties.
The validity, enforceability and scope of protection of intellectual property rights in internet-related industries,
particularly in China, is uncertain and still evolving. For example, as we face increasing competition and as litigation becomes a more common way to resolve disputes in China, we face a higher risk of being the subject of intellectual property
infringement claims. We have also been subject to administrative penalties for offering certain literary works with expired licenses. Pursuant to relevant laws and regulations, internet service providers, including mobile internet service providers,
may be held liable for damages if such providers have reasons to know that the works uploaded or linked infringe the copyrights of others. In cases involving the unauthorized posting of copyrighted content by users on websites in China, there have
been court proceedings but no settled court practice that provides clear guidance as to under what circumstances hosting providers and administrators of a website such as 3G.cn or a reading base such as our mobile reading base or GO platform can be
held liable for the unauthorized posting by third parties of copyrighted material. Any such proceeding could result in significant costs to us and divert our managements time and attention from the operation of our business, as well as
potentially adversely impact our reputation, even if we are ultimately absolved of all liability.
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In addition, we cannot assure you that we will not become subject to intellectual property laws
in other jurisdictions, such as the United States, by virtue of our ADSs being listed on NASDAQ, the ability of users to access, download and use our products and services in the United States and other jurisdictions, the ownership of our ADSs by
investors in the United States and other jurisdictions, or the extraterritorial application of foreign law by foreign courts or otherwise, among other reasons. If a claim of infringement brought against us in the United States or other jurisdictions
is successful, we may be required to pay substantial penalties or other damages and fines, remove relevant content or enter into license agreements which may not be available on commercially reasonable terms or at all. Even though the allegations or
claims could be baseless, defense against any of these allegations or claims would be both costly and time-consuming and could significantly divert the efforts and resources of our management and other personnel.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, service marks, patents, domain names, trade secrets, proprietary technologies and similar intellectual
property as critical to our success, and we rely on trademark and patent law, trade secret protection and confidentiality and license agreements with our employees and others to protect our proprietary rights. As of December 31, 2013, we had
registered 11 domain names that are material to our business, including
3G.net.cn
,
3G.cn
and
jiubang.com
, 59 software copyrights, six patents, 50 trademarks and service marks in China and four trademarks in South Korea. In
addition, we have filed 47 patent applications covering certain of our proprietary technologies and 27 trademark applications in China. We have also filed 18 trademark applications in South Korea, Japan and the U.S.
Monitoring unauthorized use of our intellectual property rights is difficult and costly, and we cannot be certain that we can effectively
prevent misappropriation of our intellectual properties, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and diversion of our resources.
In addition, it is often difficult
to create and enforce intellectual property rights in China and other countries outside of the United States. Patents, trademarks and service marks may also be invalidated, circumvented, or challenged. Trade secrets are difficult to protect, and our
trade secrets may be leaked or otherwise become known or be independently discovered by others. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Even where adequate, relevant laws exist in China and
other countries outside of the United States, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a court judgment or an arbitration award delivered in another jurisdiction, and accordingly, we
may not be able to effectively protect our intellectual property rights or enforce agreements in such countries. Given the potential cost, effort, risks and downsides of obtaining patent protection, in some cases we have not and do not plan to apply
for patents or other forms of formal intellectual property protection for certain key technologies. If some of these technologies are later proven to be important to our business and are used by third parties without our authorization, especially
for commercial purposes, our business and competitive position may be harmed.
If we fail to obtain and maintain the requisite licenses and
approvals required under the complex regulatory environment for internet-based and mobile-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected.
The internet industry in China, including the mobile internet, is highly regulated. Our PRC variable interest entities are required to obtain
and maintain applicable licenses or approvals from different regulatory authorities in order to provide their current services. Under the current PRC regulatory scheme, a number of regulatory agencies, including the General Administration of Press,
Publication, Radio, Film and Television, or GAPPRFT, the Ministry of Culture, or MOC, Ministry of Industry and Information Technology, or MIIT, and the State Council Information Office, or SCIO, jointly regulate all major aspects of the internet
industry, including the mobile internet business. Operators must obtain various government approvals and licenses for relevant internet or publication business. We have obtained Internet Content Provider Licenses, or ICP licenses, for provision of
internet and mobile network information services, a Value-added Telecommunications Business Operation License, or SP license, for provision of mobile network information services, a License for Online Transmission of Audio-visual Programs and an
Internet Publishing License for internet publication and mobile games business and an Online Culture Operating License for operation of online games and music and entertainment products and an Online Culture Operating License for operation of
internet comic and animation products. We have also obtained SMS Service Access Codes for provision of internet and mobile network information services. These licenses are essential to the operation of our business and are generally subject to
annual government review. However, we cannot assure you that we can successfully renew these licenses annually or that these licenses are sufficient to conduct all of our present or future business.
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We have applied for the approval to include publication of internet literature and mobile
literature in our Internet Publishing License. We have also applied for the approval from the SCIO to publish news on 3G.cn or disseminate new through the mobile internet. We currently operate a current events channel on 3G.cn related to current
topics and social events produced by third party news agencies. As previously reported by certain news media in 2013, the State Internet Information Office named our mobile portal application, as one of the several mobile apps that provided internet
news services without proper licenses or approvals, and required the named mobile apps to rectify the non-compliance as soon as possible. We have communicated with the State Internet Information Office and rectified the situation to meet their
requirements. If the PRC government promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of relevant internet businesses and/or mobile and web-based subscription services that we
plan to launch, the PRC government has the power to, among other things, levy fines, confiscate our income, revoke our business licenses, and require us to discontinue or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material and adverse effect on our results of operations.
As we further develop and expand our
products and services, we may need to obtain additional qualifications, permits, approvals or licenses. For example, we may be required to obtain a License for Production and Operation of Radio and TV Programs, and an Internet News Publication
License for the productions and operation of our news programs. In addition, we work with a lottery business partner to operate an online lottery through 3G.cn. Under PRC laws, a license is required for conducting the online lottery business. There
have been no detailed procedures available for online lottery operators to submit the application for such license or for the approval authorities to grant such license. We intend to apply for the license as soon as detailed procedures are available
under the relevant PRC law. We cannot assure you that we or the service or content providers will be granted such qualifications, permits, approvals or licenses in a timely manner or at all. Prior to the receipt of such qualifications, permits,
approvals or licenses, we may be deemed as being in violation of relevant laws or regulations and be subject to penalties, such as confiscation of the net revenues that were generated through the unlicensed internet activities, the imposition of
fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.
In addition, internet companies in China are subject to a variety of existing and new rules, regulations, policies, and license and permit
requirements. In connection with enforcing these rules, regulations, policies and requirements, relevant government authorities may suspend services by, or revoke licenses of, any internet content service provider that is deemed to provide illicit
content online, and such activities may be intensified in connection with any ongoing government campaigns. For example, in April 2014, the Chinese government initiated a campaign to enhance and enforce its scrutiny on the dissemination of
pornographic content on the internet in China. As a result, various literary and visual and audio content websites, including certain widely known websites, were subject to administrative penalties ranging from fines to proposed license revocation
to suspension of website operations, due to unhealthy and indecent content on these websites. We disabled certain functions on our mobile reading services for several days and conducted an internal compliance investigation in order to ensure that
the literary content within the services are in compliance with the standards set out by the authorities. As of the date of this report, we have not received any warning or order from any government authorities. However, we cannot be sure that our
internal investigation was sufficient to remove all content that may be viewed unhealthy, indecent or otherwise problematic. In addition, while we maintain a regular internal monitoring and compliance protocol, we cannot ascertain that we would not
fall foul of any changing or new government regulations or standards in the future. If we receive a public warning from the relevant government authorities or our licenses for reading or portal services are revoked, our reputation would be harmed
and our share trading price may fluctuate widely. If the operation of our mobile online reading services is suspended, our revenues and results of operation may be materially and adversely affected.
Concerns about collection and use of personal data could damage our reputation and deter current and potential users from using our products and
services, which could have material adverse effects on our business and results of operations.
Concerns about our personalization
technology with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputation and results of operations. For example, one of our competitors had previously
publicly spread allegations about our collection of user data. Although we were subsequently able to refute such allegations, such negative publicity and any additional negative publicity in relation to our services or products, regardless of its
veracity, could seriously harm our reputation which in turn may deter current and potential users from using our products and services, which could have material adverse effects on our business and results of operations.
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We apply strict management and protection for any information provided by users and, under our
privacy policy, without our users prior consent, we will not provide any of our users personal information to any unrelated third party. While we strive to comply with our privacy policy as well as all applicable data protection laws and
regulations, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving, and future
regulatory or user concerns about the extent to which personal information is used or shared with advertisers or others may adversely affect our ability to share certain data with advertisers, which may limit certain methods of targeted advertising.
Concerns about the security of personal data could also lead to a decline in general usage of our products and services, which could lead to lower user numbers. For example, if the PRC government authorities require real-name registration by our
users, the growth of our user numbers may slow down and our business, financial condition and results of operations may be adversely affected. See Risks Related to Doing Business in ChinaWe may be adversely affected by the
complexity, uncertainties and changes in PRC regulations of internet and mobile internet businesses and companies. A significant reduction in user numbers could have a material and adverse effect on our business, financial condition and
results of operations.
Errors, flaws or failures in our products or services could harm our reputation or decrease market acceptance of our
services and products.
Our products and services may contain errors, flaws or failures that may only become apparent after their
release, especially in terms of updated versions of our mobile internet products and services. We receive user feedbacks in connection with errors, flaws or failures in our products and services from time to time, and such errors, flaws or failures
may also come to our attention during our internal testing process. We generally have been able to resolve such errors, flaws or failures in a timely manner, but we cannot assure you that we will be able to detect and resolve all of them effectively
or in a timely manner. Errors, flaws or failures in our services and products may adversely affect user experience and cause our users to stop using our services and products, which could materially and adversely affect our business and results of
operations.
If any system failure, interruptions and downtime occurs, our business, financial condition and results of operations may be materially
and adversely affected.
Although we seek to reduce the possibility of disruptions or other outages, our GO platform, 3G.cn and our
mobile reading services may be disrupted by problems with our own technology and system, such as malfunctions in our software or other facilities and network overload. Our systems may be vulnerable to damage or interruption from telecommunication
failures, power loss, computer attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. Parts of our system are not fully redundant or backed up, and our disaster recovery planning may not be sufficient for all
eventualities. Despite any precaution we may take, the occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in the availability of our products and services. Any
interruption in the ability of our users to use our products and services could reduce our future revenues, harm our future profits, subject us to regulatory scrutiny and lead users to seek alternative internet mobile products.
Our servers may experience some downtime from time to time, which may negatively affect our brand and user perception of the reliability of
our systems. Any scheduled or unscheduled interruption in the ability of users to use our servers could result in an immediate, and possibly substantial, loss of revenues.
We have limited control over the prices of the services provided by telecommunication service providers and may have limited access to
alternative networks or services. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if internet access fees or other charges to
mobile internet users increase, our user traffic may decline and our business may be harmed.
Security breaches or computer virus attacks could have
a material adverse effect on our business prospects and results of operations.
Any significant breach of security of our computer
systems could significantly harm our business, reputation and results of operations and could expose us to lawsuits brought by our users and partners and to sanctions by governmental authorities in the jurisdictions in which we operate. We cannot
assure you that our IT systems will be completely secure from future security breaches or computer virus attacks. Anyone who is able to circumvent our security measures could misappropriate proprietary information, including the personal information
of our users, obtaining users names and passwords and enabling the hackers to access users other online and mobile accounts, if those users use identical user names and passwords. They could also misappropriate other information,
including financial information, uploaded by our users in a secure environment. These circumventions may cause interruptions in our operations or damage our brand image and reputation. Our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could cause system interruptions, website slowdown or unavailability, delays in communication or transactions, or loss of data. We may be required to incur significant additional costs to protect
against security breaches or to alleviate problems caused by such breaches. In addition, a significant security breach or virus attack on our system could result in a material adverse impact on our business and results of operations.
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We have granted, and may continue to grant, options, restricted shares and other types of awards under our
share incentive plans, which may result in increased share-based compensation expenses.
We adopted a 2006 global share plan in
June 2006, which was amended and restated in October 2013, or the 2006 Plan, and a 2010 global share plan in June 2010, which was amended and restated in October 2013, or the 2010 Plan. Under the 2006 Plan, we are authorized to grant options or
other types of awards to purchase a maximum of 5,224,126 ordinary shares and as of March 31, 2014, options to purchase a total of 3,481,274 common shares of our company are outstanding under the 2006 Plan. Under the 2010 Plan, we are authorized
to grant options or other types of awards to purchase a maximum of 5,373,659 ordinary shares and as of March 31, 2014, options to purchase a total of 4,921,161 common shares of our company were granted (excluding those forfeited) under the 2010
Plan. In October 2013, we adopted a 2013 share incentive plan, or the 2013 Plan. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2013 Plan, or the Award Pool, is 4,243,070, which equals to three percent of
our total outstanding shares on an as-converted basis as of the date of adoption of the 2013 Plan, plus an automatic annual increase of a number of shares on the first day of each year, beginning on January 1, 2014, equal to the total number of
shares underlying the awards granted in the year immediately prior to each annual increase; provided that shares underlying the awards issued under the 2013 Plan but remain unvested as of January 1 of a given year should be counted as part of
the existing Award Pool and should not be counted as part of the number of shares to be added on January 1 of the same year. As of March 31, 2014, options to purchase a total of 35,000 common shares of our company and 3,108,763 restricted
shares (excluding those forfeited) were granted under the 2013 Plan. For the years ended December 31, 2011, 2012 and 2013, we recorded RMB0.3 million, RMB0.4 million and RMB17.8 million (US$2.9 million), respectively, in share-based
compensation expenses. The amount of these expenses is based on the fair value of the share-based compensation awards we granted. The expenses associated with share-based compensation have affected our net income and may reduce our net income in the
future, and any additional securities issued under share-based compensation schemes will dilute the ownership interests of our shareholders, including holders of our ADSs. We believe the granting of share-based compensation is of significant
importance to our ability to attract and retain key personnel and employees, or consultants, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may
increase, which may have an adverse effect on our results of operations.
If we fail to implement and maintain an effective system of internal
controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
Prior
to our initial public offering in November 2013, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not
conducted an audit of our internal control over financial reporting. However, in connection with the preparation and audit of our consolidated financial statements as of and for the two years ended December 31, 2012, we and our independent
registered public accounting firm identified one material weakness relating to insufficient accounting personnel with appropriate U.S. GAAP knowledge for financial information processing and reporting and two significant deficiencies, including a
significant deficiency relating to the lack safeguarding controls over the use of our companys assets and a significant deficiency related to information technology general control, or ITGC, in our internal control over financial reporting, as
defined in the standards established by the Public Company Accounting Oversight Board of the United States. ITGC deficiencies include the failure to maintain an information technology management and security policy as guidance for processing
financial and business data. We have implemented and are continuing to implement a number of measures to address the material weakness and deficiencies identified. As a result of such efforts, subsequently, in connection with the preparation and
audit of our consolidated financial statements for the year ended December 31, 2013, although the aforementioned material weakness and significant deficiency relating to ITGC still exist, we were in the view that the significant deficiency
relating to the lack safeguarding controls over the use of our companys assets was remedied. However, we cannot assure you that we will be able to continue implementing these measures in the future to remedy the existing material weakness and
the significant deficiency, or that we will not identify additional material weaknesses or significant deficiencies in the future.
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Furthermore, it is possible that, had our independent registered public accounting firm conducted
an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of our initial public offering in 2013, we became a public company in the United States
subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form
20-F beginning with our annual report for the fiscal year ending December 31, 2014. In addition, once we cease to be an emerging growth company as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS
Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective.
Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it
is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our
reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets
and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
Future strategic alliances or acquisitions may not be successful and may have a material and adverse effect on our business, reputation and results of
operations.
We may enter into strategic alliances, including joint ventures or minority equity investments, with various third
parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third party and increased expenses in
establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers
negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.
In February 2014, we acquired GetJar, Inc., a privately held mobile ad network based on California. This first international acquisition
provides our platform with state-of-the-art mobile data analytics capabilities that will support our mobile advertising research and development initiatives. If appropriate opportunities arise, we may acquire additional assets, products,
technologies or businesses that are complementary to our existing business. Completed transactions or future acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our
management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. There are uncertainties as to entry into markets in which we have limited or no prior
experience and in which competitors have stronger market positions. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances
of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and
consummating acquisitions may be significant. In addition to possible shareholders approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable laws and
regulations, which could result in increased delay and costs.
Our results of operations may be subject to wide fluctuations due to a number of
factors, which may adversely affect the trading price of our ADSs.
We may experience seasonality and other fluctuations in our
business, reflecting fluctuations in mobile internet and smartphone usage. Revenues from mobile application products and services are typically higher in the fourth quarter due to Christmas holidays and increased marketing campaigns during the
period. We generally experienced weaker demands for our mobile reading services and mobile portal marketing services in the first quarter of each year due to the Chinese New Year holidays. Revenues from mobile portal marketing services are generally
higher in the third and fourth quarters as there are typically more large-scale marketing campaigns during the period on our portal website. Thus, our operating results in one or more future periods may fluctuate substantially or fall below the
expectations of securities analysts and investors. In such event, the trading price of our ADSs may fluctuate significantly.
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We have limited business insurance coverage. Any uninsured occurrence of business disruption may result in
substantial costs to us and the diversion of our resources, which could have an adverse effect on our results of operations and financial condition.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed
economies. We do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Any uninsured occurrence may disrupt our business operations, require us to incur substantial costs and divert our resources, which could have an adverse effect on our results of operations
and financial condition.
Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely
affected by the downturn in the global or Chinese economy.
The global financial markets experienced significant disruptions in
2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and is facing new challenges, including the escalation of the European sovereign debt crisis in 2011 and the slowdown
of the Chinese economy starting in 2012. It is unclear how the European sovereign debt crisis or the Chinese economic slowdown will progress in 2014 and beyond. There is considerable uncertainty over the long-term effects of the expansionary
monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the worlds leading economies, including Chinas. There have also been concerns over unrest in the Middle East and Africa, which
have resulted in volatility in oil and other markets, and over the possibility of a war involving Iran. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and tensions in the relationship
between China and Japan. The mobile internet products and services industry may be affected by economic downturns. A prolonged slowdown in the world economy, including in the Chinese economy, may lead to a reduced amount of mobile internet
advertising, which could materially and adversely affect our business, financial condition and results of operations. Our products and services may be viewed as discretionary by our users, who may choose to discontinue or reduce spending on such
products and services during an economic downturn. In such an event, our ability to retain existing users and increase new users will be adversely affected, which would in turn negatively impact our business and results of operations.
Moreover, a slowdown or disruption in the global or Chinese economy may have a material and adverse impact on financings available to us. The
weakness in the economy could erode investor confidence, which constitutes the basis of the credit market. The recent financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in
the capital markets or from financial institutions on commercially reasonable terms, or at all. Although we are uncertain about the extent to which the recent global financial and economic crisis and slowdown of Chinese economy may impact our
business in the short-term and long-term, there is a risk that our business, results of operations and prospects would be materially and adversely affected by any global economic downturn or disruption or slowdown of Chinese economy.
Any catastrophe, including natural catastrophes and outbreaks of health pandemics and other extraordinary events, could disrupt our business operations.
Our operations may be vulnerable to interruption and damage from natural and other types of catastrophes, including earthquakes,
fire, floods, hail, windstorms, severe winter weather (including snow, freezing water, ice storms and blizzards), environmental accidents, power loss, communications failures, explosions, man-made events such as terrorist attacks and similar events.
Due to their nature, we cannot predict the incidence, timing and severity of catastrophes. If any such catastrophe or extraordinary event occurs in the future, our ability to operate our business could be seriously impaired. Such events could make
it difficult or impossible for us to deliver our services and products to our users and could decrease demand for our products. Because we do not carry property insurance and significant time could be required to resume our operations, our financial
position and results of operations could be materially and adversely affected in the event of any major catastrophic event.
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In addition, our business could be adversely affected by the outbreak of influenza A (H1N1),
avian influenza, H7N9, severe acute respiratory syndrome (SARS) or other pandemics. Any occurrence of these pandemic diseases or other adverse public health developments in China or elsewhere could severely disrupt our staffing or the staffing of
our business partners and otherwise reduce the activity levels of our work force and the work force of our business partners, causing a material and adverse effect on our business operations.
Risks Related to Our Corporate Structure
If the
PRC government finds that the structure we have adopted for our business operations does not comply with PRC governmental restrictions on foreign investment in mobile internet businesses, or if these laws or regulations or interpretations of
existing laws or regulations change in the future, we could be subject to severe penalties, including the shutting down of our platform and our business operations.
Foreign ownership of internet-based businesses is subject to significant restrictions under current PRC laws and regulations. The PRC
government regulates internet access, the distribution of online information, the online advertising, the operation of online games and the conduct of online commerce through strict business licensing requirements and other government regulations.
These laws and regulations also limit foreign ownership in PRC companies that provide internet information distribution services. Specifically, foreign ownership in an internet information provider or other value-added telecommunication service
providers may not exceed 50%. In addition, according to the Several Opinions on the Introduction of Foreign Investment in the Cultural Industry promulgated by the MOC, the GAPPRFT, the National Development and Reform Commission and the Ministry of
Commerce, or the MOFCOM, in July 2005, foreign investors are prohibited from investing in or operating, among others, any internet cultural operating entities. Companies providing mobile internet services such as ours are governed by these rules and
regulations on internet companies in China.
We are a Cayman Islands company and we conduct our operations in China primarily through a
series of contractual arrangements entered into among our PRC subsidiary, Jiubang Computer Technology (Guangzhou) Co., Ltd., or Jiubang Computer, our PRC variable interest entities, including Guangzhou Jiubang Digital Technology Co., Ltd., or
Jiubang Digital, Guangzhou Sanju Advertising Media Co., Ltd., or Sanju Advertising, Guangzhou Hengye Software Technology Co., Ltd., or Hengye Software and Guangzhou Zhiteng Computer Technology Co., Ltd., or Zhiteng Computer, the shareholders of
these variable interest entities and us. Our contractual arrangements with our PRC variable interest entities and their shareholders enable us to exercise effective control over our PRC variable interest entities because we have the power to direct
activities of our variable interest entities that most significantly impact the economic performance of the variable interest entities and the obligation to absorb the expected losses and the right to receive the expected residual return of the
variable interest entities that could potentially be significant to the variable interest entities. Accordingly, the financial statements for the variable interest entities are consolidated in our financial statements. All of the equity (net assets)
or deficit (net liabilities) and net income (loss) of the variable interest entities are attributed to us. For a detailed description of these contractual arrangements, see Item 7. Major Shareholders and Related Party TransactionsB.
Related Party TransactionsContractual Arrangements.
On September 28, 2009, the GAPPRFT, the National Copyright
Administration and the Office of National Work Group for Combating Pornography and Illegal Publications jointly issued a Notice on Implementing the Provisions of the State Council on Three Determination and the Relevant Explanation of
the State Commission Office for Public Sector Reform on Further Strengthening the Administration of the Pre-approval of Online Games and Examination and Approval of Imported Online Games, or Circular 13. Circular 13 restates that foreign investors
are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating in domestic
mobile game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements such as the variable interest entity structural arrangements we adopted. We are not aware of any
companies that have adopted a corporate structure that is the same as or similar to ours having been penalized or terminated under Circular 13 since the effective date of the circular. Furthermore, we are advised by our PRC counsel, Jun He Law
Offices, that the enforcement of Circular 13 is still subject to substantial uncertainty, including possible subsequent joint actions by relevant authorities, such as the MOC. In the event that we, our PRC subsidiaries, or PRC variable interest
entities are found to be in violation of the prohibition under Circular 13, the GAPPRFT, in conjunction with the relevant regulatory authorities in charge, may impose applicable penalties, which in the most serious cases may include suspension or
revocation of relevant licenses and registrations. In addition, various media sources have reported that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with
variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government
authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide.
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Based on the advice of our PRC legal counsel, Jun He Law Offices, the current corporate structure
of our PRC subsidiaries and our PRC variable interest entities, and the contractual arrangements among our PRC subsidiary, our PRC variable interest entities, their shareholders and us, as described in this prospectus, are in compliance with
existing PRC laws, rules and regulations. However, we were further advised by Jun He Law Offices that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, and these laws or
regulations or interpretations of these laws or regulations may change in the future. Furthermore, the relevant government authorities have broad discretion in interpreting these laws and regulations. Accordingly, we cannot assure you that PRC
government authorities will not ultimately take a view contrary to the opinion of our PRC legal counsel.
If our corporate structure,
contractual arrangements and businesses of our company, our PRC subsidiaries or our PRC variable interest entities are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad
discretion in dealing with such violation, including
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levying fines, confiscating our income or the income of our PRC subsidiaries or PRC variable interest entities,
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revoking or suspending the business licenses or operating licenses of our PRC subsidiaries or PRC variable interest entities,
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shutting down our servers or blocking our platform, discontinuing or placing restrictions or onerous conditions on our operations,
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requiring us to discontinue our operations,
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requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our initial public offering to finance our business and operations in China, and
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taking other regulatory or enforcement actions that could be harmful to our business.
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Any of
these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. Our PRC variable
interest entities contributed most of our consolidated net revenues in the years ended December 31, 2011, 2012 and 2013. If the imposition of any of these penalties causes us to lose the rights to direct the activities of our PRC variable
interest entities or our right to receive their economic benefits, we would no longer be able to consolidate such entities.
We rely on contractual
arrangements with our PRC variable interest entities and their shareholders for the operation of our business, which may not be as effective as direct ownership.
Because of PRC restrictions on foreign ownership of mobile internet businesses in China, we depend on contractual arrangements with our PRC
variable interest entities in which we have no ownership interest to conduct our business. These contractual arrangements are intended to provide us with effective control over these entities and allow us to obtain economic benefits from them. Our
PRC variable interest entities are owned directly by our core management team, Messrs. Yuqiang Deng, Xiangdong Zhang and Yingming Chang. However, these contractual arrangements may not be as effective in providing control as direct ownership. For
example, our PRC variable interest entities and their shareholders could breach their contractual arrangements with us by, among other things, failing to operate our business in an acceptable manner or taking other actions that are detrimental to
our interests. If we were the controlling shareholder of these PRC variable interest entities with direct ownership, we would be able to exercise our rights as shareholders to effect changes to their board of directors, which in turn could implement
changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if our PRC variable interest entities or their shareholders fail to perform their obligations under these contractual
arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies, which may be time-consuming, unpredictable and expensive. If we are unable to enforce these
contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materially and adversely affect our
results of operations and damage our reputation. See Risks Relating to Doing Business in ChinaUncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you
and us.
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Our contractual arrangements with our PRC variable interest entities may result in adverse tax consequences
to us.
As a result of our corporate structure and the contractual arrangements among our PRC subsidiary, our PRC variable interest
entities, their shareholders and us, we are effectively subject to the 6% PRC value-added tax and related surcharges on revenues generated by our subsidiaries from our contractual arrangements with our PRC variable interest entities. The PRC
Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its affiliates or related parties to the relevant tax authorities. These transactions may be
subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the
contracts between us and our PRC variable interest entities were not on an arms length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that our PRC variable
interest entities and any of their respective subsidiaries adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by reducing expense deductions recorded by such PRC variable interest entities
and thereby increasing these entities tax liabilities, which could subject these entities to late payment fees and other penalties for the underpayment of taxes. Our consolidated net income may be materially and adversely affected if our PRC
variable interest entities tax liabilities increase or if it becomes subject to late payment fees or other penalties.
The shareholders of our
variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business.
The individual shareholders of our variable interest entities are also shareholders, directors and officers of our company. Conflicts of
interest may arise between the roles of these individuals as shareholders, directors and officers of our company and as shareholders of our variable interest entities. We rely on these individuals to abide by the laws of the Cayman Islands, which
provide that directors and officers owe a fiduciary duty to our company that requires them to act in good faith and in the best interest of our company and not to use their positions for personal gains. We cannot assure you that when conflicts
arise, shareholders of our variable interest entities will act in the best interest of our company or that the conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we
would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.
We may rely on dividends paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC
subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of our ADSs and ordinary shares.
We are a holding company, and we may rely on dividends to be paid by our wholly owned PRC subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to the holders of our ADSs and ordinary shares and service any debt we may incur. If our wholly owned PRC subsidiaries incur debt on their own behalf in the future, the
instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
Under PRC laws and
regulations, wholly foreign-owned enterprises in the PRC, such as Jiubang Computer, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned
enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of
its registered capital. At the discretion of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus
funds are not distributable as cash dividends. Any limitation on the ability of our wholly owned PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
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Certain shareholders have substantial influence over our company and their interests may not be aligned
with the interests of our other shareholders, which may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their securities.
As of March 31, 2014, our co-founders and our chief operating officer beneficially own an aggregate of 31.6% of our outstanding shares and
36.6% of the then total voting power. Our co-founders and our chief operating officer together hold 100% of the equity interest in each of our PRC variable interest entities, including Jiubang Digital through their shareholding in Sanju Advertising.
These executive officers have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This
concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of any contemplated sale of our company and may
reduce the price of our ADSs.
In addition, if any of our core management team members violates the terms of their non-compete
undertakings or employment agreements with us or their legal duties by diverting business opportunities from us, it will result in our loss of corporate opportunities. These actions may take place even if they are opposed by our other shareholders,
including those who purchased ADSs in our initial public offering. Although we have adopted a code of business conduct and ethics to help restrict conflicts of interest involving directors and officers, any violation of this code by our existing
officers or directors may materially and adversely affect our business operations. For more information regarding the beneficial ownership of our company by our principal shareholders, see Directors, Senior Management, and Employees.
We may lose the ability to use and enjoy assets held by our PRC variable interest entities that are important to the operation of our business if
such entities go bankrupt or become subject to a dissolution or liquidation proceeding.
Some of our PRC variable interest entities
hold certain assets, such as patents for the proprietary technology that are essential to the operations of our platform and important to the operation of our business. If any of these PRC variable interest entities goes bankrupt and all or part of
its assets become subject to liens or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If
any of such PRC variable interest entities undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which
could materially and adversely affect our business, financial condition and results of operations.
Risks Related to Doing Business in China
Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and
regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC
administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal
protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect.
As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and
procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
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Changes in Chinas economic, political or social conditions or government policies could have a
material adverse effect on our business and operations.
Substantially all of our assets are located in China and a significant
number of our users, advertisers, suppliers and business partners are from China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social
conditions in China generally and by continued economic growth in China as a whole.
The Chinese economy differs from the economies of
most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures since the
late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive
assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant
control over the Chinese economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among
various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative
effect on us. The Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has
slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and adversely affect our results of operations and financial condition.
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet and mobile internet businesses and companies.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit
requirements pertaining to, companies in the internet industry, including mobile internet companies. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the
internet business include, but are not limited to, the following:
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There are uncertainties related to the regulation of the internet business in China, including evolving licensing practices and the requirement for real-name registrations. Permits, licenses or operations at some of our
subsidiaries and PRC variable interest entities may be subject to challenge, or we may fail to obtain permits or licenses that may be deemed necessary for our operations or we may not be able to obtain or renew certain permits or licenses. See
Risks Relating to Our Business and IndustryIf we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment for internet-based and mobile-based businesses in China, our
business, financial condition and results of operations may be materially and adversely affected and PRC Regulation. We are currently not required by PRC law to ask users for their real name and personal information when they
register for a user account. We cannot assure you that PRC regulators would not require us to implement compulsory real-name registration in the future.
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The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the
State Internet Information Office (with the involvement of the SCIO, the MIIT and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and
coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry. We are unable to determine what policies this new agency or any new
agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. Further, new laws, regulations or policies may be promulgated or announced that will regulate internet
activities, including internet publication and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new
regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
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In July 2006, the MIIT issued the Notice of the Ministry of Information Industry on Intensifying
the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunication business operating licenses to any
foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunication business in China. According to this notice, either the holder of a value-added
telecommunication business operating license or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice also requires each license
holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Currently, all contracts with telecommunication carriers and other service
providers to host the servers used in our business were entered into by Jiubang Digital, and such arrangements are in compliance with this notice. Jiubang Digital also owns a majority of the domain names and trademarks necessary for daily operation,
and holds the ICP license and the SP license necessary to conduct our operations in China.
The interpretation and application of existing
PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and
activities of, internet and mobile internet businesses in China, including our business. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of Chinas regulation
of internet business.
Content posted or displayed on GO platform, 3G.cn and our mobile reading base, including advertisements, may be found
objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.
The PRC government has
adopted regulations governing internet and wireless access and the distribution of information over the internet and wireless telecommunication networks. Under these regulations, internet content providers and internet publishers are prohibited from
posting or displaying over the internet or wireless networks content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory.
Furthermore, internet content providers are also prohibited from displaying content that may be deemed by relevant government authorities as socially destabilizing or leaking state secrets of the PRC. Failure to comply with
these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of the concerned platforms and reputational harm. The operator may also be held liable for such censored information displayed on
or linked to their platform. For a detailed discussion, see Item 4. Information on the Company B. Business Overview PRC Regulation Information Security and Censorship.
Since our inception, we have worked to monitor the content on our platform and to make the utmost effort in complying with relevant laws and
regulations. However, it may not be possible to determine in all cases the types of content that could result in our liability as a distributor of such content, and if any of the content on GO platform, 3G.cn or our mobile reading base is deemed by
the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required
licenses, which could materially and adversely affect our business, financial condition and results of operations. For example, as reported by certain news media, the State Internet Information Office recently named our mobile portal application, as
one of the several mobile apps that contained certain inappropriate content, and required the named mobile apps to rectify the non-compliance as soon as possible. We have communicated with the State Internet Information Office and rectified the
situation to meet their requirements.
We may also be subject to potential liability for any unlawful actions of our users or third party
service providers on our platform or for content we distribute that is deemed inappropriate. It may be difficult to determine the type of content or actions that may result in liability to us, and if we are found to be liable, we may be prevented
from operating our business in China. Moreover, the costs of compliance with these regulations may continue to increase as a result of more content being made available by an increasing number of users and third party business parties on our GO
platform, 3G.cn and the mobile reading base, which may adversely affect our results of operations. Although we have adopted internal procedures to monitor content and to remove offending content once we become aware of any potential or alleged
violation, we may not be able to identify all the content that may violate relevant laws and regulations or third party intellectual property rights and even if we manage to identify and remove offending content, we may still be held liable for such
third-party content.
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In addition, under PRC advertising laws and regulations, we are obligated to monitor the
advertising content shown on our GO platform and 3G.cn to ensure that such content is true and accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of
advertisements prior to internet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been
obtained. Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the
misleading information. In circumstances involving serious violations by us, PRC governmental authorities may force us to terminate our advertising operations or revoke our licenses.
While we have made significant efforts to ensure that the advertisements shown on our GO platform and 3G.cn are in full compliance with
applicable PRC laws and regulations, we cannot assure you that all the content contained in such advertisements or offers is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the
interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on
our business, financial condition, results of operations and prospects.
Under the PRC Enterprise Income Tax Law, we may be classified as a PRC
resident enterprise, which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.
Under the PRC Enterprise Income Tax Law, or the EIT Law, that became effective on January 1, 2008, an enterprise established outside the
PRC with de facto management bodies within the PRC is considered a resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. On
April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies,
or SAT Circular 82, which provides certain specific criteria for determining whether the de facto management body of a PRC controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on
July 27, 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82;
the bulletin became effective on September 1, 2011. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration and competent tax authorities.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered
as a PRC tax resident enterprise by virtue of having its de facto management body in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior
management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the
PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders meetings are located or kept in the PRC; and (d) more than half of the enterprises directors or senior management
with voting rights habitually reside in the PRC. SAT Bulletin 45 further clarifies the resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of
Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese
controlled offshore incorporated enterprise.
Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises
controlled by PRC enterprises or PRC enterprise groups instead of those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SATs general position on how the term de facto management
body could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
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We believe that we should not be treated as a resident enterprise for PRC tax
purposes even if the standards for de facto management body prescribed in SAT Circular 82 are applicable to us. However, we have been advised by our PRC counsel, Jun He Law Offices, that it is possible that the PRC tax authorities may
take a different view given the lack of certainty regarding the interpretation and implementation of the EIT Law and its implementing rules, both of which became effective on January 1, 2008. If the PRC tax authorities determine that our Cayman
Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, then our world-wide income could be subject to PRC tax at a rate of 25%, which could materially reduce our net income. In addition, we will also be subject
to PRC enterprise income tax reporting obligations.
Although dividends paid by one PRC tax resident to another PRC tax resident should
qualify as tax-exempt income under the EIT Law, we cannot assure you that dividends by our PRC subsidiaries to our Cayman Islands holding company will not be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes.
Foreign ADS holders may also be subject to PRC withholding tax on dividends payable by us and gains realized on the
sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Although our holding company is registered in the Cayman Islands, it remains unclear whether dividends received and gains realized by our foreign
ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
We face uncertainty with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.
We face uncertainties on the reporting and consequences on private equity financing transactions and share exchange involving the transfer of
shares in our company by non-resident investors. According to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on
December 10, 2009, with retroactive effect from January 1, 2008, or SAT Circular 698, where a non-resident enterprise transfers the equity interests in a PRC resident enterprise indirectly through a disposition of equity interests in an
overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the non-resident
enterprise, as the seller, shall report such Indirect Transfer to the competent tax authority of the PRC resident enterprise within 30 days of execution of the equity transfer agreement for such Indirect Transfer. The PRC tax authority will examine
the true nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement without reasonable commercial purposes and for the purpose of avoiding or reducing PRC tax, they will disregard
the existence of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10% and
our relevant subsidiaries or variable interest entities may be held liable for paying such tax. SAT Circular 698 also points out that when a non-resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties
at a price lower than the fair market value, the competent tax authorities have the power to make a reasonable adjustment on the taxable income of the transaction.
If our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax
authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our results of operations could be materially and adversely affected.
The Chinese government has provided various tax incentives to our subsidiaries in China. These incentives include reduced enterprise income tax
rates. For example, under the EIT Law and its implementation rules, the statutory enterprise income tax rate is 25%. However, Jiubang Digital was recognized as a high and new technology enterprise, which enabled it to enjoy an enterprise
income tax rate of 15% until August 31, 2014. We are in the process of applying for the extension of such qualification. Jiubang Computer has obtained double soft certification, and it is entitled to exemption of the enterprise income
tax for the first two years and half rate reduction of enterprise income tax for the subsequent three years. Any increase in the enterprise income tax rate applicable to our PRC subsidiaries or PRC variable interest entities in China, or any
discontinuation or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by our PRC subsidiaries or PRC variable interest entities in China, could adversely affect our business, results of operations and
financial condition. In addition, in the ordinary course of our business, we are subject to complex income tax and other tax regulations and significant judgment is required in the determination of a provision for income taxes. Although we believe
our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our results of operations and financial condition would be
materially and adversely affected.
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Chinas M&A Rules and certain other PRC regulations establish complex procedures for some
acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted regulations and
rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may impact
national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of
the National Peoples Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal
year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover within
China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million within China) must be cleared by MOFCOM before they can be completed. In
addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular No. 6, which
officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular No. 6, a security review is required for mergers and acquisitions by foreign investors having
national defense and security concerns and mergers and acquisitions by which foreign investors may acquire the de facto control of domestic enterprises with national security concerns.
In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned
regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such
transactions. It is unclear whether our business would be deemed to be in an industry that raises national defense and security or national security concerns. However, MOFCOM or other government agencies may publish
explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target
entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.
PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries ability to increase their registered
capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
The PRC State Administration
of Foreign Exchange, or SAFE, promulgated regulations in October 2005 that require PRC citizens or residents to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the
purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update
their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments,
external guarantees, or other material events that do not involve roundtrip investments. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise
the filing of SAFE registrations in a timely manner by the offshore holding companys shareholders who are PRC citizens or residents. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE branches.
If our shareholders who are PRC citizens or residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer
or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under
PRC laws for evasion of applicable foreign exchange restrictions.
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We have completed foreign exchange registration of PRC resident shareholders of Mr. Yuqiang
Deng and Mr. Xiangdong Zhang for our financings that were completed before the end of 2010 and the subsequent transfer of their shares to their respective personal holding companies. We have also applied for foreign exchange registration of
Mr. Yingming Chang, a PRC resident, for the shares he holds in our company, and are in the process of updating the foreign exchange registration of Mr. Yuqiang Deng and Mr. Xiangdong Zhang. Because of uncertainty over how the SAFE
regulations will be interpreted and implemented and applied to us, we cannot predict how they will affect our business operations. For example, our present and prospective PRC subsidiaries ability to conduct foreign exchange activities, such
as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may have little control over either our present or
prospective direct or indirect PRC resident shareholders or the outcome of such registration procedures. A failure by our current or future PRC resident shareholders to comply with the SAFE regulations could subject us to fines or other legal
sanctions, restrict our cross-border investment activities, limit our subsidiarys ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership
Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas
publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary
of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such
participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is
required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC employees who
have been granted stock options are subject to these regulations upon the completion of our initial public offering. Failure of our PRC stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal
sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute dividends to us, or otherwise materially adversely affect our business.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may
restrict or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and variable interest entities or to make additional capital contributions to our PRC subsidiaries, which may materially and
adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our
operations in China through our PRC subsidiaries and variable interest entities. We may make loans to our PRC subsidiaries and variable interest entities, or we may make additional capital contributions to our PRC subsidiaries.
Any loans by us to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and
foreign exchange loan registrations. For example, loans by us to our wholly owned PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign
Exchange, or SAFE. If we decide to finance our wholly owned PRC subsidiaries by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions imposed on
loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our variable interest entities, which are PRC domestic companies. Further, we are not likely to finance the activities of our variable
interest entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in mobile internet services, online advertising, online games and related businesses.
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On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues
Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency
registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from the foreign currency registered capital of a foreign-invested enterprise may only be used for purposes
within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from the foreign
currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Violations of SAFE Circular 142 could result in severe monetary or other penalties. Furthermore, SAFE promulgated a circular on November 19, 2010, known as Circular No. 59, which tightens the examination of the authenticity of settlement
of net proceeds from our initial public offering and requires that the settlement of net proceeds shall be in accordance with the description in the prospectus included in our registration statement on Form F-1 (Registration No. 333-191846),
which was filed with the U.S. Securities and Exchange Commission, or SEC, in connection with our initial public offering.
In light of the
various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 142, we cannot assure you that we will be able to complete the necessary government
registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or variable interest entities or with respect to future capital contributions by us to our PRC
subsidiaries. Our failure to complete such registrations or obtain such approvals may negatively affect our ability to use the proceeds we received from our initial public offering and to capitalize or otherwise fund operations of our PRC operating
subsidiary, Jiubang Computer, and any other new subsidiaries we may establish in the future for business purposes, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Our PRC subsidiaries and PRC variable interest entities are subject to restrictions on paying dividends or making other payments to us, which may
restrict our ability to satisfy our liquidity requirements.
We are a holding company registered in the Cayman Islands. We rely on
dividends from our PRC subsidiaries as well as consulting and other fees paid to us by our PRC variable interest entities for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to our
shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits after making up previous years accumulated losses each year, if any, to fund certain reserve funds
until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Since we have not achieved profitability, we are not yet required to allocate funds for such reserve funds. Furthermore,
if our PRC subsidiaries and PRC variable interest entities incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which may restrict our ability to
satisfy our liquidity requirements.
In addition, the EIT Law and its implementation rules provide that withholding tax rate of 10% will
be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where
the non-PRC-resident enterprises are incorporated.
Fluctuations in exchange rates could have a material adverse effect on our results of operations
and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among
other things, changes in Chinas political and economic conditions and Chinas foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and
the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However, the Peoples Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve
policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow band. However, the Renminbi fluctuated significantly during that period against other
freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the Renminbi has started to slowly appreciate against the U.S. dollar, though there have been periods recently when the U.S. dollar has appreciated against the Renminbi. It
is difficult to predict how long the current situation may last and when and how this relationship between the Renminbi and the U.S. dollar may change again.
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There remains significant international pressure on the Chinese government to adopt a flexible
currency policy to allow the Renminbi to appreciate against the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. The majority of our revenues and costs are denominated in Renminbi. Any
significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S.
dollars we received from our initial public offering into Renminbi to pay our operating expenses, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be
able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in
exchange rates may have a material adverse effect on your investment.
Governmental control of currency conversion may limit our ability to utilize
our cash balance effectively and affect the value of your investment.
The PRC government imposes control on the convertibility of
the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a substantial portion of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC
subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future.
If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
The economy of China has been experiencing increases in labor costs in recent years. Chinas overall economy and the average wage in China
are expected to continue to grow. The average wage level for our employees has also increased in recent years.
In addition, we have been
subject to stricter regulatory requirements in terms of entering labor contract with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment
insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract law, that became effective in January 2008 and its implementation rules that
became effective in September 2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees probation and unilaterally terminating labor
contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or
cost-effective manner, which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National Peoples Congress promulgated the PRC Social Insurance Law, or the Social Insurance
Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the
employers must, together with their employees or separately, pay the social insurance premiums for such employees.
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We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to pass on these increased labor costs to our users by increasing prices for our products or services, our profitability and results of operations may be materially and adversely affected. Also, as the interpretation and
implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice do not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government
investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and
adversely affected.
If the custodians or authorized users of controlling non-tangible assets of our company, including our corporate chops and
seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including contracts such as revenue-sharing contracts with advertisers, publishers
and authors, which are important to our business, are executed using the chops or seals of the signing entity, or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration
of Industry and Commerce.
Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our
PRC subsidiaries and variable interest entities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of our PRC subsidiaries and variable interest
entities are members of our senior management team who have signed employment undertaking letters with us or our PRC subsidiaries and variable interest entities under which they agree to abide by various duties they owe to us. In order to maintain
the physical security of our chops and the chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel of each of our subsidiaries and variable interest entities. Although we monitor
such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter
difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries
or variable interest entities, we, our PRC subsidiaries or variable interest entities would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the
chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representatives fiduciary duties to us, which could involve significant time and resources and divert management attention away
from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the
representative and acts in good faith.
Our auditor, like other independent registered public accounting firms operating in China, is not permitted
to be subject to inspection by the Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in this prospectus filed with the SEC, as an auditor
of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to
assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our
auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.
Inspections
of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The
inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditors audit procedures or quality control procedures. As a result,
investors may be deprived of the benefits of PCAOB inspections and lose confidence in our reported financial information and procedures and the quality of our financial statements.
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Proceedings instituted recently by the SEC against five PRC-based accounting firms, including our
independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In December 2012, the SEC brought administrative proceedings against five accounting firms, including our independent registered public
accounting firm, in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an
initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until
reviewed and approved by the SEC. The accounting firms have the ability to appeal and the four firms which are subject to the six month suspension from practicing before the SEC have indicated that they will appeal. The sanction will not become
effective until after a full appeal process is concluded and a final decision is issued by the SEC. The accounting firms can also further appeal the final decision of the SEC through the federal appellate courts. We are not involved in the
proceedings brought by the SEC against the accounting firms. However, our independent registered public accounting firm is one of the four accounting firms subject to the six month suspension from practicing before the SEC in the initial
administrative law decision. We may therefore be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms.
