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SEC Filings

424B4
NQ MOBILE INC. filed this Form 424B4 on 05/06/2011
Entire Document
 
e424b4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-172839
and
Registration No. 333-173943
 
PROSPECTUS
 
7,750,000 American Depositary Shares
 
NETQIN MOBILE INC. (NetQin LOGO)
 
Representing 38,750,000 Class A Common Shares
 
 
•  This is the initial public offering of NetQin Mobile Inc., or NetQin.
 
•  We are offering 7,750,000 American Depositary Shares, or ADSs. Each ADS represents five Class A common shares, par value $0.0001 per share.
 
•  Our ADSs have been approved for listing on the New York Stock Exchange, or the NYSE, under the symbol “NQ.”
 
•  The initial public offering price per ADS is $11.50.
 
•  Prior to this offering, there has been no public market for our ADSs or shares.
 
•  Upon the completion of this offering, we will have a dual-class common share structure; our common shares will be divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of Class B common shares are entitled to ten votes per share.
 
 
 
 
Investing in our common stock involves risk. See “Risk Factors” beginning on page 16.
 
 
 
                 
    Per ADS   Total
 
Public offering price
  $ 11.50     $ 89,125,000  
Underwriting discounts and commissions
  $ 0.805     $ 6,238,750  
Proceeds, before expenses, to NetQin
  $ 10.695     $ 82,886,250  
 
 
We have granted the underwriters the right to purchase up to 1,162,500 additional ADSs to cover over-allotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
Piper Jaffray & Co.
 
 
Oppenheimer & Co. Canaccord Genuity
 
The date of this prospectus is May 4, 2011.


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You should rely only on the information contained in this prospectus or any related free writing prospectus filed with the Securities and Exchange Commission, or the SEC. We have not authorized anyone to provide information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ADS.
 
We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside the United States.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our financial statements and related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Overview
 
We are a leading software-as-a-service, or SaaS provider of consumer-centric mobile Internet services focusing on security and productivity. According to a January 2011 report prepared by Frost & Sullivan, a third-party market research firm, we are the dominant provider in the mobile security industry in China with a 67.7% market share as of December 31, 2010, as measured by the number of registered user accounts. We provide a comprehensive suite of mobile Internet services that protect mobile users from security threats and enhance their productivity. As of March 31, 2011, the number of registered user accounts for our services reached approximately 85.97 million in over 100 countries, representing a sizeable share of the fast-growing market for mobile Internet services. Our technological innovation and global significance have been widely recognized through distinctions such as the 2011 Technology Pioneer Award bestowed by the Davos World Economic Forum in September 2010.
 
With significant advances in wireless technologies and the expanding usage of smartphones and other advanced mobile devices, mobile Internet is becoming an essential means of communication and mobile security is becoming a fundamental need in mobile users’ daily lives. We believe we are well positioned to capture market opportunities presented by the rapidly evolving mobile Internet industry. Our cloud-client computing platform combines our cloud-side mobile security knowledge repository and our client-side applications to provide mobile anti-malware, anti-spam, privacy protection, data backup and restore and other services to users worldwide. Leveraging our cloud-side resources, we believe we have compiled one of the largest, most comprehensive mobile security knowledge repositories in the world, including mobile malware, spam messages, malicious websites and other threats. In addition, we offer user-centric client-side mobile security and productivity applications optimized for mobile devices. Our industry-leading mobile security knowledge repository grows continually as new security threats are identified through our own technology or through the contribution of security knowledge from our users and mobile ecosystem participants. As a result, our platform becomes increasingly more powerful as we continue to grow our user base and open our platform to more mobile ecosystem participants, which we believe presents a significant entry barrier to potential competitors.
 
Our vision is to become the most trusted mobile Internet cloud service company by providing trusted intelligent mobile experiences to our users. We began our business by offering mobile security services to address a fundamental and rapidly growing need of mobile users. Building upon the success of our mobile security offerings and our users’ trust in our services, we continue to develop and introduce new services to enhance the productivity of mobile users. Our services are compatible with a wide range of handset models and almost all currently available operating systems for smartphones, including Android, Symbian, iOS, BlackBerry OS and Windows Mobile. We offer our services to users globally through an innovative “Freemium” SaaS business model. Our Freemium SaaS offerings provide users with free services and the ability to choose from a selection of premium services to meet individual needs. Our current service offerings include:
 
  •  Mobile Security:  Our mobile security services are designed to protect users from mobile malware threats, data theft and privacy intrusion. We provide mobile malware scanning,
 


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  Internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating and reporting and other services.
 
  •  Mobile Productivity:  Our mobile productivity services are designed to intelligently enhance time and relationship management, including screening incoming calls, filtering unwanted spam short messaging services messages, or SMS messages, protecting communication privacy and managing calendar activities. In addition, we offer cloud-side synchronization of personal data, including address books, text messages, calendars and other data.
 
  •  Personalized Intelligent Cloud Services:  We provide personalized intelligent cloud services such as “NQ Space” accessible by users through the Internet and across a variety of Internet-enabled devices. These services utilize synchronized user information to provide tailored user experience and extend the functionalities of our core services. For example, mobile users’ contact information which has been stored in the cloud can be used to seamlessly link calendar activities across related contacts.
 
Since our inception, we have focused on building a large and engaged user base. Our cumulative registered user accounts as of December 31, 2008, 2009 and 2010 and as of March 31, 2011 were 15.18 million, 35.63 million, 71.69 million and 85.97 million, respectively. Our average monthly active user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011, were 5.46 million, 11.96 million, 25.44 million and 30.26 million, respectively, and our average monthly paying user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011, were 1.03 million, 1.14 million, 3.24 million and 3.67 million, respectively. Substantially all of our users are smartphone users, which we believe have attractive demographic characteristics.
 
We generate revenues primarily through the sale of user subscriptions to our premium mobile Internet services. We have grown significantly since we commenced our operations. Our total net revenues increased from $4.0 million in 2008 to $5.3 million in 2009 and to $17.7 million in 2010, representing a compound annual growth rate, or CAGR, of 111.4%. We incurred a net loss of $3.6 million in 2008, $5.2 million in 2009, and $9.8 million in 2010. Our net loss amounts reflect the impact of non-cash share-based compensation expenses of $1.2 million in 2008, $1.2 million in 2009, and $12.6 million in 2010.
 
In February 2011, we granted options to purchase 8,020,000 common shares to Dr. Henry Yu Lin, the chairman of the board of directors and chief executive officer, Dr. Vincent Wenyong Shi, a director and the chief operating officer of our company, and Ying Han, an independent director. The vesting period of these options ranges from one to six years. Our board of directors also approved the acceleration of vesting schedules of employees’ options to purchase 14,994,000 common shares. As a result, we expect to incur share-based compensation expense totaling approximately $13.3 million from the first quarter of 2011 over the vesting period of the newly granted options. In addition, in March 2011, we granted options to purchase 1,111,825 common shares to our executive officer and employees with a vesting period ranging from immediately upon this offering to four years. As a result, we expect to incur a share-based compensation expense totaling approximately $1.7 million from the first quarter of 2011 over the vesting period of these newly granted options. Share-based compensation expenses relating to the February and March option grants and the February option acceleration will materially and adversely affect our financial results in the first quarter of 2011 and in subsequent periods over the vesting period of the newly granted options.
 


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Our Industry
 
Personal mobile communications and computing have advanced dramatically with the continual build out of advanced mobile infrastructure and the introduction of increasingly sophisticated portable smart devices. Wireless technology and mobile Internet have allowed for increased interaction and collaboration among individuals beyond what can be achieved through the traditional Internet. This increased level of connectivity has created increasing demand for advanced mobile Internet services, particularly in China, which has the largest mobile user population in the world.
 
Early mobile services were primarily based on Short Message Service, or SMS, technology and were largely focused on user entertainment. Advancements in 3G and mobile technology have led to the development of a new generation of advanced services based on mobile Internet technology to address the need for more effective and efficient use of mobile devices. A number of significant industry advancements have helped to define the mobile Internet computing paradigm. For users, specially designed mobile applications provide simple and convenient interfaces through which users can interact with mobile Internet services. For service providers, a cloud architecture provides the ability to expand the capability of mobile Internet services beyond the computing power available from individual mobile devices.
 
Mobile Internet services are being developed to address users’ requirements for mobile security and productivity. Advanced mobile devices promote the proliferation of mobile applications and increased sharing of data among users which increase the risk of security breaches and threats. There has been increasing demand for services that address these security risks and enhance users’ productivity.
 
Our Competitive Strengths
 
We believe the following strengths enable us to proactively identify the trends of the mobile industry and develop innovative services to address user needs, thus making us a pioneer of the fast-growing mobile security and productivity services industry:
 
  •  leading position in the mobile security and productivity services market with a large and fast-growing global user base;
 
  •  diverse and flexible cloud-client based services portfolio with an innovative Freemium SaaS business model;
 
  •  proprietary technology and strong research and development capabilities;
 
  •  diversified user acquisition and payment channels based on strong relationships with key players in the mobile ecosystem;
 
  •  sophisticated and proprietary business and operation support systems; and
 
  •  visionary and experienced management team with proven track record.
 
Our Strategies
 
Our goal is to further extend our leadership position in China and become a dominant provider of mobile security and productivity services globally. We intend to execute the following strategies to achieve our goal:
 
  •  further expand and monetize our user base;
 
  •  further diversify and enhance our services portfolio;
 


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  •  maintain and strengthen our technology leadership;
 
  •  strengthen and diversify collaborative relationships with key players in the mobile ecosystem;
 
  •  further expand our presence in overseas markets; and
 
  •  establish a strong consumer brand among mobile Internet users.
 
Our Challenges
 
We expect to face risks and uncertainties, including those relating to:
 
  •  growth of the mobile security and productivity industry;
 
  •  our ability to further expand and monetize our user base;
 
  •  our ability to continue to develop and offer mobile security and productivity services that appeal to users;
 
  •  our ability to keep up with the technological developments in the evolving mobile Internet industry and maintain our technological leadership;
 
  •  our ability to maintain strong relationships with key players in the mobile ecosystem;
 
  •  our ability to manage our global expansion effectively and cost-efficiently;
 
  •  the complex system of regulations governing the telecommunications and software development industries in China; and
 
  •  risks associated with our control over our consolidated affiliated entity and its subsidiary, which is based on contractual arrangements rather than equity ownership.
 