On May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China
Securities Regulatory Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China.
However, it is not clear how these recent developments could affect the SECs final decision in the case against the five accounting firms or any subsequent appeal to courts that the accounting firms may initiate. Therefore, it is difficult to
determine the final outcome of the administrative proceedings and the potential consequences thereof.
If our independent registered
public accounting firm were denied, 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 to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our ADSs 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.
Risks Related to Our ADSs
The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.
The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because
of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in China that have listed their securities in the United
States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The
trading performances of these Chinese companies securities after their offerings, including companies in the internet and mobile internet businesses, may affect the attitudes of investors toward Chinese companies listed in the United States,
which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other
practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in such practices. In addition, securities markets may from time to
time experience significant price and volume fluctuations that are not related to our operating performance.
In addition to market and
industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
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variations in our net revenues, earnings and cash flow;
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announcements of new investments, acquisitions, strategic partnerships, or joint ventures;
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announcements of new services and expansions by us or our competitors;
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changes in financial estimates by securities analysts;
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changes in the number of our users;
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fluctuations in our operating metrics;
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failure on our part to realize monetization opportunities as expected;
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additions or departures of key personnel;
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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;
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detrimental negative publicity about us, our competitors or our industry;
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regulatory developments affecting us or our industry; and
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potential litigation or regulatory investigations.
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Any of these factors may result in large
and sudden changes in the volume and price at which our ADSs will trade.
We are an emerging growth company within the meaning of the Securities Act
and may take advantage of certain reduced reporting requirements.
We are an emerging growth company, as defined in the
JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation
requirements of Section 404 for so long as we are an emerging growth company until the fifth anniversary from the date of our initial listing in November 2013. As a result of our current status as an emerging growth company, our investors may
not have access to certain information that they may deem important.
The JOBS Act also provides that an emerging growth company need not
comply with any new or revised financial accounting standard until such date that a non-reporting company is required to comply with such new or revised accounting standard. However, we have elected to opt out of this provision and, as a
result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding
our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by
research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or
fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.
The sale or availability for sale, or perceived sale or availability for sale, of substantial amounts of our ADSs could adversely affect their market
price.
Sales of substantial amounts of our ADSs in the public market after the completion of our initial public offering, or the
perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in our initial public offering are freely
tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in
Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. In connection with our initial public offering, we and our officers, directors and our shareholders have agreed not to sell any shares or ADSs for 180 days after
the November 21, 2013 without the prior written consent of the underwriters. However, the underwriters may release the securities subject to lock-up agreements from the lock-up restrictions at any time, subject to applicable regulations of the
Financial Industry Regulatory Authority, Inc. Class A ordinary shares underlying our outstanding options will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up
agreements and Rules 144 and 701 under the Securities Act. We may also issue additional options in the future which may be exercised for additional Class A ordinary shares. There were 58,995,186 Class A ordinary shares outstanding as of
March 31, 2014. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
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Our articles of association contain anti-takeover provisions that could have a material adverse effect on
the rights of holders of our ordinary shares and ADSs.
Our currently effective amended and restated articles of association
contains provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions have the effect of depriving our shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our
shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including
dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be
issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and
other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
You may face difficulties in protecting your
interests, and your ability to protect your rights through U.S. courts may be limited, because we are registered under Cayman Islands law.
We are an exempted company limited by shares registered under the laws of the Cayman Islands. Our corporate affairs are governed by our
memorandum and articles of association, the Companies Law (2013 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent
in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of
our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws
than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general
rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and under what
conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a
shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of the above, public
shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the
United States.
Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction.
We are a Cayman Islands company and a substantial majority of our assets are located outside of the United States. A significant percentage of
our current operations are conducted in China. In addition, a significant majority of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an
action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
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There are uncertainties as to whether Cayman Islands courts would:
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recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
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impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.
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There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands
will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your
Class A ordinary shares.
As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the
underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary
will vote the underlying Class A ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and
restated memorandum and articles of association which is currently in effect, the minimum notice period required for convening a general meeting is 14 days. When a general meeting is convened, you may not receive sufficient advance notice to
withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We
cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or
for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
You may not receive dividends or other distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or
impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A
ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a
holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not
feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation
to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or
anything else to holders of ADSs. This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause
a material decline in the value of our ADSs.
Our dual-class voting structure will limit your ability to influence corporate matters and could
discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our ordinary shares 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 ten votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary
shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be
automatically and immediately converted into the equal number of Class A ordinary shares.
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Due to the disparate voting powers attached to these two classes of ordinary shares, as of
December 31, 2013, our existing holders of Class B ordinary shares collectively own approximately 96.0% of the voting power of our outstanding shares and have considerable influence over matters requiring shareholders approval, including
election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. In particular, our core management, Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang and their respective
affiliates, beneficially own approximately 31.6% of our total outstanding shares, representing 36.6% of our total voting power immediately after our initial public offering. This concentrated control will limit your ability to influence corporate
matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it
deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary
needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers
of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or
under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.
We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an emerging growth company.
We are a public company and incur significant legal, accounting and other expenses that we did not incur as a private company. The
Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, and NASDAQ, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.0 billion in revenues for our last
fiscal year, we qualify as an emerging growth company pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public
companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth companys internal control over
financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to opt out of this provision and, as a result, we will
comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more
time-consuming and costly. After we are no longer an emerging growth company, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and
disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified
persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of
additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class
action suits against the company following periods of instability in the market price of that companys securities. If we were involved in a class action suit, it could divert a significant amount of our managements attention and other
resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our
ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
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We may be classified as a passive foreign investment company, or PFIC, for United States federal income tax
purposes, which could subject United States investors in our ADSs or Class A ordinary shares to significant adverse United States income tax consequences.
We will be classified as a passive foreign investment company, or PFIC if, in the case of any particular taxable year, either
(a) 75% or more of our gross income for such year consists of certain types of passive income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year
produce or are held for the production of passive income (the asset test). Although the law in this regard is unclear, we treat our PRC variable interest entities as being owned by us for United States federal income tax purposes, not
only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated
financial statements.
While we do not expect to be a PFIC for United States federal income tax purposes for the taxable year ended
December 31, 2013, there is a risk that we may become a PFIC for our current taxable year ending December 31, 2014 and future taxable years because of our significant cash balances and because the value of our assets for purposes of the
PFIC test will generally be determined by reference to the market price of our ADSs or Class A ordinary shares. Accordingly, fluctuations in the market price of our ADSs or Class A ordinary shares may cause us to become a PFIC for the
current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets. Under
circumstances where we determine not to deploy significant amounts of cash for active purposes or not to treat our PRC variable interest entities as owned by us for United States federal income tax purposes, our risk of being classified as a PFIC
may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC
for the current taxable year or any future taxable year.
If we are classified as a PFIC in any taxable year, a U.S. holder (as defined in
Item 10. Additional Information E. TaxationMaterial United States Federal Income Tax Considerations) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs
or Class A ordinary shares and on the receipt of distributions on the ADSs or Class A ordinary shares to the extent such gain or distribution is treated as an excess distribution under the United States federal income tax rules
and such holders may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. holder holds our ADSs or Class A ordinary shares, we generally will continue to be treated as a PFIC
for all succeeding years during which such U.S. holder holds our ADSs or Class A ordinary shares. Each U.S. holder is urged to consult its tax advisor concerning the United States federal income tax consequences of an investment in our ADSs or
common shares if we are treated as a PFIC for our current taxable year ending 2014 or any future taxable year, including the possibility of making a mark-to-market election. For more information, please see Item 10. Additional
Information E. TaxationMaterial United States Federal Income Tax ConsiderationsPassive Foreign Investment Company Considerations.
ITEM 4.
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INFORMATION ON THE COMPANY
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A.
History and Development of the Company
We commenced operations in June 2003, with the establishment of Guangzhou Jiubang Digital Technology Co., Ltd., or Jiubang Digital. We, through
Jiubang Digital, started our mobile internet business, including the launch of 3G.cn, our mobile internet portal in March 2004, and subsequently our GO Launcher EX in November 2010. Jiubang Digital is one of our PRC variable interest entities
through the contractual arrangement described below.
In January 2005, we incorporated Sungy Data Ltd. under the laws of the British
Virgin Islands as our offshore holding company.
In March 2005, Sungy Data Ltd. established Jiubang Computer Technology (Guangzhou) Co.,
Ltd., or Jiubang Computer, our wholly owned subsidiary in China. Jiubang Computer entered into a series of contractual arrangements, as a result of which Sungy Data Ltd. became primary beneficiary of, and exercise effective control over the
operations of, these PRC entities:
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In June 2006, we entered into certain contractual arrangements with Jiubang Digital and its then shareholders. As of March 31, 2014, Guangzhou Sanju Advertising Media Co., Ltd., or Sanju Advertising (a company
wholly owned by Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang), Mr. Yuqiang Deng, and Mr. Xiangdong Zhang each holds 80%, 16% and 4% of the equity interest in Jiubang Digital, respectively;
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In June 2006, we entered into certain contractual arrangements with Sanju Advertising and its then shareholders. As of March 31, 2014, Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang
each holds 70%, 20% and 10% of the equity interest in Sanju Advertising, respectively. Sanju Advertising primarily engages in advertising services;
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In August 2006, we entered into certain contractual arrangements with Guangzhou Zhiteng Computer Technology Co., Ltd., or Zhiteng Computer and its then shareholders. As of March 31, 2014, Mr. Yuqiang Deng and
Mr. Xiangdong Zhang each holds 80% and 20% of the equity interest in Zhiteng Computer, respectively. Zhiteng primarily engages in technology supporting services; and
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In May 2010, we entered into certain contractual arrangements with Guangzhou Hengye Software Technology Co., Ltd., or Hengye Software and its then shareholders. As of March 31, 2014, Mr. Yuqiang Deng,
Mr. Xiangdong Zhang and Mr. Yingming Chang each holds 70%, 10% and 20% of the equity interest in Hengye, respectively. Hengye Software primarily engages in mobile internet value-added services.
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Currently, Jiubang Computer is our operating subsidiary in China whose authorized scope of business includes research and development of
computer software, providing computer information technology service and technology consulting service, and selling products and services provided by the company. Jiubang Computer is engaged in research and development activities and also provides
services to our VIEs, including technology development, technical consulting and market research and consulting services.
In November
2008, we acquired 70% of the equity interest in XMedia Technologies Ltd, or XMedia, a company incorporated in the Cayman Islands. In November 2009, we acquired the remaining 30% equity interest in XMedia. As a result, XMedia became our wholly-owned
subsidiary.
In February 2011, we indirectly acquired 33% of the equity interest in Zhuhai Zhengdian Technology Co., Ltd., or Zheng Dian,
a company incorporated in China. In May 2012, we sold all of our equity interest in Zheng Dian.
In August 2013, Sungy Data Ltd. was
redomiciled in the Cayman Islands as an exempted company registered under the laws of the Cayman Islands. In October 2013, Sungy Data Ltd. was renamed Sungy Mobile Limited.
In November 2013, Sungy Mobile Limiteds ADSs were listed on The NASDAQ Stock Market under the symbol GOMO. In December 2013,
Sungy Mobile Limited completed an initial public offering of 8,050,000 ADSs, representing 48,300,000 Class A ordinary shares.
In
February 2014, we acquired GetJar, Inc., or GetJar, a privately held mobile ad network based in California for $5.3 million in cash. We may issue up to an aggregate of 1,443,074 Class A ordinary shares to the seller of GetJar by early 2016 as
earnout payments if certain performance targets are achieved. We also incorporated Sungy Technology Limited under the laws of the British Virgin Islands, which holds the intellectual properties in relation to the operation of GetJar Inc.
Our principal executive offices are located at Floor 17, Tower A, China International Center, No. 33 Zhongshan 3 Road, Yuexiu District,
Guangzhou 510055, People
s Republic of China. Our telephone number at this address is (+86 20) 6681 5066. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland
House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.
See Item 5. Operating and Financial Review and Prospects B. Liquidity and Capital Resources Capital Expenditures for
a discussion of our capital expenditures and divestitures.
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B.
Business Overview
Overview
We are a leading provider of
mobile internet products and services globally with a focus on applications and mobile platform development. Our platform product, GO Launcher EX, manages apps, widgets and functions on Android smartphones and serves as users first entry point
to their phones.
We have developed a portfolio of GO series products which include our launcher products and a broad range of other GO
series apps and widgets that provide rich functionality, enhanced performance and extensive personalization for Android smartphones. We have created and continued to expand a GO platform that is built upon GO Launcher EX and integrates all of our GO
series products as well as third-party mobile internet products and services.
In addition to our GO series products and GO platform, we
also offer 3G.cn, a mobile internet portal, and mobile reading services, both of which provide us with a stable and growing user and paying customer base.
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We launched 3G.cn, one of the first Chinese mobile internet portals, in March 2004, when the mobile internet was still in its infancy. It provides mobile users access to a vast array of professional media and
user-generated content, such as entertainment and sports events coverage in multi-media formats. 3G.cn had more than 45 million unique visitors in December 2013.
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We started charging fees for our mobile reading services in the first half of 2010 to capture one of the early monetization opportunities in the mobile internet industry. Our mobile reading services are comprised of an
expanding library of original and copyrighted literary works and a growing and highly engaged user community.
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We generate
our revenues through advertising in various forms, paid apps and premium themes, in-app purchase for advanced functionalities as well as users purchases of literary content.
Our GO Series Products and Platform
Our
GO series products include launcher products and a broad range of other GO series apps and widgets that provide rich functionality, enhanced performance and extensive personalization to Android smartphones. We launched our GO series products at a
time when demand for Android apps were on the rise. Our GO series products have rapidly achieved global popularity since the launch of GO Launcher EX in November 2010.
The following table sets forth the key operating data relating to our core GO series products:
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Accumulated
Number of
User as of
December 31, 2013
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Accumulated
Number of Paid
Downloads as of
December 31, 2013
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(million)
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(million)
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GO Launcher EX
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268
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1.4
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GO SMS Pro
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110
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0.9
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GO Locker
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118
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0.5
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GO Weather
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83
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0.3
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All GO series products
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364
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(1)
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3.6
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(1)
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When calculating the accumulated number of users of all GO series products, we count each individual user only once regardless of the number of GO series products such individual user may be using.
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Launcher Products
There are more
than 900 million Android smartphones currently in use and the number is continuously growing. The advent of the smartphone era, especially the continuing popularity of the Android smartphones, has transformed smartphones from expensive
electronic devices into everyday consumer staple. While the Android operating system provides the low level functions of smartphones, all Android smartphones come with a pre-installed launcher that operates above the Android operating system and
manages all apps, widgets and functions through a main user interface after the smartphone is powered on. A launcher on an Android smartphone can typically be customized to fit various user preference. It determines to a great extent the
performance, functionality, feel, look and handle of smartphones and is one of the determining factors of user experience on different smartphones.
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Smartphone users, especially the younger generation, became dissatisfied with the limited
functionality and performance and the same feel and look of the factory configured launcher of the standard Android smartphones. As a result, these users are attracted to third-party launcher products that can provide them with redefined experience.
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After the release in November 2010, GO Launcher EX has attracted approximately 268 million users worldwide as of December 31, 2013. GO Launcher EX
can be downloaded for free, although it has paid premium features.
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GO Launcher EX offers extensive functions and
high performance that turn the use of smartphones into a more productive experience. In addition, through themes, widgets and various levels of customization, GO Launcher EX users can extensively personalize their smartphones and change the
otherwise monotonous phones into exciting and sensible instruments that perform more in sync with their owners habits and symbolize the individuality of their owners. For example:
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GO Launcher EX includes many new functions and features not available in
factory installed launchers and other third-party launchers, which significantly increases the utility of smartphones and makes smartphone use more convenient and intuitive.
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Developed using our sophisticated 3D graphics engine, the graphics rendering
speed of GO Launcher EX can reach 57-60 frames per second, approximately 50-80% faster than the factory installed launcher, which creates much smoother visual effects for screen transitions.
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GO Launcher EX provides more than 10,000 eye-catching themes developed
either by us internally or by numerous creative theme designers worldwide representing numerous styles and rich cultural implications. It also provides more than 25 types of dynamic screen transition effects.
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GO Launcher EX is currently available in 38
languages, serving users in over 200 countries and regions.
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GO Launcher EX has received a score of 4.5 out of 5
as of March 31, 2014 on Google Play.
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Next Launcher is our second launcher product and is
a paid app featuring striking 3D effects, entertaining operation experience and visual enjoyment. For example, apps can be customized to rotate, swing, float or bounce on screens. Screen transition can have classic cylinder, flip, cubic effect as
well as true 3D crystal, cloth and folding effects. Users can also define additional finger gestures such as double finger glide and double click for their favored operations. With additional themes and custom widgets downloadable from Google Play,
it provides extensive and extremely comprehensive options for users looking to spice up their smartphones. Users can also build their customized app icons by editing its size, angle, style and label. We have been developing additional 3D screen
transition effects and 3D widgets and themes specially designed for the Next Launcher.
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Next Launcher has paid downloads of approximately
200,000 times as of December 31, 2013 on Google Play. It has received a score of 4.5 out of 5 as of March 31, 2014.
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Other GO Series Products
Founded on the success of GO Launcher EX, we developed a large portfolio of other GO series products and services through apps and widgets to
further improve the functionality, performance and personalization of smartphones. Our most popular GO series mobile apps include GO SMS Pro, GO Locker and GO Weather.
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GO SMS Pro seamlessly combines SMS/MMS sent over the mobile internet with traditional
SMS/MMS sent over mobile carriers networks, which maximizes the availability of the SMS/MMS services to users and at the same time reduces the fees users pay to mobile carriers.
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Besides common SMS/MMS features, GO SMS Pro provides additional features
such as auto-reply, folders organization, private message box for better privacy protection, SMS blocker to block spam or other unwanted messages, automatically scheduled outgoing message, and group messaging. It also offers advanced functionalities
such as advanced private message box that can be unlocked using hand gestures and unlimited cloud storage space for message backup.
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With more than 1,640 emoticons and rich features as well as 257 artistically
designed themes, GO SMS Pro is a powerful tool that provides convenient and personalized communication experience to users.
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GO SMS has attracted approximately 110 million users worldwide as of
December 31, 2013, and it received a score of 4.4 out of 5 as of March 31, 2014 on Google Play.
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GO Locker provides many different lock/unlock styles and a vast number of
themes to lock / unlock smartphone screens in users preferred ways, which are well beyond the basic locker functions that Android OS provides.
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It allows users to add live widgets to the locked screen such that users can
conveniently check information or access apps directly from the locked screen. For example, users can check weather information and control music player without unlocking the screen.
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GO Locker has attracted approximately 118 million users worldwide as of
December 31, 2013, and it received a score of 4.4 out of 5 as of March 31, 2014 on Google Play.
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GO Weather provides detailed weather report including information such as
temperature, chance of rain, wind speed, humidity, visibility, sunrise and sunset time, weather alert and forecast for more than 100,000 locations in the world. It also offers attractive user interface with a variety of widget themes and live
wallpapers to make weather forecast interesting and visually attractive. Users can even take pictures of their weather conditions and share them with their friends through various email, SMS, or social networking apps installed on their
phones.
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GO Weather has attracted approximately 83 million Android smartphones
worldwide as of December 31, 2013, and it received a score of 4.5 out of 5 on Google Play as of March 31, 2014, the highest score among all apps in the weather category.
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Some of our other GO series apps and their functions and user statistics are listed below. The number of users
and Google Play score for each app are as of December 31, 2013 and as of March 31, 2014, respectively.
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GO Keyboard has more functionalities than a factory installed keyboard. It helps users type
faster on their smartphone screens by providing intuitive keyboard layout, fluid transition between alphabet, numbers and symbols, more than 480 emoticons and accurate word prediction and auto-correction functions.
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It can be further customized through the choice of more than 125 themes and
various settings for sound, vibration, display and transition effects.
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It provides input for 48 languages and supports a broad range of smartphones
and tablets.
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Users: approximately 30 million; Google Play Score: 4.4
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GO Battery Saver & Power Widget effectively reduces power
consumption and prolongs battery life for smartphones. Battery life of the phone can be extended by up to 40% after using our GO Battery Saver & Widget, according to our internal testing on one of the most popular smartphone
models.
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With a single click on one of the several pre-set modes, it optimizes power
consumption by managing Wi-Fi, blue tooth and mobile connections, audio player, screen brightness, vibration, data synchronization, apps and other battery draining components in smartphones.
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It also allows users to customize the battery saving schedules of their
smartphones to suit their unique needs. After being configured, it intelligently switches modes, turns on/off phone functions at different battery levels, phone status, or time.
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Users: approximately 25 million; Google Play Score: 4.4
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GO Cleaner & Task Manager provides a convenient tool to monitor and
manage all the apps and widgets installed in smartphones.
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It provides an easy one-touch capability to close all apps running in the
background or close individual apps one by one. It can also clean cached or residual files, free up phone memory, disable certain startup apps when system reboots and generally improve the performance and battery life of Android
smartphones.
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It enhances user privacy and security by deleting private records of online
and off-line activities, such as browsing history, search records and call logs.
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Users: approximately 15 million; Google Play Score: 4.4
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Go Toucher stays on top of any screen and provides one-touch quick access to
important functions which users normally have to flip through several screens or menus to access on the smartphone.
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For example, one of our popular themes blue light for GO Toucher
displays a floating touch point on every screen regardless of whether the current screen is a home screen, a webpage or a screen opened by an app. The theme has calendar events, contact and recent calls, recent messages, favorite app lists, weather
and system switch widget fanning out on a futuristic blue screen.
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Users can also customize GO Toucher by selecting various themes that provide
different controls, feels and look.
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Users: approximately 11 million (including users of GO Toucher Pro, an
upgraded version of GO Toucher); Google Play Score: 4.4
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We have also developed a large number of add-on widgets for GO Launcher EX, all of which provide
additional functionalities and performance enhancement to improve user experience. The table below includes a list of the main widgets we have developed.
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Switch
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Provides a fast way to turn on/off or adjust common functions, such as Wi-Fi and GPS
connection, screen brightness, screen locker, flashlight, and battery usage.
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Calendar
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Provides simpler and faster way to work with calendar.
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Clock
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Provides world clock and time browsing tool on home screen.
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Note
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Helps manage schedules and notes efficiently. A user can use task style to add schedules,
note style to quickly write down thoughts, and even doodle style to record his or her plan by drawing a picture. It also supports sharing schedules with other users.
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Search
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Searches internet, users contacts and installed apps in a single user
interface.
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Contacts
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Allows a user to make phone calls, send messages, emails or chat from home screen by one
click without opening contacts app.
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Weather
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Displays live weather conditions without opening GO Weather.
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Message
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Enables viewing of SMS messages on screen without opening GO SMS Pro.
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Email
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Enables sending/receiving of emails directly on home screen without the need to open any
email app; supports most of the popular email apps in the market.
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Facebook
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Enables viewing of Facebook postings without opening Facebook app.
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Twitter
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Enables reading of tweets and timeline/mentions/messages or uploading of photos without
opening Twitter app.
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Weibo
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Enables viewing of Weibo postings without opening Sinas Weibo app, a Twitter-like
social media.
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Task manager
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Accesses task manager functions without opening Task Manager app.
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Power manager
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Accesses power manager functions without opening Power Manager app.
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Store
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Offers apps, widgets, games, themes and wallpapers on our GO platform, and users can pay
through Google Play account.
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Development of GO Series Products
We strive to be a pacesetter in our industry in terms of developing new products and services. For example, we believe we were among the first
in our industry to develop the Switch widget that provides a fast way to turn on/off or adjust common functions of smartphones. We were one of the first to automatically categorize installed apps and provide app search functions in launcher
products. We were also one of the first to enable hand gestures in the operation of Android smartphones. Many of these features have been followed by other launcher providers and become industry standard configurations. We believe we are one of the
few developers that apply 3D graphics engine in user interface development and have successfully implemented the 3D technology into a launcher product.
As of December 31, 2013, we had approximately 264 employees in our product development team dedicated to GO series products and GO
platform. Before we commit to develop any products, we typically conduct extensive studies of user needs and market demand. We then go through a prescribed series of steps, including testing user interactions, graphics design, client and server end
software development, internal testing and beta version testing, often with multiple iterations, before officially releasing the products. Once our products are released, we collect and closely study data on user satisfaction and user feedback. We
have a customer service team to collect feedbacks and identify areas in which our products need to be further enhanced or fine-tuned. In addition, our sophisticated data analytics system automatically collects and analyzes more than two terabytes of
data per day and generates a large number of daily reports relating to the operations of our products, which further help us timely identify areas that need improvement. We have been promptly releasing new versions of our products to resolve issues
thus identified after product releases, enhance existing functions or add new features to improve our products.
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Promotion of GO Series Products and Platform
We believe that creating superior products with high user satisfaction levels is the most effective way to market and promote our GO series
products and GO platform. Through constant improvement and fine-tuning, we have received high ratings and a large number of positive comments on Google Play. We as a development team have also gradually gained considerable respect in users
community, and most our GO series products reached the one million download threshold within a couple of months of their releases.
We
also promote our GO series products through in-app cross promotion. Users of any one of our GO series products can readily become interested in trying, and are provided convenient in-app access to, other complementary GO series products, which
create a strong network effect to cross-market our GO series products. Furthermore, through mobile advertising networks, we can cross-promote apps with other app developers by displaying the advertisements of other app developers apps in our
apps in exchange for them to display the advertisements of our GO series apps.
Starting in January 2012, we entered into arrangements
with several leading Chinese smartphone manufacturers to pre-install GO Launcher in some of their smartphone models at no cost. We had seen approximately 18 million activations from the pre-installed GO Launcher apps as of December 31,
2013.
Through achieving higher user satisfaction, cross-promotion and pre-installation, we have been able to build a large community of
loyal users for our GO series products and GO platform without having to incur significant marketing expenses.
Distribution and Payment
Our GO series products are available for download on Google Play, other similar third-party app stores as well as GO Market, our
mobile application store for Chinese users. While overseas users pay through Google Play, users in China pay through various third-party payment methods such as Alipay and SMS.
Our 3G.cn Mobile Internet Portal
3G.cn, our mobile internet portal, was one of the earliest multi-media portals in China to be solely devoted to serving mobile internet users.
It provides mobile internet users with access to a vast array of professional media and user-generated content on a wide range of topics, including entertainment, sports and current events, in a variety of media. We launched 3G.cn in 2004, when
Chinas mobile internet industry was still in its infancy. We currently offer more than ten different versions of the portal which can optimally serve a range of smartphones, including a version based on the newly developed HTML5 format.
Channels
3G.cn offers more than
70 free channels that cater to a broad range of focuses and interests. Some of our most popular channels include the following:
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NOW Live Broadcast
. NOW, a special live broadcast channel on the portal, delivers real time blow-by-blow coverage of live broadcasts for events relating to a diverse range of topics, including sports,
entertainment and technology. We partner with various media outlets to obtain exclusive coverage of games and entertainment programs, so that we can provide users with the most up to date information on popular events. For example, for the 2012
London Olympics, 3G.cn had the rights to provide mobile internet coverage.
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General Information
. Our general information channel includes articles sourced from third-party major media outlets organized by keywords, topic and popularity, covering diverse areas of interest such as
international stories, regional events, finance analysis, military coverage and cultural stories. We provide links to the official websites for popular movies, and for famous sports teams. We also provide in-depth coverage and analysis of current
events and public interest topics.
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Apps download center
. Our apps download center is dedicated to providing downloads of popular new software / apps that optimize user experience of smartphones, including GO series products, online travel agents
programs, city map guides and other resources for entertainment and everyday practical uses.
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Mobile reading
. We provide access from 3G.cn to our mobile reading database, providing visitors with access to a vast, expanding library of original and copyrighted literary works covering a broad range of
genres.
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Organization and Management of Content
We obtain content for 3G.cn through cooperation with media agencies and content-sharing with entertainment-related content providers such as
other major media sites in China. We also have strong in-house capabilities to produce original content with respect to entertainment and sports. Our staff writers are responsible for writing, editing, organizing and managing content, and include
field reporters for sports and entertainment stories.
To help our smartphone users navigate and explore the vast content on 3G.cn, we
created a navigation guide specifically tailored for mobile internet users, grouping content by topics, common interest keywords and popularity, making it easier for users to browse or directly identify items of interest to them.
Revenues from 3G.cn
We primarily
generate revenues from 3G.cn through advertising. With the large number of visitors to 3G.cn, the vast array of content on the website and the broad range of advertising formats we offer, we are able to attract numerous advertisers from a variety of
industries, including smartphone manufacturers, mobile game developers and credit card companies, among others.
Generally, advertisers on
3G.cn enter into contracts with us directly or through advertising agencies, with each contract typically lasting a few weeks for each advertising slot purchased. Advertisements on 3G.cn are charged primarily on the basis of duration, with pricing
variations depending on the size, display method and prominence of the locations for these advertisements. As we continue to expand and enrich the content on 3G.cn, we expect that we will attract an increasing number of visitors and advertisers and
derive more advertising revenues from 3G.cn in the future.
Promotion of 3G.cn
We believe that the best way to promote 3G.cn is to maintain a broad range of high quality content and deliver superior visitor experience. We
aim to maintain and expand our large attractive user base and our large advertising space inventory that enables advertisers to connect and engage with their targeted audiences and promote their products and services.
3G.cn also promotes large sports events and entertainment shows organized by third parties in exchange for receiving publicity during the
broadcast of these events. We promote popular movies on the entertainment channel of 3G.cn in exchange for being mentioned on the movies press materials. We also continually sponsor auto shows as part of our publicity strategy.
Our Mobile Reading Services
We
started charging fees for our mobile reading content in 2010. Currently, our mobile reading services consist of GGBook, a mobile app for smartphones, a literary channel on 3G.cn, and content that can be accessed from third-party internet
operators mobile reading databases. We are one of the earliest mobile reading service providers in China offering original content. We offer an expanding collection of original and copyrighted third-party literary works to a large, growing and
highly engaged user community
Large and Expanding Content
As of December 31, 2013 we had over 80,152 pieces of free and premium works on our mobile reading base, of which 31,493 pieces require
readers to pay. Approximately half of the literature available on our mobile reading base are original content to which we have exclusive publishing or reproduction rights, while the remaining are sourced from other mobile reading database in China
or traditional offline-published books. We offer a comprehensive and continually expanding library of original and copyrighted literary works covering a wide range of genres, from romance, fantasy, martial arts, science fiction and mystery to humor.
We engage registered authors who provide original content for our mobile reading base. Our authors transfer to us the copyright to their works in exchange for a fee based on the revenue we earn from their works. We also acquire licenses to post
contents from traditional, offline-published books and make them available to our mobile readers.
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Organization and Management of Content
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Professional editing team
. We have an editing team with more than 85 editors devoted to the reviewing and editing of literary content as of March 31, 2014.
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Content Organization and Monitoring
. We categorize our literary works by topic, popularity, authorship, free versus premium content and various other groupings so as to make it easier for readers to browse,
search, read and bookmark different works. We have a team that ensures the literary works we offer are in compliance with applicable PRC laws and regulations, aided by a software program that periodically sweeps our platform for sensitive key words
or questionable content. See Item 3. Key InformationD. Risk FactorsRisks Relating to Doing Business in ChinaContent posted or displayed on GO platform, 3G.cn and our mobile reading base, including advertisements, may be found
objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.
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Highly Engaged
Reader Base
One of the key elements to the success of our mobile reading services is our highly engaged reader base. Our readers
visit our mobile reading library through a variety of smartphones, and frequently comment on, rate and provide constructive feedback on authors literary works that are continually published chapter by chapter. This interaction between authors
and readers enhances user stickiness, encourages readers to regularly visit our mobile reading base and makes our reader base attractive to advertisers.
Quality Authors
We believe that
our large and highly engaged online user community creates a natural network effect that attracts Chinas aspiring and established authors and helps to keep our library in line with the latest reader interests. We provide a medium for authors
to publish literary works that can easily reach a vast, highly engaged reader base. By publishing on our mobile reading base, a writer can, share revenues with us, and use our community to establish a fan base. Many of our readers are inspired by
ideas shared in our reader community, and in turn have become popular authors themselves, attracting more readers to our reading base.
We
seek to sign talented authors who have potential for commercial success. Authors receive reviews from our readers and editing advice from our editing team, which in turn improve their writing skills and help them find topics and styles suited to
themselves and to their reader base. In 2012, one of our authors became the top ten most searched authors on Baidu.com, Chinas most popular search engine. In addition, thirty of our authors have published offline as of December 31, 2013.
Revenues from Mobile Reading
We offer customized subscription packages designed to maximize reader satisfaction and to generate greater recurring revenues. We provide free
content as well as paid premium content to our readers; we believe that our free content attracts readers to visit and browse our online literature library. Typically, our readers register as members and browse through the content of our library
before transferring money to their accounts with us to purchase premium content. Our premium original content can be subscribed for by monthproviding unlimited access to a certain number of works for a month for a set feeor by chapters
or books. We also provide content to reading channels of third party internet operators and receive a percentage of the fees paid by their users who subscribe to our content.
Distribution and Payment
We have
a large number of readers who seek to join an established, vibrant mobile reading community. We believe the best way to promote our mobile reading base is to deliver superior content and reader experience. The more readers we engage for our mobile
reading base, the more vibrant our mobile reading community becomes, and the greater the value we can bring to our readers, which further encourages loyalty and incentivize reader referrals.
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In addition to offering original content on our own mobile reading base through 3G.cn and GGBook,
we share our original content with third-party reading channels in China under revenue-sharing arrangements. Currently, third-party reading channels we work with include those operated by major mobile network carriers and internet companies in
China. These third-party reading channels provide our original content with valuable additional exposure and enhance the monetization of our original content.
Our readers pay for our mobile reading content through SMS, phone cards and payment systems operated by major mobile carriers in China.
Competition
The mobile internet
industry is rapidly evolving and highly competitive. We face competition in all major aspects of our business:
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GO series products
. We face competition from numerous competing products for Android smartphones from third-party developers, such as Facebook Home in the field of launcher products. We will continue to innovate
and improve our existing products and services and develop new ones to maintain our competitive advantages.
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3G.cn
. 3G.cn faces a variety of competitors in China, as a significant portion of major internet companies in China have mobile internet portals. In the future, we expect to continue to compete with other
internet portals for visitors, content and advertisers.
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Mobile reading services
. Our most prominent competitor in mobile reading services in China is Cloudary Corporations network of original literature websites. Our mobile reading services also compete with
literary content providers. We compete with these companies for content, readers, authors, advertisers and distribution channels, and expect to continue such competition as we further expand.
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Intellectual Property
We regard
our patents, trademarks, domain names, copyrights, trade secrets, proprietary technologies and similar intellectual property as critical to our success. We seek to protect our intellectual property rights through a combination of patent, trademark,
copyright and trade secret protection laws in the United States, the PRC and other jurisdictions, as well as through confidentiality agreements and procedures with our employees, business partners and others. The intellectual property rights we own
as of December 31, 2013 include: (1) six patents relating to our proprietary technology; (2) 11 registered domain names that are material to our business, including 3G.net.cn, 3G.cn and jiubang.com; (3) copyrights to 59 software
programs relating to various aspects of our operations; and (4) 50 trademarks and service marks registered in China and four trademarks in South Korea for our brands and logos, including logos for GO Launcher EX and GO series products. In
addition, we have filed 47 patent applications in China covering certain of our proprietary technologies and 27 trademark applications in China and 18 trademark applications in South Korea, Japan and U.S. as of December 31, 2013.
Legal Proceedings
We are
currently not a party to, and are not aware of any threat of, any legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or
results of operations. From time to time, we have become, and may in the future become, a party to various legal or administrative proceedings or claims arising in the ordinary course of our business, including actions with respect to intellectual
property claims, breach of contract claims, labor and employment claims and other matters. Regardless of the outcome, legal or administrative proceedings or claims may have an adverse impact on us because of defense and settlement costs, diversion
of management attention and other factors.
PRC REGULATION
Certain areas related to the internet, such as telecommunications, internet information services, connections to the international information networks,
internet information security and censorship and online games (including online mobile games) operations, are covered extensively by a number of existing laws and regulations issued by various PRC governmental authorities, including:
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the Ministry of Industry and Information Technology, or the MIIT (formerly the Ministry of Information Industry);
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the Ministry of Culture, or the MOC;
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the General Administration of Press and Publication, Radio, Film and Television, or the GAPPRFT, established as a result of institutional reform integrating the General Administration of Press and Publication, and the
State Administration for Radio, Film and Television;
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the National Copyright Administration, or the NCA;
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the State Administration for Industry and Commerce, or the SAIC;
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the State Council Information Office, or the SCIO;
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the Ministry of Commerce, or the MOFCOM;
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the Bureau of Protection of State Secrets;
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the Ministry of Public Security; and
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the State Administration of Foreign Exchange, or the SAFE.
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As the online social platform and
online games (including online mobile games) industries are still at an early stage of development in China, new laws and regulations may be adopted from time to time to require new licenses and permits in addition to those we currently have. There
are substantial uncertainties on the interpretation and implementation of any current and future Chinese laws and regulations, including those applicable to the online social platform and online games (including online mobile games) industries. See
Item 3Key InformationD. Risk FactorsRisks Relating to Doing Business in ChinaUncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and
us. And this section sets forth the most important laws and regulations that govern our current business activities in China and that affect the dividends payment to our shareholders.
Regulation on Telecommunications Services and Foreign Ownership Restrictions
The Telecommunications Regulations, which became effective on September 25, 2000, are the core regulations on telecommunications services
in China. The Telecommunications Regulations set out basic guidelines on different types of telecommunications business activities, including the distinction between basic telecommunications services and value-added
telecommunications services. According to the Catalog of Telecommunications Business (2003 Amendment), implemented on April 1, 2003 and attached to the Telecommunications Regulations, internet information services are deemed a type of
value-added telecommunications services. The Telecommunications Regulations require the operators of value-added telecommunications services to obtain value-added telecommunications business operation licenses from MIIT or its provincial delegates
prior to the commencement of such services. Under these regulations, if the value-added telecommunications services offered include mobile network information services, the operation license for value-added telecommunications business must include
the provision of such services in its covered scope.
The Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises, or the FITE Regulations, which took effect on January 1, 2002 and were amended on September 10, 2008, are the key regulations that regulate foreign direct investment in telecommunications companies in China. The FITE
Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from holding more than 50% of the equity interest in a foreign-invested enterprise that provides value-added telecommunications services, including the
provision of internet content. Moreover, such foreign investor shall demonstrate a good track record and experience in operating value-added telecommunications services when applying for the value-added telecommunications business operation license
from the MIIT.
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On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of
Foreign Investment in Value-added Telecommunications Services, or the MILT Circular 2006, which requires that (a) foreign investors can only operate a telecommunications business in China through establishing a telecommunications enterprise
with a valid telecommunications business operation license; (b) domestic license holders are prohibited from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any
resource, sites or facilities to foreign investors to facilitate the unlicensed operation of telecommunications business in China; (c) value-added telecommunications service providers or their shareholders must directly own the domain names and
registered trademarks they use in their daily operations; (d) each value-added telecommunications service provider must have the necessary facilities for its approved business operations and maintain such facilities in the geographic regions
covered by its license; and (e) all value-added telecommunications service providers should improve network and information security, enact relevant information safety administration regulations and set up emergency plans to ensure network and
information safety. The provincial communications administration bureaus, as local authorities in charge of regulating telecommunications services, (a) are required to ensure that existing qualified value-added telecommunications service
providers will conduct a self-assessment of their compliance with the MILT Circular 2006 and submit status reports to the MET before November 1, 2006; and (b) may revoke the value-added telecommunications business operation licenses of
those that fail to comply with the above requirements or fail to rectify such non-compliance within specified time limits. Due to the lack of any additional interpretation from the regulatory authorities, it remains unclear what impact MILT Circular
2006 will have on us or the other PRC internet companies with similar corporate and contractual structures.
To comply with such foreign
ownership restrictions, we operate our businesses in China through Jiubang Digital, Sanju Advertising, Zhiteng Computer and Hengye Software, all of which are owned by PRC citizens or entities. Jiubang Computer was established by Sungy Data Ltd. (now
renamed as Sungy Mobile Limited). Jiubang Digital, Sanju Advertising, Zhiteng Computer, and Hengye Software are all controlled by Jiubang Computer through a series of contractual arrangements. See Item 4. Information on the Company
C. Organizational Structure. Moreover, Jiubang Digital owns a majority of the domain names, registered trademarks and facilities necessary for daily operations in compliance with the MILT Circular 2006. Based on our PRC legal counsel, Jun He
Law Offices understanding of the current PRC laws, rules and regulations, our corporate structure complies with all applicable PRC laws, and does not violate, breach, contravene or circumvent or otherwise conflict with any applicable PRC laws.
However, we were further advised by our PRC legal counsel that there are substantial uncertainties with respect to the interpretation and application of existing or future PRC laws and regulations and thus there is no assurance that Chinese
governmental authorities would take a view consistent with the opinions of our PRC legal counsel.
Internet Information Services
The Administrative Measures on Internet Information Services, or the ICP Measures, issued by the State Council on September 25, 2000 and
amended on January 8, 2011, regulate the provision of internet information services. According to the ICP Measures, internet information services refer to services that provide internet information to online users, and are
categorized as either commercial services or non-commercial services. Pursuant to the ICP Measures, internet information commercial service providers shall obtain an ICP license, a sub-category of the value-added telecommunications business
operation license, from the relevant local authorities before engaging in the provision of any commercial internet information services in China. In addition, if the internet information services involve provision of news, publication, education,
medicine, health, pharmaceuticals, medical equipment and other services that statutorily require approvals from other additional governmental authorities, such approvals must be obtained before applying for the ICP license.
We currently, through Jiubang Digital, Zhiteng Computer and Hengye Software, our PRC variable interest entities, hold ICP licenses, covering
the provision of internet and mobile network information services, issued by the Guangdong branch of the MILT on August 15, 2013, December 13, 2011 and April 8, 2013, respectively. Besides, the ICP Measures and other relevant
measures also ban the internet activities that constitute publication of any content that propagates obscenity, pornography, gambling and violence, incite the commission of crimes or infringe upon the lawful rights and interests of third parties,
among others. If an internet information service provider detects information transmitted on their system that falls within the specifically prohibited scope, such provider must terminate such transmission, delete such information immediately, keep
records and report to the governmental authorities in charge. Any providers violation of these prescriptions will lead to the revocation of its ICP license and, in serious cases, the shutting down of its internet systems.
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Internet Publication and Cultural Activities
The Tentative Measures for Internet Publication Administration, or Internet Publication Measures, were jointly promulgated by the GAPPRFT and
the MILT on June 27, 2002 and became effective on August 1, 2002. The Internet Publication Measures imposed a license requirement for any company that engages in internet publishing, which means any act by an internet information service
provider to select, edit and process content or programs and to make such content or programs publicly available on the internet. The Internet Publication Measures also require the professional editorial personnel of an Internet publishing entity to
examine the published content to ensure that it complies with applicable laws. Failure to do so may subject us to fines and other penalties, the compliance of which, if fails, may subject us to fines and other penalties. The provision of online
games is deemed an internet publication activity; therefore, an online game operator must (i) obtain an Internet Publishing License so that it can directly offer its online games to the public in the PRC, or (ii) publish its online games
through a qualified press entity by entering into an entrustment agreement.
The Rules for the Administration of Electronic Publication,
or the Electronic Publication Rules, was issued by the GAPPRFT on February 21, 2008 and became effective on April 15, 2008. Under the Electronic Publication Rules and other regulations issued by the GAPPRFT, online games are classified as
a kind of electronic publication, and publishing of online games is required to be conducted by licensed electronic publishing entities that have been issued standard publication codes. Pursuant to the Electronic Publication Rules, if a PRC company
is contractually authorized to publish foreign electronic publications, it must obtain the approval of, and register the copyright license contract with, the GAPPRFT.
We, through Jiubang Digital, obtained an Internet Publishing License for the mobile internet dissemination of the content of publications in
the literature category that have been published in China and the publication of mobile games on February 5, 2013. We are also in the process of applying to expand the permitted activities under the Internet Publishing License of Jiubang
Digital to cover the publication of online literature and mobile literature. For more information on the pre-approval by the GAPPRFT, see Regulation on Online Games and Foreign Ownership Restrictions.
On May 10, 2003, the MOC promulgated the Tentative Measures for the Administration of Online Culture, or the Online Cultural Measures,
which became effective on July 1, 2003 and subsequently amended on July 1, 2004 and on April 1, 2011 respectively. According to the Online Cultural Measures, internet information services providers engaging in online cultural
activities shall obtain a license from the provincial branches of the MOC. Online cultural activities, as defined in the Online Cultural Measures, include dissemination of online cultural products, such as audiovisual products and gaming products,
and importing, publishing and broadcasting of internet cultural products among other things. Specifically, entities are required to obtain online cultural operating licenses from the provincial branches of the MOC if they intend to commercially
engage in any of the following activities:
(a) production, duplication, import, publishing or broadcasting of online cultural products;
(b) publishing of online cultural products on the internet or transmission thereof via the internet or mobile telecommunication networks to computers, fixed-line or mobile phones, television sets, gaming consoles or Internet café for the
purpose of browsing, reviewing, using or downloading such products by online users; or (c) exhibitions or contents related to online cultural products. If internet information services providers engage in online cultural activities but fail to
obtain online cultural operating licenses, they may be ordered to shut down their websites and subject to fines and penalties of confiscating illegal gain.
We, through Jiubang Digital and Zhiteng Computer, have obtained the Internet Culture Operation Licenses from the Guangdong branch of the MOC,
respectively, which collectively cover the business scope of the provision of music, entertainment, comic and animation and gaming products through internet.
Regulation on Online Games and Foreign Ownership Restrictions
On June 3, 2010, the MOC promulgated the Provisional Administration Measures of Online Games, or the Online Game Measures, which came into
effect on August 1, 2010. The Online Game Measures governs the research, development and operation of online games. It specifies that the MOC is responsible for the censorship of imported online games and the filing of records of domestic
online games. The procedures for the filing of records of domestic online games must be conducted with the MOC within 30 days after the commencement date of the online operation of such online games or the occurrence date of any material alteration
of such online games.
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All operators of online games, or Online Game Business Operators, are required to obtain Internet
Culture Operation Licenses. An Internet Culture Operation License is valid for three years and in case of renewal, the renewal application should be submitted 30 days prior to the expiry date of such license. An Online Game Business Operator should
request the valid identity certificate of game users for registration, and notify the public 60 days ahead of the termination of any online game operations or the transfer of online game operational rights Online Game Business Operators are also
prohibited from (a) setting compulsory matters in the online games without game users consent; (b) advertising or promoting the online games that contain prohibited content, such as anything that compromise state security or divulges
state secrets; and (c) inducing game users to input legal currencies or virtual currencies to gain online game products or services, by way of random draw or other incidental means. It also states that the state cultural administration
authorities will formulate the compulsory clauses of a standard online game service agreement, which have been promulgated on July 29, 2010 and are required to be incorporated into the service agreement entered into between the Online Game
Business Operators, with no conflicts with the rest of clauses in such service agreements. Jiubang Digital holds a valid Internet Culture Operation License issued on May 29, 2013 that authorizes Jiubang Digital to engage in the provision of
music, entertainment and gaming products through internet.
On July 11, 2008, the General Office of the State Council promulgated the
Regulation on Main Functions, Internal Organization and Staffing of the GAPPRFT, or the Regulation on Three Provisions. On September 7, 2009, the Central Organization Establishment Commission issued the corresponding interpretations, or the
Interpretations on Three Provisions. The Regulation on Three Provisions stipulates that the MOC is authorized to regulate the online game industry, while the GAPPRFT is authorized to approve the publication of online games before their launch on the
internet. The Interpretation on Three Provisions further provides that once an online game is launched on the internet, it will be completely under the regulation of the MOC, and that if an online game is launched on the internet without obtaining
prior approval from the GAPPRFT, the MOC, instead of the GAPPRFT, is directly responsible for investigating the game. On July 11, 2013, the General Office of the State Council promulgated the Provisions on the Main Responsibilities, Internal
Institutions and Staffing of GAPPRFT, or the Three-Decision Provisions, which reiterates the restrictions stipulated in the Regulation on Three Provisions.
On September 28, 2009, the GAPPRFT, the NCA and the National Working Group to Eliminate Pornography and Illegal Publications jointly
issued the Circular on Consistent Implementation of the Stipulation on the Three Determinations of the State Council and the Relevant Interpretations of the State Commission for Public Sector Reform and the Further Strengthening of the Pre-approval
of Online Games and the Approval and Examination of Imported Online Games, or Circular 13. Circular 13 explicitly prohibits foreign investors from directly or indirectly engaging in online gaming business in China, including through variable
interest entity structures, or VIE Structures. Foreign investors are not allowed to indirectly control or participate in PRC operating companies online games (including online mobile games) operations, whether (a) by establishing other
joint ventures, entering into contractual arrangements or providing technical support for such operating companies; or (b) in a disguised form such as by incorporating or directing user registration, user account management or game card
consumption into online gaming platforms that are ultimately controlled or owned by foreign companies. Circular 13 reiterates that the GAPPRFT is responsible for the examination and approval of the import and publication of online games and states
that downloading from the internet is considered a publication activity, which is subject to approval from the GAPPRFT. Violations of Circular 13 will result in severe penalties. For detailed analysis, see Item 3. Key Information D. Risk
FactorsRisks Relating to Our Doing Business in ChinaWe may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet and mobile internet businesses and companies.
Anti-fatigue Compliance System and Real-name Registration System
On April 15, 2007, in order to curb addictive online game-playing by minors, eight PRC government authorities, including the GAPPRFT, the
Ministry of Education, the Ministry of Public Security and the MIIT, jointly issued a circular requiring the implementation of an anti-fatigue compliance system and a real-name registration system by all PRC online games (including online mobile
games) operators. Under the anti-fatigue compliance system, three hours or less of continuous playing by minors, defined as game players under 18 years of age, is considered to be healthy, three to five hours is deemed
fatiguing, and five hours or more is deemed unhealthy. Game operators are required to reduce the value of in-game benefits to a game player by half if it discovers that the amount of a time a game player spends online has
reached the fatiguing level, and to zero in the case of the unhealthy level.
To identify whether a game player is
a minor and thus subject to the anti-fatigue compliance system, a real-name registration system should be adopted to require online games (including online mobile games) players to register their real identity information before playing online
games. Pursuant to a notice issued by the relevant eight government authorities on July 1, 2011, online games (including online mobile games) operators must submit the identity information of game players to the National Citizen Identity
Information Center, a subordinate public institution of the Ministry of Public Security, for verification as of October 1, 2011.
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We are currently not required by PRC law to ask users for their real name and personal
information when they register for a user account. We cannot assure you that PRC regulators would not require us to implement compulsory real-name registration in the future. See Item 3. Key InformationD. Risk FactorsRisks Relating
to Doing Business in ChinaWe may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet businesses and companies. In addition, We require our mobile game developer to comply with the requirements
under the PRC law, but we cannot assure you that such commercial partners will effectively implement the anti-fatigue rules, and any noncompliance on the part of such commercial partners may cause potential liabilities to us and in turn disrupt our
operations. See Item 3. Key InformationD. Risk FactorsRisks Relating to Our Business and IndustryNon-compliance on the part of third parties with which we conduct business could disrupt our business and adversely affect
results of our operation.
Online Music
On November 20, 2006, the MOC issued Several Suggestions of the MOC on the Development and Administration of Internet Music, or the
Suggestions, which became effective on the same date. The Suggestions, among other things, reiterate the requirement for an internet service provider to obtain an Internet Culture Operation License to carry out any business relating to internet
music products. In addition, foreign investors are prohibited from operating internet culture businesses. However, the laws and regulations on internet music products are still evolving, and there have not been any provisions clarifying whether
music products will be regulated by the Suggestions or how such regulation would be carried out.
On August 18, 2009, the MOC
promulgated the Notice on Strengthening and Improving the Content Review of Online Music, or the Online Music Notice. According to the Online Music Notice, only internet culture operating entities approved by the MOC may engage in the
production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music shall be reviewed by or filed with the MOC. Internet culture operating entities should
establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.
Jiubang
Digital holds a valid Internet Culture Operation License covering our provision of online music. If any music provided through our platform is found to lack necessary filings and/or approvals, we could be requested to cease providing such music or
be subject to claims from third parties or penalties from the MOC or its local branches. Moreover, the unauthorized posting of online music on our platform by third parties may expose us to the risk of administrative penalties and intellectual
property infringement lawsuits. See Item 3. Key InformationD. Risk FactorsRisks Relating to Our Business and Our IndustryNon-compliance on the part of third parties with which we conduct business could disrupt our business
and adversely affect results of our operation.
In 2011, the MOC greatly intensified its regulation of the provision of online music
products. According to the series of Notices on Clearing Online Music Products that are in Violation of Relevant Regulations promulgated by the MOC since January 7, 2011, entities that provide any the following will be subject to relevant
penalties or sanctions imposed by the MOC: (a) online music products or relevant services without obtaining corresponding qualifications, (b) imported online music products that have not passed the content review of the MOC or
(c) domestically developed online music products that have not been filed with the MOC. Thus far, we believe that we have eliminated from our platform any online music products that may fall into the scope of those prohibited online music
products thereunder.
Online Internet News Dissemination
Pursuant to the Provisional Regulations for the Administration of Internet Websites Engaging in News Publication Services and the Provisions
for the Administration of Internet News Information Services, each promulgated by the SCIO and the MIIT, which became effective as of November 7, 2000 and September 25, 2005, respectively, websites established by non-news organizations may
publish news released by certain official news agencies but may not publish news generated by themselves or news sourced elsewhere. In order to disseminate news, such websites must satisfy the relevant requirements set forth in the applicable
regulations and have acquired approval from the SCIO after securing permission from the news office of the provincial-level government. In addition, websites intending to publish news released by the aforementioned news agencies must enter into
agreements with the respective organizations, and file copies of such agreements with the news office of the provincial-level government.
In order to comply with these laws and regulations, we have applied for the approval from the SCIO to publish news on 3G.cn or disseminate
news through the mobile internet. We cannot assure you that we may be able to obtain one. If we cannot secure the approval from the SCIO, our operations on 3G.cn may be adversely affected. See Item 3. Key InformationD. Risk
FactorsRisks Relating to Our Business and IndustryIf we fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment for internet-based and mobile-based businesses in China, our
business, financial condition and results of operations may be materially and adversely affected.
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Online Transmission of Audio-Visual Programs
The Measures for the Administration of Publication of Audio-Visual Programs through Internet or Other Information Network, or the Audio-Visual
Measures, promulgated by the GAPPRFT on July 6, 2004 and put into effect on October 11, 2004, apply to the activities relating to the opening, broadcasting, integration, transmission or download of audio-visual programs using internet or
other information network. Under the Audio-Visual Measures, to engage in the business of transmitting audio-visual programs, a license issued by GAPPRFT is required. Foreign invested enterprises are not allowed to carry out such business.
On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non- state-owned Capital into the Cultural
Industry. On July 6, 2005, five PRC governmental authorities, including the MOC, the GAPPRFT, the CSRC and the MOFCOM, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these
regulations, non-state-owned capital and foreign investors are not allowed to engage in the business of transmitting audio-visual programs through information networks.
To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within
the territory of the PRC, the GAPPRFT and the MEET jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which came into effect on
January 31, 2008. Providers of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by the GAPPRFT, or complete certain registration procedures with the GAPPRFT. In
general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet
audio-visual program service determined by the GAPPRFT. In a press conference jointly held by the GAPPRFT and the MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, the GAPPRFT and the MIIT clarified that
providers of internet audio-visual program services who engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to register their business and continue their operation of internet audio-visual program
services so long as those providers did not violate the relevant laws and regulations in the past. On May 21, 2008, GAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of
Audio-Visual Programs, which further sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual Programs. The notice also states that providers of internet audio-visual
program services that engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their violation of the laws and regulations is minor in scope and can be rectified in a
timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 31, 2009, GAPPRFT promulgated the Notice on Strengthening the Administration of
the Content of Internet Audio-Visual Programs, which reiterates the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and prohibits certain types of internet
audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited elements. On March 17, 2010, the GAPPRFT issued the Internet Audio-Visual Program Services Categories (Provisional), or the
Provisional Categories, which classified internet audio-visual program services into four categories.
Jiubang Digital holds a valid
License for Online Transmission of Audio-Visual Programs, under which we can broadcast films, teleplays and cartoons.
Regulation of Short Message
Services and Telecommunications Networks Code Number Resources
Under current PRC laws and regulations, a commercial operator of
short message services, which are parts of the information services of the second category of value-added telecommunications services, must obtain a value-added telecommunications business operating license for short message services from the
appropriate telecommunications authorities in order to carry on any commercial short message services operations in China through mobile network.
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On April 15, 2004, the MIIT issued the Notice on Certain Issues Regarding Standardizing
Short Message Services, specifying that only those information services providers which hold relevant licenses can provide short message services in the PRC. The Notice requires information services providers to examine the contents of short
messages and record and keep for five months the time of sending and receiving the short messages, the mobile numbers or codes of the sending and receiving terminals of the short messages.
On January 29, 2003, the MIIT issued the Administrative Measures on Telecommunications Networks Code Number Resources, or the Code Number
Measures to regulate code numbers, including those of mobile communications networks. The Code Number Measures require entities which provide short message services in multiple provinces to apply to the MIIT for inter-regional code number, and the
other entities which provide short message services in one province to apply to the MIITs provincial branch for local code number. The Code Number Measures also set forth qualification, materials, and procedures for obtaining such code
numbers.
In June 2006, the MIIT issued the Administrative Measures on Application, Distribution, Usage and Withdrawal of SMS Services
Access Codes. This Administrative Measures require that the administration and usage of services in connection with SMS short codes to comply with the Code Number Measures and those SMS services providers to file with either the MIIT or its
provincial branches according to the coverage of such business of those services providers.
We currently, through Jiubang Digital, Hengye
Software and Zhiteng Computer, have obtained licenses for provision of information services via mobile networks. Further, Jiubang Digital, Hengye Software and Zhiteng Computer have all obtained code numbers for use in Guangdong province.
Regulation on Advertising Business
The SAIC is the primary governmental authority regulating advertising activities in China. Regulations that apply to advertising business
primarily include:
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Advertisement Law of the Peoples Republic of China, promulgated by the Standing Committee of the National Peoples Congress on October 27, 1994 and effective since February 1, 1995;
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Administrative Regulations for Advertising, promulgated by the State Council on October 26, 1987 and effective since December 1, 1987; and
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Implementation Rules for the Administrative Regulations for Advertising, promulgated by the State Council on January 9, 1988 and amended on December 3, 1998, December 1, 2000 and November 30,
2004, respectively.
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According to the above regulations, companies that engage in advertising activities must each obtain,
from the SAIC or its local branches, a business license which specifically includes operating an advertising business in its business scope. An enterprise engaging in advertising business within the specifications in its business scope does not need
to apply for an advertising operation license, provided that such enterprise is not a radio station, television station, newspaper or magazine publisher or any other entity otherwise specified in the relevant laws or administrative regulations.
Enterprises conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid
for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant laws or regulations.
PRC
advertising laws and regulations set certain content requirements for advertisements in China, including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving
obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisers, advertising agencies, and advertising distributors are required to ensure that the content of the advertisements they prepare or distribute is
true and in complete compliance with applicable laws. In providing advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers for advertisements and verify that the content
of the advertisements complies with applicable PRC laws and regulations. Prior to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify that such censorship has been
performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement
correcting the misleading information. Where serious violations occur, the SAIC or its local branches may revoke such offenders licenses or permits for their advertising business operations.
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Intellectual Property Rights Software Registration
Software Registration
The State
Council and the NCA have promulgated various rules and regulations and rules relating to protection of software in China. According to these rules and regulations, software owners, licensees and transferees may register their rights in software with
the SCB or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and
registered software rights may be entitled to better protections. As of December 31, 2013, we had registered copyrights to 59 software programs in China.
Patents
The National
Peoples Congress adopted the Patent Law of the Peoples Republic of China in 1984 and amended it in 1992, 2000 and 2008, respectively. A patentable invention, utility model or design must meet three conditions: novelty, inventiveness and
practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear
transformation. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a twenty-year term for an invention and a ten-year term for a utility
model or design, starting from the application date. Except under certain specific circumstances provided by law, any third-party user must obtain consent or a proper license from the patent owner to use the patent, or else the use will constitute
an infringement of the rights of the patent holder.
As of December 31, 2013, we had obtained six patents granted from, and 47 patent
applications are under review by, the State Intellectual Property Office.
Copyright Law
The Copyright Law of the Peoples Republic of China, promulgated in 1990 and amended in 2001 and 2010, or the Copyright Law, and its
related implementing regulations, promulgated in 1991 and amended in 2013 are the principal laws and regulations governing the copyright related matters. The amended Copyright Law covers internet activities, products disseminated over the internet
and software products, among the subjects entitled to copyright protections. Registration of copyright is voluntary, and is administrated by the China Copyright Protection Center.
Under the Copyright Law and its implementation rules, anyone infringing upon the copyrights of others is subject to various civil liabilities,
which include stopping the infringement, eliminating the damages, apologizing to the copyright owners and compensating the copyright owners for such owners actual and other losses resulting from such infringement. If the actual loss of the
copyright owner is difficult to calculate, the income received by the offender as a result of the copyright infringement shall be deemed to be the actual loss; or if such income is in itself difficult to calculate, the relevant PRC court may decide
the amount of the actual loss up to RMB500,000 for each infringement.
To address the problem of copyright infringement related to content
posted or transmitted on the internet, the PRC National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These measures, which became
effective on May 30, 2005, apply to acts of automatically providing services such as uploading, storing, linking or searching works, audio or video products, or other contents through the internet based on the instructions of internet users who
publish contents on the internet, or the Internet Content Providers, without editing, amending or selecting any stored or transmitted content. When imposing administrative penalties upon the act which infringes upon any users right of
communication through information networks, the Measures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied.
Where a copyright holder finds that certain internet content infringes upon its copyright and sends a notice to the relevant internet
information service operator, the relevant internet information service operator is required to (i) immediately take measures to remove the relevant contents, and (ii) retain all infringement notices for six months and to record the
content, display time and IP addresses or the domain names related to the infringement for 60 days. After any content is removed by an internet information service operator according to the notice of a copyright holder, the content provider may
deliver a counter-notice to both the internet information service operator and the copyright holder, stating that the removed content does not infringe upon the copyright of other parties. After the delivery of such counter-notice, the internet
information service operator may immediately reinstate the removed contents and shall not bear administrative legal liability for such reinstatement.
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An internet information service operator may be subject to cease-and-desist orders and other
administrative penalties such as confiscation of illegal income and fines, if it is clearly aware of a copyright infringement through the internet or, although not aware of such infringement, it fails to take measures to remove relevant content upon
receipt of the copyright owners notice of infringement and, as a result, damages public interests. Where there is no evidence to indicate that an internet information service operator is clearly aware of the existence of copyright
infringement, or the internet information service operator has taken measures to remove relevant contents upon receipt of the copyright owners notice, the internet information service provider shall not bear the relevant administrative legal
liabilities.
On May 18, 2006, the State Council issued the Regulations on Protection of the Right of Communication through
Information Network, which took effect on July 1, 2006 and was amended on January 30, 2013. Under this regulation, an internet information service provider may be exempt from indemnification liabilities under the following circumstances:
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any internet information service provider that provides automatic internet access service upon instructions from its users or provides automatic transmission service for works, performances and audio-visual products
provided by its users are not required to assume indemnification liabilities if (a) it has not chosen or altered the transmitted works, performance and audio-visual products and (b) it provides such works, performances and audio-visual
products to the designated users and prevents any person other than such designated users from obtaining access.
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any internet information service provider that, for the sake of improving network transmission efficiency, automatically stores and provides to its own users the relevant works, performances and audio-visual products
obtained from any other internet information service providers, are not required to assume the indemnification liabilities if (a) it has not altered any of the works, performance or audio-visual products that are automatically stored;
(b) it has not affected such original internet information service provider in holding the information about where the users obtain the relevant works, performance and audio-visual products; and (c) when the original internet information
service provider revises, deletes or shields the works, performances and audio-visual products, it will automatically revise, delete or shield the same.
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any internet information service provider that provides its users with information memory space for such users to provide the works, performances and audio-visual products to the general public via an informational
network are not required to assume the indemnification liabilities if (a) it clearly indicates that the information memory space is provided to the users and publicizes its own name, contact person and web address; (b) it has not altered
the works, performance and audio-visual products that are provided by the users; (c) it is not aware of or has no reason to know that the works, performances and audio-visual products provided by the users infringe upon the copyrights of
others; (d) it has not directly derived any economic benefit from the providing of the works, performances and audio-visual products by its users; and (e) after receiving a notice from the copyright holder, it promptly deletes the
allegedly infringing works, performances and audio-visual products pursuant to the relevant regulation.
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Since 2005, the
NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns specifically aimed to crack down on internet copyright infringement and piracy in China; these campaigns normally last for three to four months
every year. According to the Notice of 2010 Campaign to Crack Down on Internet Infringement and Piracy promulgated by the NCA, the Ministry of Public Security and the MIIT on July 19, 2010, the 2010 campaign mainly targeted internet audio and
video programs, literature websites, online games, animation, software and art works related to Shanghai World Expo and Guangzhou Asian Games. During the 2010 campaign, starting from late July to the end of October 2010, the local branches of NCA
focused on popular movies and TV series, newly published books, online games and animation, music and software and various illegal activities, including, for example, illegal uploading or transmission of a thirty partys works without proper
license or permission, sales of pirated audio-video and software through e-commerce platforms, providing search links, information storage, web hosting or internet access services for third parties engaging in copyright infringement or piracy of
copyrighted works and the infringement by use of mobile media. In serious cases, the operating permits of the websites engaging illegal activities were revoked, and such websites were ordered to shut down.
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We have adopted measures to mitigate copyright infringement risks, including, for instance,
establishing a routine reporting and registration system updated on a monthly basis.
Domain Name
In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain
names, which were amended on May 29, 2012. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the Chinese Internet, or the Domain Name Measures. The Domain Name Measures regulate the registration
of domain names, such as the first tier domain name .cn. In February 2006, the CNNIC issued the Measures on Domain Name Dispute Resolution and relevant implementing rules, pursuant to which the CNNIC can authorize a domain name dispute
resolution institution to decide disputes. As of December 31, 2013, we had registered 11 domain names that are material to our business, including www.3g.cn, www.3G.net.cn and www.jiubang.com.
Trademark
The PRC Trademark Law,
adopted in 1982 and amended in 1993 and 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered
trademarks. Trademark license agreements must be filed with the Trademark Office for record. As of December 31, 2013, we had registered 50 trademarks and service marks and had filed 27 trademark applications in China.
Internet Infringement
On
December 26, 2009, the Standing Committee of National Peoples Congress promulgated the Tort Law of the Peoples Republic of China, or the Tort Law, which became effective on July 1, 2010. Under the Tort Law, an internet user or
an internet service provider that infringes upon the civil rights or interests of others through using the internet assumes tort liability. If an internet user infringes upon the civil rights or interests of another through using the internet, the
person being infringed upon has the right to notify and request the internet service provider whose internet services are facilitating the infringement to take necessary measures including the deletion, blocking or disconnection of an internet link.
If, after being notified, the internet service provider fails to take necessary measures in a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused by its failure to act. According to the Tort
Law, civil rights and interests include the personal rights and rights of property, such as the right to life, right to health, right to name, right to reputation, right to honor, right of portraiture, right of privacy, right of marital autonomy,
right of guardianship, right to ownership, right to usufruct, right to security interests, copyright, patent right, exclusive right to use trademarks, right to discovery, right to equity interests and right of heritage, among others.
Regulation of Internet Content
The PRC government has promulgated measures relating to internet content through a number of governmental agencies, including the MIIT, the MOC
and the GAPPRFT. These measures specifically prohibit internet activities, such as the operation of online games, that result in the publication of any content which is found to contain, among others, propagate obscenity, gambling or violence,
instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise state security or secrets. If an ICP license holder violates these measures, its ICP license may be revoked and its websites may be shut down by the
relevant government agencies.
Information Security and Censorship
Internet content in China is regulated and restricted from a state security standpoint. Internet companies in China are required to complete
security filing procedures and regularly update information security and censorship systems for their websites with local public security bureau. The PRC Law on Preservation of State Secrets, which became effective on October 1, 2010 requires
an internet information services providers to discontinue disseminating any information that may be deemed to be leaked state secrets and to report such incidents in a timely manner to the state security and public security authorities. Failure to
do so in a timely and adequate manner may subject the internet information services providers to liability and certain penalties given by the Ministry of State Security, the Ministry of Public Security and/or the MIIT or their respective local
branches.
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On December 13, 2005, the Ministry of Public Security promulgated Provisions on
Technological Measures for Internet Security Protection, or the Internet Protection Measures, which took effect on March 1, 2006. The Internet Protection Measures require all internet information services operators to take proper measures
including anti-virus, data back-up and other related measures, and keep records of certain information about their 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 submit the above information as required by laws and regulations.
The National Peoples Congress, Chinas national
legislative body, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000, that may subject persons to criminal liabilities in China for any attempt to: (a) gain improper entry to a computer or system of
strategic importance; (b) disseminate politically disruptive information; (c) leak state secrets; (d) spread false commercial information or (e) infringe upon intellectual property rights.
In 1997, the Ministry of Public Security issued the Administration Measures on the Security Protection of Computer Information Network with
Internationally Connections, which prohibit using the internet in ways which, among others, result in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection powers in
this regard, and relevant local security bureaus may also have jurisdiction. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
To comply with the above laws and regulations, we have established an internet information security department to implement measures on
information filtering. For example, we have adopted monitor system, and installed on our platform various alerts on sensitive words or abnormal activities of users. We also have a dedicated team that maintains constant surveillance on the
information posted on our platform, with different categories for monitoring purposes, according to subject and content. We have also established and follow a strict review process and storage system of relevant records which, in combination with
various information security measures, have effectively prevented the public dissemination of statutory prohibited information through our websites in the past. We intend to continue to further update our measurements and system and work closely
with relevant authorities to avoid any violation of relevant laws and regulations in the future.
Privacy Protection
PRC laws and regulations do not prohibit internet content providers from collecting and analyzing their users personal information if
appropriate authorizations are obtained and if in a way that is legal, reasonable and necessary. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. PRC laws and regulations prohibit
internet content providers from disclosing any information transmitted by users through their networks to any third parties without their authorization unless otherwise permitted by law. If an internet content provider violates these regulations,
the MIIT or its local bureaus may impose penalties and the internet content provider may be liable for damages caused to its users.
Regulation of
Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange.
The core regulations governing
foreign currency exchange in China are the Foreign Exchange Administration Regulations, as amended in August 2008, or the FEA Regulations. Under the FEA Regulations, the Renminbi is freely convertible for current account items, including the
distribution of dividends, interest payments, trade- and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China,
unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.
On August 29, 2008, SAFE promulgated
Circular 142 to regulate the conversion of foreign currency into Renminbi by a foreign-invested enterprise by restricting the ways in which the converted Renminbi may be used. Circular 142 stipulates that the registered capital of a foreign-invested
enterprise that has been settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and cannot be used for equity investments within the PRC.
Meanwhile, the SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested enterprise settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without the
SAFE s approval, and may not in any case be repayment of Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 may lead to severe penalties including heavy fines. As a result, Circular 142 may
significantly limit our ability to transfer the net proceeds from our initial public offering to our other PRC subsidiaries through Jiubang Computer and Beijing XMedia Science and Technology Co., Ltd., or Beijing XMedia, our wholly owned
subsidiaries in China, and thus may adversely affect our business expansion in China. We may not be able to convert the net proceeds into Renminbi to invest in or acquire any other PRC companies, or establish other VIEs in the PRC.
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Dividend Distribution
. The Foreign Investment Enterprise Law, promulgated in 1986
and amended in 2000, and the Administrative Rules under the Foreign Investment Enterprise Law, promulgated in 2001, are the key regulations governing distribution of dividends of foreign-invested enterprises.
Under these regulations, a wholly foreign-invested enterprise in China, or a WFOE, may pay dividends only out of its accumulated profits, if
any, determined in accordance with PRC accounting standards and regulations. In addition, a WFOE is required to allocate at least 10% of its accumulated profits each year, if any, to statutory reserve funds unless its reserves have reached 50% of
the registered capital of the enterprises. These reserves are not distributable as cash dividends. The proportional ratio for withdrawal of rewards and welfare funds for employees shall be determined at the discretion of the WFOE. Profits of a WFOE
shall not be distributed before the losses thereof before the previous accounting years have been made up. Any undistributed profit for the previous accounting years may be distributed together with the distributable profit for the current
accounting year.
Circular 75.
The SAFE issued Circular on Several Issues concerning Foreign Exchange Administration for
Domestic Residents to Engage in Financing and in Return Investments via Overseas Special Purpose Companies, or Circular No. 75, on October 21, 2005, which became effective on November 1, 2005. Under Circular 75, prior registration
with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to
registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other
material change involving a change in the capital of the offshore company.
Circular 75 applies retroactively. PRC residents who have
established or acquired control of offshore companies that have made onshore investments in the PRC in the past were required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006. Under the relevant
rules, failure to comply with the registration procedures set forth in Circular 75 may lead to restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the
payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC
residents who control our company from time to time are required to register with the SAFE in relation to their investments in us.
We
have completed the foreign exchange registration of PRC resident shareholders of Mr. Yuqiang Deng and Mr. Xiangdong Zhang for our financings that were completed before the end of 2010 and the subsequent transfer of their shares to their
respective personal holding companies. We have also applied for foreign exchange registration of Mr. Yingming Chang, a PRC resident, for the shares he holds in our company, and are in the process of updating the foreign exchange registration of
Mr. Yuqiang Deng and Mr. Xiangdong Zhang.
Stock Option Rules.
The Administration Measures on Individual Foreign
Exchange Control were promulgated by the PBOC on December 25, 2006, and their Implementation Rules, issued by the SAFE on January 5, 2007, became effective on February 1, 2007. Under these regulations, all foreign exchange matters
involved in employee stock ownership plans and stock option plans participated in by onshore individuals, among others, require approval from the SAFE or its authorized branch. Furthermore, the Notices on Issues concerning the Foreign Exchange
Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, were promulgated by SAFE on February 15, 2012, that replaced the Application Procedures of Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Pursuant to the Stock Option Rules, PRC residents who
are granted shares or stock options by companies listed on overseas stock exchanges based on the stock incentive plans are required to register with SAFE or its local branches, and PRC residents participating in the stock incentive plans of overseas
listed companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures
with respect to the stock incentive plans on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, purchase and sale of corresponding
stocks or interests, and fund transfer. In addition, the PRC agents are required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agents or the overseas
entrusted institution or other material changes. The PRC agents shall, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign
currencies in connection with the PRC residents exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by
the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, the PRC agents shall file each quarter the form for record-filing of information of the
Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies with SAFE or its local branches.
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We and our PRC citizen employees who have been granted share options, or PRC optionees, are
subject to the Stock Option Rules. If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC optionees may be subject to fines and other legal sanctions. See Item 3. Key
InformationD. Risk FactorsRisks Relating to Doing Business in ChinaPRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries ability to increase their registered capital or
distribute profits to us or otherwise expose us to liability and penalties under PRC law.
In addition, the State Administration for
Taxation has issued circulars concerning employee share options, under which our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to
employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or if we fail to withhold their income taxes as required by relevant laws
and regulations, we may face sanctions imposed by the PRC tax authorities or other PRC government authorities.
Regulation on Tax
PRC Enterprise Income Tax
The PRC
enterprise income tax is calculated based on the taxable income determined under the applicable Enterprise Income Tax Law, or the EIT Law and its implementation rules. On March 16, 2007, the National Peoples Congress of China enacted the
EIT Law, which became effective on January 1, 2008. On December 6, 2007, the State Council promulgated the implementation rules to the EIT Law, which also became effective on January 1, 2008. The EIT Law imposes a uniform enterprise
income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises and domestic enterprises, unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential
treatment available under the previous tax laws and regulations. According to the EIT Law and relevant regulations, subject to the approval of competent tax authorities, the income tax of an enterprise that has been determined to be a high and new
technology enterprise shall be reduced to a preferential rate of 15%.
Moreover, under the 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 are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income.
Though the implementation rules of the EIT Law define de facto management bodies as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise, the only detailed guidance currently available for the definition of de facto management body as well as the determination of offshore incorporated PRC tax resident status and its administration
are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or Circular 82, and the Administrative Measures for Enterprise
Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial) or SAT Bulletin No. 45, both issued by the SAT, which provide guidance on the administration as well as determination of the tax residency status of a
Chinese-controlled offshore-incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreign country or territory and that has a PRC company or PRC corporate group as its primary controlling shareholder.
According to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having its
de facto management body in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions set forth in Circular 82 are met:
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the primary location of the day-to-day operational management is in the PRC;
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decisions relating to the enterprises financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC;
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the enterprises primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in the PRC; and
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50% or more of voting board members or senior executives habitually reside in the PRC.
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In
addition, Bulletin No. 45 provides clarification on the resident status determination, post-determination administration, and competent tax authorities. It also specifies that when provided with a copy of PRC resident determination certificate
from a resident Chinese-controlled offshore-incorporated enterprise, the payer should not withhold 10% income tax when paying certain PRC-sourced income such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated
enterprise.
Although we do not believe that our company should be treated as a PRC resident enterprise for PRC tax purposes, substantial
uncertainty exists as to whether we will be deemed to be such by the relevant authorities. In the event that we are considered a PRC resident enterprise, we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide
income.
In addition, although the EIT Law provides that dividend income between qualified resident enterprises is exempted
income, and the implementation rules refer to qualified resident enterprises as enterprises with direct equity interest, it is unclear whether dividends we receive from our PRC subsidiaries are eligible for exemption.
In accordance with the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
Circular 698, if a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or Indirect Transfer, and such overseas holding company is
located in a tax jurisdiction that: (i) has an effective tax rate of less than 12.5%, or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the PRC competent tax authority
of the PRC resident enterprise this Indirect Transfer within 30 days from the date when the equity transfer agreement was made. Using a substance over form principle, the PRC tax authority may disregard the existence of the overseas
holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding, or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up
to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to
make a reasonable adjustment to the taxable income of the transaction. Circular 698 is retroactively effective on January 1, 2008. There is uncertainty as to the application of Circular 698. Circular 698 may be determined by the tax authorities
to be applicable to our private equity financing transactions where non-resident investors were involved, if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-resident
investors in such transactions may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under the general anti-avoidance rule of
the EIT Law, which may have a material adverse effect on our financial condition and results of operations or such non-resident investors investments in us. See Item 3. Key InformationD. Risk FactorsRisks Relating to Doing
Business in ChinaWe face uncertainty with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.
PRC Business Tax
Pursuant to
applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services
provided are related to technology development and transfer, such business tax may be exempted subject to the approval of relevant tax authorities. In addition, certain businesses, such as mobile game and online reading, are subject to 3% business
tax and surcharges pursuant to applicable PRC tax regulations.
62
Value Added Tax
On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (VAT) reform program (Pilot
Program), applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Program initially applied only to transportation industry and modern service industries
(Pilot Industries) in Shanghai and would be expanded to eight trial regions (including Beijing and Guangdong province) and nationwide if conditions permit. The Pilot Industries in Shanghai included industries involving the leasing of
tangible movable property, transportation services, research and development and technical services, information technology services, cultural and creative services, logistics and ancillary services, certification and consulting services. Revenues
generated by advertising services, a type of cultural and creative services, are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the
same Pilot Program on September 1, 2012, and Guangdong province launched it on November 1, 2012. In Beijing and Guangdong province, we will pay the pilot VAT instead of business taxes for our advertising activities, and for any other parts
of our business that are deemed by the local tax authorities to belong to Pilot Industries.
On May 24, 2013, the Ministry of Finance
and the State Administration of Taxation issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection
Circular. The scope of certain modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services.
Cultural Development Fee
According to applicable PRC tax regulations or rules, advertising service providers are generally required to pay a cultural development fee at
the rate of 3% on the revenues (a) which are generated from providing advertising services and (b) which are also subject to the business tax.
Dividends Withholding Tax
Under
the old EIT Law that was effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to us by Jiubang Computer or Beijing XMedia, our PRC subsidiaries, were exempt from PRC
withholding tax. We are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our subsidiaries located in the PRC. Pursuant to the EIT Law and its implementation rules, dividends generated after
January 1, 2008 and distributed to us by our PRC subsidiaries are subject to withholding tax at a rate of 10%.
As uncertainties
remain regarding the interpretation and implementation of the EIT Law and its implementation rules, we cannot assure you that, if we are deemed a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS
holders would not be subject to any PRC withholding tax. See Item 3. Key InformationD. Risk FactorsRisks Relating to Doing Business in ChinaUnder the PRC enterprise income tax law, we may be classified as a PRC resident
enterprise, which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.
Labor Laws and Social Insurance
The principle laws that govern employment include:
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Labor Law of the Peoples Republic of China, promulgated by the Standing Committee of the National Peoples Congress on July 5, 1994, effective since January 1, 1995 and amended on August 27,
2009; and
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Labor Contract Law of the Peoples Republic of China, promulgated by the Standing Committee of the National Peoples Congress on June 29, 2007 and effective since January 1, 2008 and amended on
December 28, 2012.
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According to the Labor Law and Labor Contract Law, employers must execute written labor contracts
with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly comply with state rules
and standards and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative penalties. For serious violations, criminal liability
may arise.
63
In addition, employers in China are required to provide employees with welfare schemes covering
pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
We
have caused all of our full-time employees to enter into written labor contracts with us and have provided and currently provide our employees with the proper welfare and employment benefits.
New M&A Regulations and Overseas Listings
On August 8, 2006, six PRC governmental agencies jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors, or the New M&A Rules, which became effective on September 8, 2006 and amended on June 22, 2009. The New M&A Rules require offshore special purpose vehicles formed to pursue overseas listing of equity interests
in PRC companies and controlled directly or indirectly by PRC companies or individuals to obtain the approval of the Chinese Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicles
securities on any stock exchange overseas.
The application of the M&A Rules remains unclear. Based on the understanding on the
current PRC laws, rules and regulations and the M&A Rules of our PRC Legal Counsel, Jun He Law Offices, prior approval from the CSRC is not required under the M&A Rules for the listing and trading of our ADSs on NASDAQ because the company
does not constitute a special purpose vehicle as defined by the M&A Rules which is required to obtain approval from the CSRC for overseas listings. However, as there has been no official interpretation or clarification of the M&A Rules,
there is uncertainty as to how this regulation will be interpreted or implemented.
Considering the uncertainties that exist with respect
to the issuance of new laws, regulations or interpretation and implementing rules, the opinion of Jun He Law Offices, summarized above, is subject to change. If the CSRC or another PRC regulatory agency subsequently determines that prior CSRC
approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.
64
C.
Organizational Structure
The following diagram illustrates our corporate structure and principal subsidiaries and variable interest entities as of the date of this
annual report:
(1)
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Jiubang Digital is one of our variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang, our co-founders, and Sanju Advertising, one of our variable interest entities, each owns 16%, 4% and 80% of
Jiubang Digitals equity interests, respectively.
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(2)
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Sanju Advertising is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 20% and 10% of Sanju Advertisings equity interests,
respectively.
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(3)
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Hengye Software is one of our variable interest entities. Mr. Yuqiang Deng, Mr. Xiangdong Zhang and Mr. Yingming Chang each owns 70%, 10% and 20% of Hengye Softwares equity interests, respectively.
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(4)
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Zhiteng Computer is one of variable interest entities. Mr. Yuqiang Deng and Mr. Xiangdong Zhang each owns 80% and 20% of Zhiteng Computers equity interests, respectively.
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65
D.
Property, Plants and Equipment
Our principal executive offices are located on leased premises comprising approximately 6,600 square meters in Guangzhou, China. This facility
currently accommodates our management headquarters, principal development, engineering, editorial departments, finance, human resources and administrative activities. The leases for this Guangzhou facility expire in 2017. We also have a branch
office in San Francisco, focusing on handling advertising and sales for the overseas market, a branch office in Beijing, focusing on selling and marketing, and a branch office in Shanghai that handles advertising and sales matters. We lease these
premises in Beijing and Shanghai under lease agreements from independent third parties, and we plan to renew these leases from time to time as needed.
Our servers are hosted in leased internet data centers in different geographic regions in China. These data centers are owned and maintained
by domestic internet data center providers. We typically enter into leasing and hosting service agreements with these internet data center providers that are renewed periodically. We believe that our existing facilities are sufficient for our
current needs and we will obtain additional facilities, principally through leasing, to accommodate our future expansion plans.
We
believe that our existing facilities are sufficient for our current needs and we will obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
ITEM 4A
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UNRESOLVED STAFF COMMENTS
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None.
ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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A.
Operating Results
Overview
We generate our revenues through
paid apps and premium themes, in-app purchase for advanced functionalities, advertising in various forms as well as users purchases of literary content. Our total revenues increased from RMB96.6 million in 2011 to RMB185.2 million in 2012,
further increased to RMB328.8 million (US$54.3 million) in 2013. We achieved profitability since 2012 and our net income was RMB15.2 million and RMB91.8 million (US$15.2 million) in 2012 and 2013, respectively.
Discussion of Selected Statements of Operations Items
Revenues
In the years ended
December 31, 2011, 2012 and 2013, we derived our revenues from mobile application products and services, mobile reading services, mobile portal marketing services, and certain other services. The following table sets forth the principal
components of our total revenues by amount and as a percentage of our total revenues for the periods presented.
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For the Year Ended December 31
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2011
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2012
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2013
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RMB
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% of
total
revenues
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RMB
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% of
total
revenues
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RMB
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US$
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% of
total
revenues
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Total revenues:
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Mobile application products and services
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3,896,544
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4.0
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34,056,890
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18.4
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153,363,875
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25,333,907
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46.6
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Mobile reading services
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33,547,733
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34.7
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72,766,802
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39.3
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99,791,329
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16,484,353
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30.3
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Mobile portal marketing services
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47,526,527
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49.2
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57,506,160
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31.0
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52,211,716
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8,624,761
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15.9
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Other revenues
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11,623,734
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12.1
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20,888,829
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11.3
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23,476,398
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3,878,025
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7.2
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Total
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96,594,538
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100.0
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185,218,681
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100.0
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328,843,318
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54,321,046
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100.0
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Our revenues from mobile application products and services increased from RMB3.9 million in 2011 to RMB34.1
million in 2012, and further increased to RMB153.4 million (US$25.3 million) in 2013. Revenues from our mobile reading services increased from RMB33.5 million in 2011 to RMB72.8 million in 2012 and further to RMB99.8 million (US$16.5 million) in
2013. Revenues from our mobile portal marketing services grew from RMB47.5 million in 2011 to RMB57.5 million in 2012 and decreased to RMB52.2 million (US$8.6 million) in 2013.
66
Our revenues in mobile application products and services began to increase in 2012 after we
rolled out most of our GO series products in 2012 and such products continued to gain global popularity throughout the year. On the other hand, our mobile reading services and mobile portal marketing services continue to contribute a significant
portion of our revenues. Although our mobile reading services continue to grow, the growth of revenues from our mobile reading services is not as fast as that of our revenues from mobile application products and services. We expect that our revenues
from mobile application products and services will continue to grow at a faster pace than revenues from our mobile reading services and mobile portal marketing services in the near future.
Mobile application products and services
Revenues from our mobile application products and services accounted for 4.0%, 18.4% and 46.6% of our total revenues in 2011, 2012 and 2013,
respectively. Mobile application products and services revenues mainly include revenues generated from (i) users purchase of premium themes and advanced functionalities for our free GO series products and Next Launcher, our paid product,
and (ii) advertisements displayed on our GO series products. We provide advertising services both directly to advertisers and through third-party advertising networks. We sell mobile application products through application stores such as
Google Play.
We believe that the most significant factors affecting revenues from mobile application products and services include:
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Mobile internet penetration rate
. The fast growth of the mobile internet industry is a very recent phenomenon. The success of our mobile application products and services rely upon the popularity and penetration
rate of mobile internet in different parts of the world.
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Popularity of the Android system
. We currently sell our mobile application products and services around the Android operating system. We may be affected by any significant downturn in the overall demand for or
use of Android smartphones or any decline in the popularity of Android as an operating system, to the extent that our mobile application products and services continue to be operated on Android smartphones.
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Number of free and paid downloads
. A larger number of paid downloads are associated with more downloads of premium themes and advanced functionalities for our free GO series products and Next Launcher, our paid
product. A larger number of free downloads may generate more paid downloads for premium themes and advanced functionalities for our free GO series products. It also attracts more monthly active users, which may in turn drive marketing revenues from
advertisements displayed on our GO series products.
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Mobile internet marketing revenues
. Mobile internet marketing is a relatively new advertising model. The effectiveness of mobile internet as a marketing tool, measured in various ways such as click-through rates,
may heavily influence advertisers attitude toward marketing on our GO platform. We generate revenues for advertisements displayed on our GO series products with advertising networks. We are also in the process of developing our own mobile
internet marketing network and, after its completion, we may be able to retain a larger portion of these revenues and may be able to generate additional revenue streams by delivering advertisements to third-party mobile applications on behalf of our
own advertising clients.
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New products and revenue model
. Our business and revenue model relating to GO series products and GO platform is still new and evolving. We have been experimenting with various revenue models with varying degrees
of success. We intend to develop additional new products and services and experiment with new revenue models to fully explore our business potential.
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We started to offer direct advertising services, i.e., helping advertisers sourced directly by us distribute and promote their products on our
GO platform, in the first quarter of 2012. Marketing revenues from direct advertising services have experienced a rapid increase because the number of user actions that generate revenues for us, such as clicks, downloads, installations or
activations, and are attributable to the advertisements published on our GO series products continued to increase due to (i) increases in number of our direct advertisers and advertising space offered to direct advertisers in our GO series
products, (ii) improvement in our ability to more effectively distribute relevant advertisements to our users and (iii) increases in our monthly active users. The increases in monthly active users in our GO series products are in turn
driven by increased total downloads of our GO series products. Certain of our GO series products available for paid downloads are free of advertisements, and thus do not contribute to advertising sales.
67
We also offer advertising services on our GO platform through advertising networks or third party
advertising agencies. Starting in the second quarter of 2012, users can download our premium themes and advanced functionalities for GO series products using their Go Gold, previously named as GetJar Gold, a virtual currency of GetJar, an
advertising network which we acquired in February, 2014. Prior to the acquisition, we received fees from GetJar, which generates advertising revenues from its advertising customers. In addition, we have established business relationship with Google
AdMob previously. We entered into broader advertising arrangements with Google AdMob in 2013 and allowed advertisements from Google to be delivered to and displayed on our GO series products automatically. We generate revenues based on the number of
clicks or actions attributable to these advertisements. Marketing revenues from the advertising networks have experienced a rapid increase because the number of user actions that generate revenues for us and are attributable to the advertisements
published on our GO series products continued to increase primarily due to (i) increase in advertising space offered to third-party advertising networks in our GO series products and (ii) increases in our monthly active users.
Revenues from paid downloads were mainly from downloads of premium themes or advanced functionalities for our GO series products and, to a
lesser extent, from downloads of our paid product, Next Launcher. Premium themes downloaded include those developed by ourselves and by third parties using our publicly available development kit. A small portion of the third-party premium theme
developers have arrangements with us under which we sell their themes under our name through Google Play. We receive payments from Google Play and these third party developers receive a fixed percentage of the sales prices from us. Other third-party
premium theme developers market and sell their themes by themselves under their own names and we receive no payment from these sales. However, these premium themes considerably contribute to the popularity of our GO series products. Our revenues
from paid downloads were affected by changes in our product mix and were also significantly correlated to the number of paid downloads, which in turn were mainly driven by the number of our offerings of paid products, premium themes and advanced
functionalities and our success in promoting these offerings.
Mobile reading services
Revenues from our mobile reading services accounted for 34.7%, 39.3% and 30.3% of our total revenues in 2011, 2012 and 2013, respectively. We
derive revenues by providing content to third parties, such as uploading our literary content to third-party operated mobile reading platforms that charge their users for access to our content. Under revenue-sharing arrangements with such third
parties, we receive an agreed percentage of the fees generated by the content we provide. Our mobile reading services revenues also include revenues generated from readers purchases of online literary content from our own reading channel on
3G.cn and GGBook. Such content can be subscribed for by chapter, by book or by monthproviding access to a certain number of literary works for a month for a set fee.
We believe that the most significant factors affecting revenues from our mobile reading services include:
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Distribution channels and revenue-sharing. A majority of our revenues from our mobile reading services are derived from reading platforms operated by third parties. We have entered into revenue-sharing arrangements with
major mobile network carriers in China that run their own mobile reading databases, as well as with other mobile reading services providers such as major internet search companies and portals. Pursuant to these arrangements, we provide our original
content to other mobile reading services providers in exchange for a portion of the reader fees they charge for our literary content. Our ability to distribute our literary content through more third-party mobile reading services providers, the
growth in the number of paying users on these third-party service providers mobile reading platforms and our ability to negotiate more favorable revenue-sharing arrangements can significantly affect revenues from our mobile reading services.
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Service mix and pricing. Users pay for our contents, by month, by book or by chapter, depending on what choices of subscription packages are available to them. Each of the mobile network carriers, third-party mobile
reading services providers and ourselves offers multiple subscriptions packages with different levels of subscription fees for different amount of literary content. The mix of the subscription service package offeringsthe number, type and
price of our literary works that are included in a subscription package can vary greatlyand their acceptance by users can affect our revenues. We have no control over the subscription service packages offered by mobile network carriers and
other third parties.
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Mobile portal marketing services
Revenues from our mobile portal marketing services accounted for 49.2%, 31.0% and 15.9% of our total revenues in 2011, 2012 and 2013,
respectively. Our mobile portal marketing services revenues primarily consist of advertising on 3G.cn in different formats and over different periods of time. We either charge advertisers a fixed fee for advertisements of certain sizes and formats
in fixed locations over a period of time, or charge advertisers per action, such as when each time a user clicks on an advertisement, downloads, installs or activates an item being advertised.