See “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties associated with our business and investing in our ADSs.
 
Corporate History and Structure
 
We commenced operations on October 21, 2005 when our founders incorporated Beijing NetQin Technology Co. Ltd., or Beijing Technology, in China. Beijing Technology is primarily engaged in the research and development of products and services related to mobile security and productivity. On March 14, 2007, our founders incorporated NetQin Mobile Inc. in the Cayman Island to become the offshore holding company for our operations in China. Our founders, Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi, hold in aggregate 27.0% of our outstanding share capital indirectly through RPL Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands. Our founders, if acting together, could exert substantial influence over our company and our daily operations. Immediately after this offering, our founders will collectively beneficially own 24.0% of our outstanding share capital and 28.3% of our aggregate voting power and will continue to have significant influence over our company in the foreseeable future. After this offering, our directors, executive officers and principal shareholders will collectively hold approximately 78.1% of the total voting power of our outstanding common shares, and we anticipate that our existing shareholders and option holders who have exercised their vested options will collectively hold approximately 98.0% of
 


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the total voting power of our outstanding common shares immediately after this offering, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs.
 
On May 15, 2007, we established our wholly owned subsidiary, NetQin Mobile (Beijing) Co., Ltd., or NetQin Beijing, in China. On April 26, 2010, we established NetQin International Ltd., or NetQin HK, in Hong Kong; NetQin HK became the directly wholly owned subsidiary of NetQin Mobile Inc. and the immediate holding company of NetQin Beijing. NetQin HK will conduct part of our business activities and operations outside of China. On November 5, 2010, we established NetQin US Inc., or NetQin US, in the United States, which became the directly wholly owned subsidiary of NetQin Mobile Inc. The major functions of NetQin US include analyzing market information in the U.S. mobile industry. The international business of our company will be handled by us, NetQin HK and NetQin Beijing, with the allocation of business to be determined by relevant tax considerations, among other things.
 
PRC laws and regulations currently limit foreign ownership of companies that provide value-added telecommunications services. To comply with these restrictions, we conduct our operations in China primarily through contractual arrangements between our wholly-owned PRC subsidiary, NetQin Beijing, and our affiliated entity, Beijing Technology. Beijing Technology holds the qualifications, licenses and permits necessary to conduct our operations in China.
 
NetQin Beijing, as our wholly owned subsidiary, has entered into a series of contractual agreements with Beijing Technology and its shareholders, which enable us to:
 
  •  exercise effective control over Beijing Technology;
 
  •  receive substantially all of the economic benefits of Beijing Technology in consideration for the technical and consulting services provided by and the intellectual property rights licensed by NetQin Beijing; and
 
  •  hold an exclusive option to purchase all of the equity interests in Beijing Technology when and to the extent permitted under PRC laws, regulations and legal proceedings.
 
As a result of these contractual arrangements, we are considered the primary beneficiary of Beijing Technology, and we treat it as our consolidated affiliated entity under the generally accepted accounting principles in the United States, or U.S. GAAP. We have consolidated the financial results of Beijing Technology in our consolidated financial statements in accordance with U.S. GAAP. For a description of these contractual arrangements, see “Corporate Structure.”
 
On June 1, 2009, Beijing Technology set up a PRC joint venture, Fuzhou NetQin Mobile Information Technology Co., Ltd., or Fuzhou NetQin, with a third party entity, Fuzhou Huihe Yitong Information Technology Co., Ltd., or Fuzhou Huihe. Fuzhou NetQin primarily engages in the research and development of mobile software and related products and services. Beijing Technology holds 51% of the equity interest in Fuzhou NetQin, while Fuzhou Huihe holds 49% of the equity interest. The financial results of Fuzhou NetQin are consolidated in the consolidated financial statements of Beijing Technology.
 


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The following chart illustrates our corporate structure as of the date of this prospectus:
 
(PERFORMANCE GRAPHS)
(1) Beijing Technology is our consolidated affiliated entity established in China and is 52.00% owned by our chairman and chief executive officer, Dr. Henry Yu Lin, 33.25% owned by one of our directors, Xu Zhou and 14.75% owned by Dr. Vincent Wenyong Shi, our chief operating officer. The three shareholders of Beijing Technology are the three founders of our company. We effectively control Beijing Technology through contractual arrangements. See “Corporate Structure.”
(2) The remaining equity interests are owned by Fuzhou Huihe.
 
Our officers and directors beneficially own in aggregate 70.5% of our outstanding share capital as of the date of this prospectus. Immediately after this offering, our officers and directors will collectively beneficially own 52.7% of our outstanding share capital and 62.1% of our aggregate voting power.
 
Corporate Information
 
Our principal executive offices are located at No. 4 Building, 11 Heping Li East Street, Dongcheng District, Beijing, 100013, the People’s Republic of China. Our telephone number at this address is +86 (10) 8565-5555. Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. Our telephone at this address is +1 (345) 949-8066.
 
Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above. Our website is www.netqin.com and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc.
 


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CONVENTIONS USED IN THIS PROSPECTUS
 
In this prospectus, unless the context indicates otherwise, references to:
 
  •  “we,” “us,” “our company,” “our,” and “NetQin” refer to NetQin Mobile Inc. and its subsidiaries and consolidated affiliated entities, as the context may require;
 
  •  “shares” and ‘‘common shares” refer to, prior to the completion of this offering, our common shares, par value $0.0001 per share;
 
  •  “preferred shares” refer to our Series A, Series B, Series C and Series C-1 preferred shares, par value $0.0001 per share;
 
  •  “Renminbi” or “RMB” refers to the legal currency of China;
 
  •  “registered user account” or “activated user account” means a user account that was registered with us. We calculate registered user accounts as the cumulative number of user accounts at the end of the relevant period. Each individual user may have more than one registered user account and consequently, the number of registered user accounts we present in this prospectus overstates the number of persons who are our registered users;
 
  •  “active user account” for a specific period means the registered user account that has accessed our services at least once during such relevant period; and
 
  •  “paying user account” means the user account that has paid or subscribed for our premium services during the relevant period.
 
Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs.
 


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THE OFFERING
 
Total ADSs offered 7,750,000 ADSs
 
Offering price $11.50 per ADS
 
The ADSs Each ADS represents five Class A common shares.
 
ADSs outstanding immediately after this offering 7,750,000 ADSs (or 8,912,500 ADSs if the underwriters exercise their over-allotment option in full)
 
Common shares outstanding immediately after this offering 229,109,213 common shares (or 234,921,713 common shares if the underwriters exercise their over-allotment option in full), comprised of (i) 38,750,000 Class A common shares, par value $0.0001 per share (or 44,562,500 Class A common shares if the underwriters exercise their over-allotment option in full), and (ii) 190,359,213 Class B common shares, par value $0.0001 per share.
 
The ADSs The depositary will hold the Class A common shares underlying your ADSs and you will have rights as provided in the deposit agreement.
 
We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A common shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A common shares, after deducting its fees and expenses.
 
You may turn in your ADSs to the depositary in exchange for Class A common shares. The depositary will charge you fees for any exchange.
 
We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.
 
To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
 
Common shares Our common shares are divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of Class B common shares are entitled to ten votes per share.
 


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We will issue Class A common shares represented by our ADSs in this offering.
 
All of our existing common shares will be redesigned as Class B common shares and our outstanding preferred shares will be automatically converted into Class B common shares upon the completion of this offering.
 
All options granted prior to the completion of this offering entitle option holders to the equivalent number of Class B common shares once the options are vested and exercised and all options to be granted after this offering will entitle option holders to the equivalent number of Class A common shares.
 
Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B common shares under any circumstances. Upon any transfer of Class B common shares by a holder thereof to any person or entity which is not an affiliate of such holder and which is not any of our founders or any affiliates of our founders, such Class B common shares shall be automatically and immediately converted into the equal number of Class A common shares.
 
In addition, if at any time our three founders, Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi and their affiliates collectively own less than 5% of the total number of the issued and outstanding Class B common shares, each issued and outstanding Class B common share shall be automatically and immediately converted into one Class A common share, and we shall not issue any Class B common shares thereafter.
 
Furthermore, if at any time more than fifty percent (50%) of the ultimate beneficial ownership of any holder of Class B common shares (other than our founders or our founders’ affiliates) changes, each such Class B common share shall be automatically and immediately converted into one Class A common share.
 
Option to purchase additional ADSs We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional 1,162,500 ADSs.
 
Reserved ADSs At our request, the underwriters have reserved for sale, at the public offering price, up to an aggregate of 571,429 ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed share program.
 


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Use of proceeds We estimate that we will receive net proceeds of approximately $79.0 million from this offering (after deducting underwriting discounts and commissions and estimated offering expenses payable by us).
 
We intend to use the net proceeds from this offering as follows:
 
• approximately $25.0 million for the expansion of sales and marketing efforts;
 
• approximately $15.0 million for investments in technology, infrastructure and research and development activities; and
 
• the remainder for general corporate purposes, including working capital needs, and for potential acquisitions of complementary businesses (although we are not currently negotiating any such acquisitions).
 
See “Use of Proceeds” for more information.
 
NYSE symbol NQ
 
Depositary Deutsche Bank Trust Company Americas      
 
Lock-up We and all of our directors, executives and shareholders, and certain option holders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, shares or similar securities for a period of 180 days after the date of this prospectus. In addition, through a letter agreement, we will instruct Deutsche Bank Trust Company Americas, as depositary, not to accept any deposit of any common shares or issue any ADSs for 180 days after the date of this prospectus unless we consent to such deposit or issuance, and not to provide consent without the prior written consent of the representatives of the underwriters. The foregoing does not affect the right of ADS holders to cancel their ADSs and withdraw the underlying common shares. See “Underwriting” for more information.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.
 