68
We believe that the most significant factors affecting revenues from mobile portal marketing
services include:
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Number of advertiser
s. We attract advertisers by offering innovative mobile internet advertising solutions to fit the different needs of our advertisers. In addition, we have continually worked to enrich the
content offerings on 3G.cn in order to increase its popularity, making it increasingly more attractive to advertisers.
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Average revenue per advertiser
. Average revenue per advertiser is primarily affected by market acceptance of mobile internet advertising and the allocation of advertising budgets by our advertisers to 3G.cn. As
the mobile internet industry is relatively new, the effectiveness of mobile advertising is less proven than the results for other forms of more traditional advertising. Our average revenue per advertiser may increase as advertisers allocate more
advertising budgets to us.
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Other revenues
Other revenues are primarily derived from the promotion of third-party provided mobile applications or value-added services, such as paid
content, access to games or music files and picture download; we facilitate such promotion by placing such mobile applications or value-added services on third-party mobile channels. We receive a share of the revenues when such mobile applications
or value-added services are purchased by users on the different online channels in which we help place them.
Cost of Revenues
Cost of revenues consists primarily of (i) content acquisition cost; (ii) personnel costs; (iii) processing fees paid to mobile
application stores; (iv) distribution fees; (v) custody and bandwidth costs, and (vi) office rental fees. We expect that our cost of revenues will increase in absolute amount as we further grow our user base and expand our products
and services.
Content acquisition cost
. Content acquisition cost mainly includes copyright fees paid to authors and publishers for
the right to publish literary products on our mobile reading base and acquisition cost for content displayed in our websites and certain themes developed by third parties for our GO launcher products. The copyright fees are initially recorded as
intangible assets and amortized, on a straight-line basis, over the estimated useful life of the applicable literary products. Our content acquisition cost increased from 2011 to 2012 and 2013, and is expected to continue to increase as we continue
to expand our mobile reading services.
Personnel costs
. Personnel costs include salaries, other forms of compensation, including
share-based compensation, and insurance for our employees of those departments directly involved in providing our services and the sale of mobile application products and related services. Our personnel costs increased from 2011 to 2012 and 2013,
primarily because the expansion in our business required the hiring of additional personnel to run our daily operations and additional compensation to incentivize existing employees. We expect personnel costs to increase as we hire additional
employees in line with the expansion of our business.
Processing fees paid to mobile application stores
. Processing fees paid to
mobile application stores include fees paid to stores such as Google Play, through which we sell our GO series products. Our processing fees paid to mobile application stores increased from 2011 to 2012 and 2013, which is consistent with our growth
in revenue from GO series products. We expect processing fees paid to mobile application stores to increase as we continue to grow our GO series products and services.
Distribution fees
. Distribution fees mainly include the amount paid to third parties that direct users to access our products or
services, which may fluctuate from period to period.
Custody and bandwidth fees
. Custody and bandwidth fees are paid to third
parties for the hosting and maintenance of our servers and the purchase of bandwidth. Our custody and bandwidth fees increased from 2011 to 2012 primarily due to the increase in the number of servers and bandwidth in 2012 to serve our expanded user
base. Our custody and bandwidth fees were relatively stable between 2012 and 2013.
Office rental fees
. Office rental fees refer to
lease payments we make to the landlords of our various office spaces in China and overseas for those departments directly involved in providing our services and the sale of mobile application products. Our office rental fees increased from 2011 to
2012 and 2013, primarily due to the fact that we leased additional office space to house our additional personnel in response to our expanded business operations. We expect office rental fees to increase as our business operations continue to expand
in the future.
69
Operating Expenses
Our operating expenses consist of (i) research and development expenses, (ii) selling and marketing expenses and (iii) general
and administrative expenses. The following table sets forth the components of our operating expenses for the periods indicated, both in absolute amounts and as percentages of our total revenues.
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For the Year Ended December 31,
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2011
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2012
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2013
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RMB
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% of
total
revenue
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RMB
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% of
total
revenue
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RMB
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US$
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% of
total
revenue
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(in thousands, except for percentage)
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Operating expenses:
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Research and development expenses
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30,190
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31.3
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34,041
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18.4
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46,641
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7,705
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14.2
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Selling and marking expenses
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35,305
|
|
|
|
36.5
|
|
|
|
45,914
|
|
|
|
24.8
|
|
|
|
47,294
|
|
|
|
7,812
|
|
|
|
14.4
|
|
General and administrative expenses
|
|
|
23,225
|
|
|
|
24.0
|
|
|
|
25,615
|
|
|
|
13.8
|
|
|
|
51,246
|
|
|
|
8,465
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
88,720
|
|
|
|
91.8
|
|
|
|
105,570
|
|
|
|
57.0
|
|
|
|
145,181
|
|
|
|
23,982
|
|
|
|
44.2
|
|
Research and development expenses
Research and development expenses consist primarily of salaries and benefits, including share-based compensation, for research and development
personnel, depreciation of office premise and servers utilized by the research and development personnel, as well as other expenses we have incurred in researching and developing our GO platform, GO series products, 3G.cn and mobile reading
services. Research and development expenses increased from 2011 to 2012 and 2013, due to the need for higher levels of compensation for our research and development personnel, additional numbers of research and development personnel to meet the
needs of the rapid growth of our business as well as higher rental costs associated with our expanding research and development department. We expect our research and development expenses may increase as we expand our research and development team
to develop new products and services for our GO platform, improve technology for data analysis to further enhance user experience and develop enhanced features for our existing products and services to attract more users.
Selling and marketing expenses
Selling
and marketing expenses consist primarily of salaries and benefits, including share-based compensation, commissions for our selling and marketing personnel, and also general advertising and promotion expenses. Our selling and marketing expenses
increased from 2011 to 2012 and 2013, primarily reflecting increased commissions for our selling and marketing personnel as our advertising revenues increased and an increased number of selling and marketing personnel to serve and maintain close
relations with an increasing number of advertisers or advertising agencies. We expect that our selling and marketing expenses may increase as we intend to raise commission levels for our selling and marketing personnel due to increased advertising
demand and the hiring of additional selling and marketing personnel.
General and administrative expenses
General and administrative expenses consist primarily of salaries and benefits, including share-based compensation, for our general and
administrative personnel, professional service fees, legal expenses and other administrative expenses. Our general and administrative expenses increased from 2011 to 2012 and 2013, primarily due to the hiring of additional management and
administrative staff and higher rental costs associated with larger office space to accommodate our expanded general and administrative staff. We expect our general and administrative expenses may increase as our business grows and as we incur
increased costs related to complying with our reporting obligations under the U.S. securities laws as a public company.
70
Share-based compensation expenses
The amount of share-based compensation costs for the years ended December 31, 2011, 2012 and 2013 is allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Cost of revenues
|
|
|
74,458
|
|
|
|
76,111
|
|
|
|
639,246
|
|
|
|
105,596
|
|
Research and development expenses
|
|
|
111,716
|
|
|
|
164,374
|
|
|
|
1,944,824
|
|
|
|
321,262
|
|
Selling and marketing expenses
|
|
|
52,355
|
|
|
|
124,850
|
|
|
|
728,459
|
|
|
|
120,333
|
|
General and administrative expenses
|
|
|
53,365
|
|
|
|
60,748
|
|
|
|
14,510,015
|
|
|
|
2,396,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
291,894
|
|
|
|
426,083
|
|
|
|
17,822,544
|
|
|
|
2,944,075
|
|
We grant stock-based award such as share options to eligible employees, officers and directors. Awards granted
to employees, officers, and directors are initially accounted for as equity-classified awards, which are measured at the grant date fair value of the awards and are recognized using the straight-line method, net of estimated forfeiture rates, over
the requisite service period, which is generally the vesting period. In the future, we expect our share-based compensation expenses to increase in the absolute amount as our business continues to expand and as we continue to recruit qualified
personnel to enhance our compliance capability to meet our reporting obligations under the U.S. securities laws as a public company. We have granted options to management members that are exercisable after the completion of our initial public
offering. Share-based compensation expenses for these options were recognized in the period in which our initial public offering occurred.
Taxation
Cayman Islands
The Cayman
Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied
by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. There are no exchange control regulations or currency
restrictions in the Cayman Islands.
British Virgin Islands
Sungy Mobile Limited, before completing its transfer by way of continuation to the Cayman Islands, was a BVI business company subject to the
provisions of the BVI Business Companies Act, 2004. When Sungy Mobile Limited was a BVI business company, it was exempt from all provisions of the Income Tax Act of the BVI (including with respect to all dividends, interests, rents, royalties,
compensation and other amounts payable by us to persons who are not persons resident in the BVI).
Capital gains realized with respect to
any shares, debt obligations or other securities of a company by persons who are not persons resident in the BVI are also exempt from all provisions of the Income Tax Act of the BVI.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI
with respect to any shares, debt obligations or any of our other types of securities, save for interest payable to or for the benefit of an individual resident in the European Union.
Hong Kong
No Hong Kong profits tax has
been provided as we have no assessable profit arising in Hong Kong.
PRC
Current taxation primarily represented the provision for a state and local corporate income tax, or EIT, for subsidiaries and variable interest
entities, or VIEs, operating in the PRC. Under the EIT Law, which became effective on January 1, 2008, all our PRC entities are subject to EIT at a rate of 25%, with the exception of any preferential treatments they may receive, such as the
recognition that Jiubang Digital received as a high and new technology enterprise, which enabled it to enjoy a 15% preferential tax rate in place of the statutory 25% enterprise income tax until December 31, 2013.
71
According to a policy promulgated by the state tax bureau of the PRC and effective from 2008
onwards, enterprises engaged in research and development activities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its tax assessable profits for that year, or
Super Deduction. Jiubang Digital has claimed such Super Deduction in ascertaining its tax assessable profits from 2009 to 2012.
In
addition, according to the EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derive dividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC
shall be subject to PRC withholding tax, or WHT, at 10% (a further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is applicable to any dividends to be distributed from any of our
subsidiaries to our company out of any profits such subsidiaries derived after January 1, 2008.
Our revenues from mobile reading
services, mobile application products and services and other services are subject to business taxes at a rate of 3%-5% and related surcharges at a rate of 12% of business taxes in aggregate. Our revenues from mobile portal marketing service are
subject to value added taxes at a rate of 6% and related surcharges at a rate of 12% of value added taxes in aggregate. In addition, certain mobile portal marketing revenues are subject to cultural development fees at a rate of 3%.
For more information on PRC tax regulations, see Item 4. Information on the Company B. Business Overview PRC
Regulation Regulation on Tax.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which requires us to make
judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities; (2) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (3) the reported amounts of
revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations
regarding the future based on available information which together 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, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other
uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the
preparation of our financial statements.
Consolidation
Foreign ownership of mobile internet related businesses is subject to significant restrictions under current PRC laws and regulations. Our PRC
subsidiaries are foreign owned business entities under the PRC law and accordingly are prohibited from providing mobile internet related business in the PRC, including having ownership of entities engaged in providing such services.
We conduct majority of our business activities through the variable interest entities (VIEs). We have entered into a series of
contractual arrangements with VIEs and their equity holders, including loan agreements, master exclusive service agreements, business cooperation agreements, exclusive call option agreements, proxy agreements and power of attorney, spousal consent
letters and equity pledge agreements.
We have a controlling financial interest in the VIEs because we have (i) the power to direct
activities of the VIEs that most significantly impact the economic performance of the VIEs; and (ii) the obligation to absorb the expected losses and the right to receive expected residual return of the VIEs that could potentially be
significant to the VIEs. Accordingly, the financial statements for the VIEs are consolidated in our consolidated financial statements. All of the equity (net assets) or deficits (net liabilities) and net income (loss) of the VIEs are attributed to
us.
Under the terms of the VIE Agreements, we have (i) the right to receive economic benefits that could potentially be significant
to the VIEs in the form of service fees under the master exclusive service agreements when such services are provided; (ii) the right to receive all dividends declared by the VIEs and the right to all undistributed earnings of the VIEs;
(iii) the right to receive the residual benefits of the VIEs through its exclusive purchase option to acquire 100% of the equity interests in the VIEs, to the extent permitted under PRC law. Accordingly, the financial statements of the VIEs are
consolidated in our consolidated financial statements.
72
We believe, based on the legal opinion of our PRC counsel, Jun He Law Offices, the contractual
arrangements are legally binding and enforceable, and do not violate current PRC laws and regulations. However, if such contracts are held to be unenforceable, or if there are changes in PRC laws and regulations that affect our ability to
effectively control the VIEs, we may be precluded from consolidating these companies in the future.
Revenue recognition
Mobile Application Products and Services Revenue
We develop and sell mobile application products, including Go Series applications and themes and widgets that can be used in the application
through online application stores such as Google Play. Mobile phone users can access those stores and download the mobile application products by making payment through the payment agents authorized by the relative stores.
For the sale of mobile application products, when no post contract customer support (PCS) is provided, revenues are recognized
upon the delivery of the mobile application products and the other revenue recognition criteria are met at time of delivery. When free upgrades are provided on a when-and-if-available basis, which is considered as PCS, we were not able to establish
vendor-specific objective evidence (VSOE) for the fair value of the PCS for the year ended December 31, 2012, and therefore revenues from the sales of mobile application was recognized ratably over the estimated life of the
application.
In June 2013, our management having the relevant authority established the selling price or VSOE of the PCS. The sales term
of the mobile application product was modified by explicitly stating separate sales prices for the mobile application and the one-year free upgrades, as well as the annual renewal rate for upgrades after the one year period. We believe the annual
renewal rate for the upgrades is substantive because the renewal rate is within our normal pricing practice and the expected life of mobile application product is more than two years.
The separate sales prices for the mobile application with the one-year free upgrades, and the annual renewal rate were introduced to the
marketplace within 30 days after they were established by our management having the relevant authority and did not change from the prices established by management having the relevant authority.
Therefore, for year ended December 31, 2013, the residual method was applied for the sale of the mobile application product since we do
not sell mobile application products without PCS. That is, upon the sale of the mobile application, the consideration attributable to the fair value of the PCS is initially deferred and recognized as revenue on a straight-line basis over the one
year service period with the remaining or residual consideration recognized as revenue.
We recognize revenue from sales of mobile
application products through online application stores, mainly Google Play, on a gross basis, as we are the primary obligator under the arrangement and have latitude in establishing prices.
We also offer advertising service on our mobile application products. Our revenue recognition policy for the provision of advertising services
on our mobile application products is the same as the revenue recognition policy for the provision of advertising services on our portal website.
The majority of our revenues for mobile application products and services are derived from countries outside of China.
Mobile Reading Revenue
Service provided directly
to users
We generate revenue from the sale of online premium literature contents to the users. The users purchase the content by
chapter or by book and cannot cancel the purchase once made.
The content sold to users usually has no expiry period unless otherwise
stated. The revenue from the sale of online content or other community tools (such as votes and gifts for an author) is recognized at the time of sale as we do not have any further obligation after providing the content to the user upon sale and all
other criteria for revenue recognition are met.
73
Service provided to users through third parties
We also derive revenues by providing our literature contents to third parties, primarily mobile operators. We upload the literature content to
wireless platforms of the mobile operators and the royalty right resides with us. The mobile operators charge a fee from its wireless users when they access our literature contents through the mobile operators wireless platform via their
mobile devices (such as mobile handsets). Such fee is charged either on a monthly subscription basis under which users can access the variety of contents offered on the mobile operators platform or per usage basis based on the number of books
or chapters of our literature content accessed by the users. We receive an agreed percentage of the fee from the mobile operators.
For
the per usage basis arrangement, we have access to the information on the content accessed by the wireless users from a platform operated by the mobile operator on a monthly basis. With respect to the monthly subscription basis arrangement, we rely
on the monthly billing statements generated by the mobile operator each month to determine its share of the fees. There is normally time lag of 3 to 4 months until we receive the billing statements from the mobile operator and we have no visibility
into these revenues prior to receipts of the billing statements.
|
|
|
Under the per usage basis, since we have timely access to usage information, revenues are recognized in the period in which the content has been provided that no significant obligation remains, collection of the
receivable is reasonably assured and the amounts can be reliably estimated. The revenue is measured based on our analysis of the usage information for the month provided by the mobile operators and the contractual rates with the mobile operators.
Based on revenues amounts subsequently confirmed by the mobile operators, there were no significant adjustments between our analysis of the usage information and the mobile operators statements received.
|
|
|
|
Under the monthly subscription basis, since we do not have timely access to usage information, revenue is recognized in the period when the billing statements for the related service have been received. Before the
billing statements are received, we cannot reliably determine the revenue earned for that period.
|
The revenues recognized
under the arrangements with the mobile operators represent only our share of the revenues to be received from the operators since we are not the primary obligor in the arrangement.
Mobile Portal Marketing Revenue
We offer
customers to advertise on our portal website in particular formats and over particular periods of time. The mobile portal advertising formats primarily include banners, links, logos, buttons, pop-up windows, jump-out boxes, floating signs, and rich
media. Portal advertising agreements are entered into with various third-party advertising agencies representing their customers and with advertising customers directly. For certain advertising agreements, we are required to pay certain percentages
of revenues to the advertising agencies as rebates. We have two pricing models offered to advertisers, consisting of a fixed price pricing model and a cost per action pricing model.
Under the fixed price pricing model, we charge advertisers a fixed fee to advertise over a period of time. Mobile portal marketing revenue,
net of agency cash rebates, is recognized ratably over the period in which the advertisement is displayed and only if collection of the resulting receivable is reasonably assured.
Under the cost per action pricing model, the advertisers pay us only when a user clicks on or downloads one of their advertisements or
installs or activates the products advertised. We recognize revenue on the fees charged to advertisers each time a user clicks on or downloads one of the advertisements or installs or activates the products advertised that appear on our portal
website.
Other Revenues
Other
revenues are primarily derived from the fees we receive from the sale of digital products and services such as paid content, picture download, and access to game or music files, which are provided by third parties. We facilitate such sales by
placing the products and services on third-party mobile channels. We receive a fee from third parties when the digital products or services are purchased by users on the different online channels in which we helped place them. We act as an agent in
such transactions.
74
We evaluate whether it is appropriate to record the gross amount of our revenues and related
costs by considering a number of factors, including, among other things, whether we are the primary obligor under the arrangement, have inventory risk, and have latitude in establishing prices.
Share-based Compensation
We
account for share-based compensation following the provisions of ASC Topic 718,
CompensationStock Compensation,
under which we measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date
fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. We have elected to recognize
the compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. However, the cumulative amount of compensation cost recognized at any
date equals at least the portion of the grant date fair value of such award that is vested at that date.
In June 2006, we adopted the
2006 Plan, which was amended and restated in October 2013. The 2006 Plan provides for the granting of stock options and other stock-based awards to our key employees, directors and consultants. Our board of directors authorized and reserved for the
issuance of up to 5,224,126 ordinary shares under the 2006 Plan.
In June 2010, we adopted the 2010 Plan, which was amended and restated
in October 2013. The 2010 Plan provides for the granting of stock options and other stock-based awards to our key employees, directors and consultants. Our board of directors authorized and reserved for the issuance of up to 5,373,659 ordinary
shares under the 2010 Plan. Immediately prior to the completion of our initial public offering, the ordinary shares underlying the options granted under the 2006 Plan and 2010 Plan were re-designated as Class A ordinary shares.
In October 2013, we adopted the 2013 Plan. The 2013 Plan provides for the granting of stock options and other stock-based awards to our key
employees, directors and consultants. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2013 Plan, or the Award Pool, is 4,243,070, which equals to three percent of our total outstanding shares on an
as-converted basis as of the date of adoption of the 2013 Plan, plus an automatic annual increase of a number of shares on the first day of each year, beginning on January 1, 2014, equal to the total number of shares underlying the awards
granted in the year immediately prior to each annual increase; provided that shares underlying the awards issued under the 2013 Plan but remain unvested as of January 1 of a given year should be counted as part of the existing Award Pool and
should not be counted as part of the number of shares to be added on January 1 of the same year.
From July 1, 2006 to
December 31, 2013, our board of directors has granted the following options to our executive officers and employees:
|
|
|
|
|
|
|
Grant date
|
|
Number of options
|
|
Exercise price (US$)
|
|
Fair value of ordinary
share (US$)
|
Prior to January 1, 2012
|
|
10,824,428
|
|
0.02 1.90
|
|
0.17 0.59
|
July 1, 2012
|
|
75,675
|
|
1.90
|
|
0.64
|
December 1, 2012
|
|
305,878
|
|
1.90
|
|
0.84
|
June 1, 2013
|
|
3,646,400
|
|
0.0001 0.8826
|
|
1.65
|
September 1, 2013
|
|
1,677,500
|
|
0.8826
|
|
1.70
|
November 21, 2013
|
|
35,000
|
|
1.87
|
|
1.87
|
In determining the estimated fair value of stock options granted to executive officers and certain
employees prior to our initial public offering in November 2013, we have considered the guidance prescribed by the
AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the
Practice Aid, which sets forth the preferred types of valuation that should be used. We have followed the Level B
recommendation, and established the fair value of our ordinary shares at the dates of grant using a
retrospective valuation with the assistance of American Appraisal China Ltd. We obtained a retrospective valuation instead of contemporaneous valuation because our financial and managerial resources were limited before 2013. We are ultimately
responsible for all the fair value measurements in relation to the options and ordinary shares.
In determining the fair value of our
ordinary shares for the purpose of determining the fair value of the stock options, we followed a two-step process. In the first step, the equity value of our company was determined by taking into consideration the income approach, or the discounted
cash flow method. Due to lack of consistencies in the guideline companies valuation ratios, we did not apply any weight for the market approach to arrive at the equity value of our company. Instead, the market approach is only used to
corroborate the valuation results based on the income approach.
75
In estimating the total equity value of our ordinary shares, we considered the discounted cash
flow, or DCF, method, which incorporates the projected cash flow of our managements best estimation as of each measurement date. The projected cash flow estimation includes, among others, analysis of projected revenue growth, gross margins and
terminal value. The assumptions used in deriving the fair value of ordinary shares are consistent with our business plan.
The key
assumptions used in developing the cash flow forecasts include: (i) five-year compounded annualized growth rates of revenue range from 33% to 134%; (ii) gross margin forecast to improve with increasing economies of scale; and (iii) a
terminal growth rate after the projection period.
The DCF method of the income approach involves applying appropriate weighted average
cost of capital, or WACC, to discount the future cash flows forecast to present value. WACC comprises a required rate of return on equity plus the current tax-effected rate of return on debt, weighted by the relative percentages of equity and debt
in the capital structure of comparable public companies whose business operations are similar to that of ours. The required rates of return on equity were based on an estimation of the market required rate of return for investing in business similar
to ours, which were derived by using the capital asset pricing model, or CAPM. Under CAPM, the discount rate was determined with consideration of the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk
premium, size of our company, the scale of our business and our ability in achieving forecasted projections.
The risks associated with
achieving the forecasts were assessed in selecting the appropriate WACC, which had been determined to range from 19% to 28%.
In
estimating the fair value of our ordinary shares by the DCF method, our management does not think there would be disproportionate returns of cash flows to different shareholders. That is, we do not think the controlling shareholders would receive
greater returns than the non-controlling shareholders through their control of business decisions or participation in the daily operations of the business. Therefore, neither control premium nor a lack of control discount was considered in our
valuations.
We also applied a discount for lack of marketability, or DLOM, ranging from 40% to 10%, to reflect the fact that there is no
ready market for shares in a closely-held company like us. When determining the DLOM, the Black-Scholes option pricing model was used. Under this option-pricing method, the cost of the put option, which can hedge the price change before the
privately held shares can be sold, was considered as a basis to determine the discount for lack of marketability. This option pricing method was used because it takes into account certain company-specific factors, including the timing of the
expected initial public offering and the volatility of the share price of the guideline companies engaged in the same industry.
The above
assumptions used in determining the fair values were consistent with our business plan and major milestones we achieved. We also applied general assumptions, including the following:
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|
|
there will be no major changes in the existing political, legal, fiscal and economic conditions in countries in which we will carry on our business;
|
|
|
|
there will be no major changes in the current taxation law in countries in which we operates, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
|
|
|
|
exchange rates and interest rates will not differ materially from those presently prevailing;
|
|
|
|
the availability of financing will not be a constraint on the future growth of our operation;
|
|
|
|
we will retain and have competent management, key personnel, and technical staff to support our ongoing operation; and
|
|
|
|
industry trends and market conditions for related industries will not deviate significantly from economic forecasts.
|
In the second step, since our capital structure comprised convertible preferred shares and ordinary shares at each grant date, we allocated
our equity value among each class of equity securities using the option-pricing method. The option-pricing method treats ordinary shares and preferred shares as call options on our companys equity value and liquidation preference of the
preferred shares.
76
In determining the fair value of stock options granted to executive officers and certain
employees, we have used the binomial option pricing model. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares and the expected volatility of the price
of the underlying shares for the contract term of the options, are required in order to determine the fair value of the options. Changes in these assumptions could significantly affect the fair value of stock options and hence the amount of
compensation expense we recognize in our consolidated financial statements. For the options granted, we used the following assumptions on the date of grant in determining the estimated fair value per option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Granted In
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Expected volatility
|
|
|
63% - 64
|
%
|
|
|
60% - 63
|
%
|
|
|
54 - 60
|
%
|
Expected dividends yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Exercise multiple
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.2
|
|
Risk-free interest rate per annum
|
|
|
2.74% - 4.19
|
%
|
|
|
2.02% - 2.77
|
%
|
|
|
1.72% - 2.97
|
%
|
Estimate fair value of underlying ordinary shares (per share)
|
|
|
US$0.48 - 0.59
|
|
|
|
US$0.64 - 0.84
|
|
|
|
US$1.65 - 1.87
|
|
For the purpose of determining the estimated fair value of our stock options, we believe the expected
volatility and the estimated fair value of our ordinary shares are the most critical assumptions since we are a privately held company when we granted these stock options.
Since we did not have a trading history at the time the stock options were granted and we did not have sufficient share price history to
calculate our own historical volatility, expected volatility of our future ordinary share price was estimated based on the price volatility of the shares of selected public companies in the similar industry, which we refer to as guideline companies.
Income taxes
We assess the
likelihood that our net deferred income tax assets will be realized. To the extent that we believe that it is more likely than not that some portion or the entire amount of deferred income tax assets will not be realized, we establish a valuation
allowance.
In assessing the realizability of deferred income tax assets, we consider whether it is more likely than not that some portion
or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible
or tax loss carried forward are utilized. We consider the scheduled reversal of deferred income tax liability, projected future taxable income and tax planning strategies in making this assessment.
As of December 31, 2011, we believe it is more likely than not that we will not be able to realize the deferred income tax assets, and a
valuation allowance of RMB30.5 million was provided.
As of December 31, 2012, we assessed the need for the valuation allowance
provided against the deferred income tax assets of Jiubang Digital since it began to generate pre-tax income during 2012. Based on current business plans and projected net income in the near future, we believes it is more likely than not that
Jiubang Digital will realize the deferred income tax assets in the near future. Consequently, we recorded a deferred income tax benefit in the amount of RMB6.9 million due to the reversal of the valuation allowance of the deferred income tax assets
of Jiubang Digital. The amount of the deferred income tax assets considered realizable as of December 31, 2012 could be reduced in the near term if estimates of future taxable income are reduced.
As of December 31, 2013, we assessed the need for the valuation allowance previously provided against the deferred income tax assets of
Jiubang Computer, Beijing XMedia, Sanju Advertising and Beijing Yunlei Cultural Communication Co., Ltd, or Beijing Yunlei which generated pre-tax income during 2013. Based on current business plans and projected net income in the near future, we
believe it is more likely than not that these entities will realize the deferred income tax assets in the near future. Consequently, we recorded a deferred income tax benefit in the amount of RMB11.2 million (US$1.8 million) due to the reversal of
the valuation allowance of the deferred income tax assets of these entities. The amount of the deferred income tax assets considered realizable as of December 31, 2013 could be reduced in the near term if estimates of future taxable income are
reduced.
77
Recently Issued Accounting Pronouncements
In February 2013, Financial Accounting Standards Board, or FASB, issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income
(ASU 2013-02). The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each
component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest
expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference to the related footnote for additional information (e.g., the pension footnote).
ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012. We adopted this ASU starting from January 1, 2013.
In July 2013, the FASB issued ASU 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(ASU 2013-11). ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a
reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The new
standard is to be applied prospectively but retrospective application is permitted. The adoption is not expected to have a material impact on our consolidated financial statements.
78
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. Our business has grown rapidly
since our inception. Our limited operating history makes it difficult to predict our future results of operations. We believe that period-to-period comparisons of results of operations should not be relied upon as indicative of future performance.
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|
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|
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Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Summary Consolidated Statements of Comprehensive Income (Loss) Data:
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|
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|
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|
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|
|
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|
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|
Revenues
|
|
|
96,594,538
|
|
|
|
185,218,681
|
|
|
|
328,843,318
|
|
|
|
54,321,046
|
|
Cost of revenues
(1)
|
|
|
(46,617,793
|
)
|
|
|
(74,813,098
|
)
|
|
|
(94,144,743
|
)
|
|
|
(15,551,604
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,976,745
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|
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|
110,405,583
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|
|
|
234,698,575
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|
|
|
38,769,442
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|
Research and development expenses
(1)
|
|
|
(30,190,352
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)
|
|
|
(34,041,250
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)
|
|
|
(46,641,102
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)
|
|
|
(7,704,561
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)
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Selling and marketing expenses
(1)
|
|
|
(35,305,268
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)
|
|
|
(45,914,065
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)
|
|
|
(47,293,583
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)
|
|
|
(7,812,343
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)
|
General and administrative expenses
(1)
|
|
|
(23,224,454
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)
|
|
|
(25,614,849
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)
|
|
|
(51,246,338
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)
|
|
|
(8,465,292
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Operating income (loss)
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|
|
(38,743,329
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)
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|
|
4,835,419
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|
|
|
89,517,552
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|
|
|
14,787,246
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Change in fair value of warrants
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|
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(2,356,037
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)
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|
|
|
|
|
|
|
|
|
|
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Share of losses of equity method investments
|
|
|
(3,744,390
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)
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|
|
(1,072,946
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)
|
|
|
|
|
|
|
|
|
Impairment loss on equity method investment
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|
|
(389,270
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)
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|
|
|
|
|
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Gain on disposal of an equity method investment
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|
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4,182,485
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|
|
|
|
|
|
|
|
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Investment income on short-term investment
|
|
|
2,251,269
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|
|
|
124,862
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|
|
|
360,750
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|
|
|
59,592
|
|
Interest income
|
|
|
205,715
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|
|
|
194,643
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|
|
|
279,777
|
|
|
|
46,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(42,776,042
|
)
|
|
|
8,264,463
|
|
|
|
90,158,079
|
|
|
|
14,893,054
|
|
Income tax benefit
|
|
|
|
|
|
|
6,903,561
|
|
|
|
1,656,813
|
|
|
|
273,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
15,166,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amount of share-based compensation costs for the years ended December 31, 2011, 2012 and 2013 are as follows:
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|
|
|
|
|
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|
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|
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Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Cost of revenues
|
|
|
74,458
|
|
|
|
76,111
|
|
|
|
639,246
|
|
|
|
105,596
|
|
Research and development expenses
|
|
|
111,716
|
|
|
|
164,374
|
|
|
|
1,944,824
|
|
|
|
321,262
|
|
Selling and marketing expenses
|
|
|
52,355
|
|
|
|
124,850
|
|
|
|
728,459
|
|
|
|
120,333
|
|
General and administrative expenses
|
|
|
53,365
|
|
|
|
60,748
|
|
|
|
14,510,015
|
|
|
|
2,396,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
291,894
|
|
|
|
426,083
|
|
|
|
17,822,544
|
|
|
|
2,944,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues
.
Our revenues increased by 77.5% from RMB185.2 million in 2012 to RMB328.8 million (US$54.3 million) in 2013.
This increase was primarily due to increases in revenues from our mobile application products and services and mobile reading services.
Mobile application products and services.
Revenues from our mobile application products and services increased by 350.3% from RMB34.1
million in 2012 to RMB153.4 million (US$25.3 million) in 2013. This increase was primarily due to (i) an increase in our marketing revenues related to GO series products from RMB11.9 million in 2012 to RMB89.1 million (US$14.7 million) in 2013,
which was due to the increased popularity of our GO series products and services, an increase in the number of user actions that generated revenues such as clicks, downloads, installations or activations, and were attributable to the advertisements
published in our GO series products, and an increased variety of advertising formats and services we offered, and (ii) an increase in revenues generated from paid downloads of premium themes and advanced functionalities for our free GO series
products and Next Launcher, our paid mobile application product, from RMB22.2 million in year ended December 31, 2012 to RMB64.3 million (US$10.6 million) in 2013, as we started offering premium themes and advanced functionalities in the second
quarter of 2012 with the number of paid downloads of GO series products increasing from approximately 0.2 million in the first quarter of 2012 to approximately 0.6 million in the fourth quarter of 2013. Increases in the above revenue
streams were partly attributable to an increase in the average monthly active users for our GO series products. The increase in our average monthly active users in turn resulted from an increase in the accumulated number of free downloads of our GO
series products from approximately 207 million as of December 31, 2012 to approximately 364 million as of December 31, 2013.
79
Mobile reading services.
Revenues from our mobile reading services increased by 37.1% from
RMB72.8 million in 2012 to RMB99.8 million (US$16.5 million) in 2013, primarily due to an increase in revenues from third-party reading channels from RMB58.0 million in 2012 to RMB79.4 million (US$13.1 million) in 2013, as a result of higher demand
for our literary content from reading channels operated by both major mobile network carriers and other third party mobile reading services providers.
Mobile portal marketing services.
Revenues from our mobile portal marketing services were RMB52.2 million (US$8.6 million) in 2013,
compared to RMB57.5 million in 2012.
Other revenues.
Our other revenues increased by 12.4% from RMB20.9 million in 2012 to RMB23.5
million (US$3.9 million) in 2013. This increase was primarily due to an increase in third-party provided value-added services, such as paid content and access to game or music files, which we help promote through different online channels.
Cost of Revenues
.
Our cost of revenues increased by 25.8% from RMB74.8 million in the year ended December 31, 2012
to RMB94.1 million (US$15.6 million) in 2013. The increase in our cost of revenues was primarily a result of the following factors:
|
(i)
|
an increase in content acquisition cost from RMB23.1 million in 2012 to RMB32.4 million (US$5.4 million) in 2013;
|
|
(ii)
|
an increase in personnel costs from RMB18.5 million in 2012 to RMB21.1 million (US$3.5 million) in 2013;
|
|
(iii)
|
an increase in processing fees paid to mobile application stores from RMB6.7 million in 2012 to RMB18.4 million (US$3.0 million) in 2013;
|
|
(iv)
|
an increase in office rental fees from RMB2.6 million in 2012 to RMB3.2 million (US$0.5 million) in 2013; and
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|
(v)
|
offset by a decrease in distribution fees from RMB15.4 million in 2012 to RMB9.9 million (US$1.6 million) in 2013.
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The increase in these costs and fees was primarily attributable to the expansion of our business, which required more content, personnel and
office space for the delivery of our products and services. Our custody and bandwidth fees was RMB5.6 million in 2012, which stayed stable with the custody and bandwidth fees in 2013.
Operating Expenses
. Our operating expenses increased by 37.5% from RMB105.6 million in 2012 to RMB145.2 million (US$24.0
million) in 2013, due to increases in research and development expenses, selling and marketing expenses and general and administrative expenses.
Research and development expenses
. Our research and development expenses increased by 37.0% from RMB34.0 million in 2012 to RMB46.6
million (US$7.7 million) in 2013. This increase was primarily due to increased headcount and salaries of our research and development staff, and partly due to the increase of share-based compensation allocated to our research and development staff
in the year of 2013.
Selling and marketing expenses
. Our selling and marketing expenses increased by 3.0% from RMB45.9 million in
2012 to RMB47.3 million (US$7.8 million) in 2013. We incurred higher personnel costs as a result of increased commissions for our selling and marketing personnel, which was partly offset by a decrease in advertising and marketing expenses as we
conducted less brand promotion activities such as sponsorship for industry forum and sport events in the period.
General and
administrative expenses
. Our general and administrative expenses increased by 100.1% from RMB25.6 million in 2012 to RMB51.2 million (US$8.5 million) in 2013. This increase was primarily due to (i) the increase in share-based compensation
costs due to awards granted to our officers and employees; (ii) foreign exchange losses of RMB3.2 million (US$0.5 million) mainly arising from the exchange of proceeds from our initial public offering denominated in U.S. dollars into Renminbi;
and (iii) the costs associated with office relocation amounting to RMB3.5 million (US$0.6 million) in 2013.
Income Tax
Benefit
. Our income tax benefit was RMB1.7 million (US$0.3 million) in 2013, as compared to an income tax benefit of RMB6.9 million in 2012. This was primarily due to the recognition of deferred income tax assets of Jiubang Computer, Beijing
XMedia, Sanju Advertising and Beijing Yunlei amounting to RMB11.2 million (US$1.8 million), offset by the current income tax expense of RMB7.9 million (US$1.3 million) and the realization of deferred income tax assets of Jiubang Digital of RMB1.6
million (US$0.2 million) in 2013.
80
Net Income
. As a result of the foregoing, we recorded a net income of RMB91.8
million (US$15.2 million) in 2013, as compared to a net income of RMB15.2 million in 2012.
Year Ended December 31, 2012 Compared to Year Ended
December 31, 2011
Revenues.
Our revenues increased by 91.7% from RMB96.6 million in 2011 to RMB185.2 million in
2012. This increase was primarily due to increases in revenues from our mobile application products and services, mobile reading services and mobile portal marketing services.
Mobile application products and services.
Revenues from our mobile application products and services increased by 774.0% from RMB3.9
million in 2011 to RMB34.1 million in 2012. This increase was primarily due to (i) an increase in revenues generated from paid premium themes and advanced functionalities for our GO series products from RMB3.9 million in 2011 to RMB22.2 million
in 2012, as we started offering premium themes and advanced functionalities in the second quarter of 2012 with the number of paid downloads of GO series products and services increasing from approximately 0.2 million in the first quarter of
2012 to approximately 0.5 million in the fourth quarter of 2012; and (ii) an increase in our marketing revenues related to GO series products from RMB0.05 million in 2011 to RMB11.9 million in 2012, which was due to the increased
popularity of our GO series products and services, an increase in the number of user actions that generated revenues for us, such as clicks, downloads, installations or activations, and were attributable to the advertisements published in our GO
series products, and an increased variety of advertising formats and services we offered. Increases in the above revenue streams were partly attributable to an increase in our average monthly active users. The increase in our average monthly active
users in turn resulted from an increase in the accumulated number of free downloads of our GO series products and services which reached approximately 207 million as of December 31, 2012.
Mobile reading services.
Revenues from our mobile reading services increased by 116.9% from RMB33.5 million in 2011 to RMB72.8 million
in 2012, primarily due to an increase in revenues from third-party channels from RMB25.6 million in 2011 to RMB58.0 million in 2012, mainly because we only started entering into arrangements with third-party channels to promote our literary content
on their websites or in their reading channels during the course of 2011.
Mobile portal marketing services.
Revenues from our
mobile portal marketing services increased by 21.0% from RMB47.5 million in 2011 to RMB57.5 million in 2012. The overall increase primarily reflected an increase in advertisers from 240 in 2011 to 265 in 2012 and the increased average revenue per
advertiser from RMB198,027 to RMB217,004, as a result of increased market acceptance of mobile internet advertising and advertisers increased allocation of advertising budget to our portal.
Other revenues.
Revenues from our other services increased by 79.7% from RMB11.6 million in 2011 to RMB20.9 million in 2012. This
increase was primarily due to an increase in the number of third-party provided mobile apps or value-added services, such as paid contents, picture download and access to game or music files, which are provided by third parties for us to help them
to promote.
Cost of Revenues.
Our cost of revenues increased by 60.5% from RMB46.6 million in 2011 to RMB74.8 million in
2012. The increase in our cost of revenues was primarily due to:
|
(i)
|
an increase in content acquisition cost from RMB12.6 million in 2011 to RMB23.1 million in 2012;
|
|
(ii)
|
an increase in distribution fees from RMB7.1 million in 2011 to RMB15.4 million in 2012;
|
|
(iii)
|
an increase in personnel costs from RMB16.6 million in 2011 to RMB18.5 million in 2012;
|
|
(iv)
|
an increase in processing fees paid to mobile application stores from RMB1.1 million in 2011 to RMB6.7 million in 2012;
|
|
(v)
|
an increase in custody and bandwidth fees from RMB4.3 million in 2011 to RMB5.6 million in 2012; and
|
|
(vi)
|
an increase in office rental fees from RMB1.5 million in 2011 to RMB2.6 million in 2012.
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81
The increase in these costs and fees was primarily attributable to the expansion of our business,
which required more personnel, more contents, more servers and more office space for the delivery of our products and services.
Operating Expenses.
Our operating expenses increased by 19.0% from RMB88.7 million in 2011 to RMB105.6 million in 2012, due to
increases in research and development expenses, selling and marketing expenses and general and administrative expenses.
Research and
development expenses.
Our research and development expenses increased by 12.8% from RMB30.2 million in 2011 to RMB34.0 million in 2012. This increase was primarily due to (i) higher levels of compensation for our research and development
personnel and (ii) our expanded team of research and development personnel, from 215 as of December 31, 2011 to 298 as of December 31, 2012, with the majority of new hirings in the second half of 2012.
Selling and marketing expenses.
Our selling and marketing expenses increased by 30.0% from RMB35.3 million in 2011 to RMB45.9 million
in 2012. This increase was primarily due to (i) increased commissions for our selling and marketing personnel as our advertising revenues increased and (ii) our expanded team of selling and marketing personnel, from 116 as of
December 31, 2011 to 129 as of December 31, 2012, as part of our efforts to serve and maintain close relations with an increasing number of advertisers or advertising agencies.
General and administrative expenses.
Our general and administrative expenses increased by 10.3% from RMB23.2 million in 2011 to RMB25.6
million in 2012. This increase was primarily due to (i) higher rental costs associated with larger office space to accommodate our expanded general and administrative staff and (ii) the increase in our general and administrative staff,
from 70 as of December 31, 2011 to 77 as of December 31, 2012.
Change in Fair Value of Warrants.
We recorded a
change in fair value of warrants of RMB2.4 million in 2011, while we did not record such a change in 2012. This was due to the liability classified warrants, previously granted to a holder of series C preferred shares of our company, having been
exercised in June 2011.
Gain on Disposal of an Equity Method Investment.
We recognized a gain on disposal of an equity
method investment of RMB4.2 million in 2012, while we did not record such gain in 2011. This was due to disposal of Zhuhai Zhengdian to a third party in 2012.
Income Tax Benefit.
Our income tax benefit was RMB6.9 million in 2012 while we did not recognize any income tax benefit in 2011.
This was primarily due to the reversal of the previous valuation allowance provided against the deferred income tax assets of Jiubang Digital. Based on current business plans and projected net income in the near future, we believe it is more likely
than not that Jiubang Digital will realize deferred income tax assets in the near future. Meanwhile, valuation allowance was provided against the deferred income tax assets of our other subsidiaries and variable interest entities which were at
cumulative loss positions and which we do not believe are more likely than not to be utilized.
Net Income (Loss).
As a
result of the foregoing, we recorded net income of RMB15.2 million in 2012, as compared to the net loss of RMB42.8 million we recorded in 2011.
B.
Liquidity and Capital Resources
Cash Flows and Working Capital
To date, we have financed our operations primarily through private placements of preferred and ordinary shares to investors as well as cash
flows from operations, and more recently the proceeds from our initial public offering. Concurrently with our initial public offering, we also raised US$15.0 million from Qihoo 360 Technology Co. Ltd. by private placement of 8,021,390 Class A
ordinary shares and US$5.0 million from Kingsoft Internet Software Holdings Limited by private placement of 2,673,796 Class A ordinary shares, respectively. As of December 31, 2013, we had RMB759.4 million (US$125.4 million) in cash and
cash equivalents. We expect to require cash to fund our ongoing operational needs, particularly our research and development expenses and salaries and benefits for our employees. We believe that our cash and the anticipated cash flow from operations
will be sufficient to meet our anticipated cash needs for the next 12 months. In April 2014, we paid US$4.93 million for the purchase of 290,000 shares in Weibo Corporation in its initial public offering at the price of US$17 per share. However, we
may require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to selectively pursue. If our existing cash resources are insufficient to meet our
requirements, we may seek to sell equity or equity-linked securities, debt securities or borrow from banks.
82
Our PRC subsidiaries and variable interest entities, in the aggregate, held RMB66.1 million,
RMB63.6 million and RMB41.6 million (US$6.9 million) in cash as of December 31, 2011, 2012 and 2013, respectively. The U.S. subsidiaries owned by our variable interest entities, in the aggregate, held RMB0.7 million, RMB5.3 million and RMB12.2
million (US$2.0 million) in cash as of December 31, 2011, 2012 and 2013, respectively. For information regarding restrictions and potential tax liabilities on profit distribution from these entities, see Item 3. Key InformationD.
Risk FactorsRisks Relating to Doing Business in ChinaUnder the PRC enterprise income tax law, we may be classified as a PRC resident enterprise, which could result in unfavorable tax consequences to us and our shareholders
and have a material adverse effect on our results of operations and the value of your investment and PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries ability to
increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
Our
PRC subsidiaries are categorized as foreign-invested enterprises pursuant to applicable PRC laws, and accordingly their dividend remittances to foreign investors are conducted through the following four steps:
|
|
|
making up any losses incurred during the current year and past years and paying enterprise income taxes;
|
|
|
|
appropriating no less than 10% of the accumulative after-tax profits as a statutory reserve fund until the aggregate amount of such reserve fund reaches 50% of each PRC subsidiarys respective registered capital;
|
|
|
|
reserving a certain amount for the employee welfare funds at the discretion of the PRC subsidiary; and
|
|
|
|
distributing all or some of the remaining profits to the PRC subsidiarys direct foreign shareholders as dividends. In accordance with the EIT Law and its implementation rules, dividends generated after
January 1, 2008 and distributed to our overseas holding company by our PRC subsidiaries are subject to withholding tax at a rate of 10%. The economic benefits of our PRC variable interest entities are mainly transferred to Jiubang Computer
Technology (Guangzhou) Co., Ltd. through payment of service fees under the Business Cooperation Agreements and the Master Exclusive Services Agreements entered into between Jiubang Computer Technology (Guangzhou) Co., Ltd. and each variable interest
entity, which are subject to the business tax and related surcharges. Upon receipt of such service fees, they will become a portion of Jiubang Computer Technology (Guangzhou) Co., Ltd.s revenues and can be remitted to its parent company
through the four-step process above.
|
The following table sets forth a summary of our cash flows for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net cash provided by (used in) operating activities
|
|
|
(29,518,093
|
)
|
|
|
12,250,505
|
|
|
|
69,882,307
|
|
|
|
11,543,735
|
|
Net cash provided by (used in) investing activities
|
|
|
43,836,378
|
|
|
|
(9,714,048
|
)
|
|
|
(13,080,787
|
)
|
|
|
(2,160,792
|
)
|
Net cash provided by financing activities
|
|
|
12,557,201
|
|
|
|
|
|
|
|
620,001,707
|
|
|
|
102,416,986
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
(407,990
|
)
|
|
|
50,919
|
|
|
|
(1,013,190
|
)
|
|
|
(167,367
|
)
|
Cash at the beginning of year
|
|
|
54,543,506
|
|
|
|
81,011,002
|
|
|
|
83,598,378
|
|
|
|
13,809,468
|
|
Net increase in cash
|
|
|
26,467,496
|
|
|
|
2,587,376
|
|
|
|
675,790,037
|
|
|
|
111,632,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of year
|
|
|
81,011,002
|
|
|
|
83,598,378
|
|
|
|
759,388,415
|
|
|
|
125,442,030
|
|
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2013 was RMB69.9 million (US$11.5 million), primarily resulted
from RMB318.3 million (US$52.6 million) of cash we received mainly from the sale of our products and services, partially offset by our employee salaries and welfare payment of RMB103.1 million (US$17.0 million), our payments for cost of services,
including distribution fees and processing fees, of RMB79.1 million (US$13.1 million) and our general operating costs of RMB54.6 million (US$9.0 million).