The number of common shares that will be outstanding immediately after this offering:
 
  •  is based upon 164,990,213 common shares outstanding as of the date of this prospectus, assuming the conversion of all outstanding preferred shares into 114,637,272 Class B common shares immediately upon the completion of this offering;
 


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  •  includes 25,369,000 common shares underlying options that have been exercised for which we will issue 25,369,000 Class B common shares to the option holders upon the completion of this offering;
 
  •  excludes 19,029,442 common shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of $0.89 per share; and
 
  •  excludes 13,000,000 common shares reserved for future issuances under our 2011 Share Incentive Plan as of the date of this prospectus.
 
Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs.
 


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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the summary consolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this Summary Consolidated Financial and Operating Data together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate the results to be expected in any future period.
 
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars, except for share, per share and per ADS data)
 
Consolidated Statement of Operations Data:
                       
Net revenues:
                       
Premium mobile Internet services
    3,867       5,014       15,268  
Other services
    94       250       2,427  
                         
Total net revenues
    3,961       5,264       17,695  
                         
Cost of revenues(1)
    (2,044 )     (2,812 )     (5,193 )
                         
Gross profit
    1,917       2,452       12,502  
                         
Operating expenses:
                       
Selling and marketing expenses(1)
    (2,404 )     (3,344 )     (4,436 )
General and administrative expenses(1)
    (2,067 )     (2,139 )     (14,750 )
Research and development expenses(1)
    (1,201 )     (2,312 )     (2,959 )
                         
Total operating expenses
    (5,672 )     (7,795 )     (22,145 )
                         
Loss from operations
    (3,755 )     (5,343 )     (9,643 )
                         
Interest income
    86       159       234  
Realized gain/(loss) from available for sale investments
    294       47       (102 )
Foreign exchange losses, net
    (156 )     (2 )     (46 )
Other income/(expense), net
    (16 )     (12 )     135  
                         
Loss before income taxes
    (3,547 )     (5,151 )     (9,422 )
                         
Income tax expense
    (48 )           (401 )
Share of loss from associate
                (7 )
                         
Net loss
    (3,595 )     (5,151 )     (9,830 )
                         
Net loss attributable to the non-controlling interest
          1       3  
                         
Net loss attributable to NetQin Mobile Inc. 
    (3,595 )     (5,150 )     (9,827 )
                         
Accretion of redeemable convertible preferred shares
    (1,263 )     (1,393 )     (1,533 )
                         
Beneficial conversion feature of redeemable convertible preferred shares
                (5,693 )
                         
Net loss attributable to common shareholders
    (4,858 )     (6,543 )     (17,053 )
                         
 


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    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars, except for share, per share and per ADS data)
 
Net loss per common share:
                       
Basic
    (0.15 )     (0.15 )     (0.34 )
Diluted
    (0.15 )     (0.15 )     (0.34 )
Net loss per ADS:(2)
                       
Basic
    (0.03 )     (0.03 )     (0.07 )
Diluted
    (0.03 )     (0.03 )     (0.07 )
Weighted average number of common shares outstanding:
                       
Basic
    33,089,052       42,251,533       49,683,230  
Diluted
    33,089,052       42,251,533       49,683,230  
(1) Share-based compensation expenses included in:
 
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars)
 
Cost of revenues
    5       13       19  
Selling and marketing expenses
    31       35       102  
General and administrative expenses
    1,128       1,087       12,299  
Research and development expenses
    32       43       146  
 
(2) Each ADS represents five Class A common shares.
 
                                 
    As of December 31,
    2008   2009   2010   2010
                (unaudited
                pro forma)(1)
    (in thousands of dollars)
 
Summary Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
    587       1,704       17,966       17,966  
Total current assets
    11,631       7,645       44,611       44,611  
Total assets
    13,253       10,339       48,404       48,404  
Total current liabilities
    1,230       2,161       5,562       5,562  
Total liabilities
    1,230       2,161       5,749       5,749  
Series A convertible preferred shares
    3,242       3,242       3,242        
Series B redeemable convertible preferred shares
    13,717       15,109       16,638        
Series C redeemable convertible preferred shares
                16,983        
Series C-1 redeemable convertible preferred shares
                14,115        
Total shareholders’ equity/(deficit)
    (4,936 )     (10,173 )     (8,323 )     42,655  
(1) Pro forma basis reflects the conversion of all outstanding preferred shares on a one-for-one basis into an aggregate of 114,637,272 common shares upon the completion of this offering.
 
Non-GAAP Financial Measure
 
To supplement the net income/(loss) presented in accordance with U.S. GAAP, we use adjusted net income/(loss) as a non-GAAP financial measure. We define adjusted net income/(loss) as net income/(loss) excluding share-based compensation expenses. We present adjusted net income/(loss) because it is used by our management to evaluate our operating performance, in addition to net income/(loss)
 

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prepared in accordance with U.S. GAAP. We also believe it is useful supplemental information for investors and analysts to assess our operating performance without the effect of non-cash share-based compensation expenses.
 
The use of adjusted net income/(loss) has material limitations as an analytical tool. One of the limitations of using adjusted net income/(loss) is that it does not include share-based compensation expenses, which have been and will continue to be a significant recurring expense in our business. In addition, because adjusted net income/(loss) is not calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net income/(loss) as a substitute for or superior to net income/(loss) prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
 
The following table sets forth the calculation of adjusted net income/(loss), which is determined by adding back share-based compensation expenses to our net income/(loss) presented in accordance with U.S. GAAP.
 
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars)
 
Net loss
    (3,595 )     (5,151 )     (9,830 )
Add back: share-based compensation expenses
    1,196       1,178       12,566  
Adjusted net income/(loss)
    (2,399 )     (3,973 )     2,736  
 
Selected Operating Data
 
We monitor certain key operating metrics that we believe are important to our financial performance. For more information, see “Selected Consolidated Financial and Operating Data — Selected Operating Data.” As our business evolves and we continue to gain further insight into our growing business, we may change the method of calculating our key operating metrics to address uncertainties in these metrics or add new key operating metrics to reflect the changes in our business.
 
Our registered user accounts and active user accounts overstate the actual number of our individual registered users and active users, respectively. For more information, see “Risk Factors — Risks Related to Our Business and Industry — The number of our registered user accounts overstates the number of unique individuals who register to use our products. Our active user and paying user account figures may differ from the actual numbers of active and paying user accounts.”
 


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The following tables set forth cumulative registered user accounts as of December 31, 2008, 2009 and 2010 and as of March 31, 2011, respectively, as well as the average monthly active user accounts and average monthly paying user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011, respectively.
 
                                 
    As of December 31,   As of March 31,
    2008   2009   2010   2011
    (in millions)
 
Cumulative registered user accounts
    15.18       35.63       71.69       85.97  
China
    12.41       26.88       48.50       57.38  
Overseas
    2.77       8.75       23.19       28.58  
 
                                 
    For the Three Months Ended
    December 31,   March 31,
    2008   2009   2010   2011
    (in millions)
 
Average monthly active user accounts
    5.46       11.96       25.44       30.26  
China
    4.49       9.07       17.39       20.05  
Overseas
    0.97       2.89       8.05       10.21  
Average monthly paying user accounts
    1.03       1.14       3.24       3.67  
China
    1.00       0.97       2.55       2.81  
Overseas
    0.03       0.17       0.69       0.86  
 


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RISK FACTORS
 
An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
 
Risks Related to Our Business and Industry
 
Our limited operating history makes it difficult to evaluate our business and prospects.
 
We commenced operations in October 2005 and have experienced rapid growth since then. As such, we have a limited operating history for you to evaluate our business, financial performance and prospects. It is also difficult to evaluate our prospects because we may not have sufficient experience to address the risks frequently encountered by fast-growing companies entering new and rapidly evolving markets such as the mobile security and productivity market. We incurred net losses in 2008, 2009 and 2010, and we may continue to incur losses in the future. Our ability to achieve, maintain and increase net profit may be affected by various factors including the development of our industry, the continued acceptance of our products and services by users, our ability to maintain good relationships with other participants in the mobile ecosystem and our ability to control our costs and expenses. We may not be able to sustain our profitability on a quarterly or annual basis. Due to our limited operating history, 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 with a limited operating history may encounter or to which such companies may be exposed.
 
Our Freemium service business model is new in our industry and we may not be able to continuously meet user demand and increase the number of paying users, which may have material and adverse effects on our business and results of operations.
 
Our Freemium service business model provides users with free services and the flexibility to choose from a selection of premium services to meet users’ individual needs. This model is relatively new in the mobile security and productivity industry. The success of our business model depends on, among other factors, our ability to convert our registered user accounts into paying user accounts by improving and marketing our existing products and services and developing and pricing new products and services in response to evolving user needs. Although we constantly monitor and research user needs, we may be unable to meet user demands on a continuous basis or anticipate future user demands, which will adversely affect our ability to convert free user accounts into paying user accounts, and materially and adversely affect our business and results of operations. In addition, we may not be able to maintain and increase the prices of our premium products and services, which may have material and adverse effects on our growth and prospects.
 
The mobile security and productivity industry may not grow as quickly as expected, which may materially and adversely affect our business and prospects of future growth.
 
Our business and prospects depend on the continued development of the mobile security and productivity industry in China and overseas. As a relatively new industry, the mobile security and productivity industry has only begun to experience substantial growth in recent years both in terms of number of users and revenues. We cannot assure you, however, that the industry will continue to grow as rapidly as it did in the recent past. The growth of the mobile security and productivity industry is affected by numerous factors, such as users’ general communication experience, technological innovations, development of smartphones and other mobile devices, development of mobile Internet-based telecommunication services and applications, regulatory changes, and the macroeconomic


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environment. If the mobile security and productivity industry in China or globally does not grow as quickly as expected or if we fail to benefit from such growth by successfully implementing our business strategies, our business and prospects may be materially and adversely affected.
 
Our business is increasingly subject to the risks of international operations, which could significantly affect our financial condition and operating results.
 