83
Net cash provided by operating activities for the year ended December 31, 2012 was RMB12.3
million, primarily resulting from RMB212.0 million of cash we received mainly from the sale of our products and services, partially offset by our employee salaries and welfare payment of RMB85.3 million, our payments for cost of services, including
charges of distribution fees and processing fees, of RMB61.5 million, and our general operating costs of RMB46.0 million.
Net cash used
in operating activities for the year ended December 31, 2011 was RMB29.5 million, primarily resulting from RMB132.9 million of cash we received mainly from the sale of our products and services, partially offset by our employee salaries and
welfare payment of RMB65.1 million, our payments for cost of services, including charges of distribution fees and processing fees, of RMB49.3 million, and our general operating costs of RMB41.0 million.
Investing Activities
Net cash
used in investing activities was RMB13.1 million (US$2.2 million) for year ended December 31, 2013, primarily attributable to purchase of short term investment of RMB52.5 million (US$8.7 million), purchase of property, equipment and intangible
assets of RMB14.5 million (US$2.4 million), partially offset by proceeds from maturity of short-term investment of RMB40.0 million (US$6.6 million), receipt of cash for disposal of an equity method investment of RMB6.4 million (US$1.1 million),
receipt of government grants related to property and equipment of RMB4.2 million (US$0.7 million) and proceeds from loan repayment by related parties of RMB3.8 million (US$0.6 million).
Net cash used in investing activities was RMB9.7 million in the year ended December 31, 2012, primarily attributable to our purchase of
property, equipment and intangible assets of RMB5.1 million and non-interest bearing loan provided to related parties amounting to RMB4.8 million.
Net cash provided by investing activities was RMB43.8 million in the year ended December 31, 2011, primarily attributable to the proceeds
received from maturity of short-term investment, net of purchase of short-term investment, of RMB47.5 million and receipt of government grants for purchase of property and equipment of RMB5.4 million, partially offset by payment for the purchase of
property, equipment and intangible assets of RMB5.0 million and purchase of an equity method investment of RMB4.0 million.
Financing Activities
Net cash provided by financing activities was RMB620.0 million (US$102.4 million) in the year ended December 31, 2013,
primarily attributable to the proceeds from our initial public offering and concurrent private placement in connection with the IPO, net of underwriting discounts and commissions of RMB637.8 million (US$105.4 million) and payment of issuance costs
of RMB15.3 million (US$2.5 million).
There was no cash provided by financing activities in the year ended December 31, 2012.
Net cash provided by financing activities was RMB12.6 million in the year ended December 31, 2011, primarily attributable to the proceeds
from exercise of liability classified warrants in 2011, which amounted to RMB13.0 million, partially offset by repayment of borrowings from a related party, which amounted to RMB0.4 million.
Capital Expenditures
We incurred
capital expenditures of RMB5.0 million, RMB5.1 million and RMB14.5 million (US$2.4 million) in 2011, 2012 and 2013, respectively. Our capital expenditures are primarily used to purchase computers, servers and other equipment. As our business
expands, we may purchase new servers and other equipment in the future. We estimate that our capital expenditures for the property and equipment will be approximately RMB18.0 million in 2014.
C.
Research and Development, Patents and Licenses, Etc.
Our business success has benefited from our continuous efforts on intellectual property protection, including patent, trademark, copyright and
trade secrets. See Item 4. Information on the Company B. Business Overview Intellectual Property for a description of the protection of our intellectual property.
84
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits, including share-based compensation, for research and development
personnel, depreciation and rental of office premise and servers utilized by the research and development personnel, as well as other expenses we have incurred in researching and developing our GO platform, GO series products, 3G.cn and mobile
reading services. Research and development expenses increased from 2011 to 2012 and 2013, due to the need for higher levels of compensation for our research and development personnel, additional numbers of research and development personnel to meet
the needs of the rapid growth of our business as well as higher rental costs associated with our expanding research and development department. We expect our research and development expenses may increase as we expand our research and development
team to develop new products and services for our GO platform, improve technology for data analysis to further enhance user experience and develop enhanced features for our existing products and services to attract more users. We incurred RMB30.2
million, RMB34.0 million and RMB46.6 million (US$7.7 million) of research and development expenses in 2011, 2012 and 2013, respectively.
D.
Trend
Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events since the beginning of our fiscal year 2013 that are reasonably likely to have a material effect on our net revenues, operating income (loss), profitability, liquidity or capital resources, or that would cause the disclosed
financial information to be not necessarily indicative of future operating results or financial condition.
E.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We
have not entered into any derivative contracts that are indexed to our shares and classified as shareholders equity (deficit), or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. 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.
Tabular Disclosure of
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-2 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands of RMB)
|
|
Operating lease obligations, net of sublease rental income
(1)
|
|
|
34,918
|
|
|
|
13,621
|
|
|
|
11,747
|
|
|
|
9,550
|
|
|
|
|
|
(1)
|
Operating lease obligations refer to the lease of bandwidth and offices under operating lease agreements, where a significant portion of the risks and rewards of ownership are retained by the lessor. Payments made under
operating leases, net of sublease rental income are charged to the consolidated statements of comprehensive income (loss) on a straight-line basis over the period of the lease, including any free lease periods.
|
Other than the obligations set forth above, we did not have any other long-term debt obligations, operating lease obligations, purchase
obligations or other long-term liabilities as of December 31, 2013.
G.
Safe Harbor
See Forward Looking Statements on page 2 of this annual report.
85
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
|
Directors and Senior Management
|
The following table sets forth information
regarding our directors and executive officers as of the date of this annual report. There are no family relationships among any of the directors or executive officers of our company.
|
|
|
|
|
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Yuqiang Deng
|
|
38
|
|
Chairman and Chief Executive Officer
|
Xiangdong Zhang
|
|
37
|
|
Director and President
|
Yingming Chang
|
|
39
|
|
Director and Chief Operating Officer
|
Aihua Huang
|
|
37
|
|
Director and Vice President of Technology
|
Fei Yang
|
|
56
|
|
Director
|
David Ying Zhang
|
|
41
|
|
Director
|
Xiaosong Zhang
|
|
51
|
|
Independent Director
|
Zhi Zhu
|
|
37
|
|
Independent Director
|
Winston Li
|
|
47
|
|
Chief Financial Officer
|
Yuqiang Deng
is our co-founder and has been our director and chief executive officer since our
inception. Prior to co-founding our company in 2003, Mr. Deng worked as an engineer at China Telecom from 1999 to 2001, and as an engineer at China Mobile from 2001 to 2003. Mr. Deng received a bachelors degree in information science
from Peking University in China.
Xiangdong Zhang
is our co-founder and has been our director and president since our inception.
Mr. Zhang served as a manager at E-commerce China Dangdang Inc. from 1999 to 2000. Mr. Zhang worked for an internet start-up company which he co-founded from 2000 to 2001. From 2002 to 2003, Mr. Zhang worked for New Weekly magazine as
a journalist. Mr. Zhang received a bachelors degree in information science from Peking University in China.
Yingming Chang
has been our chief operating officer since 2005 and our director since 2006. Before joining us, Mr. Chang served as a senior product manager and regional manager at BenQ China from 1999 to 2005, responsible for the business operations of
multiple branches. Mr. Chang studied information science at Peking University in China.
Aihua Huang
has served as our
director and vice president of technology in charge of development of application software since May 2010. Prior to joining us, Mr. Huang worked at AT&T Mobile from 2007 to 2010, responsible for mobile communication platform architecture
design and software development. Mr. Huang is a member of Semiconductor Research Corporation, Materials Research Society and Institute of Electrical and Electronics Engineers. Mr. Huang received a bachelors degree in information
science from Peking University in China and a master of science degree from the electrical and computer engineering department of North Carolina State University in the U.S.
Fei Yang
has served as our director since January 2005. Mr. Yang joined and has acted as the partner of IDG Capital Partners, or
IDG Capital, since 1997. Prior to joining IDG Capital, Mr. Yang was the director of IPO Division of Guangdong Government Securities Regulatory Commission, vice president of Guangdong United Future Exchange and the director of Consultant
Division of Guangdong Foreign Trade and Economy Institute. Mr. Yang has profound experience and knowledge in economy research. He devoted himself to the project of Strategy of Pushing Regional Economy Forward launched by the central
government of China in 1996. Graduated from Sun Yat Sen University in China, Mr. Yang received a bachelors degree in science in 1982 and a masters degree in 1989.
David Ying Zhang
has served as our director since June 2006. Mr. Zhang is a founding managing partner for Matrix Partners China,
where he oversees all of Matrix Partners Chinas operations. Mr. Zhang is on the board of industry leading companies such as Kingsoft Internet Security Software Holdings Limited, Momo Technology Company Limited and Beijing Xin Wu Bu Er
Electronic Commerce Co., Ltd. Mr. Zhang was also instrumental in the establishment and growth of WI Harpers Beijing operations and co-manages the China portfolios. Prior to joining WI Harper, he also worked at ABN AMRO Capital and Solomon
Smith Barney, and at University of California, San Francisco conducting medical research. Mr. Zhang received an M.S. degree in biotechnology and business from Northwestern University and a bachelor of science degree in clinical science with
minor in chemistry from California State University, San Francisco.
86
Xiaosong Zhang
has served as our independent director since November 21, 2013.
Mr. Zhang is also an independent director and the chairman of the audit committee of Tarena International Inc., a Nasdaq listed education service provider. Mr. Zhang has served as the chief financial officer of iSoftStone Holdings Limited,
a NYSE-listed company, since July 2010, and was the companys independent director between February 2010 and July 2010. Prior to joining iSoftStone Holdings Limited, Mr. Zhang served as chief financial officer of BJB Career Education
Company Limited from 2009 to June 2010, as chief financial officer of Emarket Holding Group, Ltd. from 2008 to 2009, as chief financial officer of Chinacars, Inc. from 2007 to 2008 and as chief financial officer of Vimicro International Corporation,
a Nasdaq-listed company, from 2004 to 2007. From 2000 to 2004, Mr. Zhang worked as a manager and then a senior manager at the Beijing office of PricewaterhouseCoopers. From 1995 to 1999, Mr. Zhang was an auditor and then a senior auditor
at the Los Angeles office of KPMG LLP. Mr. Zhang received his masters degree in accountancy from the University of Illinois, his masters degree in professional meteorology from Saint Louis University, and his bachelors degree
in meteorology from Peking University. Mr. Zhang is a Certified Public Accountant in the State of California.
Zhi Zhu
has
served as our independent director since November 21, 2013. Mr. Zhu has been the chief executive officer of Beijing MobileWoo Information Technology Co. Ltd. since 2010 and currently serves as an independent non-executive director of Epro
Ltd, a Hong Kong-listed company. Mr. Zhu founded Beijing Mo Bi Tong Da Software Co., Limited in 2009; the company changed its name to Evans Interconnection (Beijing) Mobile Software Technology Co., Ltd in the same year, and Mr. Zhu served
as one of the companys general managers thereafter. From 2006 to 2008, Mr. Zhu worked as an account program manager and a partner manager at Philips Semiconductors. Mr. Zhu completed a three-year professional course in mobile
communications at the Beijing University of Posts and Telecommunications in China and received a masters degree in mobile communication systems from the University of Surrey in U.K.
Winston Li
has been our chief financial officer since July 2013. Mr. Li previously worked in the legal industry and has extensive
experience in corporate finance, governance and management. Mr. Li is a director of Le Gaga Holdings Limited, a Chinese greenhouse vegetable producer listed on the NASDAQ Global Select Market, an independent director of Country
Style Cooking Restaurant Chain Co., Ltd, a China-based quick service restaurant chain listed on the NYSE, an independent director of E-House (China) Holdings Limited, a leading real estate services company in China listed on the NYSE, and an
independent director of Leju Holdings Limited, a leading provider of real estate online services in China listed on the NYSE. From 2004 to 2010, Mr. Li was an independent director of ZTE Corporation, the largest public telecom equipment
manufacturing company in China. Mr. Li received his BA degree from Peking University and master of science degree from the University of Michigan, Ann Arbor. He received his juris doctor degree from Columbia Law School.
B.
|
Compensation of Directors and Executive Officers
|
For the fiscal year ended
December 31, 2013, we paid an aggregate of approximately RMB1.4 million (US$0.2 million) in cash, including salaries and bonuses, to our executive officers, and we did not pay any cash compensation to our non-executive directors. For details on
the share incentive grants to our officers and directors, see Share Incentive Plans. We set aside RMB0.1 million (US$20,452) for executive pension and retirement benefits in 2013 as required by PRC law.
Employment Agreements
We have entered
into employment agreements with our senior executive officers. We may terminate a senior executive officers employment for cause at any time without remuneration for certain acts of the officer, such as being convicted of any criminal conduct,
any act of gross or willful misconduct or any serious, willful, grossly negligent or persistent breach of any employment agreement provision, or engaging in any conduct which may make the continued employment of such officer detrimental to our
company. We may also terminate a senior executive officers employment by giving one months prior written notice if the senior executive officer is not qualified for his position after we provide relevant training to him. A senior
executive officer may terminate his or her employment at any time by giving one months prior written notice.
In connection with the
employment agreement, each senior executive officer has entered into an intellectual property ownership and confidentiality agreement and agreed to hold all information, know-how and records in any way connected with the products of our company,
including, without limitation, all software and computer formulae, designs, specifications, drawings, data, manuals and instructions and all customer and supplier lists, sales and financial information, business plans and forecasts, all technical
solutions and the trade secrets of our company, in strict confidence perpetually. Each officer also agrees that we shall own all the intellectual property developed by such officer during his or her employment.
87
Share Incentive Plans
We have adopted three share incentive plans, namely, the 2006 Plan, the 2010 Plan and the 2013 Plan. The purpose of these three share incentive
plans is to attract and retain the best available personnel by linking the personal interests of the members of the board, officers, employees and consultants to the success of our business and by providing such individuals with an incentive for
outstanding performance to generate superior returns for our shareholders.
2006 Global Share Plan
We adopted the 2006 Plan in June 2006, which was amended and restated in October 2013. Under the 2006 Plan, the maximum number of shares in
respect of which awards that may be granted is 5,224,126.
The following paragraphs summarize the terms of the 2006 Plan.
Types of Awards.
The Plan permits the awards of options and rights to purchase restricted shares.
Plan Administration.
Our board or a committee of our board duly authorized for the purpose of the 2006 Plan can act as the plan
administrator. The plan administrator will determine the participants to receive the awards, the number of awards to be granted to each participant, and the terms and conditions of each award grant. The plan administrator can modify or amend each
award grant and construe and interpret the terms of the 2006 Plan and the award grant.
Award Agreement.
Options or rights
to purchase restricted shares granted under the 2006 Plan are evidenced by an award agreement that sets forth the terms and conditions for each grant.
Exercise Price and Purchase Price.
The excises price of an option may be determined by the plan administrator at its discretion.
However, the exercise price in respect of certain incentive stock option shall not be less than the fair market value on the effective date of the 2006 Plan and may be varied at the election of the plan administrator. The purchase price in respect
of restricted shares shall be determined by the plan administrator.
Eligibility.
We may grant awards to our employees,
directors or consultants or employees, directors or consultants or our parent companies or subsidiaries.
Term of the Awards.
The option granted under the 2006 Plan shall be valid and effective for a period of ten years from the grant date. The right to purchase restricted shares will expire upon 30 days from the date of the grant.
Acceleration of Awards upon Change in Control.
If a change in control of our company occurs and the successor entity refuses to
assume or substitute for an award, unless the award agreement otherwise provides, the participant will vest in and have the right to exercise the awards as to all the underlying shares and all restrictions on restricted shares will lapse. If the
participant does not exercise the award within a period of time as determined by the plan administrator, the award will terminate upon expiration of such period for no consideration.
Vesting Schedule.
In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions.
Awards may not be transferred in any manner by the recipient other than by will or the laws of
descent and distribution, except as otherwise provided by the plan administrator.
Termination.
The plan administrator may
at any time terminate the operation of the 2006 Plan.
88
2010 Global Share Plan
We adopted the 2010 Plan in June 2010, which was amended and restated in October 2013. Under the 2010 Plan, the maximum number of shares in
respect of which awards under the 2010 Plan may be granted is 5,373,659.
The terms and conditions under 2010 Plan are substantially the
same as those stipulated in the 2006 Plan except the exercise price of certain incentive option and the purchase price of a restricted share, which shall not be less than US$0.8826.
We have historically determined the exercise price of shares granted under the 2006 Plan and the 2010 Plan based on a number of factors, such
as the type of awards, the length of time in which such employees were with our company the function of such employees and the price of our preferred share issuances or service time and type of a consultant. Certain employees who joined our company
near its inception were issued options with lower exercise prices than other employees. In addition, employees who we consider to be our key personnel may also be issued options with a lower exercise price.
2013 Share Incentive Plan
We
adopted the 2013 Plan in October 2013. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2013 Plan, or the Award Pool, is 4,243,070, which equals to three percent of our total outstanding shares on an
as-converted basis as of the date of adoption of the 2013 Plan, plus an automatic annual increase of a number of shares on the first day of each year, beginning on January 1, 2014, equal to the total number of shares underlying the awards
granted in the year immediately prior to each annual increase; provided that shares underlying the awards issued under the 2013 Plan but remain unvested as of January 1st of a given year should be counted as part of the existing Award Pool and
should not be counted as part of the number of shares to be added on January 1st of the same year. The following paragraphs summarize the terms of the 2013 Plan.
Types of Awards.
The following briefly describe the principal features of the various awards that may be granted under the 2013
Plan.
|
|
|
Options
. Options provide for the right to purchase a specified number of our ordinary shares at a specified price and usually will become exercisable at the discretion of our plan administrator in one or more
installments after the grant date. The option exercise price may be paid, subject to the discretion of the plan administrator, in cash or check, in our ordinary shares which have been held by the option holder for such period of time as may be
required by our plan administrator, in other property with value equal to the exercise price, through a broker-assisted cashless exercise, or by any combination of the foregoing.
|
|
|
|
Restricted
Shares
.
A restricted share award is the grant of our ordinary shares which are subject to certain restrictions and may be subject to risk of forfeiture. Unless otherwise determined by our plan
administrator, a restricted share is nontransferable and may be forfeited or repurchased by us upon termination of employment or service during a restricted period. Our plan administrator may also impose other restrictions on the restricted shares,
such as limitations on the right to vote or the right to receive dividends.
|
|
|
|
Restricted Share Units.
A restricted share unit award is the grant of the right to receive an ordinary share at a future date and may be subject to forfeiture. Our plan administrator has the discretion to set
performance objectives or other vesting criteria that will determine the number or value of restricted share units to be granted. Unless otherwise determined by our plan administrator, a restricted share unit is nontransferable and may be forfeited
or repurchased by us upon termination of employment or service during a restricted period. Our plan administrator, at the time of grant, specifies the dates on which the restricted share units become fully vested.
|
Plan Administration.
Our board or a committee of one or more members of our board duly authorized for the purpose of the 2013
Plan can act as the plan administrator.
Award Agreement.
Options, restricted shares or restricted share units granted under
the 2013 Plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant.
Exercise
Price and Purchase Price.
The exercise price in respect of any option shall be determined by the plan administrator and set forth in the award agreement which may be a fixed or variable price related to the fair market value of the shares.
The exercise price per share subject to an option may be amended or adjusted in the absolute discretion of the plan administrator, the determination of which shall be final, binding and conclusive. The purchase price in respect of restricted shares
shall be determined by the plan administrator.
89
Eligibility.
We may grant awards to our employees, consultants or directors.
Term of the Awards.
The 2013 Plan shall be valid and effective for a period of ten years from the date of effectiveness. The
term of each option, restricted share or restricted share unit grant shall be ten years from the date of the grant.
Vesting
Schedule.
In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions.
Awards for options or restricted shares may not be transferred in any manner by the award holders and may
be exercised only by such holders, subject to limited exceptions. Restricted shares may not be transferred during the period of restriction.
Termination.
The plan administrator may at any time terminate the operation of the 2013 Plan.
The following table summarizes, as of March 31, 2014, the outstanding options granted to our executive officers, directors and other
individuals as a group.
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
Underlying Options
Awarded
|
|
|
Exercise Price
(US$/Share)
|
|
|
Date of Grant
|
|
|
Date of Expiration
|
|
Aihua Huang
|
|
|
*
|
|
|
|
1.3
|
|
|
|
December 1, 2010
|
|
|
|
November 30, 2020
|
|
|
|
|
*
|
|
|
|
1.1
|
|
|
|
December 1, 2011
|
|
|
|
November 30, 2021
|
|
Xiaosong Zhang
|
|
|
*
|
|
|
|
1.87
|
|
|
|
November 21, 2013
|
|
|
|
November 21, 2023
|
|
Zhi Zhu
|
|
|
*
|
|
|
|
1.87
|
|
|
|
November 21, 2013
|
|
|
|
November 21, 2023
|
|
Other individuals as a group
|
|
|
234,100
|
|
|
|
0.87
|
|
|
|
December 1, 2006
|
|
|
|
November 30, 2016
|
|
|
|
|
|
|
|
|
|
110,100
|
|
|
|
1.3
|
|
|
|
December 31, 2007
|
|
|
|
December 31, 2017
|
|
|
|
|
141,700
|
|
|
|
1.3
|
|
|
|
July 1, 2008
|
|
|
|
June 30, 2018
|
|
|
|
|
297,500
|
|
|
|
1.3
|
|
|
|
December 31, 2008
|
|
|
|
December 31, 2018
|
|
|
|
|
72,700
|
|
|
|
1.3
|
|
|
|
July 1, 2009
|
|
|
|
June 30, 2019
|
|
|
|
|
413,400
|
|
|
|
1.3
|
|
|
|
December 1, 2009
|
|
|
|
November 30, 2019
|
|
|
|
|
256,000
|
|
|
|
1.3
|
|
|
|
December 1, 2010
|
|
|
|
November 30, 2020
|
|
|
|
|
17,400
|
|
|
|
1.5
|
|
|
|
July 1, 2011
|
|
|
|
June 30, 2021
|
|
|
|
|
93,119
|
|
|
|
1.9
|
|
|
|
July 1, 2011
|
|
|
|
June 30, 2021
|
|
|
|
|
150,000
|
|
|
|
1.2
|
|
|
|
December 1, 2011
|
|
|
|
November 30, 2021
|
|
|
|
|
377,150
|
|
|
|
1.9
|
|
|
|
December 1, 2011
|
|
|
|
November 30, 2021
|
|
|
|
|
667,430
|
|
|
|
0.935
|
|
|
|
December 1, 2011
|
|
|
|
Five years after the
vesting date
|
|
|
|
|
75,675
|
|
|
|
1.9
|
|
|
|
July 1, 2012
|
|
|
|
June 30, 2022
|
|
|
|
|
236,361
|
|
|
|
1.9
|
|
|
|
December 1, 2012
|
|
|
|
November 30, 2022
|
|
|
|
|
159,000
|
|
|
|
0.0001
|
|
|
|
June 1, 2013
|
|
|
|
July 21, 2020
|
|
|
|
|
3,072,300
|
|
|
|
0.8826
|
|
|
|
June 1, 2013
|
|
|
|
June 1, 2023
|
|
|
|
|
1,612,500
|
|
|
|
0.8826
|
|
|
|
September 1, 2013
|
|
|
|
September 1, 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,437,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The aggregate number of ordinary shares underlying the outstanding options and restricted shares held by this individual is less than 1% of our total outstanding shares.
|
The following table summarizes, as of March 31, 2014, the outstanding restricted shares granted to our executive officers, directors and
other individuals as a group.
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares
Granted
|
|
|
Date of Grant
|
|
Xiaosong Zhang
|
|
|
*
|
|
|
|
November 21, 2013
|
|
Zhi Zhu
|
|
|
*
|
|
|
|
November 21, 2013
|
|
Other individuals as a group
|
|
|
3,074,004
|
|
|
|
February 25, 2014
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,108,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The aggregate number of ordinary shares underlying the outstanding options and restricted shares held by this individual is less than 1% of our total outstanding shares.
|
90
Other Equity Based Awards
In September 2013, we granted share purchase rights to certain officers to purchase an aggregate of 2,831,374 and 13,266,202 ordinary shares of
our company at a purchase price of US$0.28 and US$0.8826 per share, respectively. The share purchase rights are exercisable as of the date of this report. Twenty-five percent of these ordinary shares after being purchased will become transferable on
each of the first, second, third and fourth anniversary of the grant date. In the event that the officer terminates the employment with us, any ordinary shares that are not transferable will be forfeited, and we will repurchase these ordinary shares
at the original purchase price.
In September 2013, we granted share purchase rights to an officer to purchase an aggregate of 163,536
ordinary shares of our company at a purchase price of US$0.8826 per share. The share purchase rights are not exercisable as of the date of this report.
Our board of directors currently consists of eight directors. A
director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested provided that the nature of
the interest has been disclosed prior to boards consideration. A director may exercise all the powers of the company to borrow money, mortgage its business, property and uncalled capital, and issue debentures or other securities whenever money
is borrowed or as security for any obligation of the company or of any third party. See Item 6. Directors, Senior Management and Employees B. Compensation of Directors and Executive Officers for a description of the
employment agreements we have entered into with our senior executive officers.
Committees of the Board of Directors
We have established an audit committee, a compensation committee and a corporate governance and nominating committee under the board of
directors. We have adopted a charter for each of the three committees. Each committees members and functions are described below.
Audit Committee
. Our audit committee consists of Messrs. Xiaosong Zhang, Zhi Zhu and Yingming Chang and is chaired by
Mr. Xiaosong Zhang. Mr. Xiaosong Zhang and Mr. Zhi Zhu both satisfy the independence requirements of NASDAQ and meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. We
have determined that Mr. Xiaosong Zhang qualifies as an audit committee financial expert. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The
audit committee is responsible for, among other things:
|
|
|
selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;
|
|
|
|
reviewing with the independent registered public accounting firm any audit problems or difficulties and managements response;
|
|
|
|
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
|
|
|
|
discussing the annual audited financial statements with management and the independent registered public accounting firm;
|
|
|
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of any material control deficiencies;
|
|
|
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
|
|
meeting separately and periodically with management and the independent registered public accounting firm; and
|
|
|
|
reporting regularly to the board.
|
91
Compensation Committee.
Our compensation committee consists of Messrs. Zhi Zhu,
Xiaosong Zhang and Yuqiang Deng, and is chaired by Mr. Zhu. Mr. Zhi Zhu and Mr. Xiaosong Zhang both satisfy the independence requirements of NASDAQ. The compensation committee assists the board in reviewing and approving
the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our directors may not be present at any committee meeting during which their compensation is deliberated upon. The compensation
committee is responsible for, among other things:
|
|
|
reviewing the total compensation package for our executive officers and making recommendations to the board with respect to it;
|
|
|
|
approving and overseeing the total compensation package for our executives other than the three most senior executives;
|
|
|
|
reviewing the compensation of our directors and making recommendations to the board with respect to it; and
|
|
|
|
periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, and employee pension and welfare benefit plans.
|
Corporate Governance and Nominating Committee.
Our nominating committee consists of Messrs. Yingming Chang, Xiaosong Zhang, and
Zhi Zhu, and is chaired by Mr. Chang. Mr. Xiaosong Zhang and Mr. Zhi Zhu both satisfy the independence requirements of NASDAQ. The nominating committee assists the board in selecting individuals qualified to become our
directors and in determining the composition of the board and its committees. The nominating committee is responsible for, among other things:
|
|
|
recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board;
|
|
|
|
reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experience and availability of service to us;
|
|
|
|
selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the nominating committee itself; and
|
|
|
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
|
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 owe to us a duty to act with skill and care. It was previously considered that a director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill
and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association.
Terms of Directors and Officers
Our
officers are elected by and serve at the discretion of the board. Our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution or the unanimous written resolution of all
shareholders. A director will be removed from office automatically if, among other things, the director (1) becomes bankrupt or makes any arrangement or composition with his creditors; or (2) dies or is found to be or becomes of unsound
mind.
92
The following table sets forth the numbers of our employees,
categorized by function, as of December 31, 2013:
|
|
|
|
|
Functions
|
|
Number of
Employees
|
|
Management
|
|
|
60
|
|
Research and development
|
|
|
323
|
|
Sales and marketing
|
|
|
148
|
|
General and administration
|
|
|
81
|
|
Editing
|
|
|
150
|
|
|
|
|
|
|
Total
|
|
|
762
|
|
|
|
|
|
|
We had a total of 854, 1,298 and 762 employees as of December 31, 2011, 2012 and 2013, respectively.
We have developed a corporate culture that encourages initiative, technical superiority and self-development. In addition, we periodically
evaluate our employees performance and provide them with training sessions tailored to each job function to enhance performance and service quality.
As required by regulations in China, we participate in various employee social security plans that are organized by municipal and provincial
governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required under PRC law to make contributions to employee benefit plans at specified
percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. We have accrued, in the aggregate, RMB0.1 million (US$20,452) for pension or similar retirement
benefits for our executive officers and directors, as required under PRC laws, for the fiscal year ended December 31, 2013. We believe that we maintain a good working relationship with our employees and we have not experienced any significant
labor disputes.
Class A Ordinary Shares
As of March 31, 2014, we had 58,995,186 Class A ordinary shares outstanding. In addition, as of March 31, 2014, we have granted,
and have outstanding, options and share purchase rights to purchase a total of 24,698,547 Class A ordinary shares and 3,108,763 restricted shares to our directors, executive officers, other employees and consultants. For information regarding
the Share Incentive Plans, see Item 6. B. Compensation of Directors and Executive Officers.
Class B Ordinary Shares
As of March 31, 2014, we had 141,435,672 Class B ordinary shares outstanding.
Beneficial Ownership
The following table
sets forth information concerning the beneficial ownership of our ordinary shares as of March 31, 2014, by:
|
|
|
each of our directors and executive officers; and
|
|
|
|
each person known to us to beneficially own more than 5% of our ordinary shares.
|
Beneficial
ownership is determined in accordance with the rules and regulations of the SEC. 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 or that would become unrestricted shares within 60 days after March 31, 2014, the most recent practicable date, 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.
93
The calculations in the table below assume that there were 200,430,858 ordinary shares
outstanding as of March 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
Beneficially Owned As of March 31, 2014
|
|
|
Voting Power As of March 31,
2014
|
|
|
|
Number
|
|
|
%
|
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Yuqiang Deng
(1)
|
|
|
45,909,710
|
|
|
|
22.1
|
|
|
|
26.7
|
|
Xiangdong Zhang
(2)
|
|
|
14,900,039
|
|
|
|
7.3
|
|
|
|
7.1
|
|
Yingming Chang
(3)
|
|
|
7,442,111
|
|
|
|
3.7
|
|
|
|
3.0
|
|
Aihua Huang
(4)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Fei Yang
(5)
|
|
|
40,540,928
|
|
|
|
20.2
|
|
|
|
27.5
|
|
David Ying Zhang
(6)
|
|
|
13,786,900
|
|
|
|
6.9
|
|
|
|
9.4
|
|
Xiaosong Zhang
(7)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Zhi Zhu
(8)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Winston Li
(9)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
|
|
|
123,507,131
|
|
|
|
57.0
|
|
|
|
73.1
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
IDG funds
(10)
|
|
|
40,540,928
|
|
|
|
20.2
|
|
|
|
27.5
|
|
Freedom First Holdings Limited
|
|
|
45,909,710
|
|
|
|
22.1
|
|
|
|
26.7
|
|
CBC Mobile Venture Limited
(11)
|
|
|
20,583,161
|
|
|
|
10.3
|
|
|
|
14.0
|
|
WI Harper INC fund VI Ltd.
(12)
|
|
|
13,786,900
|
|
|
|
6.9
|
|
|
|
9.4
|
|
JAFCO Asia Technology Fund III
(13)
|
|
|
13,552,715
|
|
|
|
6.8
|
|
|
|
9.2
|
|
Hamamelis Holdings Limited
|
|
|
14,900,039
|
|
|
|
7.3
|
|
|
|
7.1
|
|
|
For each person and group included in this column, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the total number of shares
outstanding, which is 200,430,858 as of March 31, 2014, and the number of shares such person or group has the right to acquire upon exercise of option or other right within 60 days after March 31, 2014.
|
(1)
|
Represents 38,895,676 Class B ordinary shares held by Freedom First Holdings Limited, a BVI company wholly owned and controlled by Mr. Yuqiang Deng and 7,014,034 Class A ordinary shares issuable to
Mr. Deng upon his exercise of share purchase rights with 60 days after March 31, 2014. The business address of Mr. Deng is Floor 16, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou
510055, China.
|
(2)
|
Represents 10,028,692 Class B ordinary shares held by Hamamelis Holdings Limited, a BVI company wholly owned and controlled by Mr. Xiangdong Zhang and 4,871,347 Class A ordinary shares issuable to
Mr. Zhang upon his exercise of share purchase rights within 60 days after March 31, 2014. The business address of Mr. Zhang is Floor 17, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou
510055, China.
|
(3)
|
Represents 4,047,600 Class B ordinary shares held by C-Cycle Limited, a BVI company wholly owned and controlled by Mr. Yingming Chang and 3,394,511 Class A ordinary shares issuable to Mr. Chang upon his
exercise of share purchase rights within 60 days after March 31, 2014. The business address of Mr. Chang is Floor 17, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou 510055, China.
|
(4)
|
The business address of Mr. Aihua Huang is Floor 17, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou 510055, China.
|
(5)
|
Represents (i) 21,428,600 Class B ordinary shares held by IDG Technology Venture Investment III, L.P., (ii) 14,729,964 Class B ordinary shares held by IDG-Accel China Growth Fund L.P., (iii) 3,010,129
Class B ordinary shares held by IDG-Accel China Growth Fund-A L.P., and (iv) 1,372,235 Class B ordinary shares held by IDG-Accel China Investors L.P. We refer to these funds collectively as the IDG funds. Mr. Fei Yang is associated with
IDG Technology Venture Investment III, L.P. and IDG-Accel China Growth Fund L.P. and is deemed to have the voting and investment power over shares held by IDG funds. The business address of Mr. Yang is Room 1002, No. 88 Taoyu Road, Tianhe
District, Guangzhou, China.
|
(6)
|
Represents 13,786,900 Class B ordinary shares held by WI Harper INC Fund VI Ltd. Mr. Zhang is deemed to have the voting and investment power over shares held by WI Harper INC Fund VI Ltd. The business address of
Mr. Zhang is Suite 2601, Taikang Financial Tower, No. 38 Yard East 3rd Ring Road, Chaoyang, District, Beijing, China.
|
(7)
|
The business address of Mr. Xiaosong Zhang is Building 16, DongQu, 10 Xibeiwang Dong Lu, Haidian District, Beijing 100193, China.
|
(8)
|
The business address of Mr. Zhi Zhu is No.15, Sanai Center, Guanghuali street, Chaoyang district, Beijing, China.
|
(9)
|
The business address of Mr. Winston Li is Floor 17, Tower A, China International Center, No. 33 Zhongshan 3rd Road, Yuexiu District, Guangzhou 510055, China.
|
94
(10)
|
Represents (i) 21,428,600 Class B ordinary shares held by IDG Technology Venture Investment III, L.P., (ii) 14,729,964 Class B ordinary shares held by IDG-Accel China Growth Fund L.P., (iii) 3,010,129
Class B ordinary shares held by IDG-Accel China Growth Fund-A L.P., and (iv) 1,372,235 Class B ordinary shares held by IDG-Accel China Investors L.P. The voting and dispositive power in the shares held by IDG Technology Venture Investment III,
L.P., IDG-Accel China Growth Fund L.P., IDG-Accel China Growth Fund-A L.P. and IDG-Accel China Investors L.P. are ultimately controlled by Mr. Quan Zhou and Mr. Chi Sing Ho. IDG Technology Venture Investment III, L.P. is incorporated in
Delaware. IDG-Accel China Growth Fund L.P., IDG-Accel China Growth Fund-A L.P. and IDG-Accel China Investors L.P. are incorporated in the Cayman Islands. The registered address of IDG Technology Venture Investment III, L.P. is the Corporation Trust
Company, 1209 Orange Street, Wilmington, Delaware 19801. The registered address of IDG-Accel China Growth Fund L.P. is Intertrust SPV (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. The registered address of
IDG-Accel China Growth Fund-A L.P. is Intertrust SPV (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. The registered address of IDG-Accel China Investors L.P. is Intertrust SPV (Cayman) Limited, 190 Elgin
Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands.
|
(11)
|
Represents 20,583,161 Class B ordinary shares. The voting and dispositive power in the shares held by CBC Mobile Venture Limited is controlled by China Broadband Capital Partners L.P., which is ultimately controlled by
Mr. Suring Tian. The registered address of CBC Mobile Venture Limited is Box 957, Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands.
|
(12)
|
Represents 13,786,900 Class B ordinary shares. Mr. David Ying Zhang is deemed to have the voting and investment power over shares held by WI Harper INC Fund VI Ltd., which is ultimately controlled by Pete Yeau-Hwan
Liu and Mr. David Ying Zhang, general partners of WI Harper Fund 6. The registered address of WI Harper INC Fund VI Ltd. is M&C Corporate Services Limited, PO Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman
Islands.
|
(13)
|
Represents 13,552,715 Class B ordinary shares. JAFCO Asia Technology Fund III is an exempted company organized and existing under the laws of the Cayman Islands and is wholly owned by JAFCO Asia Technology Fund III
L.P., a limited partnership established in the Cayman Islands. JAFCO Asia Technology Holdings III Limited, a Cayman Islands company and a wholly-owned subsidiary of JAFCO Investment (Asia Pacific) Ltd, is the sole general partner of JAFCO Asia
Technology Fund III L.P. and controls the voting and the investment power over the securities owned by JAFCO Asia Technology Fund IR. JAFCO Asia Technology Holdings III Limited has appointed JAFCO Investment (Asia Pacific) Ltd to manage JAFCO Asia
Technology Fund III L.P. and voting and investment power over the securities owned by JAFCO Asia Technology Fund III is exercised by an investment committee and a listed portfolio divestment committee of JAFCO Investment (Asia Pacific) Ltd. As of
the date of this prospectus, Messrs. Yoshiyuki Shibusawa, Junitsu Uchikata and Ui Chel Joung are members of such investment committee and Messrs. Shibusawa and Uchikata are members of such listed portfolio divestment committee. Each member of these
committees may be deemed to have shared voting and investment power over the securities owned by JAFCO Asia Technology Fund III, and each such person disclaims beneficial ownership of the securities held by JAFCO Asia Technology Fund III,
except to the extent of each persons pecuniary interest therein. JAFCO Investment (Asia Pacific) Ltd is wholly owned by JAFCO Co., Ltd., a public company listed on the Tokyo Stock Exchange. The registered address of JAFCO Asia Technology
Fund III is 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands.
|
As of March 31, 2014, 200,430,858 of
our ordinary shares were issued and outstanding, including 141,435,672 Class B ordinary shares and 58,995,186 Class A ordinary shares. Based on a review of the register of members maintained by our Cayman Islands registrar, we believe that as
of March 31, 2014, 21,428,600 Class B ordinary shares and 48,300,000 Class A ordinary shares representing approximately 34.8% of our total outstanding shares were held by two record holders in the United States, which includes 48,300,000
Class A ordinary shares held of record by JPMorgan Chase Bank, N.A., the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our
ordinary shares in the United States. None of our existing shareholders have different voting rights from other shareholders in the same class. See B. Compensation of Directors and Executive Officers Employee Agreements
for a description of the employment agreements we have entered into with our senior executive officers.
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 ten votes per share.
We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
95
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to Item 6. Directors, Senior
Management and Employees E. Share Ownership.
B.
|
Related Party Transactions
|
Contractual Arrangements
The PRC government extensively regulates foreign ownership of, and the licensing and permit requirements pertaining to, companies that provide
internet-based services such as our GO platform. To comply with these restrictions, we conduct our operations primarily through contractual arrangements between Jiubang Computer, our PRC subsidiary, and Jiubang Digital, Sanju Advertising, Hengye
software and Zhiteng Computer, our variable internal entities and their respective shareholders.
The following is a summary of the
currently effective contractual arrangements, as amended and restated, among Sungy Mobile Limited, formerly known as Sungy Data Ltd., Jiubang Computer, Jiubang Digital and its shareholders and subsidiaries. Except explicitly indicated otherwise
below, the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Sanju Advertising and its shareholders, the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Hengye Software and its shareholders, and the
contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Zhiteng Computer and its shareholders are substantially the same as the contractual arrangements among Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its
shareholders and subsidiaries.
Contractual Arrangements with Jiubang Digital
Master Exclusive Service Agreement
Under
the master exclusive service agreement between Jiubang Computer and Jiubang Digital and its subsidiaries, Jiubang Computer has the exclusive right to provide Jiubang Digital and its subsidiaries services related to Jiubang Digitals business,
including but not limited to technology development, technical consulting services, network development, updating and daily maintenance, market research and consulting services. Jiubang Computer has the right to determine the service fees based on
the technical difficulty and complexity of the services and the actual labor costs it incurs for providing the services during the relevant period. The term of this agreement is ten years and will be automatically extended upon the expiration.
Jiubang Computer may terminate the agreement at any time with a 30-day prior written notice to Jiubang Digital, whereas none of Jiubang Digital and its subsidiaries can terminate this agreement.
Business Cooperation Agreement
Pursuant
to the business cooperating agreement by and among Sungy Mobile Limited, Jiubang Computer, Jiubang Digitals shareholders, including Sanju Advertising, Mr. Yuqiang Deng and Mr. Xiangdong Zhang, Jiubang Digital and its subsidiaries,
Jiubang Digital and its subsidiaries shall accept and follow our suggestions on their daily operations and financial management. The nominee shareholders of Jiubang Digital must appoint candidates recommended by us as Jiubang Digitals board of
directors, and Jiubang Digital must appoint candidates recommended by us as the directors of Jiubang Digitals subsidiaries. Also, we have the right to appoint senior executives of Jiubang Digital and its subsidiaries. In addition, Jiubang
Digital and its subsidiaries agree not to engage in any transaction that may materially affect their assets, obligations, rights or operation without our prior written consent. To ensure sufficient cashflow required by the business operations of
Jiubang Digital, Sungy Mobile Limited agrees that it will, to the extent permissible under PRC law, through itself or any party designated by it, provide financial support to Jiubang Digital. The agreement shall be in effect as long as Jiubang
Digital exists. None of Jiubang Digital, its shareholders and subsidiaries can terminate this agreement. Jiubang Computer may terminate the agreement by providing a 30-day prior written notice to Jiubang Digital and its shareholders.
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Proxy Agreement and Power of Attorney
Under the proxy agreement and power of attorney by and among Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its shareholders,
including Sanju Advertising, Mr. Yuqiang Deng and Mr. Xiangdong Zhang, each of Jiubang Digitals shareholders irrevocably nominates, appoints and constitutes Sungy Mobile Limited as its attorney-in-fact to exercise on such
shareholders behalf any and all rights that such shareholder has in respect of its equity interests in Jiubang Digital. Each shareholder further covenants with and undertakes that, if the shareholder receives any dividends, interest, any other
forms of capital distributions, residual assets upon liquidation, or proceeds or consideration from the transfer of equity interest as a result of, or in connection with, such shareholders equity interests in Jiubang Digital, the shareholder
shall, to the extent permitted by applicable laws, remit all such dividends, interest, capital distributions, assets, proceeds or consideration to Jiubang Computer or Sungy Mobile Limited, to the extent permitted by law, without any compensation.
The proxy agreement and power of attorney will remain effective as long as Jiubang Digital exists. Jiubang Digitals shareholders do not have the right to terminate this agreement or revoke the appointment of the attorney-in-fact without the
prior written consent of Sungy Mobile Limited.
Loan Agreements
Under loan agreements by and among Jiubang Computer, Jiubang Digital and each of the individual shareholders of Jiubang Digital, Jiubang
Computer made interest-free loans in an aggregate amount of RMB10.0 million to the two individual shareholders of Jiubang Digital exclusively for the purpose of the capital contribution of Jiubang Digital. The loans can only be repaid with the
proceeds derived from the sale of all of the equity interests in Jiubang Digital to Jiubang Computer or its designated representatives pursuant to the equity option agreement. Each of the loan agreements has an indefinite term until the full
repayment of the loan thereunder.
Except the foregoing, there are not any other loan agreements between our subsidiaries and shareholders
of our variable interest entities.
Exclusive Option Agreement
Under the exclusive option agreement between Sungy Mobile Limited, Jiubang Computer, Jiubang Digital and its shareholders, Sungy Mobile Limited
has the right to require each of the shareholders to transfer to Sungy Data Ltd., Jiubang Computer or a third party designated by Sungy Mobile Limited, to the extent permitted under PRC law, all or part of such shareholders equity interests in
Jiubang Digital. Also, Sungy Mobile Limited has the right to require Jiubang Digital to transfer any and all of its assets to Jiubang Computer or a third party designated by Sungy Mobile Limited and has the sole discretion as to when to exercise
such options, either in part or in full. Without Sungy Mobile Limiteds prior written consent, Jiubang Digitals shareholders shall not transfer their equity interests in Jiubang Digital, and Jiubang Digital shall not transfer its assets.
The transfer price will be the minimum amount of consideration permitted under PRC law at the time of such share transfer. The agreement will remain effective as long as Jiubang Digital exists. Sungy Mobile Limited and Jiubang Computer may terminate
the agreement at any time with a ten-day prior written notice to Jiubang Digital and its shareholders, whereas none of Jiubang Digital and its shareholders can terminate this agreement.
Equity Pledge Agreement
Under the equity
pledge agreement between Jiubang Computer, Jiubang Digital and its shareholders, the shareholders of Jiubang Digital have pledged all of their equity interests in Jiubang Digital to Jiubang Computer to guarantee the performance of all the
obligations of Jiubang Digital and its shareholder and subsidiaries under the master exclusive service agreement, business cooperation agreement, loan agreements and exclusive option agreement. This pledge will remain effective until all the
guaranteed obligations are performed or all the principal agreements are terminated.
Spousal Consent Letters
Pursuant to spousal consent letters, the spouse of each of Mr. Yuqiang Deng and Mr. Yingming Chang acknowledged that certain equity
interests in Jiubang Digital (directly or through Sanju Advertising) held by and registered in the name of her spouse will be disposed of pursuant to relevant arrangements under the business cooperation agreement, the proxy agreement and power of
attorney, the exclusive option agreement, the equity pledge agreement and the loan agreement. These spouses undertake not to take any action to interfere with the disposition of such equity interests, including, without limitation, claiming that
such equity interests constitute communal property of marriage.