International expansion forms an important component of our growth strategy. Expanding our business internationally exposes us to a number of risks, including:
 
  •  our ability to select the appropriate geographical regions for overseas expansion;
 
  •  difficulty in identifying appropriate local wireless carriers, handset companies and/or joint venture partners and establishing and maintaining good cooperation relationships with them;
 
  •  difficulty in understanding local market and culture;
 
  •  fluctuations in currency exchange rates;
 
  •  compliance with foreign laws and regulations that apply to our overseas operations, including import and export requirements, foreign exchange controls and cash repatriation restrictions, data privacy requirements, labor laws, and anti-competition regulations; and
 
  •  increased costs associated with doing business in foreign jurisdictions.
 
Our financial condition and operating results also could be significantly affected by these and other risks associated with overseas activities. Furthermore, we are in the process of implementing policies and procedures designed to facilitate compliance with laws and regulations in foreign jurisdictions applicable to us, but there can be no assurance that our employees, contractors or agents will not violate such laws and regulations or our policies. Any such violations could individually or in the aggregate materially and adversely affect our financial condition and operating results.
 
Undetected errors, flaws or failures in our products or services, failure to detect new security threats, failure to respond to security events with sufficient speed and efficiency, or failure to maintain updated knowledge repositories 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 products and services. We receive user feedbacks in connection with errors, flaws or failures in our products and services that affect their user experience 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. Undetected errors, flaws or failures in our services and products or failure to detect new security threats or respond to such threats with sufficient speed and efficiency 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.
 
Maintaining comprehensive repositories of mobile viruses, malware and spam massages also helps increase the efficiency and accuracy of our mobile security and productivity products and services. Failure to maintain updated repositories for these products and services may materially and adversely affect our business and results of operations.


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Failure to maintain effective customer support could harm our reputation and our ability to retain users, which may materially and adversely affect out results of operations.
 
Customer support, including customer service and technical support, is critical to retaining current users and attracting potential users, and we may not be able to maintain and continually improve the quality of our customer service and technical support to meet mobile users’ expectations. Our business is significantly affected by the overall size of our user base and our ability to monetize our user base, which in turn are determined by, among other factors, user experience of our services and products. If our mobile security and productivity products and services contain errors or other flaws, or if we otherwise fail to provide effective customer service, our users may be less inclined to use our services or recommend us to other potential users, and may switch to our competitors’ mobile services. Some China-based Internet companies have experienced group complaints, sometimes organized by their competitors or people attempting to profit from such complaints. If we face similar group complaints in a short time frame, we may not be able to effectively handle customer service requests from our users. Unsatisfactory customer support can disrupt our operations, adversely affect the user experience, harm our reputation, cause our users to stop using our services, and lower the market acceptance of our products and services, any of which may materially and adversely affect our results of operations.
 
We operate in a rapidly evolving industry. If we fail to keep up with technological developments and mobile device users’ changing requirements, our business, financial condition and results of operations may be materially and adversely affected.
 
The mobile security and productivity industry is rapidly evolving and subject to continuous technological developments. Our success depends on our ability to keep up with these technological developments and the resulting changes in user behavior. For example, an increasing number of mobile users have been able to access the Internet via an increasing number of different platforms, including Android, Symbian, iOS, BlackBerry OS and Windows Mobile. There may also be changes in the industry landscape as different types of platforms compete with one another for market share. For example, Nokia may, as a result of a strategic partnership with Microsoft announced in February 2011, switch from the Meego platform to the Windows Phone platform on some of its smartphone models, thus potentially changing the market demand for mobile products that operate on these two platforms. If we do not adapt our products and services to such changes in an effective and timely manner as more platforms become available in the future, we may suffer loss in market share. Given that we operate in a rapidly evolving industry, we also need to continuously anticipate new security challenges and industry changes and respond to such changes in a timely and effective manner.
 
Furthermore, changes in technology may require substantial capital expenditures in research and development as well as in modification of products, services or infrastructure. If we fail to keep up with technological developments and continue to innovate to meet the needs of our users, our products and services may become less attractive to users, which in turn may adversely affect our competitiveness, results of operations and prospects.
 
We may not be able to continue using or adequately protect our intellectual property rights, which could harm our business and competitive position.
 
We believe that patents, trademarks, trade secrets, copyright, and other intellectual property we use are important to our business. We rely on a combination of patent, trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. Some of the intellectual property used in our business operations are held by our founders and a third party. We have entered into a license agreement to use such intellectual property for our business operations, but if the individuals holding the intellectual property fail to perform under these license agreements or if the agreements are terminated for any reason, our business and results of operations may be negatively impacted, and if we


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are deemed to be using such intellectual property without due authorization, we may become subject to legal proceedings or sanctions which could harm our business and results of operations. We have also invested significant resources to develop our own intellectual property. In addition, failure to maintain or protect intellectual property rights could harm our business, and any unauthorized use of our intellectual property by third parties may adversely affect our current and future revenues and our reputation.
 
The validity, enforceability and scope of protection available under intellectual property laws with respect to the mobile and Internet industries in China, where all of our operations and a significant part of our business are located, are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States or other countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.
 
We may not be able to manage our expansion effectively and our current and planned resources may not be adequate to support our expanding operations; consequently, our business, results of operations and prospects may be materially and adversely affected.
 
We have experienced rapid growth since we commenced operations and began offering our first anti-virus services and products for mobile phones in 2005. The number of our cumulative registered user accounts increased from 15.18 million as of December 31, 2008 to 71.69 million as of December 31, 2010. The number of our employees increased from 248 as of December 31, 2008 to 378 as of December 31, 2010. Our rapid expansion may expose us to new challenges and risks. To manage the further expansion of our business and the growth of our operations and personnel, we need to continuously expand and enhance our infrastructure and technology, and improve our operational and financial systems and procedures and controls. We also need to expand, train and manage our growing employee base. In addition, our management will be required to obtain, maintain or expand relationships with wireless carriers, handset manufacturer partners, chipmakers and other third-party business partners. We cannot assure you that our current and planned personnel, infrastructure, systems, procedures and controls will be adequate to support our expanding operations. If we fail to manage our expansions effectively, our business, results of operations and prospects may be materially and adversely affected.
 
We have historically derived a majority of our revenues from our smartphone handset users, which may be affected by fluctuations in the smartphone market.
 
We derive substantially all of our net revenues for the years ended December 31, 2008, 2009 and 2010, respectively, from applications for use in smartphones. Any significant downturn in the overall demand for smartphones could adversely affect the demand for mobile security and productivity applications, which in turn would materially decrease our revenues. Although the smartphone market has grown in recent years, it is uncertain whether the number of smartphones to be manufactured will grow at a similar rate in the future. For example, the recent global economic downturn resulted in lower-than-anticipated growth in smartphone sales. To the extent that our future revenues substantially depend on sales of smartphones, our business would be vulnerable to any downturns in the smartphone market.


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A significant portion of our revenues historically have been attributable to the users of a limited number of wireless carriers and smartphone manufacturers, and if we are unable to maintain these key relationships or establish new relationships with additional wireless carriers and smartphone manufacturers, our revenues would be adversely affected.
 
In the value-added telecommunications market, wireless carriers and handset manufacturers generally have the power to select software and application suppliers. We have established strong relationships with certain wireless carriers and handset manufacturers, and we anticipate that a limited number of wireless carriers and handset manufacturers, particularly smartphone manufacturers, will continue to represent a significant percentage of our revenues for the foreseeable future. However, there is no assurance that we would be able to continue our current arrangements with these wireless carriers and handset manufacturers on similarly favorable terms or at all, and we are not guaranteed any minimum level of revenues from them. We cannot assure you that revenues derived from collaboration with such wireless carriers and handset manufacturers will reach or exceed historical levels in any future period. The loss of one or more of such key wireless carriers or smartphone manufacturers, whether due to a change of control or bankruptcy or other causes, a reduction in mobile devices with our products preinstalled, or our failure to attract additional key wireless carriers and handset manufacturers, would adversely affect our revenues.
 
We depend on wireless carriers and mobile payment service providers for the collection of a substantial portion of our revenues, and any loss or deterioration of our relationship with wireless carriers or mobile payment service providers may result in disruptions to our business operations and the loss of revenues.
 
For the years ended December 31, 2008, 2009 and 2010, a substantial portion of our revenues were collected through the payment channels of wireless carriers. We cooperate with wireless carriers, either directly or through mobile payment service providers. Wireless carriers provide us with billing and collection services for a fixed percentage of the total billing. If we cooperate with wireless carriers through mobile payment service providers, we share the payments with the mobile payment service providers. Substantially all of our net revenues were collected through wireless carriers and mobile payment service providers in 2008 and 2009, and more than half of our net revenues were collected through wireless carriers and mobile payment service providers in 2010. Our agreements with wireless carriers are generally for a term of one year and we generally renew such agreements when they expire. Because several large wireless carriers hold dominant positions in their respective markets, if a wireless carrier’s payment channel or collection system becomes unavailable or malfunctions, we may experience delays associated with attempts to resolve the problems, which may result in a loss of revenues. In addition, any loss or deterioration of our relationships with wireless carriers may result in disruptions to our business operations, the loss of our revenues and a material and adverse effect on our financial condition and results of operations.
 
Our relationships with mobile payment service providers are also critical for us to collect sales proceeds. Net revenues generated through our top mobile payment service provider, Tianjin Yidatong Technology Development Co., Ltd., or Yidatong, as a percentage of our total net revenues, were 52.7%, 20.0% and 21.4% in 2008, 2009 and 2010, respectively. Yidatong charges us at a lower fee rate than other mobile payment service providers through which we cooperate with wireless carriers. The principal shareholder of Yidatong was our consultant in 2006 and 2007 and received certain share options and consulting fees in connection with her services. In addition, we provided Yidatong with an interest-free advance in order to fund Yidatong’s short-term liquidity needs and to further cultivate our long-term commercial relationship with Yidatong. Please refer to note 8, “Other Non-Current Assets,” in the Notes to the Consolidated Financial Statements for details of this advance. This advance was fully repaid by Yidatong in January 2011. In addition, Beijing Technology, is a mobile payment service provider of China Mobile. Net revenues generated directly from China Mobile, as a percentage of our total net revenues, were 28% in 2008, 48% in 2009 and 10% in 2010. Our agreements with mobile payment


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service providers are generally for terms of one to five years and we generally renew these agreements when they expire. Our agreement with Yidatong has a term of five years and will expire in June 2015. We have become less dependent on any specific mobile payment service provider or wireless carriers, such as Yidatong or China Mobile, as we establish more diversified payment channels. However, if mobile payment service providers, especially Yidatong or China Mobile, do not perform their contracts with us due to the recent negative publicity or any other reason, our business and results of operations may be materially and adversely affected. In addition, if Yidatong or other mobile payment service providers increase the fee rates they charge us or if our relationships with them deteriorate, our business and results of operations would be adversely affected.
 
The success of our business depends on our ability to maintain and enhance a strong brand; failure to do so may result in a reduced number of user accounts and material and adverse effects on our business, financial condition and results of operations.
 
We believe that maintaining and enhancing our “NetQin” and other brands is of significant importance to the success of our business. A well-recognized brand is critical to increasing the number of our user accounts and, in turn, enhancing our attractiveness to the top mobile device manufacturers. Since the mobile security and productivity industry is highly competitive, maintaining and enhancing our brand depends largely on our ability to retain our current position as a market leader in China and a significant market player in the rest of the world, and the retaining of such position may be difficult and expensive.
 
Historically, with our comprehensive and reliable mobile security and productivity services, we have established our reputation and established our market position. As a company with a limited operating history, we have conducted and will continue to conduct various marketing and brand promotion activities. We cannot assure you, however, that these activities will be successful and achieve the brand promotion effect we expect. Any failure to maintain and enhance our brand may result in a reduced number of user accounts and material and adverse effects on our business, financial condition and results of operations.
 
The recent negative publicity and allegations in the media against Beijing Feiliu Jiutian Technology Co., Ltd., or Beijing Feiliu, and us may have adversely damaged our brand, public image and reputation, which may seriously harm our ability to attract and retain users and business partners and result in a material adverse impact on our business, results of operations and prospects.
 
On March 15, 2011, a live program broadcast by China Central Television Station, or CCTV, the national television broadcasting network owned by China’s central government, in celebration of China’s consumer rights protection day, reported various complaints of certain alleged fraudulent practices by Beijing Feiliu, a company in which we hold a 33% equity interest, and by us. Such alleged fraudulent practices generally included, among other things, uploading malware or viruses to imported mobile phones to promote our mobile security products. We have interviewed our employees and reviewed our mobile security products, and from this investigation we have found no evidence of malware or the alleged fraudulent practices. We also understand that Beijing Feiliu has also interviewed their employees and examined or tested their mobile software products and did not find any evidence of malware or alleged fraudulent practices. Following the CCTV broadcast on March 15, 2011, many news articles in China and overseas reported on CCTV’s negative publicity about Beijing Feiliu and us with additional allegations, including claims that China’s Ministry of Industry and Information Technology, or MIIT, directed the three major telecom operators in China to cease offering our mobile security applications on their respective online application stores, and as a result the three major telecom operators have terminated their business relationships with us.
 
Based on our internal investigation and due diligence inquiries with certain major telecom operators in China, we believe that the claims about their termination of our contractual arrangements are false.


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Furthermore, prior to the CCTV broadcast, our products were not available at the application store of China Unicom. We continue to maintain business relationships with our major business partners in the ordinary course of our business. Following the CCTV March 15 broadcast, Beijing Feiliu submitted the two versions of its download software that were mentioned in the CCTV program for testing and certification with the PRC State Information Center Software Testing Center, or SICST, a national level certification organization established by the PRC National Development and Reform Commission. According to the certificate issued by SICST, Beijing Feiliu’s software met SICST’s testing requirements and does not have the function to automatically download any third-party software without user authorization, and does not bundle with any third-party software that does so. In addition, Beijing Feiliu also submitted the two versions of its download software that were mentioned in the CCTV program for testing and verification with the Computer Technology Security Test Center MIIT, or CTSTC, a security test center established by the MIIT. After performing various tests on the software, CTSTC concluded that Beijing Feiliu’s download software in fact can be installed normally and uninstalled successfully, and that no applications were downloaded or added to the installed application list other than the download software itself.
 
Although we do not believe that we have committed any wrongdoings and we do not have any reason to believe at this stage that Beijing Feiliu has engaged in any fraudulent practices, CCTV has wide coverage and perceived authority over public opinion and the negative publicity by CCTV and other media about Beijing Feiliu and us may have adversely damaged our brand, public image and reputation, which may seriously harm our ability to attract and retain users and result in a material adverse impact on our results of operations and prospects. For example, as of the date of this prospectus, each of Nokia, China Mobile and China Telecom has removed our applications from its respective official online mobile application store, and although Nokia has restored our application onto its official online store, Ovi, there may be similar removals or other negative reactions from other mobile internet websites, mobile application stores and mobile internet portals that have our applications. Such negative publicity and any additional negative publicity in relation to our services or products, regardless of its veracity, could seriously harm our brand, public image and reputation which in turn may result in a loss of users and business partners and have a material adverse effect on our business, results of operation and prospects.
 
We depend on the billing and payment systems of wireless carriers, mobile payment service providers and third-party payment processors; if these systems fail to accurately account for or calculate the revenues generated from the sales of our mobile products and services, our results of operations may be adversely affected. In addition, any payment delays or failures by these wireless carriers, mobile payment service providers and third-party payment processors could significantly harm our cash flow and profitability.
 
We depend on wireless carriers, mobile payment service providers 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 wireless carriers and third-party payment processors which indicate the aggregate amount of fees that were charged to users for our products and services. Although our proprietary Business and Operation Support System, or BOSS, when reconciled with the systems of the relevant wireless carriers, mobile payment service providers and third-party payment processors, can help ensure maximum accuracy in the user data and payment we receive from these business associates, inaccurate reporting is still possible and our business and results of operations could be adversely affected if the wireless carriers, mobile payment service providers or third-party payment processors fail to accurately account for or calculate the revenues generated from the sales of our mobile products and services.
 
We generally offer our wireless carriers, mobile payment service providers and third-party payment processors credit terms ranging from 180 to 240 days for overseas payment and from 60 to 90 days for


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domestic payment. We are experiencing rapid expansion overseas, and the accounts receivable from overseas wireless carriers, mobile payment service providers and third-party payment processors have longer settlement periods in general. Substantially all of our accounts receivable was due from wireless carriers, mobile payment service providers and third-party payment processors as of December 31, 2010. Failure to timely collect our receivables from them, especially from overseas mobile payment service providers and third-party payment processors, may adversely affect our cash flows. Our wireless carriers, mobile payment service providers and or 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, mobile payment service providers and third-party payment processors to pay us may significantly harm our cash flow and profitability.
 
We may face increasing competition, which could reduce our market share and materially and adversely affect our business and results of operations.
 
The mobile security and productivity application industry is highly competitive. The industry is characterized by the frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in performance characteristics, rapid adoption of technological and product advancements, as well as price sensitivity on part of users. On the mobile security front, we compete directly with (i) domestic PC/mobile security vendors such as Qihoo 360 and Kingsoft, (ii) international security software providers such as Symantec, McAfee, Trend Micro and Kaspersky, and (iii) other emerging companies offering mobile security products, such as Lookout. While we have focused on providing mobile security services since the founding of our company, most of our competitors are traditional PC anti-virus providers who recently entered into the mobile security market. On the mobile productivity front, we compete with services such as Apple MobileMe, although we are not in direct competition with them because we are manufacturer-neutral and platform neutral, whereas products and services such as Apple MobileMe are largely limited by platform or mobile device manufacturer.
 
We may also face competition from alliances between our existing and new competitors, and new competitors may also emerge. With more entrants into the industry, aggressive price cutting by competitors may result in downward pressure on our gross margins in the future. Some of our existing and potential competitors may have greater financial, technological and marketing resources, stronger relationships with mobile ecosystem participants and a larger portfolio of offerings than we do. Some of our competitors or potential competitors may have greater development experience and resources than we have. If there are new entrants in the market or intensified competition among existing competitors, we may have to provide more favorable revenue-sharing arrangements to mobile ecosystem participants working with us, or cut price of our product and service offerings to retain and attract users which could adversely affect our profitability. If we fail to compete effectively, our market share would reduce and our results of operations would be materially and adversely affected.
 
Significant changes in the policies, guidelines or practice of wireless carriers with respect to mobile applications and other content may result in lower revenues or additional costs for us and materially and adversely affect our business operations, financial condition and results of operations.
 
Governments in the PRC or elsewhere in the world may from time to time issue new policies or guidelines, requesting or stating their requirements for certain actions to be taken by all wireless carriers. A significant change in wireless carriers’ policies or guidelines may cause our revenues to decrease or operating costs to increase. We cannot assure you that our financial condition and results of operations will not be materially adversely affected by government policy or guideline changes.
 
For example, in January 2010, China Mobile began implementing series of measures targeted at further improving the user experience from mobile handset embedded services. Under these measures, mobile


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applications and other content that are embedded in handsets will be required to introduce additional notices and confirmations to users during the purchase of such mobile applications and content. In addition, services based on SMS short codes will be required to be more tailored to the specific mobile applications and content offerings or mobile payment service providers. Such measures make it more burdensome for users to purchase applications mobile services and products. As a result, some users purchased fewer applications or ceased purchasing altogether. All these may adversely affect our revenues. If similar or more stringent measures are imposed by the government or wireless carriers in the future, our business and results of operations may be materially adversely affected.
 
We cannot assure you that any of the governments in the regions we operate or any wireless carriers we work with will not introduce additional requirements with respect to the procedures for ordering monthly subscriptions or single-transaction downloads of mobile services and products, notifications to users, the billing of user accounts or other consumer protection measures or adopt other policies that may require significant changes in the way we promote and sell the applications, any of which could have a material adverse effect on our financial condition and results of operations.
 
Disruption or failure of our cloud-client computing platform and our servers could impair our users’ mobile experience and adversely affect our reputation and results of operations.
 