97
Transactions with Affiliates
Our co-founders, Mr. Yuqiang Deng and Mr. Xiangdong Zhang, borrowed RMB3,511,093 and RMB1,265,454, respectively, from our company in
2012. The outstanding amounts due to us from Mr. Deng and Mr. Zhang as of December 31, 2012 were non-interest bearing and were repaid to us in full in cash on August 21, 2013. Mr. Zhang borrowed an additional RMB517,500 from
our company during the six-month period ended June 30, 2013 and subsequently repaid the full amount in cash on August 30, 2013.
Shareholders
Agreements
We entered into our second amended and restated shareholders agreement in September 2013 and a supplementary agreement in
October 2013 with our shareholders, which consist of holders of ordinary shares, series A, series B and series C preferred shareholders.
Under this shareholders agreement, series A, series B and series C preferred shareholders, subject to certain conditions, have a right of
first refusal with respect to any issuance of new shares by us, excluding the issuance of securities in connection with our initial public offering, under our 2006 Plan and 2010 Plan. In addition, Series A, Series B and Series C preferred
shareholders have a right of first refusal and a co-sale right with respect to any transfer of our shares by other shareholders, and holders of more than 80% of our preferred shares also have a drag-along right with respect to the disposition of all
or substantially all of the companys assets or business or a change of control of our company.
Except for the registration rights,
all preferred shareholders rights were terminated upon the completion of our initial public offering.
Registration Rights in Connection with
Pre-IPO Financings
Pursuant to our current second amended and restated shareholders agreement dated September 1, 2013, as
amended, we have granted certain registration rights to holders of our registrable securities, which include our ordinary shares issued or issuable pursuant to conversion of our preferred shares. Set forth below is a description of the registration
rights granted under the agreement.
Demand Registration Rights.
(1) holders of at least 80% of our outstanding registrable
securities or (2) any time after six months following the completion of our initial public offering, holders of at least 25% of our outstanding registrable securities, have the right to demand that we file a registration statement covering the
registration of all or a part of registrable securities then outstanding. We, however, are not obligated to effect a demand registration if we have effected three demand registrations and such registration have been declared effective. We have the
right to defer filing of a registration statement for a period of not more than 60 days after the receipt of the request of the initiating holders if our president or chief executive officer determines in good faith that filing of a registration
will be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any other securities during such 60-day period. Further, if the registrable securities are
offered by means of an underwriting and the underwriter advises the initiating holders in writing that marketing factors require a limitation of the number of securities to be underwritten, the number of the registrable securities will be allocated
among the holders on a pro rata basis according to the number of registrable securities each holder requesting registration is entitled to include in the offering.
Piggyback Registration Rights.
If we propose to publicly offering our ordinary shares for our own account or for the account of a
security holder, other than relating to any employee benefit plan or a corporate reorganization or a registration in which the only securities being registered are ordinary shares issuable upon conversion of debt securities are also being
registered, we must offer holders of our registrable securities an opportunity to include in the registration all or any part of their registrable securities. If the managing underwriters of any underwritten offering determine in good faith that
marketing factors require a limitation of the number of shares to be underwritten, the managing underwriters may decide to exclude shares from the registration and the underwriting and to allocate the number of securities first to us and second to
each of holders requesting for the inclusion of their registrable securities on a pro rata basis based on the total number of registrable securities held by each such holder and third, to holders of other securities of our company, provided that
(1) only in our initial public offering may any registrable securities be excluded from such offering, and (2) in the case of any of our public offering subsequent to the initial public offering, the number of securities of selling holders
of registrable securities may not be reduced below 25% of the aggregate number of registrable securities requested to be included in such offering.
98
Form F-3 Registration Rights.
Holders have the right to request that we effect
registration statements on Form F-3 at any time after our initial public offering. We, however, are not obligated to effect such registration if, among other things, (1) Form F-3 is not available for such offering by the holders of registrable
securities, (2) the aggregate anticipated price of such offering is less than US$0.5 million, and (3) we have effected a registration within the six-month period preceding the date of such request for Form F-3 registration. We have
the right to defer filing of a Form F-3 registration statement for a period of not more than 60 days after the receipt of the request of relevant holders if our president or chief executive officer determines in good faith that filing of such
registration will be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any other securities during such 60-day period.
Expenses of Registration.
We will bear all registration expenses and the fees of a single counsel for the selling holders incurred in
connection with any demand, piggyback or F-3 registration. All the registration expenses incurred other than the demand, piggyback, or F-3 registration, will be apportioned among the selling holders and the company. We are also not required to pay
for any expenses of any registration proceeding begun in response to holders exercise of their demand registration rights if the registration request is subsequently withdrawn at the request of the holders of a majority of the registrable
securities to be registered, subject to a few exceptions.
Termination of Obligations
. We have no obligation to effect any demand,
piggyback or Form F-3 registration upon the earlier of (i) the fifth anniversary after the completion of our initial public offering; and (ii) as to any registrable security holder, at such time as all registrable securities owned by
such holder may be sold in any three-month period without registration pursuant to Rule 144 under the Securities Act.
Registration Rights in Connection with Concurrent Private Placement
Under the registration rights agreements entered into on November 8, 2013 in connection with our concurrent private placement of
Class A ordinary shares, we have granted certain registration rights to investors in the private placement, Qihoo 360 and the subsidiary of Kingsoft, both of which we will refer to as investors below. Set forth below is a description of these
registration rights.
Demand registration rights.
At any time starting from six (6) months after November 8, 2013, the
investors will have the right to demand that we file a registration statement covering the registration of all or a part of the registrable securities they hold on a form other than Form F-3. We, however, are not obligated to effect a demand
registration if we have already effected a demand registrations and such registration has been declared effective. We have the right to defer filing of a registration statement for up to 60 days after the receipt of the request of the initiating
holders if our president or chief executive officer determines in good faith that filing of a registration will be materially detrimental to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period and
cannot register any other securities during such 60-day period. Further, if the registrable securities are offered by means of an underwriting and the underwriter advises the initiating holders in writing that marketing factors require a limitation
of the number of securities to be underwritten, the number of the registrable securities will be allocated among the investors on a pro rata basis according to the number of registrable securities each investor requesting registration is entitled to
include in the offering.
Piggyback registration rights.
If we propose to register any of our shares under the Securities Act in
connection with the public offering of such securities, we must offer the investors an opportunity to include in the registration all or any part of their securities that each investor may request to be registered.
Form F-3 Registration Rights.
At any time starting from six (6) months after November 8, 2013, the investors will have the
right to request that we effect registration statements on Form F-3. We, however, are not obligated to effect such registration if, among other things, (1) Form F-3 is not available for such offering by the holders of registrable securities,
(2) the aggregate anticipated price of such offering is less than US$0.5 million, and (3) we have effected a registration within the six-month period preceding the date of such request for Form F-3 registration. We have the right to defer
filing of a Form F-3 registration statement for up to 60 days after the receipt of the request of relevant holders if our president or chief executive officer determines in good faith that filing of such registration will be materially detrimental
to us and our shareholders, but we cannot exercise the deferral right more than once in any 12-month period and cannot register any other securities during such 60-day period. Further, if the registrable securities are offered by means of an
underwriting and the underwriter advises the initiating holders in writing that marketing factors require a limitation of the number of securities to be underwritten, the number of the registrable securities will be allocated among the investors on
a pro rata basis according to the number of registrable securities each investor requesting registration is entitled to include in the offering.
99
Employment Agreements
See Item 6. Directors, Senior Management and Employees B. Compensation of Directors and Executive Officers Employee
Agreements for a description of the employment agreements we have entered into with our senior executive officers.
Share Incentives
See Item 6. Directors, Senior Management and Employees B. Compensation of Directors and Executive Officers for a
description of share-based compensation awards we have granted to our directors, officers and other individuals as a group.
C.
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Interests of Experts and Counsel
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Not applicable.
ITEM 8.
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FINANCIAL INFORMATION
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A.
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Consolidated Statements and Other Financial Information
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See Item 18.
Financial Statements.
Legal Proceedings
We are not currently a party to any pending material litigation or other legal proceeding and are not aware of any pending or threatened
litigation or other legal proceeding that may have a material adverse impact on our business or operations. However, we may be subject to various legal proceedings and claims that are incidental to our ordinary course of business.
Dividend Policy
We have not paid
dividend in the past and do not have any present plan to pay any dividend in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may receive dividends from our PRC subsidiary for our cash requirements,
including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See Item 3. Key informationD. Risk FactorsRisks Relating to Our Corporate Structure and
Our IndustryOur PRC subsidiaries and PRC consolidated affiliated entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements and Item
4. Information on the Company B. Business Overview PRC Regulation Regulation of Foreign Currency Exchange and Dividend Distribution .
Our board of directors has discretion on whether to distribute dividends, subject to the applicable laws. Even if our board of directors
decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may
deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our Class A ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See Item
12. Description of Securities Other than Equity Securities D. American Depositary Shares. Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.
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.
100
ITEM 9.
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THE OFFER AND LISTING
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A.
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Offering and Listing Details
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See C. Markets and Item
12. Description of Securities other than Equity Securities D. American Depositary Shares. We have a dual-class common share structure in which Class A ordinary shares have different voting rights than Class B ordinary shares. Class
B ordinary shares are each entitled to ten votes, whereas Class A ordinary shares are each entitled to one vote. See Item 3. Key Information D. Risk Factors Risks Related to Our ADSs Our dual class common share
structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as
beneficial.
Not applicable.
Our ADSs, each representing six Class A ordinary shares, have been
listed on the NASDAQ Global Market since November 22, 2013 and trade under the symbol GOMO. The following table provides the high and low trading prices for our ADSs on the NASDAQ Global Market for the periods indicated.
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Trading Price
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High
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Low
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US$
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US$
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Annual High and Low
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Fiscal Year 2013 (from November 22, 2013)
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22.17
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12.4
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Quarterly Highs and Lows
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Fourth Fiscal Quarter of 2013 (from November 22, 2013)
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22.17
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12.4
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First Fiscal Quarter of 2014
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33.87
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18.12
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Second Fiscal Quarter of 2014 (until April 28, 2014)
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25.20
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16.26
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Monthly Highs and Lows
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November 2013 (from November 22, 2013)
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17.5
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12.4
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December 2013
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22.17
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13.6
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January 2014
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25.67
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28.12
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February 2014
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28.49
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19.5
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March 2014
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33.87
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19.25
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April 2014 (until April 28, 2014)
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25.20
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16.26
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Not applicable.
Not applicable.
Not applicable.
ITEM 10.
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ADDITIONAL INFORMATION
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Not applicable.
101
B.
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Memorandum and Articles of Association
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We are a Cayman Islands exempted company
and our affairs are governed by our memorandum and articles of association and the Companies Law (2013 Revision) of the Cayman Islands, referred to as the Companies Law below. The following are summaries of certain provisions of our memorandum and
articles of association in effect as of the date of this annual report insofar as they relate to the material terms of our ordinary shares.
Registered
Office and Objects
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box
309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The memorandum of association provides, inter alia, that the liability of the members of our company is limited to the amount, if any, for the time being unpaid on the ordinary shares. The
objects for which our company is established are unrestricted, and we shall have full power and authority to carry out any object not prohibited by the Companies Law or any other law of the Cayman Islands and in view of the fact that we are an
exempted company, we will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of our business carried on outside the Cayman Islands.
Board of Directors
See
Item 6. Directors, Senior Management and Employees C. Board Practices Duties of Directors and Terms of Directors and Officers.
Ordinary Shares
General
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in
registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Our company will issue only non-negotiable shares, and will not issue bearer or negotiable shares.
Register of Members
Under Cayman
Islands law, we must keep a register of members and there should be entered therein:
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(a)
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the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;
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(b)
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the date on which the name of any person was entered on the register as a member; and
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(c)
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the date on which any person ceased to be a member.
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Under Cayman Islands law, the register of
members of our company is prima facie evidence of the matters set out therein (i.e. the register of members will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members should
be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members.
If the
name of any person is incorrectly entered in or omitted from our register of members, or if there is any default or unnecessary delay in entering on the register the fact of any person having ceased to be a member of our company, the person or
member aggrieved (or any member of our company or our company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either refuse such application or it may, if satisfied of the justice of
the case, make an order for the rectification of the register.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors (provided always that dividends
may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account).
Conversion
Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time,
while Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances.
102
Voting Rights
On a show of hands each shareholder is entitled to one vote or, on a poll, each holder of Class A ordinary shares is entitled to one vote,
while each holder of Class B ordinary shares is entitled to ten votes, voting together as one class on all matters that require a shareholders vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll
may be demanded by the chairman of such meeting or any one shareholder present in person or by proxy. Rule 5640 of the NASDAQ Stock Market Marketplace Rules states that voting rights of existing shareholders of publicly traded common stock cannot be
disparately reduced or restricted through any corporate action or issuance. The fact that we allow shareholders to vote by show of hands unless a poll is demanded is not in compliance with this rule. However, Maples and Calder, our counsel as to
Cayman Islands law, has confirmed that the Companies Law does not require us to follow or comply with the requirements set out in Rules 5640 as referred to above, and there are also no such requirements under the seventh amended and restated
memorandum and articles of association which became effective immediately upon completion of our initial public offering. In addition, NASDAQ has reviewed and granted us home country exemption with respect to this point. Therefore, we intend to
follow home country practice in lieu of Rule 5640 as referred to above.
Maples and Calder, our counsel as to Cayman Islands law, has
advised that such voting structure is in compliance with current Cayman Islands law as in general terms, a company and its shareholders are free to provide in the articles of association for such rights as they consider appropriate, subject to such
rights not being contrary to any provision of the Companies Law and not inconsistent with common law. Maples and Calder has confirmed that the inclusion in the articles of provisions giving weighted voting rights to specific shareholders generally
or on specific resolutions is not prohibited by the Companies Law. Further, weighted voting provisions have been held to be valid as a matter of English common law and therefore it is expected that such would be upheld by a Cayman Islands court.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of votes attached to the
ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of votes cast attached to the ordinary shares. Both ordinary resolutions and special resolutions may also be passed by a
unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Law and our memorandum and articles of association. A special resolution will be required for important matters such as a change of name or
making changes to our memorandum and articles of association.
Transfer of Ordinary Shares
Any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any
other form approved by our board of directors.
However, our board of directors may, in its absolute discretion, decline to register any
transfer of any ordinary share which is not fully paid up or on which our company has a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
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the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the
transferor to make the transfer;
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the instrument of transfer is in respect of only one class of shares;
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the instrument of transfer is properly stamped, if required;
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the ordinary shares transferred are free of any lien in favor of us;
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any fee related to the transfer has been paid to us; and
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in the case of a transfer to joint holders, the transfer is not to more than four joint holders.
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If our directors refuse to register a transfer they are required, within three months after the date on which the instrument of transfer was
lodged, to send to each of the transferor and the transferee notice of such refusal.
103
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of ordinary shares), assets available for
distribution among the holders of ordinary shares will be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be
distributed so that the losses are borne by our shareholders proportionately. We are a limited liability company registered under the Companies Law, and under the Companies Law, the liability of our members is limited to the amount, if
any, unpaid on the shares respectively held by them. Our memorandum of association contains a declaration that the liability of our members is so limited.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their ordinary shares. The ordinary shares
that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Ordinary Shares
We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders thereof, on such terms
and in such manner as may be determined, before the issue of such shares, by our board of directors or by a special resolution of our shareholders. Our company may also repurchase any of our shares provided that the manner and terms of such purchase
have been approved by our board of directors or by ordinary resolution of our shareholders, or are otherwise authorized by our memorandum and articles of association. Under the Companies Law, the redemption or repurchase of any share may be paid out
of our companys profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if the company can, immediately
following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or
repurchase would result in there being no shares outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares
If
at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class of shares may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class
or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of two-thirds of the vote of all
of the shares in that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be
varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
General Meetings of Shareholders
Shareholders meetings may be convened by a majority of our board of directors or our chairman. Additionally, on the
requisition of shareholders representing not less than one-third of the voting rights entitled to vote at general meetings, the board shall convene an extraordinary general meeting. Advance notice of at least fourteen calendar days is required for
the convening of our annual general shareholders meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least two shareholders present or by proxy, representing not less than
one-third in nominal value of the total issued voting shares in our company. Rule 5620(c) of the NASDAQ Stock Market Marketplace Rules states that each company that is not a limited partnership shall provide for a quorum as specified in its by-laws
for any meeting of the holders of common stock, provided that in no case shall such quorum be less than 33 1/3 % of the outstanding shares of the companys common voting stock. The fact that we set shareholder meeting quorum at not less
than one-third in nominal value of the total issued voting shares in our company is not in compliance with this rule. However, Maples and Calder, our counsel as to Cayman Islands law, has confirmed that the Companies Law does not require us to
follow or comply with the requirements set out in Rules 5620(c) as referred to above, and there are also no such requirements under the seventh amended and restated memorandum and articles of association which has become effective immediately upon
completion of our initial public offering. In addition, NASDAQ has reviewed and granted us home country exemption with respect to this point. Therefore, we intend to follow home country practice in lieu of Rule 5620(c) as referred to above.
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Election and Removal of Directors
Unless otherwise determined by our company in general meeting, our articles provide that our board will consist of not less than three
directors. There are no provisions relating to retirement of directors upon reaching any age limit.
The directors have the power to
appoint any person as a director either to fill a casual vacancy on the board or as an addition to the existing board. An appointment of a director may be on terms that the director will automatically retire from office at the next or a subsequent
annual general meeting or upon any specified event or after any specified period. A director whose term of office expires is eligible for re-election at a meeting of the shareholders or re-appointment by our board.
Our articles provide that persons standing for election as directors at a duly constituted general meeting with requisite quorum are appointed
by shareholders by way of ordinary resolution.
A director may be removed with or without cause by ordinary resolution. The notice must
contain a statement of the intention to remove the director and must be served on the director not less than ten calendar days before the meeting. The director is entitled to attend the meeting and be heard on the motion for his removal.
Proceedings of Board of Directors
Our articles provide that our business is to be managed and conducted by our board of directors. The quorum necessary for board meetings may be
fixed by the board and, unless so fixed at another number, will be a majority of the directors.
Our articles provide that the board may
from time to time at its discretion exercise all powers of our company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of our company and issue
debentures, bonds and other securities of our company, whether outright or as collateral security for any debt, liability or obligation of our company or of any third party.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or
our corporate records. However, we will in our articles provide our shareholders with the right to inspect our list of shareholders and to receive annual audited financial statements.
Changes in Capital
Our
shareholders may from time to time by ordinary resolution:
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increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;
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consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
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convert all or any of our paid up shares into stock and reconvert that stock into paid up shares of any denomination;
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sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the
same as it was in case of the share from which the reduced share is derived; or
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cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled.
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We may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by our
company for an order confirming such reduction, reduce our share capital or any capital redemption reserve in any manner permitted by law.
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Exempted Company
We are an exempted company with limited liability under the Companies Law of the Cayman Islands. The Companies Law in the Cayman Islands
distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The
requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
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an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
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an exempted companys register of members is not required to be open to inspection;
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an exempted company does not have to hold an annual general meeting;
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an exempted company may issue no par value, negotiable or bearer shares;
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an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);
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an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
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an exempted company may register as a limited duration company; and
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an exempted company may register as a segregated portfolio company.
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Limited
liability means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
We have not entered into any material contracts other than in
the ordinary course of business and other than those described elsewhere in Item 4. Information on the Company B. Business Overview, Item 7. Major Shareholders and Related Party Transactions B. Related Party
Transactions, or elsewhere in this annual report.
See Item 4. Information on the Company B.
Business Overview PRC Regulation Regulation of Foreign Currency Exchange and Dividend Distribution.
Cayman Islands Taxation
See Item 5. Operating and Financial Review and ProspectsA. Operating ResultsDiscussion of Selected Statements of Operations
ItemsTaxationCayman Islands.
Peoples Republic of China Taxation
Under the existing tax laws in the PRC, we are qualified as a non-resident enterprise. We are a holding company incorporated in the Cayman
Islands; our holding company holds 100% of the equity interests in Jiubang Computer and indirectly holds 100% of the equity interests in Beijing XMedia Science and Technology Co., Ltd. Our business operations are principally conducted through our
PRC subsidiaries and our PRC variable interest entities. The PRC Enterprise Income Tax Law and its implementation rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such as
dividends paid by a PRC subsidiary to its overseas parent that is not a PRC resident enterprise and has no establishment in the PRC, will normally be subject to PRC withholding tax at a rate of 10%.
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If the PRC tax authorities determine that Sungy Mobile Limited, our Cayman Islands holding
company, is a PRC resident enterprise for enterprise income tax purposes, our world-wide income could be subject to PRC tax at a rate of 25%, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income
tax reporting obligations. Furthermore, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as tax-exempt income under the PRC Enterprise Income Tax Law, we cannot assure you that dividends by our
PRC subsidiaries to our Cayman holding company will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance
with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. In addition, ADS holders may be subject to PRC withholding tax on dividends payable by us and gains
realized on the sale or other disposition of ADSs or Class A ordinary shares, if the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for enterprise income tax purposes. See Item 3. Key
InformationD. Risk FactorsRisks Relating to Doing Business in ChinaUnder the PRC Enterprise Income Tax Law, we may be classified as a PRC resident enterprise, which could result in unfavorable tax consequences to us and
our shareholders and have a material adverse effect on our results of operations and the value of your investment.
Material United States
Federal Income Tax Considerations
The following is a summary of the material United States federal income tax considerations relating
to the acquisition, ownership, and disposition of our ADSs or Class A ordinary shares by a U.S. holder (as defined below) that acquires our ADSs or Class A ordinary shares and holds our ADSs or Class A ordinary shares as capital
assets (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the Code). This summary is based upon existing United States federal income tax law, which is subject to differing
interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation that may be important to particular investors in light of their individual circumstances, including
investors subject to special tax rules (for example, certain financial institutions, insurance companies, broker-dealers, traders in securities that have elected the mark-to-market method of accounting for their securities, partnerships and their
partners, regulated investment companies, real estate investment trusts, and tax-exempt organizations (including private foundations)), holders who are not U.S. holders, holders who own (directly, indirectly, or constructively) 10% or more of our
voting stock, investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes, or investors that have a
functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, except to the extent described below, this summary does not discuss any non-United
States, alternative minimum tax, state, or local tax considerations, or the Medicare tax. Each U.S. holder is urged to consult its tax advisors regarding the United States federal, state, local, and non-United States income and other tax
considerations of an investment in our ADSs or Class A ordinary shares.
General
For purposes of this summary, a U.S. holder is a beneficial owner of our ADSs or Class A ordinary shares that is, for United
States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized
under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a
trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has
otherwise elected to be treated as a United States person.
If a partnership (or other entity treated as a partnership for United States
federal income tax purposes) is a beneficial owner of our ADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership.
Partnerships holding our ADSs or Class A ordinary shares and partners in such partnerships are urged to consult their tax advisors as to the particular United States federal income tax consequences of an investment in our ADSs or Class A
ordinary shares.
For United States federal income tax purposes, U.S. holders of ADSs will be treated as the beneficial owners of the
underlying shares represented by the ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will not be subject to United States federal income tax. A U.S. holders tax basis in withdrawn Class A ordinary
shares will be the same as in the ADSs surrendered, and the holding period of withdrawn Class A ordinary shares will include the period during which the holder held the surrendered ADSs.
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Passive Foreign Investment Company Considerations
A non-United States corporation, such as our company, will be classified as a passive foreign investment company, or
PFIC, for United States federal income tax purposes, if, in the case of any particular taxable year, either (i) 75% or more of its gross income for such year consists of certain types of passive income or (ii) 50%
or more of its average quarterly assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income. For this purpose, cash is categorized as a passive asset and the companys
unbooked intangibles associated with active business activities may generally be classified as active assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Although the law in this regard is unclear,
we treat our PRC variable interest entities as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all
of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements.
While
we do not expect to be a PFIC for United States federal income tax purposes for the taxable year ended December 31, 2013, there is a risk that we may become a PFIC for our current taxable year ending December 31, 2014 and future taxable
years because of our significant cash balances and because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or Class A ordinary shares. Accordingly, fluctuations in
the market price of our ADSs or Class A ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. It is also possible that the Internal Revenue Service (the IRS) may challenge our classification or
valuation of our goodwill and other unbooked intangibles, which may result in our company being, or becoming classified as, a PFIC for the current or one or more future taxable years.
The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be
affected by how, and how quickly, we use our liquid assets . Under circumstances where we determine not to deploy significant amounts of cash for active purposes or not to treat our PRC variable interest entities as owned by us for United States
federal income tax purposes, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each
taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. If we were classified as a PFIC for any year during which a U.S. holder held our ADSs or Class A ordinary shares, we
generally would continue to be treated as a PFIC for all succeeding years during which such U.S. holder held our ADSs or Class A ordinary shares.
The discussion below under Dividends and Sale or Other Disposition of ADSs or Ordinary Shares is written on the basis
that we will not be classified as a PFIC for United States federal income tax purposes. The
United States federal income tax rules that apply if we are
classified as a PFIC for the current taxable year or any subsequent taxable year are generally discussed below under Passive Foreign Investment Company Rules.
Dividends
Subject to the PFIC
rules discussed below, any cash distributions (including the amount of any tax withheld) paid on our ADSs or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under United States federal income tax
principles, will generally be includible in the gross income of a U.S. holder as dividend income on the day actually or constructively received by the U.S. holder, in the case of Class A ordinary shares, or by the depositary, in the case of
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 will generally be reported as a dividend for United States federal income tax
purposes. A non-corporate recipient of dividend income will generally be subject to tax on dividend income from a qualified foreign corporation at a reduced United States federal tax rate rather than the marginal tax rates generally
applicable to ordinary income provided that certain holding period requirements are met.
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A non-United States corporation (other than a corporation that is classified as a PFIC for the
taxable year in which the dividend is paid or the preceding taxable year) will generally be considered to be a qualified foreign corporation (a) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the
Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on stock (or ADSs in respect of such stock)
which is readily tradable on an established securities market in the United States. Under current IRS guidance, our ADSs will be considered readily tradable on NASDAQ, which is an established securities market in the United States, for as long as
the ADSs continue to be listed on such exchange. Thus, we believe that dividends we pay on our ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our Class A ordinary shares will be listed on
established securities markets, it is unclear whether dividends that we pay on our Class A ordinary shares that are not backed by ADSs currently meet the conditions required for the reduced tax rate. There can be no assurance that our ADSs will
continue to be considered readily tradable on an established securities market in later years.
In the event that we are deemed to be a
PRC resident enterprise and are liable to pay tax under the PRC Enterprise Income Tax Law, we should be eligible for the benefits of the United States-PRC income tax treaty, which the Secretary of Treasury of the United States has
determined is satisfactory for purposes of clause (a) above and which includes an exchange of information provision. If we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares
are represented by the ADSs, would generally be eligible for the reduced rate of taxation applicable to qualified dividend income whether or not such shares are readily tradable on an established securities market in the United States. Dividends
received on the ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations. Each U.S. holder is advised to consult its tax advisors regarding the availability of the reduced tax rate
applicable to qualified dividend income for any dividends we pay with respect to our ADSs or Class A ordinary shares.
Dividends will
generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the PRC
Enterprise Income Tax Law, a U.S. holder may be subject to PRC withholding taxes on dividends paid on our ADSs or Class A ordinary shares. A U.S. holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit
in respect of any foreign withholding taxes imposed on dividends received on ADSs or Class A ordinary shares. A U.S. holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for United
States federal income tax purposes, in respect of such withholdings, but only for a year in which such U.S. holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. holder is
advised to consult its tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other
Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed below, a U.S. holder will generally recognize capital
gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. holders adjusted tax basis in such ADSs or Class A ordinary
shares. Any capital gain or loss will be long-term if the ADSs or Class A ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. The
deductibility of a capital loss may be subject to limitations. In the event that we are treated as a PRC resident enterprise under the PRC Enterprise Income Tax Law and gain from the disposition of the ADSs or Class A ordinary
shares is subject to tax in the PRC, a U.S. holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. Each U.S. holder is advised to consult its tax
advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign tax credit under their particular circumstances.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. holder holds our ADSs or Class A ordinary shares, and unless the
U.S. holder makes a mark-to-market election (as described below), the U.S. holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make
to the U.S. holder (which generally means any distribution paid during a taxable year to a U.S. holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. holders
holding period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ADSs or Class A ordinary shares. Under the PFIC rules:
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such excess distribution and/or gain will be allocated ratably over the U.S. holders holding period for the ADSs or Class A ordinary shares;
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such amount allocated to the current taxable year and any taxable years in the U.S. holders holding period prior to the first taxable year in which we are classified as a PFIC, or pre-PFIC year, will be taxable as
ordinary income;
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such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to the U.S. holder for that year; and
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an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year.
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If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or Class A ordinary shares and any of our non-United
States subsidiaries is also a PFIC, such U.S. holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. Each U.S. holder is advised to consult its tax
advisors regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. holder
of marketable stock in a PFIC may make a mark-to-market election with respect to our ADSs, provided that the ADSs are regularly traded on NASDAQ. If a mark-to-market election is made, the U.S. holder will generally (i) include as
ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any,
of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S.
holders adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. holder makes an effective mark-to-market election, in each year that we are a PFIC any gain recognized
upon the sale or other disposition of the ADSs will be treated as ordinary income and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.
If a U.S. holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified
as a PFIC, the U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified as a PFIC.
Because a mark-to-market election cannot be made for any lower-tier PFICs that a PFIC may own, a U.S. holder who makes a mark-to-market
election with respect to our ADSs may continue to be subject to the general PFIC rules with respect to such U.S. holders indirect interest in any of our non-United States subsidiaries that is classified as a PFIC.
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, which, if available, would
result in tax treatment different from the general tax treatment for PFICs described above.
As discussed above under
Dividends, dividends that we pay on our ADSs or Class A ordinary shares will not be eligible for the reduced tax rate that applies to qualified dividend income if we are classified as a PFIC for the taxable year in which the
dividend is paid or the preceding taxable year. In addition, if a U.S. holder owns our ADSs or Class A ordinary shares during any taxable year that we are a PFIC, such holder is required to file an annual report containing such information as
the United States Treasury Department may require and will generally be required to file an annual IRS Form 8621. Each U.S. holder is advised to consult its tax advisors regarding the potential tax consequences to such holder if we are or become
classified as a PFIC, including the possibility of making a mark-to-market election.
Information Reporting and Backup Withholding
Certain U.S. holders are required to report information to the IRS relating to an interest in specified foreign financial assets,
including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000 (or a higher dollar amount prescribed by the IRS), subject to certain exceptions
(including an exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose penalties if a U.S. holder is required to submit such information to the IRS and fails to do so.
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In addition, U.S. holders may be subject to information reporting to the IRS with respect to
dividends on and proceeds from the sale or other disposition of our ADSs or Class A ordinary shares. Each U.S. holder is advised to consult with its tax advisor regarding the application of the United States information reporting rules to their
particular circumstances.
F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
We previously filed with the SEC a registration statement
on Form F-1 under the Securities Act with respect to our initial public offering of our Class A ordinary shares represented by ADSs.
We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934 or 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 which is December 31. The SEC maintains
a website at 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. Copies of reports and other information, when filed, may
also be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. 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 JPMorgan Chase Bank, N.A., 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.
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Subsidiary Information
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For a listing of our significant subsidiaries, see
Item 4. Information on the Company C. Organizational Structure.
ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Foreign Exchange Risk
The revenues and expenses of our subsidiaries and PRC consolidated affiliated entities are generally denominated in Renminbi and their assets
and liabilities are denominated in Renminbi. Our financing activities are denominated in U.S. dollars.
To date, we have not entered into
any material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although our exposure to foreign exchange risks is generally limited, the value of your investment in our ADSs will be affected by the exchange
rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.
The Renminbi is not freely convertible into foreign currencies. Remittances of foreign currencies into the PRC and exchange of foreign
currencies into Renminbi require approval by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange, under the authority of the Peoples Bank of China, controls the
conversion of Renminbi into other currencies.
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The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in Chinas political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the Peoples Bank of China. On July 21,
2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy resulted in a more than 20% appreciation of the Renminbi against the U.S. dollar in the following three years. During the period between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S.
dollar had been stable and traded within a narrow band. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. On June 20, 2010, the Peoples Bank of China
announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. Since then, the Renminbi has started to slowly appreciate against the U.S. dollar, though there have been
periods recently when the U.S. dollar has appreciated against the Renminbi. It is difficult to predict how long the current situation may last and when and how this relationship between the Renminbi and the U.S. dollar may change again. To the
extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the
conversion. Conversely, if we decide to convert the Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would
have a negative effect on the U.S. dollar amounts available to us.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing
bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may
fall short of expectations due to changes in market interest rates.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics
of China, the change of consumer price index, or CPI, in China was 4.9%, 2.6% and 2.6% in 2011, 2012 and 2013, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that
we will not be affected in the future by higher rates of inflation in China.
ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
Not applicable.
Not applicable.
D.
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American Depositary Shares
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Fees and Charges Our ADS holders May Have to Pay
The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party
surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADSs or the deposited securities or a distribution of ADSs),
whichever is applicable:
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a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
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a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
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a fee of up to US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall
be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);
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a fee for the reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of its agents (including, without limitation, the custodian and expenses incurred on behalf of holders in
connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of securities (including, without
limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the depositarys or its custodians compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a
proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash
distributions);
|
|
|
|
a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the $0.05 per ADS issuance fee for the execution and delivery of ADSs which
would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those
holders entitled thereto;
|
|
|
|
stock transfer or other taxes and other governmental charges;
|
|
|
|
cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of shares;
|
|
|
|
transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities;
|
|
|
|
in connection with the conversion of foreign currency into U.S. dollars, JPMorgan Chase Bank, N.A. shall deduct out of such foreign currency the fees and expenses charged by it or its agent so appointed in connection
with such conversion; and
|
|
|
|
fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private sale of securities under the deposit agreement.
|
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements
from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program
upon such terms and conditions as we and the depositary may agree from time to time. The Depositary may make available to us a set amount or a portion of the depositary fees charged in respect of the ADR program or otherwise upon such terms and
conditions as we and the Depositary may agree from time to time. 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 will generally set off the amounts owing from
distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses
owing until such fees and expenses have been paid. At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
113
SUNGY MOBILE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (including cash of VIEs of RMB48,046,536 and RMB52,345,013 as of December 31, 2012 and 2013, respectively)
|
|
|
83,598,378
|
|
|
|
759,388,415
|
|
|
|
125,442,030
|
|
Short-term investment (including short-term investment of VIEs of nil and RMB1,500,000 as of December 31, 2012 and 2013,
respectively)
|
|
|
|
|
|
|
12,500,000
|
|
|
|
2,064,853
|
|
Accounts receivable, net (including accounts receivable, net of VIEs of RMB46,339,590 and RMB68,544,138 as of December 31, 2012 and
2013, respectively)
|
|
|
46,341,590
|
|
|
|
84,344,499
|
|
|
|
13,932,719
|
|
Amount due from related parties
|
|
|
3,310,909
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets (including prepaid expenses and other current assets of VIEs of RMB10,228,548 and
RMB11,747,964 as of December 31, 2012 and 2013, respectively)
|
|
|
10,483,930
|
|
|
|
14,545,788
|
|
|
|
2,402,793
|
|
Deferred income tax assets (including deferred income tax assets of VIEs of RMB6,903,561 and RMB11,902,908 as of December 31, 2012
and 2013, respectively)
|
|
|
6,903,561
|
|
|
|
16,421,037
|
|
|
|
2,712,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
150,638,368
|
|
|
|
887,199,739
|
|
|
|
146,554,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net (including property and equipment, net of VIEs of RMB7,877,323 and RMB8,902,848 as of December 31, 2012
and 2013, respectively)
|
|
|
8,635,729
|
|
|
|
9,214,738
|
|
|
|
1,522,166
|
|
Intangible assets, net (including intangible assets, net of VIEs of RMB1,489,031 and RMB2,070,778 as of December 31, 2012 and 2013,
respectively)
|
|
|
1,489,031
|
|
|
|
2,070,778
|
|
|
|
342,068
|
|
Other non-current assets (including other non-current assets of VIEs of RMB3,555,345 and RMB4,354,820 as of December 31, 2012 and
2013, respectively)
|
|
|
3,555,345
|
|
|
|
4,518,314
|
|
|
|
746,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
164,318,473
|
|
|
|
903,003,569
|
|
|
|
149,165,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (including accounts payable of VIEs of RMB5,056,562 and RMB9,291,942 as of December 31, 2012 and 2013,
respectively)
|
|
|
5,056,562
|
|
|
|
9,354,988
|
|
|
|
1,545,334
|
|
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of VIEs of RMB38,890,746 and
RMB44,224,588 as of December 31, 2012 and 2013, respectively)
|
|
|
39,356,316
|
|
|
|
50,797,381
|
|
|
|
8,391,129
|
|
Income tax payable (including income tax payable of VIEs of nil and RMB7,860,663 as of December 31, 2012 and 2013,
respectively)
|
|
|
|
|
|
|
7,860,663
|
|
|
|
1,298,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
44,412,878
|
|
|
|
68,013,032
|
|
|
|
11,234,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities (including non-current liabilities of VIEs of RMB2,220,000 and nil as of December 31, 2012 and 2013,
respectively)
|
|
|
2,220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
46,632,878
|
|
|
|
68,013,032
|
|
|
|
11,234,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series A convertible preferred shares
|
|
|
21,940,700
|
|
|
|
|
|
|
|
|
|
Redeemable Series B convertible preferred shares
|
|
|
159,973,556
|
|
|
|
|
|
|
|
|
|
Redeemable Series C convertible preferred shares
|
|
|
265,213,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
US$0.0001 par value: 850,000,000 shares authorized; nil and 58,995,186 shares issued and outstanding as of December 31, 2012 and
2013
|
|
|
|
|
|
|
36,211
|
|
|
|
5,982
|
|
Class B ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
US$0.0001 par value: 150,000,000 shares authorized; 51,880,468 and 141,435,672 shares issued and outstanding as of December 31,
2012 and 2013
|
|
|
42,360
|
|
|
|
97,272
|
|
|
|
16,068
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,111,259,393
|
|
|
|
183,566,975
|
|
Accumulated other comprehensive income
|
|
|
40,335,417
|
|
|
|
45,021,487
|
|
|
|
7,437,020
|
|
Accumulated deficit
|
|
|
(369,820,097
|
)
|
|
|
(321,423,826
|
)
|
|
|
(53,095,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(329,442,320
|
)
|
|
|
834,990,537
|
|
|
|
137,930,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred shares and shareholders equity (deficit)
|
|
|
164,318,473
|
|
|
|
903,003,569
|
|
|
|
149,165,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SUNGY MOBILE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Revenues
|
|
|
96,594,538
|
|
|
|
185,218,681
|
|
|
|
328,843,318
|
|
|
|
54,321,046
|
|
Cost of revenues
|
|
|
(46,617,793
|
)
|
|
|
(74,813,098
|
)
|
|
|
(94,144,743
|
)
|
|
|
(15,551,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49,976,745
|
|
|
|
110,405,583
|
|
|
|
234,698,575
|
|
|
|
38,769,442
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(30,190,352
|
)
|
|
|
(34,041,250
|
)
|
|
|
(46,641,102
|
)
|
|
|
(7,704,561
|
)
|
Selling and marketing expenses
|
|
|
(35,305,268
|
)
|
|
|
(45,914,065
|
)
|
|
|
(47,293,583
|
)
|
|
|
(7,812,343
|
)
|
General and administrative expenses
|
|
|
(23,224,454
|
)
|
|
|
(25,614,849
|
)
|
|
|
(51,246,338
|
)
|
|
|
(8,465,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(38,743,329
|
)
|
|
|
4,835,419
|
|
|
|
89,517,552
|
|
|
|
14,787,246
|
|
|
|
|
|
|
Change in fair value of warrants
|
|
|
(2,356,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of losses of equity method investments
|
|
|
(3,744,390
|
)
|
|
|
(1,072,946
|
)
|
|
|
|
|
|
|
|
|
Impairment loss on equity method investments
|
|
|
(389,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of an equity method investment
|
|
|
|
|
|
|
4,182,485
|
|
|
|
|
|
|
|
|
|
Investment income on short-term investment
|
|
|
2,251,269
|
|
|
|
124,862
|
|
|
|
360,750
|
|
|
|
59,592
|
|
Interest income
|
|
|
205,715
|
|
|
|
194,643
|
|
|
|
279,777
|
|
|
|
46,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(42,776,042
|
)
|
|
|
8,264,463
|
|
|
|
90,158,079
|
|
|
|
14,893,054
|
|
Income tax benefit
|
|
|
|
|
|
|
6,903,561
|
|
|
|
1,656,813
|
|
|
|
273,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
15,166,740
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred shares
|
|
|
(55,220,717
|
)
|
|
|
(58,232,795
|
)
|
|
|
(50,711,382
|
)
|
|
|
(8,376,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
|
(97,996,759
|
)
|
|
|
(43,064,771
|
)
|
|
|
41,103,510
|
|
|
|
6,789,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.28
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.27
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
15,166,740
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
18,113,956
|
|
|
|
1,334,554
|
|
|
|
4,686,070
|
|
|
|
774,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(24,662,086
|
)
|
|
|
16,502,578
|
|
|
|
96,500,962
|
|
|
|
15,940,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SUNGY MOBILE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Ordinary Shares
|
|
|
Class B Ordinary Shares
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Accumulated
Deficit
|
|
|
Total
Shareholders
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
51,880,468
|
|
|
|
42,360
|
|
|
|
|
|
|
|
20,886,907
|
|
|
|
(229,476,544
|
)
|
|
|
(208,547,277
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,776,042
|
)
|
|
|
(42,776,042
|
)
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,113,956
|
|
|
|
|
|
|
|
18,113,956
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291,894
|
|
|
|
|
|
|
|
|
|
|
|
291,894
|
|
Accretion of redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291,894
|
)
|
|
|
|
|
|
|
(54,928,823
|
)
|
|
|
(55,220,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
51,880,468
|
|
|
|
42,360
|
|
|
|
|
|
|
|
39,000,863
|
|
|
|
(327,181,409
|
)
|
|
|
(288,138,186
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,168,024
|
|
|
|
15,168,024
|
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,334,554
|
|
|
|
|
|
|
|
1,334,554
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426,083
|
|
|
|
|
|
|
|
|
|
|
|
426,083
|
|
Accretion of redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(426,083
|
)
|
|
|
|
|
|
|
(57,806,712
|
)
|
|
|
(58,232,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
51,880,468
|
|
|
|
42,360
|
|
|
|
|
|
|
|
40,335,417
|
|
|
|
(369,820,097
|
)
|
|
|
(329,442,320
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,814,892
|
|
|
|
91,814,892
|
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,686,070
|
|
|
|
|
|
|
|
4,686,070
|
|
Repurchase and cancellation of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
(575,300
|
)
|
|
|
(414
|
)
|
|
|
(2,499,940
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,500,354
|
)
|
Ordinary shares issued in connection with exercise of share options
|
|
|
|
|
|
|
|
|
|
|
3,452,400
|
|
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,123
|
|
Issuance of ordinary shares, upon initial public offering (IPO), net of issuance cost of RMB60,729,250
|
|
|
48,300,000
|
|
|
|
29,647
|
|
|
|
|
|
|
|
|
|
|
|
493,624,834
|
|
|
|
|
|
|
|
|
|
|
|
493,654,481
|
|
Concurrent private placement issuance of ordinary shares in connection with IPO
|
|
|
10,695,186
|
|
|
|
6,564
|
|
|
|
|
|
|
|
|
|
|
|
122,759,988
|
|
|
|
|
|
|
|
|
|
|
|
122,766,552
|
|
Conversion of redeemable Series A convertible preferred shares to ordinary shares
|
|
|
|
|
|
|
|
|
|
|
21,428,600
|
|
|
|
13,153
|
|
|
|
23,047,229
|
|
|
|
|
|
|
|
|
|
|
|
23,060,382
|
|
Conversion of redeemable Series B convertible preferred shares to ordinary shares
|
|
|
|
|
|
|
|
|
|
|
34,226,200
|
|
|
|
21,008
|
|
|
|
169,411,155
|
|
|
|
|
|
|
|
|
|
|
|
169,432,163
|
|
Conversion of redeemable Series C convertible preferred shares to ordinary shares
|
|
|
|
|
|
|
|
|
|
|
31,023,304
|
|
|
|
19,042
|
|
|
|
294,386,344
|
|
|
|
|
|
|
|
|
|
|
|
294,405,386
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,822,544
|
|
|
|
|
|
|
|
|
|
|
|
17,822,544
|
|
Accretion of redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,292,761
|
)
|
|
|
|
|
|
|
(43,418,621
|
)
|
|
|
(50,711,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
|
58,995,186
|
|
|
|
36,211
|
|
|
|
141,435,672
|
|
|
|
97,272
|
|
|
|
1,111,259,393
|
|
|
|
45,021,487
|
|
|
|
(321,423,826
|
)
|
|
|
834,990,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013 US$
|
|
|
|
|
|
|
5,982
|
|
|
|
|
|
|
|
16,068
|
|
|
|
183,566,975
|
|
|
|
7,437,020
|
|
|
|
(53,095,434
|
)
|
|
|
137,930,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SUNGY MOBILE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
15,166,740
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation costs
|
|
|
291,894
|
|
|
|
426,083
|
|
|
|
17,822,544
|
|
|
|
2,944,075
|
|
Change in fair value of warrants
|
|
|
2,356,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,771,295
|
|
|
|
8,312,528
|
|
|
|
6,947,110
|
|
|
|
1,147,581
|
|
Loss on disposal of property and equipment
|
|
|
8,492
|
|
|
|
6,978
|
|
|
|
545,494
|
|
|
|
90,109
|
|
Impairment loss of property and equipment
|
|
|
|
|
|
|
|
|
|
|
1,750,000
|
|
|
|
289,079
|
|
Gain on disposal of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(8,100
|
)
|
|
|
(1,338
|
)
|
Share of losses of equity method investments
|
|
|
3,744,390
|
|
|
|
1,072,946
|
|
|
|
|
|
|
|
|
|
Impairment loss on equity method investments
|
|
|
389,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of an equity method investment
|
|
|
|
|
|
|
(4,182,485
|
)
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
|
|
|
|
(6,903,561
|
)
|
|
|
(9,517,476
|
)
|
|
|
(1,572,175
|
)
|
Unrealized foreign currency exchange gain
|
|
|
|
|
|
|
|
|
|
|
(4,878,709
|
)
|
|
|
(805,905
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,224,283
|
)
|
|
|
(13,173,992
|
)
|
|
|
(38,002,909
|
)
|
|
|
(6,277,633
|
)
|
Prepaid expenses and other current assets
|
|
|
3,689,670
|
|
|
|
(478,141
|
)
|
|
|
(8,328,811
|
)
|
|
|
(1,375,822
|
)
|
Other non-current assets
|
|
|
(585,023
|
)
|
|
|
(1,592,041
|
)
|
|
|
(827,969
|
)
|
|
|
(136,771
|
)
|
Accounts payable
|
|
|
1,117,055
|
|
|
|
2,338,061
|
|
|
|
3,408,426
|
|
|
|
563,032
|
|
Accrued expenses and other current liabilities
|
|
|
8,602,138
|
|
|
|
13,333,119
|
|
|
|
3,517,152
|
|
|
|
580,992
|
|
Income tax payable
|
|
|
|
|
|
|
|
|
|
|
7,860,663
|
|
|
|
1,298,489
|
|
Non-current liabilities
|
|
|
4,097,014
|
|
|
|
(2,077,014
|
)
|
|
|
(2,220,000
|
)
|
|
|
(366,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(29,518,093
|
)
|
|
|
12,250,505
|
|
|
|
69,882,307
|
|
|
|
11,543,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Receipt of government grants related to property and equipment
|
|
|
5,400,000
|
|
|
|
200,000
|
|
|
|
4,200,000
|
|
|
|
693,791
|
|
Purchase of property and equipment
|
|
|
(3,540,822
|
)
|
|
|
(3,574,421
|
)
|
|
|
(12,458,382
|
)
|
|
|
(2,057,978
|
)
|
Purchase of intangible assets
|
|
|
(1,500,800
|
)
|
|
|
(1,563,080
|
)
|
|
|
(2,073,814
|
)
|
|
|
(342,570
|
)
|
Proceeds from disposal of intangible assets
|
|
|
|
|
|
|
|
|
|
|
40,500
|
|
|
|
6,690
|
|
Purchase of short-term investment
|
|
|
(503,580,000
|
)
|
|
|
(25,000,000
|
)
|
|
|
(52,500,000
|
)
|
|
|
(8,672,382
|
)
|
Proceeds from maturity of short-term investment
|
|
|
551,058,000
|
|
|
|
25,000,000
|
|
|
|
40,000,000
|
|
|
|
6,607,529
|
|
Purchase of an equity method investment
|
|
|
(4,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of an equity method investment
|
|
|
|
|
|
|
|
|
|
|
6,400,000
|
|
|
|
1,057,205
|
|
Issuance of loans to related parties
|
|
|
|
|
|
|
(4,776,547
|
)
|
|
|
(517,500
|
)
|
|
|
(85,486
|
)
|
Proceeds from loans repayment by related parties
|
|
|
|
|
|
|
|
|
|
|
3,828,409
|
|
|
|
632,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
43,836,378
|
|
|
|
(9,714,048
|
)
|
|
|
(13,080,787
|
)
|
|
|
(2,160,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares upon IPO, net of underwriting discounts and commissions of RMB39,307,514
|
|
|
|
|
|
|
|
|
|
|
515,076,220
|
|
|
|
85,084,530
|
|
Payment of issuance cost of ordinary shares in connection with IPO
|
|
|
|
|
|
|
|
|
|
|
(15,342,834
|
)
|
|
|
(2,534,456
|
)
|
Proceeds from concurrent private placement issuance of ordinary shares in connection with IPO
|
|
|
|
|
|
|
|
|
|
|
122,766,552
|
|
|
|
20,279,590
|
|
Payment for repurchase of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
(2,500,354
|
)
|
|
|
(413,029
|
)
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
2,123
|
|
|
|
351
|
|
Proceeds from exercise of liability classified warrants
|
|
|
12,977,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings from a related party
|
|
|
(420,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,557,201
|
|
|
|
|
|
|
|
620,001,707
|
|
|
|
102,416,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
(407,990
|
)
|
|
|
50,919
|
|
|
|
(1,013,190
|
)
|
|
|
(167,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
26,467,496
|
|
|
|
2,587,376
|
|
|
|
675,790,037
|
|
|
|
111,632,562
|
|
Cash at beginning of year
|
|
|
54,543,506
|
|
|
|
81,011,002
|
|
|
|
83,598,378
|
|
|
|
13,809,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
|
81,011,002
|
|
|
|
83,598,378
|
|
|
|
759,388,415
|
|
|
|
125,442,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exercise of the liability classified warrants
|
|
|
3,030,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount receivable from disposal of an equity method investment
|
|
|
|
|
|
|
6,400,000
|
|
|
|
|
|
|
|
|
|
Amount due to a related party offset with amount due from a related party
|
|
|
|
|
|
|
1,465,638
|
|
|
|
|
|
|
|
|
|
Accounts payable for property and equipment
|
|
|
|
|
|
|
1,310,000
|
|
|
|
2,200,000
|
|
|
|
363,414
|
|
IPO cost payable
|
|
|
|
|
|
|
|
|
|
|
6,026,669
|
|
|
|
995,535
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SUNGY MOBILE LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
Sungy Mobile Limited (formerly known as Sungy Data Ltd.) (the Parent), a holding company, was incorporated in
January 2005. In March 2005, the Parent established a wholly-owned subsidiary, Jiubang Computer Technology (Guangzhou) Co., Ltd. (Jiubang Computer), in the Peoples Republic of China (the PRC). During 2005 to 2007, the
Parent and Jiubang Computer entered into a series of contractual agreements (as described in Note 2(w)) with Guangzhou Jiubang Digital Technology Co., Ltd. (Jiubang Digital), Guangzhou Sanju Advertising Media Co., Ltd. (Sanju
Advertising), Guangzhou Hengye Software Technology Co., Ltd. (Hengye Software), Guangzhou Zhiteng Computer Technology Co., Ltd. (Zhiteng Computer) and each of their individual equity holders. As described in Note 2(w),
the Parent is the primary beneficiary of Jiubang Digital, Sanju Advertising, Hengye Software and Zhiteng Computer (collectively, the VIEs).