Our ability to provide our users with high-security mobile experience depends on the continuous and reliable operation of our cloud-client computing platform and servers. Disruptions, failures, unscheduled service interruptions or a decrease in the connection speed could hurt our reputation and cause our users to switch to our competitors’ products and services. Our systems are vulnerable to damage or interruption as a result of fires, floods, earthquakes, power losses, telecommunication failures, undetected errors in the software, computer viruses, hacking and other attempts to harm our network and servers. We may experience network or service interruptions in the future despite our continuous efforts to improve our network and servers.
 
If we experience frequent or persistent disruptions to our network or servers, whether caused by failures of our own systems or those of third-party payment processors, our users’ mobile experience may be negatively affected, which in turn, may have a material and adverse effect on our reputation and results of operations. We cannot assure you that we will be successful in minimizing the frequency or duration of these interruptions.
 
We may be subject to liabilities for user complaints concerning our products and services which may subject us to fines or penalties and adversely affect our business operations.
 
In recent years, the PRC government has adopted several administrative rules governing and reinforced the supervision over paid services and products on the Internet. Under these administrative rules, telecommunications and Internet information providers are required to follow a formal procedure in handling user complaints, and the activities such as arbitrary charges or trapped charges are subject to severe penalties from the relevant authorities. Failure to comply with these administrative rules may subject us to liabilities including refund, damages payments to users or, in the most serious scenario, suspension of our business.
 
As of December 31, 2010, one user complaint had been lodged against us with a local authority concerning our products and services. Although we resolved the user complaint, if we are unable to duly resolve user complaints in a timely manner in the future, or if the PRC government promulgates regulations or administrative rules that have more restrictive provisions or more severe penalties, our business operations may be adversely affected.


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Our business may be adversely affected due to our failure to ensure the security and privacy of confidential user information.
 
A significant barrier to the development of wireless business is the secure transmission of confidential information over the wireless network. We rely on proprietary encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential user information and to protect such information, such as user name and password. While we have not experienced any material breach of our security measures to date, there can be no assurance that advances in technology capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the algorithms used by us to protect user information. A party who is able to circumvent these security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Concerns over the security and privacy of user information, including concerns regarding potential misuse of private user information to commit crimes such as identity theft, may inhibit the wireless business generally, and our mobile security and productivity products and services in particular. To the extent that our activities involve the storage and transmission of personal data or proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. There can be no assurance that our security measures will prevent security breaches, and failure to prevent such security breaches may have a material adverse effect on our business, prospects, financial condition and results of operations.
 
Our results of operations, financial performance and business may be adversely affected by potential intellectual property rights infringement claims against us.
 
We could face claims by others that we are improperly using intellectual property owned by them or otherwise infringing upon their rights in intellectual property. For example, intellectual property disputes may arise in relation to the third-party produced mobile software programs that we make available for download. Irrespective of the validity or the successful assertion of any such claims, we could incur costs in either defending or settling any intellectual property disputes alleging infringement. Intellectual property litigation against us could potentially force us to, among others, cease offering the challenged mobile application, develop non-infringing alternatives or obtain licenses from the owners of the infringed intellectual property. In such case, we may not be successful in developing such alternatives or in obtaining such licenses on reasonable terms or at all and our results of operations, financial performance and business may be materially and adversely affected.
 
We have granted, and may continue to grant, stock options under our stock option plan, which may result in increased share-based compensation expenses.
 
We adopted two share incentive plans, the 2007 Global Share Plan and the 2011 Share Incentive Plan. As of December 31, 2010, options to purchase a total of 35,420,617 common shares of our company were outstanding under the Plan. See “Management — Share Incentive Plans” for detailed discussion. For the years ended December 31, 2008, 2009 and 2010, we recorded $1.2 million, $1.2 million and $12.6 million, respectively, in share-based compensation expenses. In the past, we have granted a large number of options to third-party consultants who have contributed to our business growth. As of the date of this prospectus, 10,375,000 options were granted to third-party consultants and all of them have been exercised. We will issue the equivalent number of Class B common shares to these consultants after the completion of this offering. We believe the granting of stock options is of significant importance to our ability to attract and retain key personnel, employees and third-party consultants, and we will continue to grant stock options to employees and consultants 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.


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In February 2011, we granted options to purchase 8,020,000 common shares to three directors and executive officers of our company. The vesting period of these options ranges from one to six years. Our board of directors also approved the acceleration of vesting schedules of employees’ options to purchase 14,994,000 common shares. As a result, we expect to incur share-based compensation expense totaling approximately $13.3 million from the first quarter of 2011 over the vesting period of the newly granted options. In March 2011, we granted options to purchase 1,111,825 common shares to our executive officer and employees with a vesting schedule ranging from immediately upon this offering to four years. As a result, we expect to incur a share-based compensation expense totaling approximately $1.7 million from the first quarter of 2011 over the vesting period of these newly granted options. Share-based compensation expenses relating to the February and March option grants and the February option acceleration will materially and adversely affect our financial results in the first quarter of 2011 and in subsequent periods over the vesting period of the newly granted options.
 
Our quarterly revenues and operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall short of expectations.
 
Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate depending upon a number of factors, including, among others, the demand for our products and services, the launch of our new products and services, policy changes of wireless carriers, and our revenue-sharing arrangements with mobile ecosystem participants. Many of these factors are out of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause the price of our ADSs to fall.
 
We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could expose us to new risks such as a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful, which may negatively affect our earnings, revenues growth, business operations, overall profitability and future plans for growth.
 
Our strategy includes plans to grow both organically and through acquisitions, joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.
 
In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by a number of factors. These factors include diversion of management’s attention, difficulties in retaining personnel of the acquired companies, unanticipated problems or legal liabilities, and tax and accounting issues. If we fail to integrate acquired companies efficiently, our earnings, revenues growth and business operations could be negatively affected.
 
Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products and services in which the acquired companies specialize, and the loss of key personnel and user accounts. If we are not able to realize the benefits envisioned for such acquisitions, joint ventures or other strategic alliances, our overall profitability and growth plans may be adversely affected.


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The continuing and collaborative efforts of our senior management and key employees are crucial to our success, and our business may be harmed if we were to lose their services.
 
Our success depends on the continuous effort and services of our experienced senior management team, in particular our founders, Dr. Henry Yu Lin and Dr. Vincent Wenyong Shi, both experienced engineers with a successful track record of developing products and services. If one or more of our executives or other key personnel are unable or unwilling to continue to provide us with their services, we may not be able to replace them easily or at all. Our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain personnel. Competition for management and key personnel is intense and the pool of qualified candidates is limited. We may not be able to retain the services of our executives or key personnel, or attract and retain experienced executives or key personnel in the future. If any of our executive officers or key employees join a competitor or forms a competing company, we may lose our superiority in technological design and development. Each of our executive officers and key employees has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between us and our executives or key employees, these agreements may not be enforceable in China, where these executives and key employees reside, in light of uncertainties with China’s legal system. See “— Risks Relating to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”
 
Our business, financial condition and results of operations may be adversely affected by the downturn in the global or Chinese economy.
 
The global financial markets have experienced significant disruptions since 2008 and the effect of the crisis persisted in 2009. China’s economy has also faced challenges. To the extent that there have been improvements in some areas, it is uncertain whether such recovery is sustainable. Since the demand for high-end mobile applications is particularly sensitive to macro economic conditions, our business and prospects may be affected by the macroeconomic environment. A prolonged slowdown in the world’s economy, especially the Chinese economy, may harm the revenue generating operations, which could materially and adversely affect our business and financial condition.
 
Moreover, a slowdown in the global economy or the recurrence of any financial disruptions may have a material and adverse impact on financings available to us. The weakness in the economy could erode investors’ 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 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 the global economic downturn and the slowdown of the world economy.
 
We may offer our products and services to persons in countries targeted by economic sanctions of the United States government through third party distributors and download services, which may adversely affect our reputation and prospective investors may decide not to invest in our shares, thereby potentially reducing our share price.
 
The U.S. government has enacted laws and regulations, including laws and regulations administered by the Office of Foreign Assets Control, or the U.S. Economic Sanctions Laws, that impose restrictions upon U.S. persons with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of U.S. Economic Sanctions Laws, or the Sanctions Targets. U.S. persons are also prohibited from facilitating such activities or transactions. We will not use any net proceeds from this offering to fund any activities or business with any Sanctions Targets or activities or transactions prohibited by U.S. Economic Sanctions Laws. We do not actively seek to provide our


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products and services to Sanctions Targets, have not generated any revenue from the distribution of our products and services in countries that are Sanctions Targets, and do not intend to do so in the future. However, we make free products available for download on the internet and have third-party distributors for our products outside of China, there may be instances where our products and services eventually become available to Sanctions Targets through different channels and without any active distribution by us in these regions. We believe the U.S. Economic Sanctions Laws under their current terms are not applicable to our activities. However, we cannot assure you that our products would not be available to Sanctions Targets, or effectively prevent Sanctions Targets from using our products and services in the future. If such transactions occur, our reputation could be adversely affected, investors in the United States may choose not to invest in, and to divest any investments in, issuers that are associated even indirectly with sanctioned activities, all of which could have a material and adverse effect on the price of our shares and the value of your investment in us.
 
The number of our registered user accounts overstates the number of unique individuals who register to use our products. Our active user and paying user account figures may differ from the actual numbers of active and paying user accounts.
 
We define registered user accounts as the cumulative number of user accounts at the end of the period. However, this method of calculation overstates the number of our individual registered users, because a unique individual may register for more than one user account. For example, an individual who has more than one smartphone may create a separate account for each device. Thus, the actual number of unique individual users of our products and services is lower than the number of registered user accounts we provide in this prospectus, which difference could be potentially significantly.
 
We define active user accounts for a specific period as the registered user accounts that have accessed our services at least once during such period. We define paying user accounts for a specific period as the registered user accounts that have paid or subscribed for our premium services during such period. The numbers of active and paying user accounts derived from our operational system may differ from the actual numbers of active and paying user accounts.
 
If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.
 
We will be subject to reporting obligations under the U.S. securities laws. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. In preparing our consolidated financial statements as of and for the years ended December 31, 2008, 2009 and 2010, we and our independent registered public accounting firm identified one material weakness and other deficiencies in our internal control over financial reporting. As defined in the standards established by U.S. Public Company Accounting Oversight Board, a “material weakness” is a significant deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
The material weakness identified related to the lack of sufficient staff with U.S. GAAP knowledge to address complex U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the number of control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible


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that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.
 
Following the identification of the material weakness and other control deficiencies, we have taken measures and plan to continue to take measures to remedy these deficiencies. For details of our proposed remedies, see “Management’s Discussion and Analysis — Internal Control Over Financial Reporting.” However, the implementation of these measures may not fully address these deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct these control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.
 
Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of 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, 2012. In addition, beginning at the same time, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. If we fail to remedy the material weaknesses identified above, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. This could adversely impact the market price of our ADSs due to a loss of investor confidence in the reliability of our reporting processes. We will need to incur costs and use management and other resources in order to comply with Section 404.
 
We have limited business insurance coverage, which could expose us to substantial costs and diversion of resources that in turn may 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. Consistent with customary industry practice in China, we do not maintain business interruption insurance, real property insurance or key employee insurance for our executive officers. 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. Uninsured damage to any of our equipment or buildings or a significant product liability claim may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
 
Risks Related to Our Corporate Structure
 
If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in telecommunication business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
 
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in telecommunication business, including mobile application providers. Specifically, foreign ownership in a value-added telecommunication mobile payment service provider may not exceed 50%. We conduct our operations in China principally through contractual arrangements among our wholly-


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owned PRC subsidiary, NetQin Beijing and an affiliated entity in the PRC, Beijing Technology, and the shareholders of Beijing Technology. Beijing Technology holds the licenses and permits necessary to conduct our businesses in China. Our contractual arrangements with Beijing Technology and its shareholders enable us to exercise effective control over this entity and treat it as our consolidated affiliated entity. For a detailed discussion of these contractual arrangements, see “Corporate Structure.”
 
The Circular regarding Strengthening the Administration of Foreign Investment in and Operation of Value added Telecommunications Business, or the Circular, issued by the MIIT, in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license to conduct any value-added telecommunications business in China. Under the Circular, a domestic company that holds a telecommunications value-added services operation license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, websites or facilities, to foreign investors that conduct value added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local license holder. The Circular further requires each telecommunications value-added services operation license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications mobile payment service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the Circular will have on us or the other Chinese telecommunications and Internet companies that have adopted the same or similar corporate and contractual structures as ours.
 
We cannot assure you, however, that we will be able to enforce these contracts. Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our websites, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. The PRC government may also require us to restructure our operations entirely if it comes to find that our contractual arrangements do not comply with applicable laws and regulations. It is unclear how such mandatory restructuring could impact our business and operating results, as the PRC government has not yet found such contractual arrangements to be in non-compliance. However, any such restructuring may cause significant disruption to our business operations.
 
The relevant regulatory authorities would have broad discretion in dealing with such violations. If a relevant authority determines that we do not fully comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The relevant regulatory authorities may also require us to restructure our operations entirely if it finds that our contractual arrangements do not comply with applicable laws and regulations. It is unclear how a restructuring could impact our business and operating results, as no PRC authorities has yet found any such contractual arrangements to be in non-compliance. However, any such restructuring


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may cause significant disruption to our business operations. In addition, if the imposition of any of these penalties causes us to lose our rights to direct the activities of the VIE and its subsidiary or the right to receive their economic benefits, this may result in our being unable to control, and hence unable to consolidate, the VIE and its subsidiary.
 
We rely on contractual arrangements with our consolidated affiliated entity in China and its shareholders for our operations, which may not be as effective as direct ownership in providing operational control and may negatively affect our ability to conduct our business.
 
Since PRC laws restrict foreign equity ownership in companies engaged in value-added telecommunication businesses like us in China, we rely on contractual arrangements with our consolidated affiliated entity, Beijing Technology, and its shareholders to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over Beijing Technology. Beijing Technology and its shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective.
 
Although we have been advised by Jincheng Tongda & Neal, our PRC legal counsel, that each contract under these contractual arrangements is valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over Beijing Technology as direct ownership of Beijing Technology. In addition, Beijing Technology or its respective shareholders may breach the contractual arrangements. We cannot assure you that when conflicts of interest arise, Beijing Technology and its respective shareholders will act completely in our interests or that conflicts of interests will be resolved in our favor. In any such event, we would have to rely on legal remedies under PRC law.
 
All of these contractual arrangements 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. Uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be negatively affected.
 
Contractual arrangements with Beijing Technology may result in adverse tax consequences to us.
 
Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements among NetQin Beijing, Beijing Technology and its respective shareholders were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. An unfavorable transfer pricing arrangements could, among others, result in an upward adjustment on taxation. In addition, the PRC tax authorities may impose late payment penalties and interest on Beijing Technology for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if Beijing Technology’s tax liabilities increase significantly and it is required to pay late payment penalties and interests.
 
The shareholders of our affiliate variable interest entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
 
All of the shareholders of our variable interest entity, Beijing Technology, are individuals who are our founders or executive officers. Conflicts of interest may arise between the dual roles of those individuals


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who are both executive officers of our company and shareholders of our variable interest entity. We do not have existing arrangements to address potential conflicts of interest between those individuals and our company and cannot assure you that when conflicts arise, those individuals will act in the best interest of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and those individuals, we would have to rely on legal proceedings, which may materially disrupt our business. There is also substantial uncertainty as to the outcome of any such legal proceeding.
 
We may rely principally on dividends and other distributions on equity paid by our PRC and HK subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC and HK subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.
 
We are a holding company, and we rely principally on dividends and other distributions on equity paid by our wholly-owned PRC subsidiary, NetQin Beijing, and our wholly-owned Hong Kong subsidiary, NetQin HK, which is the direct holding company of NetQin Beijing, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If NetQin Beijing or NetQin HK, as the case may be, incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements NetQin Beijing currently has in place with Beijing Technology in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.
 
Under PRC laws and regulations, NetQin Beijing, as wholly foreign-owned enterprises in the PRC, may pay dividends only out of its cumulative profits as determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises such as NetQin Beijing is required to set aside at least 10% of their cumulative after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of their respective registered capital. At their discretion, they may allocate a portion of their 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. The registered capital of NetQin Beijing is $30 million. NetQin Beijing has been in cumulative loss pursuant to PRC accounting standards since its inception and therefore, in accordance with applicable PRC laws and regulations, it has not commenced to contribute to the statutory reserve fund.
 
Any limitation on the ability of NetQin Beijing 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. See “Risk Factors — Risks Related to Doing Business in China — Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”
 
In addition, under the PRC Enterprise Income Tax Law and the Implementing Rules, both of which became effective on January 1, 2008, dividends generated from the business of our PRC subsidiary, NetQin Beijing after January 1, 2008 and payable to us may be subject to a withholding tax rate of 10% if the PRC tax authorities subsequently determine that we are a non-PRC resident enterprise, unless there is a tax treaty with China that provides for a different withholding arrangement.


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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 this offering to make loans to our PRC subsidiary and consolidated affiliated entities or to make additional capital contributions to our PRC subsidiary, 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 subsidiary and consolidated affiliated entities. We may make loans to our PRC subsidiary and consolidated affiliated entities, or we may make additional capital contributions to our PRC subsidiary.
 
Any loans we issue to our PRC subsidiary, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and foreign exchange loan registrations. Pursuant to Article 18 of the Provisional Rules on Management of Foreign Debt effective on March 1, 2003, the total amount of foreign debts of a foreign-invested company shall be subject to a statutory limit which is the difference between the amount of total investment and the amount of registered capital of such foreign-invested company. The current amount of total investment and amount of registered capital of our PRC subsidiary are $32.9 million and $30 million, respectively, and the current statutory limits on the loans to the PRC subsidiary is $2.9 million. Such statutory limits can increase if the amount of total investment of the PRC subsidiary increases; under PRC laws and regulations, the maximum amount of total investment of a foreign-invested company with a registered capital of more than $12 million shall not exceed three times of its registered capital. For example, loans by us to NetQin Beijing to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. We may also decide to finance NetQin Beijing by means of capital contributions. These capital contributions must be approved by the PRC 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 consolidated affiliated entities, Beijing Technology and Fuzhou NetQin, each a PRC domestic company. However, if such loans become necessary for the operations of our PRC subsidiary or consolidated affiliated entities, these statutory limits and other restrictions may materially and adversely affect our liquidity and ability to fund operations in the PRC by limiting a source of cash for these PRC entities. Meanwhile, we are also not likely to finance the activities of our consolidated affiliated entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in our line of business.
 
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 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 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.
 
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 subsidiary or any consolidated affiliated entities or with respect to future capital contributions by us to our PRC


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subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
 
Risks Related to Doing Business in China
 
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
 
Although a significant portion of our business is overseas, substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced, to a considerably 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 China’s 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 may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past 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, which may adversely affect our business and operating results.
 
Uncertainties with respect to the PRC legal system could adversely affect us.
 
We conduct our business primarily through our PRC subsidiary and consolidated affiliated entities, Beijing Technology and its subsidiary, Fuzhou NetQin, in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiary is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
 
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC


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administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. For example, China enacted a new Anti-Monopoly Law, which became effective on August 1, 2008. Because the Anti-Monopoly Law and related regulations are still new, there have been very few court rulings or judicial or administrative interpretations on certain key concepts used in the law. As a result, there is uncertainty how the enforcement and interpretation of the new Anti-Monopoly Law may affect our business and operations.
 
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, which may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until some time after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
 
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of the licenses and permits required for the telecommunications and software development industries in China.
 
The PRC government extensively regulates the telecommunications and software development industries, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the telecommunication industry. These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty.
 
As a result, there are uncertainties relating to the regulation of the telecommunication business in China, particularly evolving licensing practices. This means that permits, licenses or operations at some of our companies may be subject to challenge, or we may fail to obtain permits or licenses that applicable regulators may deem necessary for our operations or we may not be able to obtain or renew certain permits or licenses to maintain their validity. The major permits and licenses that could be involved include, without limitation, the Value-Added Telecommunications Services Operation Permit issued by the MIIT and the Telecommunications and Information Services Operation Permit issued by the Beijing Communications Administration. New laws and regulations may be promulgated that will regulate telecommunication activities and additional licenses may be required for our operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
 
On July 13, 2006, the MIIT, the predecessor of which is the Ministry of Information Industry, 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 services providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, websites or facilities to any foreign investor for their illegal operation of a telecommunications 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.
 