The Parent, through its consolidated subsidiaries and VIEs (collectively, referred to as the Company), primarily provides mobile
reading services and mobile portal marketing services, and sells mobile application products and related services in the PRC. To a lesser extent, the Company also sells its products and services outside of the PRC.
The Company completed its IPO on November 22, 2013 and its ordinary shares were traded in the form of American Depositary Share
(ADS) on the NASDAQ Global Market. Each ADS represents six Class A ordinary shares.
2
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP).
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of the Parent, its consolidated subsidiaries and VIEs for which the
Parent, through its wholly-owned subsidiary, Jiubang Computer, is the primary beneficiary. All significant intercompany balances and transactions have been eliminated upon consolidation.
(c) Use of Estimates
The preparation of
consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the fair value valuations of financial and equity instruments and
share-based payments, the collectability of accounts receivable, the realizability of deferred income tax assets, the useful lives and residual values of property and equipment, the estimated useful lives of mobile application products, fair value
of postcontract customer support (PCS), and the recoverability of the carrying values of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. Actual
results could differ from those estimates.
(d) Foreign Currency
The accompanying consolidated financial statements have been expressed in Renminbi (RMB), the Companys reporting currency.
F-7
The functional currency of the Parent and its subsidiaries in Cayman Islands, Hong Kong and the
United States is the U.S. dollar (US$). The functional currency of the Parents consolidated PRC subsidiaries and VIEs is the RMB.
Transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the exchange rates
prevailing at the date of the transactions. Monetary assets and liabilities denominated in a foreign currency are remeasured into the functional currency using the applicable exchange rate at the balance sheet date. The resulting exchange
differences are recorded in general and administrative expenses in the consolidated statements of comprehensive income (loss).
Assets and
liabilities of the entities with functional currencies other than RMB are translated into RMB using the exchange rate on the balance sheet date. Revenues and expenses are translated into RMB at average rates prevailing during the reporting period.
The resulting foreign currency translation adjustments are recognized as a separate component of accumulated other comprehensive income within shareholders equity (deficit).
For the convenience of readers, the 2013 RMB amounts included in the accompanying consolidated financial statements have been translated into
US$ at the rate of US$1.00 = RMB6.0537, being the noon buy rate for US$ in effect on December 31, 2013 in the City of New York for cable transfer in RMB per US$ as certified for custom purposes by the Federal Reserve Bank of New York. No
representation is made that RMB amounts could have been, or could be, converted into US$ at that rate or at any other certain rate on December 31, 2013, or at any other date. The US$ convenience translation is not required under U.S. GAAP and
all US$ convenience translation amounts in the accompanying consolidated financial statements are unaudited.
(e) Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of
its business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, and non-income tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, is disclosed.
(f) Fair Value Measurements
The Company applied the provisions of Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures
(ASC Topic 820)
,
for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a
recurring and nonrecurring basis. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability. ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|
|
|
|
Level 3 inputs are unobservable inputs for the asset or liability.
|
F-8
The level in the fair value hierarchy within which a fair value measurement in its entirety falls
is based on the lowest level input that is significant to the fair value measurement in its entirety. In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement
reflects managements own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management based on the best information available in the circumstances.
The carrying amounts of cash, short-term investment, accounts receivable, amount due from related parties, accounts payable, and accrued
expenses and other current liabilities, as of December 31, 2012 and 2013, approximate fair value because of the short maturity of these instruments.
(g) Cash
Cash consists of cash on hand
and cash in banks. None of the Companys cash is restricted from withdrawal.
Cash balances include demand deposits in:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Financial institutions in the mainland of the PRC
|
|
|
|
|
|
|
|
|
Denominated in RMB
|
|
|
47,358,807
|
|
|
|
713,371,057
|
|
Denominated in US$
|
|
|
16,519,981
|
|
|
|
723,094
|
|
|
|
|
|
|
|
|
|
|
Total cash balances held at mainland PRC financial institutions
|
|
|
63,878,788
|
|
|
|
714,094,151
|
|
|
|
|
|
|
|
|
|
|
Financial institutions in Hong Kong Special Administrative Region (HKSAR) of the PRC
|
|
|
|
|
|
|
|
|
Denominated in RMB
|
|
|
5,693,406
|
|
|
|
106,581
|
|
Denominated in Hong Kong dollar
|
|
|
1,704,880
|
|
|
|
62,206
|
|
Denominated in US$
|
|
|
6,704,840
|
|
|
|
32,652,558
|
|
Denominated in British pound
|
|
|
18,604
|
|
|
|
18,413
|
|
|
|
|
|
|
|
|
|
|
Total cash balances held at HKSAR financial institutions
|
|
|
14,121,730
|
|
|
|
32,839,758
|
|
|
|
|
|
|
|
|
|
|
Financial institutions in United States
|
|
|
|
|
|
|
|
|
Denominated in RMB
|
|
|
|
|
|
|
64,145
|
|
Denominated in US$
|
|
|
5,263,420
|
|
|
|
12,131,440
|
|
|
|
|
|
|
|
|
|
|
Total cash balances held at United States financial institutions
|
|
|
5,263,420
|
|
|
|
12,195,585
|
|
|
|
|
|
|
|
|
|
|
Total cash balances held at financial institutions
|
|
|
83,263,938
|
|
|
|
759,129,494
|
|
|
|
|
|
|
|
|
|
|
Management believes these financial institutions have high credit ratings.
(h) Accounts Receivable
The Company
maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. In establishing the required allowance, management considers historical losses adjusted to take into account
current market conditions and customers financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. Accounts receivable are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. No allowance for accounts receivable was provided as of December 31,
2012 and 2013 as the Company believes that it is probable the accounts receivable will be fully collected.
F-9
(i) Property and Equipment, net
Property and equipment is stated at historical cost.
Depreciation expense is calculated based on the straight line method over the following useful lives, taking into consideration the
assets estimated residual value:
|
|
|
Computer equipment
|
|
3 to 5 years
|
Office equipment and furniture
|
|
3 to 5 years
|
Motor vehicles
|
|
4 years
|
Leasehold improvements
|
|
the shorter of the lease terms or the estimated useful lives of the assets
|
(j) Intangible Assets
Intangible assets mainly comprise literature content copyrights purchased from third parties. The estimated useful life of intangible assets,
which is the period over which the intangible asset is expected to contribute directly or indirectly to the future cash flows of the Company, ranges between 1 and 10 years. Intangible assets are amortized on a straight-line basis, as the pattern of
the economic benefit of intangible assets cannot be reliably determined over their estimated useful lives.
(k) Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows
expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
(l) Equity Method Investment
Investments
where the Company does not have a controlling financial interest, but has the ability to exercise significant influence over the operating and financial policies of the investee, are accounted for using the equity method of accounting. Under the
equity method of accounting, the Companys share of the investees results of operations is reported as share of income (losses) of equity method investments in the consolidated statements of comprehensive income (loss).
The Company recognizes an impairment loss when there is a decline in value below the carrying value of the equity method investment that is
considered to be other-than-temporary. The process of assessing and determining whether impairment on an investment is other-than-temporary requires a significant amount of judgment. To determine whether an impairment is other-than-temporary,
management considers whether it has the ability and intent to hold the investment until recovery and whether evidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this
assessment includes the reasons for the impairment, the severity and duration of the decline in value, any change in value subsequent to the period end, and forecasted performance of the investee.
(m) Operating Leases
The Company leases
premises for offices under non-cancellable operating leases. Leases with escalated rent provisions are recognized on a straight-line basis commencing with the beginning of the lease term. There are no capital improvement funding, other lease
concessions or contingent rent in the lease agreements.
The Company subleases a portion of the leased premises to a third party. Income
from subleases is recognized on a straight-line basis over the term of the lease and recognized as a reduction of gross rental expenses.
F-10
(n) Revenue Recognition
Revenue is recognized when all of the following conditions are met: persuasive evidence of an agreement exists, delivery has occurred or
service has been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company evaluates whether it is appropriate to record the gross amount of its revenues and related costs by considering a number of factors,
including, among other things, whether the Company is the primary obligor under the arrangement, has inventory risk, and has latitude in establishing prices.
These criteria as they relate to each of the following major revenue generating activities are described below.
Mobile Application Products and Services Revenue
The Company develops and sells mobile application products, including Go Series applications and themes and widgets that can be used in the
application through online application stores such as Google Play. Mobile phone users can access those stores and download the mobile application products by making payment through the payment agents authorized by the relative stores.
For the sale of mobile application products, when no free updates or other PCS are provided, revenues are recognized upon the delivery of the
mobile application products and the other revenue recognition criteria are met at time of delivery.
The Company began to sell a mobile
application product in December 2012 for which free upgrades are provided on a when-and-if-available basis for an unspecified period, which is considered PCS. Since the Company was not able to establish vendor-specific objective evidence
(VSOE) of the fair value of the PCS, the Company recognized revenue from the sale of the mobile application ratably over the estimated life of the mobile application during the year ended December 31, 2012.
In June 2013, the Companys management having the relevant authority established the selling price or VSOE of the PCS. The sales term of
the mobile application product was modified by explicitly stating separate sales prices for the mobile application and the one-year free upgrades, as well as the annual renewal rate for upgrades after the one year period. The Company believes the
annual renewal rate for the upgrades is substantive because the renewal rate is within the Companys normal pricing practice and the expected life of mobile application product is more than two years.
The separate sales prices for the mobile application with the one-year free upgrades, and the annual renewal rate were introduced to the
marketplace within 30 days after they were established by the Companys management having the relevant authority and did not change from the prices established by management having the relevant authority.
Therefore, for the year ended December 31, 2013, the residual method was applied for the sale of the mobile application product. That is,
upon the sale of the mobile application, the consideration attributable to the fair value of the PCS is initially deferred and recognized as revenue on a straight-line basis over the one year service period with the remaining or residual
consideration recognized as revenue. The Company does not sell the mobile application product without PCS.
The Company also offers
advertising service on its mobile application products. The Companys revenue recognition policy for the provision of advertising services on the Companys mobile application products is the same as the revenue recognition policy for the
provision of advertising services on the Companys portal websites described below.
The majority of the Companys revenues for
mobile application products and services are derived from countries outside of China.
F-11
Mobile Reading Revenue
Service provided directly to users
The Company generates revenue from the sale of online premium literature contents to the users. The users purchase the content by chapter or by
book and cannot cancel the purchase once made.
The content sold to the users usually has no expiry period unless otherwise stated. The
revenue from the sale of online content or other community tools (such as votes and gifts for an author) is recognized at the time of sale as the Company does not have any further obligation after providing the content to the user upon sale and all
other criteria for revenue recognition are met.
Service provided to users through third parties
The Company also derives revenues by providing its literature contents to third parties, primarily mobile operators. The Company uploads the
literature content to wireless platforms of the mobile operators and the royalty right resides with the Company. The mobile operators charge a fee from its wireless users when they access the Companys literature contents through the mobile
operators wireless platform via their wireless devices (such as mobile handsets). Such fee is charged either on a monthly subscription basis under which users can access the variety of contents offered on the mobile operators platform or
per usage basis based on the number of books or chapters of the Companys literature content accessed by the users. The Company receives an agreed percentage of the fee from the mobile operators.
For the per usage basis arrangement, the Company has access to the information on the content accessed by the wireless users from a platform
operated by the mobile operator on a monthly basis. With respect to the monthly subscription basis arrangement, the Company relies on the monthly billing statements generated by the mobile operator each month to determine its share of the fees.
There is normally time lag of 3 to 4 months until the Company receives the billing statements from the mobile operator and the Company has no visibility into these revenues prior to receipts of the billing statements.
|
|
|
Under the per usage basis, since the Company has timely access to usage information, revenues are recognized in the period in which the content has been provided that no significant obligation remains, collection of the
receivable is reasonably assured and the amounts can be reliably estimated. The revenue is measured based on Companys analysis of the usage information for the month provided by the mobile operators and the contractual rates with the mobile
operators. Based on revenues amounts subsequently confirmed by the mobile operators, there were no significant adjustments between the Companys analysis of the usage information and the mobile operators statements received during the
periods presented.
|
|
|
|
Under the monthly subscription basis, since the Company does not have timely access to usage information, revenue is recognized in the period when the billing statements for the related service have been received.
|
The revenues recognized under the arrangements with the mobile operators represent only the Companys share of the
revenues to be received from the operators since the Company is not the primary obligor in the arrangement.
F-12
Mobile Portal Marketing Revenue
The Company offers customers to advertise on its portal websites in particular formats and over particular periods of time. The portal
advertising formats primarily include banners, links, logos, buttons, pop-up windows, jump-out boxes, floating signs, and rich media. Portal advertising agreements are entered into with various third-party advertising agencies representing their
customers and with advertising customers directly. For certain advertising agreements, the Company is required to pay certain percentages of revenues to the advertising agencies as rebates. The Company has two pricing models offered to advertisers,
consisting of a fixed price pricing model and a cost per action pricing model.
Under the fixed price pricing model, the Company charges
advertisers a fixed fee to advertise over a period of time. Mobile portal marketing revenue, net of agency cash rebates, is recognized ratably over the period in which the advertisement is displayed and only if collection of the resulting receivable
is reasonably assured.
Under the cost per action pricing model, the advertisers pay the Company only when a user clicks on or downloads
one of their advertisements or installs or activates the products advertised. The Company recognizes revenue on the fees charged to advertisers each time a user clicks on or downloads one of the advertisements or installs or activates the products
advertised that appear on the Companys portal websites.
Other Revenues
Other revenues are primarily derived from fee received from third parties for the sale of digital products and services such as paid content,
picture download, and access to game or music files, that are provided by third parties. The Company recognizes the fee as revenue once the products are delivered or the services are rendered.
Revenue concentration
Revenue from a customer that individually exceeds 10% of the Companys total revenues is from a mobile operator. Revenue derived from this
customer is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
Customer A
|
|
|
23,418,536
|
|
|
|
24
|
%
|
|
|
54,564,962
|
|
|
|
29
|
%
|
|
|
68,220,511
|
|
|
|
21
|
%
|
Customers accounting for 10% or more of accounts receivable, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
Customer A
|
|
|
13,447,447
|
|
|
|
29
|
%
|
|
|
16,397,159
|
|
|
|
19
|
%
|
Customer B
|
|
|
|
|
|
|
|
|
|
|
15,800,361
|
|
|
|
19
|
%
|
Business Tax and Value Added Tax (VAT)
Revenue is net of business taxes at the rate of 3-5% of gross revenues or VAT at the rate of 6% of gross revenues. Business tax and VAT
collected from customers, net of VAT paid for purchases, are recorded as liabilities in the consolidated balance sheets until it is paid to the tax authorities.
F-13
(o) Cost of Revenues
Costs of revenues consist primarily content acquisition cost, such as copyright fees for online literature, fees paid to third parties for
developing themes, distribution fee, which is the amount paid or payable to third parties that direct customers to access the Companys products or services, processing fees paid to mobile application stores, custody and bandwidth costs, office
rental fees, depreciation expense, salaries and benefits, share-based compensation and other expenses of those departments directly involved in the provision of the Companys services and the sale of mobile application products.
(p) Research and Development Expenses
Research and development expenses primarily consist of software developed for internal use and mobile application products developed for sale.
Software developed for internal use
The Company expenses all costs that are incurred in connection with the planning and implementation phases of the development of software.
Costs incurred in the development phase are capitalized and amortized over the estimated product life. No costs were capitalized for any of the periods presented.
Mobile application products developed for sale
Costs incurred internally in researching and developing a software product are charged to expense as research and development costs prior to
technological feasibility being established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Technological feasibility is established
upon completion of all the activities that are necessary to substantiate that the software product can be produced in accordance with its design specifications, including functions, features, and technical performance requirements. No costs were
capitalized for any of periods presented.
(q) Government Grant
Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attaching to them and the
grants will be received. Government grants for the purpose of giving financial support to the Company for a specific project with future related costs are recognized as a deduction to the project cost when incurred in the Companys consolidated
statements of comprehensive income (loss). Government grants that compensate the acquisition cost of an asset are deducted from the carrying amount of the asset and effectively recognized in profit or loss over the useful life of the asset by way of
reducing depreciation expense.
Government grants received in advance is recorded in accrued expenses and other current liabilities or
non-current liabilities in the consolidated balance sheet based on the expected period of usage of the government grants.
(r) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carryforwards. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or
tax laws is recognized in the consolidated statements of comprehensive income (loss) in the period the change in tax rates or tax laws is enacted. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is
considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
F-14
The Company recognizes in the consolidated financial statements the impact of a tax position, if
that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes
in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to an unrecognized tax benefits, if and when required, as part of income tax expense
in the consolidated statements of comprehensive income (loss).
(s) Employee Benefit Plans
As stipulated by the regulations of the PRC, the Companys consolidated PRC subsidiaries and VIEs are required to contribute to various
defined contribution plans, organized by municipal and provincial governments on behalf of their employees. The contributions to these plans are based on certain percentages of the employees standard salary base as determined by the local
social security bureau. The Company has no other obligation for the payment of employee benefits associated with these plans beyond the annual contributions described above.
Employee benefit expenses recognized under these plans for the years ended December 31, 2011, 2012 and 2013 are allocated to the
following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Cost of revenues
|
|
|
2,777,669
|
|
|
|
3,040,042
|
|
|
|
3,188,742
|
|
Research and development expenses
|
|
|
2,938,029
|
|
|
|
3,622,003
|
|
|
|
4,520,663
|
|
Selling and marketing expenses
|
|
|
2,726,135
|
|
|
|
4,174,193
|
|
|
|
4,379,517
|
|
General and administrative expenses
|
|
|
1,925,832
|
|
|
|
2,034,011
|
|
|
|
2,592,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee benefit expenses
|
|
|
10,367,665
|
|
|
|
12,870,249
|
|
|
|
14,681,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(t) Share-based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value
of the award and recognizes the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the expected forfeiture prior to
vesting. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date.
The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of
compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
(u) Earnings
(Loss) per Share
Basic earnings (loss) per ordinary share is computed by dividing net income (loss) attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the year using the two-class method. Under the two-class method, net income (loss) is allocated between ordinary shares and other participating securities based on
participating rights in undistributed earnings. The Companys redeemable convertible preferred shares are participating securities since the holders of these securities participate in dividends on the same basis as ordinary shareholders. These
participating securities are not included in the computation of basic loss per ordinary share in periods when the Company reports net loss, taking into consideration of the accretion of redeemable convertible preferred shares, because these
participating security holders have no obligation to share in the loss of the Company based on the contractual rights and obligations of these participating securities.
F-15
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 year. Ordinary equivalent shares consist of
ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method). Potential dilutive securities are not included in the calculation of dilutive earnings (loss) per share if the impact is anti-dilutive.
(v) Segment Reporting
The Company uses
the management approach in determining reportable operating segments. The management approach considers the internal reporting used by the Companys chief operating decision maker for making operating decisions about the allocation of resources
of the segment and the assessment of its performance in determining the Companys reportable operating segments. Management has determined that the Company has one operating segment, which is the mobile internet related business.
(w) Variable Interest Entities
The
Companys sales are conducted through VIEs, in order to comply with the PRC laws and regulations which prohibit foreign investments in companies that are engaged in mobile internet related business. The equity interests of VIEs are legally held
by individuals who act as nominee equity holders of the VIEs on behalf of the Parent.
A series of contractual agreements, including loan
agreements, master exclusive service agreements, business cooperation agreements, exclusive option agreements, proxy agreements and powers of attorney, equity pledge agreements and spousal consent letters (collectively, the VIE
Agreements) were entered among the Parent, Jiubang Computer, the VIEs, and the nominee equity holders of the VIEs. Through these agreements, the nominee equity holders have granted all their legal rights including voting rights and disposition
rights of their equity interests in the VIEs to the Parent and Jiubang Computer. Accordingly, the nominee equity holders of the VIEs do not participate significantly in income and loss and do not have the power to direct the activities of the VIEs
that most significantly impact their economic performance.
In accordance with ASC 810-10-25-38A, the Parent has a controlling financial
interest in the VIEs because the Parent has (i) the power to direct activities of the VIEs that most significantly impact the economic performance of the VIEs; and (ii) the obligation to absorb the expected losses and the right to receive
expected residual return of the VIEs that could potentially be significant to the VIEs.
Under the terms of the VIE Agreements, the Parent
has (i) the right to receive economic benefits that could potentially be significant to the VIEs in the form of service fees under the master exclusive service agreements when such services are provided; (ii) the right to receive all
dividends declared by the VIEs and the right to all undistributed earnings of the VIEs; (iii) the right to receive the residual benefits of the VIEs through its exclusive option to acquire 100% of the equity interests in the VIEs, to the extent
permitted under PRC law. Accordingly, the financial statements of the VIEs are consolidated in the Parents consolidated financial statements.
Under the terms of the VIE Agreements, the VIEs nominee equity holders have no rights to the net assets nor have the obligations to fund
the deficit, and such rights and obligations have been vested to the Parent. All of the equity (net assets) or deficits (net liabilities) and net income (loss) of the VIEs are attributed to the Parent.
The key terms of these VIE Agreements, as amended and restated, are as follows:
Loan agreements:
Jiubang Computer lent to the VIEs nominee equity holders interest free loans in the amount of
RMB14,600,000 for the sole purpose of their contribution of the VIEs registered capital. The loans can only be repaid with the proceeds derived from the sale of the VIEs equity interests to Jiubang Computer or its designated
representatives pursuant to the exclusive option agreements. Each of the loan agreements has an indefinite term until the full repayment of the loan thereunder.
F-16
Master exclusive service agreements:
The VIEs irrevocably appoint and designate
Jiubang Computer as their exclusive service provider to provide services, including but not limited to technology development service, technical consulting service, network development service and market research and consulting service to the VIEs.
The service fees are determined based on certain objective criteria such as the technical difficulty and complexity of the services provided by Jiubang Computer and the actual labor costs incurred by Jiubang Computer for providing the services
during the relevant period. The term of this agreement is 10 years, and the agreement may be automatically extended upon the expiration. Jiubang Computer may terminate the agreements at any time with a 30-day prior written notice to VIEs, whereas
none of VIEs can terminate this agreement.
Business cooperation agreements:
The Parent, Jiubang Computer, the VIEs and
their nominee equity holders agreed that the VIEs may not enter into any transaction that could materially affect the assets, obligation, right or operations of the VIEs, without prior written consent from Jiubang Computer. In addition, directors or
other senior management of the VIEs must be appointed by the Parent and the Jiubang Computer. To ensure sufficient cash flow required by the business operations of the VIEs, the Parent agrees that it shall, to the extent permissible under PRC law,
through itself or any party designated by it, provide financial support to the VIEs. The agreements shall be in effect as long as VIEs exists. None of VIEs or VIEs nominee equity holders can terminate these agreements. Jiubang Computer may
terminate the agreements by providing a 30-day prior written notice to VIEs and VIEs nominee equity holders.
Exclusive option
agreements:
Through the exclusive option agreements entered into among the Parent, the VIEs and their nominee equity holders, Jiubang Computer or any other party designated by the Parent, has an exclusive purchase option to acquire all of
the equity interest or assets in the VIEs from their nominee equity holders at any time when permitted by applicable Chinese laws and regulations. The proceeds from the exercise of the call options will be applied to repay the loans under the loan
agreements described above. The Parent has the sole discretion as to when to exercise such options, either in part or in full. Without the Parents prior written consent, VIEs nominee equity holders shall not transfer their equity
interests in VIEs, and VIEs shall not transfer its assets. The transfer price will be the minimum amount of consideration permitted under PRC law at the time of such share transfer. The agreements will remain effective as long as VIEs exist. The
Parent and Jiubang Computer may terminate the agreements at any time with a 10-day prior written notice to VIEs and their nominee equity holders, whereas none of VIEs and their nominee equity holders can terminate the agreements.
Proxy agreements and powers of attorney:
The VIEs nominee equity holders signed proxy agreements and powers of attorney,
with the Parent and Jiubang Computer to exclusively assign their rights as equity holders of the VIEs to the Parent, including voting right, right to transfer any or all equity interest in the VIEs and right to appoint director and executive
management. VIEs nominee equity holders further covenants and undertakes that, if nominee equity holder receives any dividends, interest, any other forms of capital distributions, residual assets upon liquidation, or proceeds or consideration
from the transfer of equity interest as a result of, or in connection with, such equity interests in VIEs, the VIEs nominee equity holders shall, to the extent permitted by applicable laws, remit all such dividends, interest, capital
distributions, assets, proceeds or consideration to Jiubang Computer or the Parent, to the extent permitted by law, without any compensation. The proxy agreements and powers of attorney will remain effective as long as VIEs exist. VIEs nominee
equity holders do not have the right to terminate the agreements and powers of attorney without the prior written consent of the Parent.
Equity pledge agreements:
To guarantee VIEs performance of their obligations under the master exclusive service
agreements, business cooperation agreements, loan agreements and the exclusive option agreements, the VIEs nominee equity holders have pledged their entire equity interests in the VIEs to Jiubang Computer. The equity pledges under the equity
pledge agreements were registered with the relevant local authority on July 26, 2013. Neither the nominee equity holders of the VIEs will create or allow any encumbrance on the pledged equity interests. The share pledge agreement can only be
terminated upon the termination of the master exclusive service agreements, business cooperation agreements, loan agreements and exclusive option agreements.
F-17
Spousal consent letters:
The spouses of each of nominee equity holders signed
spousal consent letters to consent that certain equity interests in the VIEs held by and registered in the name of the respective nominee equity holders will be disposed of pursuant to the VIE agreements. These spouses undertake not to take any
action to interfere with the disposition of such equity interests, including, without limitation, claiming that such equity interests constitute communal property of marriage. These spouses also waive unconditionally and irrevocably any rights or
entitlements whatsoever to such equity interest that may be granted to them according to any applicable laws.
Risks and
uncertainties of the VIE Agreements:
The Parent, through Jiubang Computer, relies on the VIE Agreements to operate and control the VIEs. However, these contractual arrangements may not be as effective as direct equity ownership in providing
the Parent with control over the VIEs. Any failure by the VIEs or their nominee equity holders to perform their obligations under the VIE Agreements would have a material adverse effect on the Companys consolidated financial position and
financial performance. All the VIE Agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be
resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Parents or Jiubang
Computers ability to enforce these contractual arrangements. In addition, if the legal structure and the VIE Agreements were found to be in violation of any existing or future PRC laws and regulations, the Company may be subject to fines or
other legal or administrative sanctions.
In the opinion of management, based on the legal opinion obtained from the Companys PRC
legal counsel, the above contractual arrangements are legally binding and enforceable and do not violate current PRC laws and regulations. However, there are uncertainties regarding the interpretation and application of existing 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 Company and the VIE Agreements are found to be in violation of any existing or future PRC laws and regulations, the PRC government could:
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levy fines on the Company or confiscate income of the Company;
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revoke or suspend Jiubang Computer or VIEs business or operating licenses;
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shut down VIEs servers or block VIEs website, and discontinue or place restrictions or onerous conditions on VIEs operations;
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require the Company to discontinue their operations in the PRC;
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require the Company to undergo a costly and disruptive restructuring;
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take other regulatory or enforcement actions that could be harmful to the Companys business.
|
If the imposition of any of these government actions, or any inability to enforce the contractual arrangements upon a breach, causes the
Parent to lose its ability to direct the activities of the VIEs and to receive substantially all the economic benefits and residual returns from the VIEs, the Parent would no longer be able to consolidate the financial results of the VIEs. Total
assets, total liability, equity, revenues, net income (loss) and cash flows of the Company would be significantly less than the reported amount in the consolidated financial statements of the Company. In the opinion of management, the likelihood of
loss resulting from the VIE Agreements is remote based on current facts and circumstances.
F-18
The equity interests of the VIEs are legally held by Deng Yuqiang and Zhang Xiangdong, the
Companys co-founders, and Chang Yingming, the Companys chief operating officer (nominee equity holders) on behalf of the Company. Deng Yuqiang, Zhang Xiangdong and Chang Yingming are also shareholders and directors of the Parent. Deng
Yuqiang, Zhang Xiangdong and Chang Yingming each holds 19.41%, 5.00% and 2.02% of the Parents total ordinary shares issued and outstanding as of December 31, 2013, respectively. The Company cannot assure that when conflicts of interest
arise, any of the nominee equity holders will act in the best interests of the Company or such conflicts will be resolved in the Companys favor. Currently, the Company does not have any arrangements to address potential conflicts of interest
between the nominee equity holders and the Company, except that the Parent could exercise the purchase option under the exclusive option agreements with the nominee equity holders to request them to transfer all of their equity ownership in the VIEs
to the Parent, Jiubang Computer or a third party designated by the Parent. The Company relies on the nominee equity holders, all of whom are the Parents directors and owe a fiduciary duty to the Parent, to comply with the terms and conditions
of the contractual arrangements. Such fiduciary duty requires directors to act in good faith and in the best interests of the Parent and not to use their positions for personal gains. If the Company cannot resolve any conflict of interest or dispute
between the Company and the nominee equity holders of the VIEs, the Company would have to rely on legal proceedings, which could result in disruption of the Companys business and subject the Company to substantial uncertainty as to the outcome
of any such legal proceedings.
The Companys involvement with the VIEs under the VIE Agreements affected the Companys
consolidated financial position, results of operations and cash flows as indicated below.
The assets and liabilities of the VIEs as of
December 31, 2012 and 2013 and the revenues, net income (loss) and cash flows for the years ended December 31, 2011, 2012 and 2013 are as follows:
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|
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|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Cash
|
|
|
48,046,536
|
|
|
|
52,345,013
|
|
Short-term investment
|
|
|
|
|
|
|
1,500,000
|
|
Accounts receivable, net
|
|
|
46,339,590
|
|
|
|
68,544,138
|
|
Prepaid expenses and other current assets
|
|
|
10,228,548
|
|
|
|
11,747,964
|
|
Amounts due from related parties
|
|
|
21,424,807
|
|
|
|
114,891,133
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|
Deferred income tax assets
|
|
|
6,903,561
|
|
|
|
11,902,908
|
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
132,943,042
|
|
|
|
260,931,156
|
|
|
|
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Property and equipment, net
|
|
|
7,877,323
|
|
|
|
8,902,848
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Intangible assets, net
|
|
|
1,489,031
|
|
|
|
2,070,778
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Other non-current assets
|
|
|
3,555,345
|
|
|
|
4,354,820
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|
|
|
|
|
|
|
|
|
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Total assets
|
|
|
145,864,741
|
|
|
|
276,259,602
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|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
5,056,562
|
|
|
|
9,291,942
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|
Accrued expenses and other current liabilities
|
|
|
38,890,746
|
|
|
|
44,224,588
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Amounts due to related parties
|
|
|
145,027,552
|
|
|
|
158,443,366
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|
Income tax payable
|
|
|
|
|
|
|
7,860,663
|
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
188,974,860
|
|
|
|
219,820,559
|
|
|
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Non-current liabilities
|
|
|
2,220,000
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
191,194,860
|
|
|
|
219,820,559
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|
|
|
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|
|
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F-19
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Year Ended December 31,
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2011
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|
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2012
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2013
|
|
|
|
RMB
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|
|
RMB
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|
|
RMB
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|
Revenues
|
|
|
96,465,122
|
|
|
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184,887,591
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|
|
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313,398,188
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Net income (loss)
|
|
|
(31,395,906
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)
|
|
|
17,517,799
|
|
|
|
102,669,162
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|
|
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|
|
|
|
|
|
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|
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|
|
Year Ended December 31,
|
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|
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2011
|
|
|
2012
|
|
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2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net cash provided by (used in) operating activities
|
|
|
(23,543,473
|
)
|
|
|
(2,669,330
|
)
|
|
|
23,575,560
|
|
Net cash provided by (used in) investing activities
|
|
|
44,049,182
|
|
|
|
(9,714,048
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)
|
|
|
(33,227,083
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)
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Net cash provided by (used in) financing activities
|
|
|
(6,390,000
|
)
|
|
|
(5,840,000
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)
|
|
|
13,950,000
|
|
Amounts due from/to related parties represent the amounts due from/to the Parents subsidiaries, which
are eliminated on consolidation.
All of the assets of the VIEs can be used only to settle obligations of VIEs. None of the assets of the
VIEs has been pledged or collateralized. The creditors of the VIEs do not have recourse to the general credit of the Parent or its consolidated subsidiaries.
(x) Recently Issued Accounting Standards
In February 2013, Financial Accounting Standards Board (the FASB) issued ASU 2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income (ASU 2013-02). The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from
each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or
interest expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference to the related footnote for additional information (e.g., the pension
footnote). ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012. The Company adopted the new standard on January 1, 2013.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset
for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The new standard is to be applied
prospectively but retrospective application is permitted. The adoption is not expected to have a material impact on the Companys consolidated financial statements.
3
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ACCOUNTS RECEIVABLE, NET
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Accounts receivable consists of the following:
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|
|
|
|
|
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December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Accounts receivable
|
|
|
46,341,590
|
|
|
|
84,344,499
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
46,341,590
|
|
|
|
84,344,499
|
|
|
|
|
|
|
|
|
|
|
F-20
4
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
Prepaid bandwidth fees
|
|
|
|
|
219,144
|
|
|
|
4,920,581
|
|
Prepaid insurance expense
|
|
|
|
|
|
|
|
|
2,027,219
|
|
Advances to employees
|
|
|
|
|
1,249,822
|
|
|
|
1,434,600
|
|
Prepaid rental expenses
|
|
|
|
|
1,661,854
|
|
|
|
1,124,781
|
|
Receivable from disposal of an equity method investment
|
|
Note 6
|
|
|
6,400,000
|
|
|
|
|
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Others
|
|
(i)
|
|
|
953,110
|
|
|
|
5,038,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
10,483,930
|
|
|
|
14,545,788
|
|
|
|
|
|
|
|
|
|
|
|
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(i)
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Others mainly represent office rental deposits and prepaid content fees. The office rental deposits of RMB3,380,050 and RMB3,896,937 as of December 31, 2012 and 2013 respectively, that are expected to be collected
after one year of the balance sheet date are presented as other non-current assets in the consolidated balance sheets.
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In 2013, the Company invested RMB52,500,000 in a financial product managed by a bank in PRC. The financial product has a
contractual life of 10 years and is redeemable any time during the ten-year period. Principal of RMB40,000,000 was redeemed in 2013 and the Company received investment income of RMB360,750 from this financial product. As of December 31, 2013,
the remaining balance of the investment of RMB12,500,000 was recorded in short-term investment. The fair value of the short-term investment, which was measured using level 2 inputs, approximated to its carrying value as of December 31, 2013.
The Company expects to redeem the short-term investment within 12 months.
6
|
EQUITY METHOD INVESTMENTS
|
In May 2010, the Company made a 49% equity interest investment in Chengdu Baimo Technology Co., Ltd. (Baimo), a
mobile game developer based in the PRC. The Company accounted for the investment under the equity method. As of December 31, 2011, the carrying value of the investment was nil. The Company recognized share of losses from this equity investment of
RMB1,642,538 and nil, and an impairment loss of RMB206,847 and nil for the years ended December 31, 2011 and 2012, respectively. In August 2013, the Company disposed Baimo for a nominal amount.
In October 2010, the Company acquired 60% equity interest in Fengmingxuan Network Co., Ltd. (Fengmingxuan), an online reading
service provider based in the PRC. The Company accounted for its investment in Fengmingxuan using the equity method because the other 40% equity holders have substantive participating rights in (i) selecting, terminating, and setting the
compensation of management responsible for implementing Fengmingxuans policies and procedures; and (ii) establishing operating and capital decisions of Fengmingxuan, including budgets, in the ordinary course of business. As of December 31,
2011, the carrying value of the investment was nil. The Company recognized share of losses from this equity investment of RMB1,392,313 and nil, and an impairment loss of RMB182,423 and nil for the years ended December 31, 2011 and 2012,
respectively. Currently, the Company is seeking a buyer to sell its equity interest in Fengmingxuan and does not expect to receive significant proceeds from the disposal.
In February 2011, Jiubang Digital made a 33% equity interest investment in Zhuhai Zhengdian Technology Co., Ltd. (Zhuhai
Zhengdian), a mobile security software developer based in the PRC. The 33% equity interest was held by Zhuhai Changsheng Computer Technology Co., Ltd. (Zhuhai Changsheng) on behalf of the Company through a loan agreement. Pursuant
to the loan agreement, (1) the Company lent to Zhuhai Changsheng interest free loan in the amount of RMB4,000,000 for the sole purpose of its contribution of the Zhuhai Zhengdians 33% registered capital; (2) Zhuhai Changsheng
assigned its 33% voting right and profit distribution right to the Company; and (3) Zhuhai Changsheng pledged 33% equity interests in the Zhuhai Zhengdian to the Company. In substance, through the loan agreement, Zhuhai Changsheng held the
equity investment in Zhuhai Zhengdian on behalf of the Company.
F-21
Zhuhai Changsheng is a related party of the Company, and is wholly owned by Hu Xiaomei, who is
the spouse of Deng Yuqiang. The investment was accounted for under equity method. On May 1, 2012 (date of disposal), Zhuhai Changsheng entered into Equity Transfer Agreement on behalf of the Company with an independent third party for the sale
of 33% equity interest in Zhuhai Zhengdian for a total cash consideration of US$1,000,000 (equivalent to RMB6,400,000). A gain of RMB4,182,485 was recognized from disposal of Zhuhai Zhengdian upon completion of the sale in May 2012. The gain was
measured as the difference between cash consideration to be received and the carrying amount of the investment at the time of completion of the sale. As of December 31, 2012, a receivable from disposal of Zhuhai Zhengdian in the amount of
RMB6,400,000 was included in prepaid expenses and other current assets. The cash consideration of the disposal transaction was received in full by the Company on February 18, 2013.
The Companys share of losses from equity investment in Zhuhai Zhengdian was RMB709,539 and RMB1,072,946 for the years ended
December 31, 2011 and 2012. As of May 1, 2012, the balance of current assets, non-current assets, current liabilities and non-current liabilities of Zhuhai Zhengdian were RMB2,405,813 and RMB6,584,533, RMB2,391,814 and nil, respectively.
The summarized income statement data of Zhuhai Zhengdian is as follows:
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|
Income statement data
|
|
Year Ended
December 31,
|
|
|
|
2011
|
|
|
2012
(a)
|
|
|
|
RMB
|
|
|
RMB
|
|
Revenues
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
2,150,119
|
|
|
|
3,251,349
|
|
Net loss
|
|
|
2,150,119
|
|
|
|
3,251,349
|
|
(a)
|
For the period from January 1, 2012 to May 1, 2012 (date of disposal).
|
As of
December 31, 2012, the balance of current assets, non-current assets, current liabilities and non-current liabilities of Baimo and Fengmingxuan were RMB277,472 and RMB261,357, RMB1,889,859 and nil, respectively. The summarized income statement
data of Baimo and Fengmingxuan is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Income statement data
|
|
2011
|
|
|
2012
|
|
|
|
RMB
|
|
|
RMB
|
|
Revenues
|
|
|
2,023,550
|
|
|
|
3,133,900
|
|
Gross profit
|
|
|
1,489,402
|
|
|
|
1,964,361
|
|
Operating loss
|
|
|
5,671,679
|
|
|
|
1,696,790
|
|
Net loss
|
|
|
5,672,640
|
|
|
|
1,686,296
|
|
7
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Computer equipment
|
|
|
19,465,980
|
|
|
|
14,869,429
|
|
Office equipment and furniture
|
|
|
2,494,285
|
|
|
|
2,473,596
|
|
Motor vehicles
|
|
|
616,649
|
|
|
|
616,649
|
|
Leasehold improvements
|
|
|
12,110,328
|
|
|
|
13,967,382
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
34,687,242
|
|
|
|
31,927,056
|
|
Less: accumulated depreciation
|
|
|
(26,051,513
|
)
|
|
|
(22,712,318
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
8,635,729
|
|
|
|
9,214,738
|
|
|
|
|
|
|
|
|
|
|
F-22
The depreciation expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Cost of revenues
|
|
|
2,105,699
|
|
|
|
1,736,347
|
|
|
|
1,485,003
|
|
Research and development expenses
|
|
|
1,925,669
|
|
|
|
2,567,077
|
|
|
|
2,066,856
|
|
Selling and marketing expenses
|
|
|
2,466,549
|
|
|
|
2,029,175
|
|
|
|
1,355,310
|
|
General and administrative expenses
|
|
|
592,555
|
|
|
|
621,777
|
|
|
|
715,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense
|
|
|
7,090,472
|
|
|
|
6,954,376
|
|
|
|
5,622,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2011, 2012 and 2013, the Company recognized loss on abandonment of
certain outdated and obsolete computer equipment amounting to RMB8,492, RMB6,978 and RMB545,494, respectively. At the time of abandonment, the computer equipment had a gross carrying amount of RMB104,843, RMB56,735 and RMB7,757,132 and accumulated
depreciation of RMB96,351, RMB49,757 and RMB7,211,638 during the year ended December 31, 2011, 2012 and 2013.
During the year ended
December 31, 2013, the Company recognized loss on impairment of leasehold improvements amounting to RMB1,750,000, that was recorded in general and administrative expenses. The factor leading to the impairment loss was due to the Companys
relocation of its leased office premise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
amount
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
Years
|
|
Copyrights
|
|
|
5,174,694
|
|
|
|
(3,276,499
|
)
|
|
|
1,898,195
|
|
|
|
3
|
|
Others
|
|
|
317,500
|
|
|
|
(144,917
|
)
|
|
|
172,583
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
5,492,194
|
|
|
|
(3,421,416
|
)
|
|
|
2,070,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
amount
|
|
|
Weighted
Average
Amortization
Period
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
Years
|
|
Copyrights
|
|
|
3,416,380
|
|
|
|
(2,019,608
|
)
|
|
|
1,396,772
|
|
|
|
2
|
|
Others
|
|
|
177,500
|
|
|
|
(85,241
|
)
|
|
|
92,259
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
3,593,880
|
|
|
|
(2,104,849
|
)
|
|
|
1,489,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was RMB680,823, RMB1,358,152 and RMB1,324,667 for the years ended December 31, 2011,
2012 and 2013, respectively. The copyrights are amortized over the contractual period, which ranges from 12 months to 60 months. The Company has no intention to renew the copyrights after the contractual period.
The estimated aggregate amortization expense for each of the next five years is as follows:
|
|
|
|
|
December 31,
|
|
Amount
|
|
|
|
RMB
|
|
2014
|
|
|
1,034,683
|
|
2015
|
|
|
628,384
|
|
2016
|
|
|
274,631
|
|
2017
|
|
|
114,440
|
|
2018
|
|
|
18,640
|
|
|
|
|
|
|
Total
|
|
|
2,070,778
|
|
|
|
|
|
|
F-23
9
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
Accrued payroll and employee benefits
|
|
|
|
|
15,743,877
|
|
|
|
19,763,943
|
|
Content fee payable
|
|
|
|
|
10,650,371
|
|
|
|
11,013,500
|
|
Deferred revenue
|
|
(i)
|
|
|
4,373,012
|
|
|
|
6,722,544
|
|
IPO cost payable
|
|
|
|
|
|
|
|
|
6,026,669
|
|
Other tax payables
|
|
(ii)
|
|
|
3,149,642
|
|
|
|
4,519,394
|
|
Accrued bandwidth fee
|
|
|
|
|
954,871
|
|
|
|
487,187
|
|
Government grants
|
|
|
|
|
3,087,014
|
|
|
|
|
|
Other accrued expenses
|
|
(iii)
|
|
|
1,397,529
|
|
|
|
2,264,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
|
|
|
39,356,316
|
|
|
|
50,797,381
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Deferred revenue mainly consists of payments received in advance from customers relating to mobile reading and mobile portal marketing services and the consideration allocated for postcontract customer support
(PCS) relating to mobile application, which are expected to be provided by the Company within one year.
|
(ii)
|
Other tax payable mainly includes VAT payable, business tax payable and surcharges.
|
(iii)
|
Other accrued expenses mainly represent accrued office expenses and other operating costs.
|
Revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Mobile application products and services
|
|
|
3,896,544
|
|
|
|
34,056,890
|
|
|
|
153,363,875
|
|
Mobile reading services
|
|
|
33,547,733
|
|
|
|
72,766,802
|
|
|
|
99,791,329
|
|
Mobile portal marketing services
|
|
|
47,526,527
|
|
|
|
57,506,160
|
|
|
|
52,211,716
|
|
Other revenues
|
|
|
11,623,734
|
|
|
|
20,888,829
|
|
|
|
23,476,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
96,594,538
|
|
|
|
185,218,681
|
|
|
|
328,843,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the Companys revenue from the following geographic areas (based on the location
of customers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
PRC (excluding HK SAR and Macau)
|
|
|
92,697,994
|
|
|
|
154,029,436
|
|
|
|
198,896,271
|
|
United States of America
|
|
|
1,791,420
|
|
|
|
14,312,392
|
|
|
|
60,358,124
|
|
Others
|
|
|
2,105,124
|
|
|
|
16,876,853
|
|
|
|
69,588,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
96,594,538
|
|
|
|
185,218,681
|
|
|
|
328,843,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Cayman Islands and British Virgin Islands
Under the current laws of Cayman Island and the British Virgin Islands (BVI), the Parent and its subsidiary in Cayman Islands and
BVI are not subject to tax on its income or capital gains.
Hong Kong
For the period from its inception to December 31, 2013, the Parents subsidiary in Hong Kong did not have any assessable profits
arising in or derived from HK SAR and therefore no provision for Hong Kong Profits Tax was required. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.
United States
Go
Portal Inc. (Go Portal), a subsidiary of the Jiubang Digital, is incorporated in the State of Delaware of the United States and its principal business activities are conducted in the State of California. Go Portal is subject to a federal
corporation tax rate of 34% and a state corporation tax rate of 8.84%, resulting in an aggregate income tax rate of approximately 39.83%.
Peoples Republic of China
The Parents consolidated PRC subsidiaries and VIEs file separate income tax returns in the PRC. On March 16, 2007, the National
Peoples Congress passed the new Enterprise Income Tax Law (new EIT Law). The statutory income tax rate under the new EIT Law is 25% effective from January 1, 2008. According to the new EIT Law, entities that qualify as
high-and-new technology enterprises eligible for key support from the State (HNTE) are entitled to a preferential income tax rate of 15%.
The Parents consolidated PRC subsidiaries and VIEs are subject to income tax at 25%, unless otherwise specified.
In 2008, Jiubang Digital received the approval from the tax authority that it qualified as an HNTE. The certificate entitled Jiubang Digital
to the preferential income tax rate of 15% effective retroactively from January 1, 2008 to December 31, 2010. In 2011, Jiubang Digital received the approval from the tax authority on its renewal as an HNTE which entitled it to the
preferential income tax rate of 15% effective retroactively from January 1, 2011 to December 31, 2013. Jiubang Digitals applicable income tax rate from January 1, 2014 onwards is 25% unless it requalifies as an HNTE.
Jiubang Computer qualified as an eligible software enterprise in 2013, which entitled it to a two-year full tax exemption followed by a
three-year 50% tax exemption, commencing from the year in which its taxable income is greater than zero.
The components of income (loss)
before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
PRC, excluding HKSAR
|
|
|
(39,020,973
|
)
|
|
|
8,760,488
|
|
|
|
112,936,180
|
|
Cayman Islands and BVI
|
|
|
(3,239,140
|
)
|
|
|
(481,547
|
)
|
|
|
(20,986,291
|
)
|
HKSAR
|
|
|
(515,929
|
)
|
|
|
(14,478
|
)
|
|
|
(615,633
|
)
|
United States
|
|
|
|
|
|
|
|
|
|
|
(1,176,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
|
(42,776,042
|
)
|
|
|
8,264,463
|
|
|
|
90,158,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
The Companys income tax benefit recognized in the consolidated statements of comprehensive
income (loss) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Current income tax expense
|
|
|
|
|
|
|
|
|
|
|
7,860,663
|
|
Deferred income tax benefit
|
|
|
|
|
|
|
(6,903,561
|
)
|
|
|
(9,517,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit
|
|
|
|
|
|
|
(6,903,561
|
)
|
|
|
(1,656,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual income tax benefit reported in the consolidated statements of comprehensive income (loss) for each
of the years ended December 31, 2011, 2012 and 2013 differs from the amount computed by applying the PRC statutory income tax rate to income (loss) before income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Computed expected income tax expense (benefit)
|
|
|
(10,694,011
|
)
|
|
|
2,066,116
|
|
|
|
22,539,520
|
|
Tax rate differential for entities in non-PRC jurisdictions
|
|
|
865,955
|
|
|
|
59,789
|
|
|
|
770,418
|
|
Research and development expenses bonus deduction
|
|
|
(1,619,472
|
)
|
|
|
(3,188,028
|
)
|
|
|
(4,932,333
|
)
|
Non-deductible expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment expense
|
|
|
443,622
|
|
|
|
253,351
|
|
|
|
322,430
|
|
Impairment loss on an equity method investment
|
|
|
51,712
|
|
|
|
|
|
|
|
|
|
Share of losses of equity method investments
|
|
|
410,634
|
|
|
|
|
|
|
|
|
|
Share-based compensation costs
|
|
|
72,974
|
|
|
|
106,521
|
|
|
|
4,455,636
|
|
Other
|
|
|
94,644
|
|
|
|
300,571
|
|
|
|
20,348
|
|
Preferential income tax rate
|
|
|
|
|
|
|
|
|
|
|
(5,240,442
|
)
|
Tax rate differential
|
|
|
1,430,646
|
|
|
|
(1,810,791
|
)
|
|
|
(4,602,374
|
)
|
Change in tax rate
|
|
|
|
|
|
|
|
|
|
|
1,070,764
|
|
Change in valuation allowance
|
|
|
8,943,296
|
|
|
|
(4,691,090
|
)
|
|
|
(16,060,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax benefit
|
|
|
|
|
|
|
(6,903,561
|
)
|
|
|
(1,656,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal components of deferred income tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Tax loss carryforwards
|
|
|
18,460,724
|
|
|
|
10,646,904
|
|
Accrued expenses and other current liabilities
|
|
|
4,635,723
|
|
|
|
8,221,083
|
|
Accounts receivable
|
|
|
3,289,043
|
|
|
|
|
|
Advertising expense
|
|
|
721,531
|
|
|
|
|
|
Impairment loss on equity method investments
|
|
|
425,000
|
|
|
|
425,000
|
|
Impairment loss on property and equipment
|
|
|
|
|
|
|
437,500
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
27,532,021
|
|
|
|
19,730,487
|
|
Valuation allowance
|
|
|
(20,628,460
|
)
|
|
|
(3,309,450
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net
|
|
|
6,903,561
|
|
|
|
16,421,037
|
|
|
|
|
|
|
|
|
|
|
F-26
The movements of the valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1
|
|
|
22,781,569
|
|
|
|
30,450,912
|
|
|
|
20,628,460
|
|
Addition
|
|
|
11,271,562
|
|
|
|
6,933,591
|
|
|
|
4,753,930
|
|
Deduction
|
|
|
(2,328,266
|
)
|
|
|
(4,721,120
|
)
|
|
|
(8,584,922
|
)
|
Reversal
|
|
|
|
|
|
|
(6,903,561
|
)
|
|
|
(11,159,024
|
)
|
Expiration of tax loss
|
|
|
(1,273,953
|
)
|
|
|
(5,131,362
|
)
|
|
|
(1,258,230
|
)
|
Change in tax rate
|
|
|
|
|
|
|
|
|
|
|
(1,070,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
30,450,912
|
|
|
|
20,628,460
|
|
|
|
3,309,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011, 2012 and 2013, valuation allowances were provided against the deferred income
tax assets of certain subsidiaries, which were at cumulative loss positions. In assessing the realization of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax
assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or utilizable. Management
considers projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2013, management assessed the need for the valuation allowance provided against the deferred income tax assets of the Company.
Since Jiubang Computer, Beijing XMedia Science and Technology Co., Ltd., or Beijing XMedia, Sanju Advertising and Beijing Yunlei Cultural Communication Co., Ltd. or Beijing Yunlei began to generate pretax income during 2013 and base on current
business plans and projected net income in the near future, management believes it is more likely than not that these entities will realize the deferred income tax assets. Consequently, the Company recorded a tax benefit in the amount of
RMB11,159,024 due to the reversal of the valuation allowance of the deferred income tax assets of these entities.
As of December 31,
2013, for U.S. federal income tax purposes, the Company had tax loss carryforwards of US$189,927 (RMB1,157,963), which would expire by 2033, if unused. For PRC income tax purposes, the Company had tax loss carryforwards of RMB44,336,299, of which
RMB4,029,710, RMB11,150,776, RMB21,074,569, RMB2,193,356 and RMB5,887,888 will expire, if unused, by 2014, 2015, 2016, 2017 and 2018, respectively.
The new EIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax treaty or arrangement, on the
amount of dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC that are related to earnings accumulated beginning on January 1, 2008. Dividends relating to undistributed earnings generated prior to
January 1, 2008 are exempt from such withholding income tax. Due to the plan to indefinitely reinvest its earnings in the PRC, the Company has not provided for deferred income tax liabilities on undistributed earnings of nil and RMB52,432,644
as of December 31, 2012 and 2013, respectively. It is not practicable to estimate the unrecognized deterred income tax liabilities thereof.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2011, 2012 and 2013 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1
|
|
|
|
|
|
|
594,402
|
|
|
|
5,905,726
|
|
Increase related to current year tax positions
|
|
|
594,402
|
|
|
|
5,311,324
|
|
|
|
16,230,858
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
(3,755,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
|
594,402
|
|
|
|
5,905,726
|
|
|
|
18,380,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Included in the balances of unrecognized tax benefits as of December 31, 2012 and 2013 were
potential benefits of RMB5,349,594 and RMB18,380,952 that, if recognized, would affect the effective tax rate. Nil interest and penalty expenses were recorded for the years ended December 31, 2011, 2012 and 2013. The unrecognized tax benefits
were presented as a reduction of the deferred income tax asset for tax loss carry forwards, if any, since the uncertain tax position would reduce the tax loss carry forwards under the tax law. The unrecognized tax benefits mainly represent the
estimated income tax expense the Company would be required to pay should its revenue for tax purposes be recognized in accordance with new EIT law and regulations. Management believes that it is reasonably possible that approximately RMB18,380,952
of the unrecognized tax benefits as of December 31, 2013 will be recognized in the next twelve months as a result of settlement.
According to the PRC Tax Administration and Collection Law, the statute of limitation is three years if the underpayment of taxes is due to
computational errors made by the taxpayer or the withholding agent. The statute of limitation is extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000. In the case of transfer pricing issues, the
statute of limitation is 10 years. There is no statute of limitation in the case of tax evasion. The income tax returns of the Parents consolidated PRC subsidiaries and VIEs for the years from 2008 to 2013 are open to examination by the PRC
tax authorities.
12
|
REDEEMABLE CONVERTIBLE PREFERRED SHARES, CONVERTIBLE NOTES AND WARRANTS
|
Series A, Series B and Series C convertible preferred shares
Pursuant to the Series A convertible preferred shares purchase agreements dated May 15, 2005, the Parent issued 21,428,600 redeemable
Series A convertible preferred shares to third party investors for US$1,200,000 (equivalent to RMB9,931,800) in aggregate or US$0.056 (equivalent to RMB0.4635) per share (Series A Original Issuance Price) (being retroactively adjusted to
reflect the effect of the share split), net of issuance costs of RMB165,530.
Pursuant to the Series B convertible preferred shares
purchase agreements dated June 9, 2006, the Parent issued 32,142,900 Series B convertible preferred shares (being retroactively adjusted to reflect the effect of the share split) to third party investors for US$9,000,000 (equivalent to
RMB72,036,900) in aggregate or US$0.280 (equivalent to RMB2.2411) per share (being retroactively adjusted to reflect the effect of the share split), net of issuance costs of RMB888,157 (Series B Financing). In conjunction with the Series
B convertible preferred shares purchase agreement, the third party investors of the Series B convertible preferred shares also received 2,083,300 warrants (being retroactively adjusted to reflect the effect of the share split) (Series B
Warrants) to purchase Series B convertible preferred shares at an exercise price of US$0.336 per share (being retroactively adjusted to reflect the effect of the share split) (the price of US$0.280 and US$0.336 are collectively referred to
Series B Original Issuance Price) on June 9, 2006.
On January 21, 2009, the Parent issued convertible promissory
notes of US$4,000,000 (equivalent to RMB27,313,600) to all holders of Series B convertible preferred shares. The notes carry an annual coupon interest rate of 4%. All of the principal and interests of convertible promissory notes were due on
January 20, 2011 (Maturity Date).
In the event that a subsequent preferred shares offering is not completed prior to the
Maturity Date, the holders of the convertible promissory notes have the option to convert the notes into Series B-1 convertible preferred shares, which have the rights and privileges identical to those of Series B convertible preferred shares in all
material aspects save that the conversion share price is determined based on a pre-money valuation of the Company of US$90,000,000.
F-28
In addition, prior to the Maturity Date, the convertible promissory notes holders have the right
to exchange the notes into the convertible preferred shares issued in a subsequent preferred shares financing. The price used to determine the number of convertible preferred shares issued in exchange for the convertible promissory notes is equal to
the purchase price paid by the investors in the newly issued convertible preferred shares times a discount of 20% or 30%, depending on when the subsequent preferred shares offering occurs. Consequently, the exchange feature permits the convertible
promissory notes holder to receive a variable number of shares of an unspecified future series of preferred shares with an aggregate fair value that is based on a fixed monetary amount (the principal amount of the convertible promissory notes that
is being exchanged). The Company accounted for this contingent prepayment feature (put option) as an embedded derivative. As of December 31, 2011 and 2012, there was no outstanding embedded derivative due to the exchange of the convertible
promissory notes as a result of the completion of Series C Financing on June 8, 2010 as described below.
Pursuant to the Series C
convertible preferred shares purchase agreements dated June 8, 2010 (Series C Original Issue Date), (i) the Company issued 22,660,321 Series C-1 convertible preferred shares to certain holders of Series B convertible preferred
shares and a third party investor for US$20,000,000 (equivalent to RMB136,431,445) in aggregate or US$0.8826 (equivalent to RMB6.0207) per share (Series C-1 Original Issuance Price), net of issuance costs of RMB343,098. In connection with the
issuance of the Series C-1 convertible preferred shares, the Company also issued to the third party investor 1,888,396 Series C Warrants to purchase Series C-3 convertible preferred shares at an exercise price of US$1.0591 per share (Series
C-3 Original Issuance Price) on June 8, 2010. The Series C Warrants have a one year term.
On June 8, 2010, as a result of
the completion of Series C Financing, the promissory notes holders elected to exchange all convertible notes of US$4,000,000 (equivalent to RMB27,313,600) into 6,474,587 Series C-2 convertible preferred shares at US$0.6178 per share (Series
C-2 Original Issuance Price). (Series C-1, Series C-2 and Series C-3 convertible preferred shares are collectively referred to as Series C convertible preferred shares).
As described below, the Series B Warrants and Series C Warrants are liability classified. The proceeds received from the issuance of Series B
and Series C Financing were first allocated to the Series B Warrants and Series C Warrants respectively based on their fair values with the residual amount allocated to the Series B and Series C-1 convertible preferred shares. The Company determined
that there was no embedded beneficial conversion feature attributable to the Series A, Series B and Series C convertible preferred shares at the commitment date since the initial conversion price of the Series A, Series B and Series C convertible
preferred shares were greater than the estimated fair values of the Companys ordinary shares as of May 15, 2005, June 9, 2006 and June 8, 2010, respectively. The estimated fair values of the underlying ordinary shares on
May 15, 2005, June 9, 2006 and June 8, 2010 were determined by management based on a retrospective valuation with the assistance of American Appraisal China Limited (American Appraisal), an independent valuation firm. The
Company first determined its enterprise value by using an income approach which requires the estimation of future cash flows and the application of an appropriate discount rate with reference to comparable listed companies engaged in a similar
industry to convert such future cash flows to a single present value, and then allocated the enterprise value between the ordinary shares and preferred shares.
The significant terms of Series A, Series B and Series C convertible preferred shares are as follows:
(i) Conversion
The holders of Series A,
Series B and Series C convertible preferred shares have the right to convert all or any portion of their holdings into ordinary shares at a rate of one-for-one at any time, subject to a contingent conversion price adjustment if there are additional
ordinary shares issued or deemed to be issued, as defined in the Companys Memorandum and Articles of Association, at a price lower than the Series A, Series B and Series C convertible preferred shares issuance price. In addition, each
Series A, Series B and Series C convertible preferred shares will automatically be converted into ordinary shares upon the consummation of a Qualified Initial Public Offering (Qualified IPO), as defined in the Memorandum and Articles of
Association.
F-29
The contingent conversion price adjustment may provide the holders of the Series A, Series B and
Series C convertible preferred shares with a beneficial conversion feature. However, any such beneficial conversion feature relating to the conversion price adjustment, if any, will only be recognized when the contingency is resolved.
(ii) Voting
The holders of Series A, Series B
and Series C convertible preferred shares have voting rights equivalent to the ordinary shareholders on an if-converted basis.
(iii)
Dividends
The board of directors of the Company may approve the payment of dividends at their discretion to the holders of Series A,
Series B and Series C convertible preferred shares. Any dividend declared and paid on ordinary shares shall be also declared and paid in respect of the Series A, Series B and Series C convertible preferred shares as if all such Series A, Series B
and Series C convertible preferred shares has been converted to ordinary shares.
(iv) Liquidation preference
The liquidation preference of the holders of Series A, Series B and Series C convertible preferred shares is as follows: in the event of any
Liquidation Event, as defined in the Memorandum and Articles of Association, the proceeds shall be distributed according to the following sequence: (i) first to the holders of the Series C convertible preferred shares at 100% of the Series C-1,
Series C-2 and Series C-3 Original Issuance Price, plus declared but unpaid dividends on each share of Series C convertible preferred shares; (ii) second to the holders of Series A and Series B convertible preferred shares at 100% of the Series
A Original Issue Price and Series B Original Issuance Price, plus declared but unpaid dividends on each share of Series A and Series B convertible preferred shares, respectively; (iii) third to the holders of Series C convertible preferred
shares a further amount equal to (a) 50% of the Series C-1, Series C-2 and Series C-3 Original Issue Price, plus declared but unpaid dividends on each share of Series C convertible preferred shares if the Liquidation Event occurs within two
years after the Series C Original Issue Date, or (b) 100% of the Series C-1, Series C-2 and Series C-3 Original Issue Price, plus declared but unpaid dividends on each share of Series C convertible preferred shares if the Liquidation Event
occurs on a date later than two years after the Series C Original Issue Date; (iv) forth to the holders of Series A and Series B convertible preferred shares a further amount equal to (a) 50% of the Series A and Series B Original Issue
Price, plus declared but unpaid dividends on each share of Series C convertible preferred shares if the Liquidation Event occurs within two years after the Series C Original Issue Date, or (b) 100% of the Series A Original Issue Price and
Series B Original Issue Price, plus declared but unpaid dividends on each share of Series A and B convertible preferred shares if the Liquidation Event occurs on a date later than two years after the Series C Original Issue Date. The remaining
assets of the Company, if any, shall be distributed pro rata to the holders of ordinary shares and Series A, Series B and Series C convertible preferred shares then outstanding, based on the number of ordinary shares then held by each shareholder on
an if-converted basis.
(v) Redemption
In August 2013, the Memorandum and Articles of Association was amended whereby the earliest redemption date of September 30, 2013 was
extended to September 30, 2014.
F-30
The holders of Series A, Series B and Series C convertible preferred shares will have the right
to request for redemption all or a portion of the respective convertible preferred shares they hold at a price calculated as follows:
(i)
if the aggregate Original Issuance Price amount (the Investment Amount) requested to be redeemed by each holder of Series A, Series B and Series C convertible preferred shares plus a return on the Investment Amount at a rate of
25% per annum (Redemption Return), is equal to or less than 80% of the cash held by the Company at the time of redemption (Cash Balance), accruing from the respective issue date until the redemption date, all preferred
shares requested to be redeemed shall be redeemed at a price that is equal to the sum of the Investment Amount and the Redemption Return; (ii) if the sum of the Investment Amount and the Redemption Return is greater than 80% of the Cash
Balance, all preferred shares requested to be redeemed shall be redeemed at a price that is equal to 80% of the Cash Balance.
If any
convertible preferred shares are redeemed pursuant to (ii), the Company shall issue to such holder a promissory note that (i) has a principal amount that is equal to the difference between the sum of the Investment Amount and the Redemption
Return of such holder and 80% of the Cash Balance; (ii) carries an annual interest of 8%; and (iii) matures 24 months after the redemption.
For all the periods presented, the Company concluded that it was probable that the Series A, Series B and Series C convertible preferred
shares will become redeemable. The Company has elected to accrete changes in the redemption value over the period from the date of issuance to the earliest redemption date using the interest method. The total accretion of Series A convertible
preferred shares of RMB1,937,640, RMB1,893,750 and RMB1,649,151, Series B convertible preferred shares of RMB15,662,572, RMB15,307,795 and RMB13,330,623 and Series C convertible preferred shares of RMB37,620,505, RMB41,031,250 and RMB35,731,608 were
recorded as a reduction to additional paid-in capital first and then charged against accumulated deficit in the absence of additional paid-in capital for the years ended December 31, 2011, 2012 and 2013, respectively.
All the Series A, Series B and Series C convertible preferred shares were automatically converted into Class B ordinary shares upon completion
of the Companys IPO in November 2013. As a result, 86,678,104 Class B ordinary shares were issued upon the conversion of Series A, Series B and Series C convertible preferred shares. Upon the conversion, the carrying amounts of the Series A,
Series B and Series C convertible preferred shares were recorded in additional paid-in capital of RMB486,844,728 and Class B ordinary shares of RMB53,203.
Warrants
Series B
Warrants have a one year term and are required to be exercised before the occurrence of a Qualified IPO, as defined in the Memorandum and Articles of Association.
As discussed above, in conjunction with the Series C convertible preferred shares purchase agreement, on January 8, 2010 the Parent
issued 1,888,396 Series C Warrants to purchase Series C-3 convertible preferred shares at an exercise price of US$1.0591 per share to the third party investor.
The Series B Warrants and Series C Warrants permit the holders to acquire Series B and Series C-3 convertible preferred shares that may
require redemption at a future date at the holders option, and therefore embody conditional obligations of the Company to repurchase the Companys preferred shares. Therefore the warrants are classified separately as liabilities (with a
corresponding reduction to the carrying amount of Series B and Series C-1 convertible preferred shares respectively) on the dates of issuance at their fair value in accordance with ASC Topic 480,
Distinguishing Liabilities from Equity
, and
remeasured to its fair value at each reporting period.
On June 6, 2007 the holders of Series B Warrants exercised all of their
warrants to purchase an aggregate of 2,083,300 Series B convertible preferred shares of the Parent. The Company received an aggregate of US$699,989 (equivalent to RMB5,340,114) in cash and issued 2,083,300 Series B convertible preferred shares in
June 2007.
F-31
On June 2, 2011 the holders of Series C Warrants exercised all of their
warrants to purchase an aggregate of 1,888,396 Series C-3 convertible preferred shares of the Parent. The change in the fair value of the warrant liability of RMB2,356,037 for the year ended December 31, 2011 was recorded in the
consolidated statements of comprehensive loss. The Parent received an aggregate of US$2,000,000 (equivalent to RMB12,977,201) in cash and issued 1,888,396 Series C-3 convertible preferred shares in June 2011.
The Company determined that there was no embedded beneficial conversion feature attributable to the Series B and Series C-3 convertible
preferred shares, that are the underlying for the Series B warrants and Series C warrants. At the dates of exercise of the Series B and Series C warrants, the amount of the proceeds exceeded the fair value of the ordinary shares into which the
Series B and Series C convertible preferred shares can be converted.
13
|
ORDINARY SHARES AND STATUTORY RESERVE
|
Ordinary Shares
Upon incorporation, the Parents authorized ordinary shares were 50,000 shares with a par value of US$1 per share. On May 15,
2005 and May 27, 2010 the Parent approved an 100-for-1 stock split, respectively. The total number of authorized ordinary shares as of December 31, 2011 and 2012 were 413,321,896 and the total number of issued and outstanding ordinary
shares as of December 31, 2011 and 2012 were 51,880,468. The total number of authorized, issued and outstanding Series A convertible preferred shares as of December 31, 2011 and 2012 were 21,428,600. The total number of authorized, issued
and outstanding Series B convertible preferred shares as of December 31, 2011 and 2012 were 34,226,200. The total number of authorized, issued and outstanding of Series C convertible preferred shares as of December 31, 2011 and 2012 were
31,023,304. All applicable share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect the effect of the share split.
In 2007, the Parent granted 575,300 share options at an exercise price of US$0.0001 to a third party consultant in exchange for the consulting
service provided in connection with the issuance of Series B convertible preferred shares. In 2008, the third party consultant exercised all the options and received 575,300 ordinary shares. In August 2013, the Parent repurchased and cancelled
575,300 ordinary shares at a total cost of RMB2,500,354 from the shareholder. The excess of the repurchase price over par value of RMB2,499,940 was charged to additional paid-in capital for the year ended December 31, 2013.
Upon the completion of the Companys IPO in the NASDAQ Stock Market on November 22, 2013, all of the Parents outstanding
ordinary shares before the IPO were redesignated as Class B ordinary shares. The Parent increased its authorized ordinary shares from US$50,000 to US$100,000, which were divided into 850,000,000 Class A ordinary shares and 150,000,000 Class B
ordinary shares, par value of US$0.0001. Holders of Class A ordinary shares and Class B ordinary shares have the same rights, except for voting rights and conversion rights. Holders of Class A ordinary shares are entitled to one vote per
share, while holders of Class B ordinary shares are entitled to ten votes per share. Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time, while Class A ordinary shares
cannot be converted into Class B ordinary shares under any circumstances. The impact of dividing of Class A and Class B ordinary shares has been retroactively reflected in the Companys capital structure in the consolidated financial
statements.
In connection with its IPO, the Parent issued 48,300,000 Class A ordinary shares with par value of US$0.0001 each, at a
price of US$1.87 per share to investors. Net proceeds from such issuance amounted to RMB493,654,481 (net of issuance costs of RMB60,729,250), of which RMB29,647 and RMB493,624,834 were recorded in the Class A ordinary shares and additional
paid-in capital, respectively.
Concurrently upon the completion of the Companys IPO, the Parent issued 8,021,390 and 2,673,796
Class A ordinary shares to Qihoo 360 Technology Co. Ltd. and Kingsoft Internet Software Holdings Limited, respectively, in a private placement at a price of US$1.87 per share. Proceeds from such issuance of ordinary shares were RMB122,766,552,
of which RMB6,564 and RMB122,759,988 were recorded in the Class A ordinary shares and additional paid-in capital, respectively.
F-32
Statutory Reserves
Under PRC rules and regulations, the Parents consolidated PRC subsidiaries and VIEs are required to appropriate 10% of their current year
net profit after offsetting prior year accumulated loss, as determined in accordance with PRC accounting rules and regulations, to a statutory surplus reserve until the reserve balance reaches 50% of their registered capital. The appropriation to
this statutory surplus reserve must be made before distribution of dividends to the Parent can be made.
For the year ended
December 31, 2011, 2012 and 2013, Jiubang Digital made appropriation to the reserve fund of nil, nil and RMB8,927,264, respectively. As of December 31, 2012 and 2013, the accumulated balance of the statutory surplus reserve was nil and
RMB8,927,264, respectively.
14
|
SHARE-BASED COMPENSATION
|
2006 Share Incentive Plan
In June 2006, the Parent adopted a share incentive plan (the 2006 Plan), pursuant to which the Parent is authorized to issue
options to officers, employees, directors and consultants of the Company to purchase up to 11,507,900 of its ordinary shares (being retroactively adjusted to reflect the effect of the share split). The 2006 Plan expires in ten years. In October
2013, the Board of Directors decreased the number of options issuable under the 2006 Plan to 5,224,126 ordinary shares.
2010 Share
Incentive Plan
In June 2010, the Parent adopted a share incentive plan (the 2010 Plan), pursuant to which the Parent
is authorized to issue options and other stock-based awards to officers, employees, directors and consultants of the Company to purchase up to 13,196,337 of its ordinary shares. In October 2013, the Board of Directors decreased the number of options
issuable under the 2010 Plan to 5,373,659 ordinary shares.
2013 Share Incentive Plan
In October 2013, the Parent adopted a share incentive plan (the 2013 Plan), pursuant to which the Parent is authorized to issue
options and other stock-based awards to officers, employees, directors and consultants of the Company to purchase up to 4,243,070 of its ordinary shares.
In December 2011, the Board of Directors approved to grant options to an officer to purchase an aggregate of 834,287 ordinary shares under the
2006 Plan. The exercisability and the exercise price of the options are dependent upon the completion of the Companys IPO, as follows:
|
(a)
|
In the event that the post-IPO valuation of the Company is not less than US$1 billion, the exercise price shall be US$1.8 per share.
|
|
(b)
|
In the event that the post-IPO valuation of the Company is less than US$1 billion, the exercise price shall be half of the public offering price per share of the Company.
|
50%, 30% and 20% of the options will vest on the first, second and third anniversary of the IPO of the Company. All the options that are not
exercisable due to the earlier termination of the employment relationship between the officer and the Company will become null and void upon the occurrence of such earlier termination. In June 2013, the Company terminated the employment with this
officer. As part of the severance package, the options granted to this officer that would have otherwise been forfeited were modified such that 667,430 share options will be immediately vested upon an IPO. The exercisability and the exercise price
of the options remained the same. Since the exercisability is dependent upon the Companys IPO, and it is not probable that this performance condition can be achieved until the IPO is effective, no compensation expense relating to the options
was recorded for the years ended December 31, 2011 and 2012. During 2013, upon the completion of the Companys IPO, RMB3,761,265 was recognized as compensation expenses.
In July and December 2011, total of 1,249,893 share options were granted to the Companys employees with 25% or 40% vesting on the second
or third anniversary of the grant date and the remaining 60% or 75% vesting evenly over the following 29 months or 36 months.
F-33
In July 2012, 75,675 share options were granted to the Companys employees with 25% vesting
on the third anniversary of the grant date and the remaining 75% vesting evenly over the following 36 months.
In December 2012, 305,878
share options were granted to the Companys employees with 25% vesting on the third anniversary of the grant date and the remaining vesting evenly over the following 3 years.
In June 2013, 3,372,300 share options were granted to certain employees with 25% vesting on the third anniversary of the grant date and the
remaining 75% to be vested evenly over the following three years, provided further, that if the Company completes its IPO before December 31, 2013, each of the above vesting dates shall be automatically accelerated by six months. The exercise
price of these options is US$0.8826 per share.
In June 2013, the Board of Directors approved the grant of options to certain employees to
purchase an aggregate of 274,100 ordinary shares of the Parent at an exercise price of US$0.0001 per share under the 2006 Plan. 25% of these share options will vest at the anniversary of the closing date of IPO (vesting commencement
date) and 25% of these share options will vest each year thereafter on the same day of the month as the vesting commencement date.
In September 2013, 1,677,500 share options were granted to certain employees. 25% of the options vest on the third anniversary of the grant
date with the remaining 75% to be vested evenly over the following three years, provided further, that if the Company completes its IPO before December 31, 2013, each of the above vesting dates shall be automatically accelerated by six months.
The exercise price of these options is US$0.8826 per share.
In September 2013, the Parent granted rights to certain officers to purchase
an aggregate of 2,831,374 and 13,266,202 ordinary shares of the Parent at an exercise price of US$0.28 and US$0.8826 per share, respectively. The rights are exercisable at the earlier of (i) the Companys IPO, or (ii) the first
anniversary of the grant date. 25% of the ordinary shares obtained upon exercise shall become transferrable on each of the first, second, third and fourth anniversary of the grant date. In the event that the officer terminates the employment with
the Company, any ordinary shares that are not transferrable will be forfeited, and the Company will repurchase these ordinary shares at the purchase price the officer paid.
In September 2013, the Parent granted rights to an officer to purchase an aggregate of 163,536 ordinary shares of the Parent at an exercise
price of US$0.8826 per share. The options vest upon the Companys IPO, subject to meeting certain terms and conditions. Since such terms and conditions were not met, these share options were fully forfeited upon the Companys IPO.
In September 2013, the Parent modified the exercise price of 3,452,400 vested options held by an officer. The exercise price was changed from
US$0.02 to US$0.0001. The Company determined the difference between the fair value of the vested options and the fair value of the original award before it was modified, and immediately recognized the incremental fair value of the vested options of
RMB426,887 as compensation expense in the year ended December 31, 2013.
In November 2013, 35,000 share options were granted to
certain directors. 30%, 30% and 40% of the options vest on the first, second and third anniversary of the grant date. All the options that are not exercisable due to the earlier termination of the contract between the director and the Company become
null and void upon the occurrence of such earlier termination. The exercise price of these options is US$1.87 per share. 34,759 restricted shares, which were fully and immediately vested at the date of grant, were also granted to these directors.
F-34
A summary of share options activity for the years ended December 31, 2011, 2012 and 2013 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
average
exercise
price
US$
|
|
|
Weighted
remaining
contractual
Years
|
|
|
Aggregate
intrinsic
value
US$
|
|
Outstanding as of January 1, 2011
|
|
|
7,837,748
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,084,180
|
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(199,200
|
)
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2011
|
|
|
9,722,728
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
381,553
|
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(409,864
|
)
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
|
|
9,694,417
|
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
21,620,012
|
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,452,400
|
)
|
|
|
0.0001
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,710,235
|
)
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(56,466
|
)
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
Modification
|
|
|
(166,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
|
24,928,471
|
|
|
|
0.88
|
|
|
|
9.44
|
|
|
|
63,960,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2013
|
|
|
24,153,796
|
|
|
|
0.84
|
|
|
|
9.41
|
|
|
|
61,706,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2013
|
|
|
888,284
|
|
|
|
1.19
|
|
|
|
4.82
|
|
|
|
1,978,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company calculated the fair value of the share options on the grant dates using the Binomial
option-pricing valuation model. The assumptions used in the valuation model are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards granted in
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
63% - 64
|
%
|
|
|
60% - 63
|
%
|
|
|
54% - 60
|
%
|
Risk-free interest rate
|
|
|
2.74% - 4.19
|
%
|
|
|
2.02% - 2.77
|
%
|
|
|
1.72% - 2.97
|
%
|
Exercise multiple
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.2
|
|
Estimated fair value of underlying ordinary shares (per share)
|
|
US$
|
0.48 - 0.59
|
|
|
US$
|
0.64 - 0.84
|
|
|
US$
|
1.65 - 1.87
|
|
Because the Companys ordinary shares did not have a trading history at the time the options were issued,
the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in the similar industry.
The estimated fair value of the underlying ordinary shares on each date of grant was determined by management based on a retrospective
valuation conducted by American Appraisal. The Company first determined its enterprise value by using income approach, which requires the estimation of future cash flows, and the application of an appropriate discount rate with reference to
comparable listed companies engaged in the similar industry to convert such future cash flows to a single present value, and then allocated the enterprise value between the ordinary shares and preferred shares.
F-35
No income tax benefit was recognized in the consolidated statements of comprehensive income
(loss) for these share options as such compensation expenses were not tax deductible.
The fair values of the options granted of the
Company for the years ended December 31, 2011, 2012 and 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Weighted average grant date fair value of option (per share)
|
|
|
1.65
|
|
|
|
2.21
|
|
|
|
7.33
|
|
Aggregate grant date fair value of options
|
|
|
3,429,048
|
|
|
|
843,121
|
|
|
|
158,567,632
|
|
The amount of compensation costs recognized for share options for the years ended December 31, 2011, 2012
and 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Cost of revenues
|
|
|
74,458
|
|
|
|
76,111
|
|
|
|
639,246
|
|
Research and development expenses
|
|
|
111,716
|
|
|
|
164,374
|
|
|
|
1,944,824
|
|
Sales and marketing expenses
|
|
|
52,355
|
|
|
|
124,850
|
|
|
|
728,459
|
|
General and administrative expenses
|
|
|
53,365
|
|
|
|
60,748
|
|
|
|
14,510,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation costs
|
|
|
291,894
|
|
|
|
426,083
|
|
|
|
17,822,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, there were unrecognized compensation costs of approximately RMB143,277,755
related to unvested share options. The unrecognized compensation costs are expected to be recognized over the remaining weighted-average vesting period of 3.6 years.
15
|
EARNINGS (LOSS) PER SHARE
|
Basic and diluted earnings (loss) per ordinary share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
|
(97,996,759
|
)
|
|
|
(43,064,771
|
)
|
|
|
41,103,510
|
|
Earnings allocated to participating redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
(21,903,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for basic earnings per share
|
|
|
(97,996,759
|
)
|
|
|
(43,064,771
|
)
|
|
|
19,200,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding
|
|
|
51,880,468
|
|
|
|
51,880,468
|
|
|
|
67,653,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to ordinary shareholders as reported in basic earnings (loss) per ordinary share
|
|
|
(97,996,759
|
)
|
|
|
(43,064,771
|
)
|
|
|
19,200,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of ordinary shares outstanding as reported in basic earnings (loss) per ordinary share
|
|
|
51,880,468
|
|
|
|
51,880,468
|
|
|
|
67,653,340
|
|
Dilutive effect of outstanding share options
|
|
|
|
|
|
|
|
|
|
|
3,296,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,880,468
|
|
|
|
51,880,468
|
|
|
|
70,950,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per ordinary share
|
|
|
(1.89
|
)
|
|
|
(0.83
|
)
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
The following table summarizes potential ordinary shares outstanding excluded from the
calculation of diluted earnings (loss) per ordinary share for the years ended December 31, 2011, 2012 and 2013, because their effect is anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Shares issuable under share options
|
|
|
9,722,728
|
|
|
|
9,694,417
|
|
|
|
3,829,315
|
|
16
|
RELATED PARTY TRANSACTIONS
|
The amounts due from related parties are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
Amounts due from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Deng Yuqiang
|
|
|
(i
|
)
|
|
|
2,045,455
|
|
|
|
|
|
Zhang Xiangdong
|
|
|
(i
|
)
|
|
|
1,265,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total due from related parties
|
|
|
|
|
|
|
3,310,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Deng Yuqiang, the Companys co-founder and chief executive officer, and Zhang Xiangdong, the Companys co-founder and president, borrowed RMB3,511,093 and RMB1,265,454, respectively from the Company in 2012.
Part of the loan provided to Deng Yuqiang was offset by an equivalent amount of RMB1,470,258 due to him. The outstanding amounts due from Deng Yuqiang and Zhang Xiangdong as of December 31, 2012 were non-interest bearing and subsequently
received by the Company in cash on August 21, 2013. Zhang Xiangdong borrowed an additional RMB517,500 from the Company, and Zhang Xiangdong subsequently repaid the amount to the Company in cash in August 2013.
|
17
|
COMMITMENTS AND CONTINGENCY
|
Future minimum lease payments under non-cancelable operating lease agreements and subleased rent income as of
December 31, 2013 are as follows. The Companys leases do not contain any contingent rent payment terms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
rentals
RMB
|
|
|
Less: Sublease
rental income
RMB
|
|
|
Total
RMB
|
|
|
|
|
Years ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
18,780,908
|
|
|
|
(5,160,000
|
)
|
|
|
13,620,908
|
|
2015
|
|
|
14,111,781
|
|
|
|
(2,365,000
|
)
|
|
|
11,746,781
|
|
2016
|
|
|
8,275,616
|
|
|
|
|
|
|
|
8,275,616
|
|
2017
|
|
|
1,274,959
|
|
|
|
|
|
|
|
1,274,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,443,264
|
|
|
|
(7,525,000
|
)
|
|
|
34,918,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense incurred under operating leases, net of sublease rental income was RMB9,141,000, RMB13,374,000,
and RMB17,429,306 for the years ended December 31, 2011, 2012 and 2013, respectively.
F-37
18
|
Sungy Mobile Limited (Parent Company)
|
The following presents condensed financial information of the Parent Company only.
Condensed balance sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
Cash
|
|
|
14,121,730
|
|
|
|
705,047,599
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
2,234,180
|
|
Investment in and amounts due from subsidiaries
|
|
|
126,730,258
|
|
|
|
236,814,824
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
140,851,988
|
|
|
|
944,096,603
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
|
|
|
|
3,320,945
|
|
Amounts due to subsidiaries
|
|
|
23,166,393
|
|
|
|
105,785,121
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,166,393
|
|
|
|
109,106,066
|
|
|
|
|
|
|
|
|
|
|
Redeemable Series A convertible preferred shares
|
|
|
21,940,700
|
|
|
|
|
|
Redeemable Series B convertible preferred shares
|
|
|
159,973,556
|
|
|
|
|
|
Redeemable Series C convertible preferred shares
|
|
|
265,213,659
|
|
|
|
|
|
Ordinary shares
|
|
|
42,360
|
|
|
|
133,483
|
|
Additional Paid-in Capital
|
|
|
|
|
|
|
1,111,259,393
|
|
Accumulated other comprehensive income
|
|
|
40,335,417
|
|
|
|
45,021,487
|
|
Accumulated deficit
|
|
|
(369,820,097
|
)
|
|
|
(321,423,826
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(329,442,320
|
)
|
|
|
834,990,537
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred shares and shareholders equity (deficit)
|
|
|
140,851,988
|
|
|
|
944,096,603
|
|
|
|
|
|
|
|
|
|
|
Condensed statements of comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
(856,602
|
)
|
|
|
(460,046
|
)
|
|
|
(20,844,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(856,602
|
)
|
|
|
(460,046
|
)
|
|
|
(20,844,955
|
)
|
Change in fair value of warrants
|
|
|
(2,356,037
|
)
|
|
|
|
|
|
|
|
|
Share of earnings (loss) of subsidiaries
|
|
|
(39,563,403
|
)
|
|
|
15,628,070
|
|
|
|
112,659,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(42,776,042
|
)
|
|
|
15,168,024
|
|
|
|
91,814,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of nil income taxes
|
|
|
18,113,956
|
|
|
|
1,334,554
|
|
|
|
4,686,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(24,662,086
|
)
|
|
|
16,052,578
|
|
|
|
96,500,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
Condensed statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net cash used in operating activities
|
|
|
(9,508
|
)
|
|
|
(157,634
|
)
|
|
|
(7,591,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contribution into a subsidiary
|
|
|
|
|
|
|
(15,738,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(15,738,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on behalf of subsidiaries and variable interest entity
|
|
|
1,126,824
|
|
|
|
16,055,569
|
|
|
|
73,410,999
|
|
Payment of issuance cost of ordinary shares in connection with IPO
|
|
|
|
|
|
|
|
|
|
|
(9,444,448
|
)
|
Proceeds from issuance of ordinary shares upon IPO, net of underwriting discounts and commissions of RMB39,307,514
|
|
|
|
|
|
|
|
|
|
|
515,076,220
|
|
Proceeds from concurrent private placement issuance of ordinary shares in connection with IPO
|
|
|
|
|
|
|
|
|
|
|
122,766,552
|
|
Payment for repurchase of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
(2,500,354
|
)
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
2,123
|
|
Proceeds from exercise of liability classified warrants
|
|
|
12,977,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,104,025
|
|
|
|
16,055,569
|
|
|
|
699,311,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
(377,470
|
)
|
|
|
(36,877
|
)
|
|
|
(793,317
|
)
|
Net increase in cash
|
|
|
13,717,047
|
|
|
|
122,658
|
|
|
|
690,925,869
|
|
Cash at beginning of year
|
|
|
282,025
|
|
|
|
13,999,072
|
|
|
|
14,121,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
|
13,999,072
|
|
|
|
14,121,730
|
|
|
|
705,047,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
On February 7, 2014, the Company entered into a definitive agreement to acquire GetJar, Inc. (GetJar), a
privately held mobile ad network based in California. This acquisition was made to support the Companys mobile advertising research and development initiatives. The total purchase consideration is US$5.3 million in cash. In addition, an
aggregate of 1,443,074 Class A ordinary shares are issuable to the seller of GetJar by May 2016 if certain performance targets are achieved. Furthermore, the Company granted restricted shares of 3,074,004 with certain performance condition to the
management and key personnel of GetJar who are employed by the Company. This transaction will be accounted for under the acquisition method of accounting in accordance with ASC Topic 805,
Business Combinations
. The initial accounting for this
business combination is incomplete as the Company is in the process of determining the fair value of assets acquired and liabilities assumed at the acquisition date.
In February 2014, the Company established a subsidiary with 75% equity interest. The registered capital of the subsidiary is RMB10 million.
This subsidiary will be engaged in online game business. Furthermore, subsequent to December 31, 2013, the Company acquired three online game companies through separate transactions. The total consideration for the three acquisitions is
approximately RMB1.8 million.
On April 17, 2014, the Company purchased 290,000 shares of Weibo Corporation, a Cayman Islands company with
operations substantially in PRC, at its initial public offering price of $17 per share. Weibo Corporation is listed in the United States.
F-40
SUNGY MOBILE LTD (NASDAQ:GOMO)
過去 株価チャート
から 8 2024 まで 9 2024
SUNGY MOBILE LTD (NASDAQ:GOMO)
過去 株価チャート
から 9 2023 まで 9 2024