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the telecommunications and software development industries have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, telecommunication businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our


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business in China or will be able to maintain our existing licenses or obtain any new licenses if required by any new laws or regulations. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of the telecommunications and software development industries. See “Regulation.”
 
Fluctuations in exchange rates may have a material adverse effect on your investment.
 
The value of the RMB against the U.S. dollar and other currencies is affected by, among others, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on exchange rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB solely to the U.S. dollar. Under this revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the RMB has traded within a narrow range against the U.S. dollar. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On June 19, 2010, the People’s Bank of China announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. It is difficult to predict how this new policy may impact the Renminbi exchange rate.
 
A majority of our revenues and costs are denominated in RMB. At the Cayman Islands holding company level, we may receive dividends and other fees paid to us by our subsidiary and consolidated affiliated entities in China. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. Conversely, a significant depreciation of the RMB 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 RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
 
We face risks of health epidemics and other disasters, which could severely disrupt our business operations.
 
Our business could be materially and adversely affected by the outbreak of H1N1, or swine influenza, avian influenza, severe acute respiratory syndrome, or SARS, or any other epidemics. In 2009 and early 2010, there were outbreaks of swine influenza in certain regions of the world, including China. In 2006 and 2007, there were reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of swine influenza, avian influenza, SARS or other adverse public health developments in China could adversely affect economic activities in China and require the temporary closure of our offices. Such closures could severely disrupt our business operations and adversely affect our results of operations.
 
Our operations are vulnerable to interruption and damage from man-made or natural disasters, including wars, acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents, power


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loss, communications failures and similar events. If any man-made or natural disaster were to occur in the future, our ability to operate our business could be seriously impaired.
 
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
 
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a substantial part of our revenues in RMB, and the rest in foreign currencies such as U.S. dollars. Under our current corporate structure, our Cayman Islands holding company primarily rely on dividend payments from our wholly-owned PRC subsidiary, NetQin Beijing, and our wholly-owned Hong Kong subsidiary, NetQin HK, to fund any cash and financing requirements we may have. 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, NetQin Beijing is 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 RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access 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.
 
The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval. Failure to obtain such approval, if required, may have material adverse effects on this offering.
 
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009. This regulation, among others, requires offshore special purpose vehicles, or SPVs that are controlled by PRC companies or residents and have been formed for the purpose of seeking an overseas public listing through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that special purpose vehicles are required to submit when seeking CSRC approval for their listings outside of China. The interpretation and application of this regulation remains unclear, and this offering may ultimately require approval from the CSRC, and if it does, it is uncertain how long it will take us to obtain the approval.
 
Our PRC counsel, Jincheng Tongda & Neal, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, we are not required to apply with the CSRC for the approval of the listing and trading of our ADSs on the NYSE, because (i) we established our PRC subsidiaries by means of direct investment other than by merger or acquisition of the equity or assets of PRC domestic companies, and (ii) our contractual arrangements with Beijing Technology do not constitute the acquisition of Beijing Technology.
 
Because there has been no official interpretation or clarification of this regulation since its adoption, there is uncertainty as to how this regulation will be interpreted or implemented. If CSRC or other PRC regulatory body determines that the CSRC approval is required for this offering or if CSRC or any other PRC government authorities promulgates any interpretation or implementing rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may


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face actions or sanctions by CSRC or other PRC regulatory agencies for failure to seek the CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our China subsidiary, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable to us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.
 
Recently enacted regulations in the PRC may make it more difficult for us to pursue growth through acquisitions.
 
Among others, the regulation discussed in the preceding risk factor established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among others, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council on August 3, 2008, were triggered.
 
We may grow our business in part by directly acquiring complementary businesses in China and elsewhere in the world. Complying with the requirements of these PRC regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
PRC regulations relating to the establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
 
SAFE has promulgated several regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, issued on October 21, 2005. These regulations require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
 
Under these foreign exchange regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations, direct or indirect investments in SPVs will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an SPV is required to update the previously filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material change not involving its round-trip investment, capital variation, such as an increase or decrease in capital, a transfer or swap of shares, a merger, division, long-term equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that SPV are required to urge the PRC resident shareholders to update their registration with the local branch of SAFE when such updates are required under applicable foreign exchange regulations. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and the SPV


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may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
 
We have requested our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of Circular 75 and urge those who are PRC residents to register with the local SAFE branch as required under Circular 75. However, we cannot assure that all of these individuals can successfully make or update any applicable registration or obtain necessary approval required by these foreign exchange regulations. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
 
Furthermore, as these foreign exchange regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with other approval requirements, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
 
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
 
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the State Administration of Taxation, or the SAT, on December 10, 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly via disposing of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer. 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%. SAT 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.
 
There is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions, and the process


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and format of the reporting of an Indirect Transfer to the competent tax authority of the relevant PRC resident enterprise. In addition, there are not any formal declarations with regard to how to determine whether a foreign investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. As a result, we may become at risk of being taxed under SAT Circular 698 and we may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under the general anti-avoidance rule of the PRC Enterprise Income Tax Law, which may have a material adverse effect on our financial condition and results of operations.
 
Discontinuation of any of the preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.
 
China passed a new PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, both of which became effective on January 1, 2008. The New EIT Law significantly curtails tax incentives granted to foreign-invested enterprises under the PRC Enterprise Income Tax Law concerning Foreign-Invested Enterprises and Foreign Enterprises (or the Old EIT Law, which was effective from July 1, 1991 to December 31, 2007) The New EIT Law, however, (i) reduces the statutory rate of the enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules promulgated by the State Council on December 26, 2007, and (iii) introduces new tax incentives, subject to various qualification criteria.
 
The New EIT Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the state” which hold independent ownership of core intellectual property to enjoy a preferential enterprise income tax rate of 15% subject to certain new qualification criteria. Beijing Technology, our consolidated affiliated entity, was recognized by the Beijing Municipal Science and Technology Commission as a “high and new technology enterprise” on December 24, 2008, and therefore was eligible for the reduced 15% enterprise income tax rate upon its filing with its in-charge tax authority. The qualification as a “high and new technology enterprise” is subject to a three-year review by the relevant authorities in China. If Beijing Technology fails to maintain its “high and new technology enterprise” qualification or renew its qualification when the relevant term expires, its applicable enterprise income tax rate may increase to 25%, which could have a material adverse effect on our financial condition and results of operations. NetQin Beijing has already obtained the Software Enterprise Certification. Therefore, it may qualify for preferential tax treatment as a “software enterprise” and would be entitled to a two-year exemption from the first year it becomes profitable and a three-year 50% reduction in corporate income tax.
 
Preferential tax treatment granted to our subsidiaries and consolidated affiliated entities by the local governmental authorities is subject to review and may be adjusted or revoked at any time. The discontinuation of any preferential tax treatments currently available to us and our wholly-owned PRC subsidiary will cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.
 
Our global income and the dividends that we may receive from our PRC subsidiaries may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.
 
Under the New EIT Law and its implementation rules, both became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Tax


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Administration issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. See “Regulation — Regulations on Tax — PRC Enterprise Income Tax.” Although SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Accordingly, we may be considered a resident enterprise and may therefore be subject to the enterprise income tax at 25% on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
 
Under the Old EIT Law applicable to us prior January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises in China, such as NetQin Beijing, was exempt from PRC withholding tax. Pursuant to the New EIT Law and its implementation rules, however, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors, which are non-PRC tax resident enterprises without an establishment in China, or whose income has no connection with their institutions and establishments inside China, are subject to withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a Cayman Islands holding company and we plan to conduct our business and derive substantially all of our income from dividends through NetQin Beijing, which is our wholly owned PRC subsidiary that is directly and wholly owned by NetQin International, our wholly owned subsidiary located in Hong Kong. As long as our Hong Kong subsidiary is considered a non-PRC resident enterprise and holds at least 25% of the equity interest of NetQin Beijing, dividends that it receives from NetQin Beijing may be subject to withholding tax at a preferential rate of 5% under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, effective on January 1, 2007, upon receiving approval from the local tax authority. However, if our Hong Kong subsidiary is not considered to be the beneficial owner of such dividends under Circular Guoshuifa (2009) No. 601, or Circular 601, issued by the SAT on October 27, 2009, such dividends would be subject to withholding tax at a rate of 10%. See “Regulation — Tax Regulations.”
 
According to Circular 601, for the purpose of determining whether a non-resident enterprise is entitled to the reduced withholding tax rate on certain PRC-sourced income as provided under tax treaties, the non-resident enterprise shall be a beneficial owner. The term “beneficial owner” refers to a person who has the right of ownership and control over the item of income, or the right or property from which that item of income is derived. A beneficial owner generally shall engage in substantive business operations, and can be an individual, corporation or any other organization. Agents or conduit companies do not qualify as beneficial owners for tax treaty purposes.
 
Circular 601 requires the PRC tax authorities to determine beneficial ownership not just from a technical or domestic law perspective, but also to apply the principle of substance over form to the facts of each case in light of the object and purposes of the tax treaty. Circular 601 only sets forth the following negative factors for the recognition of beneficial ownership, but does not provide any


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quantitative guidance on how some of the factors would be looked at by the SAT when evaluating beneficial ownership:
 
  •  the applicant is obligated to distribute all or the majority (e.g., sixty percent (60%) or above) of the PRC-sourced income to a resident of a third jurisdiction within a specified period;
 
  •  other than holding the properties or rights that generate the income received, the applicant does not have business operations;
 
  •  if the applicant is a corporation or another type of business entity, the assets, the scale of operations, and the human resources of the applicant are disproportionately small relative to the income received from the PRC;
 
  •  the applicant has no or minimal control or decision-making rights, and bears little or no risks;
 
  •  the applicant is exempt from tax or is not subject to tax in the contracting country on the income received from the PRC, or the applicant is subject to an extremely low effective tax rate therein;
 
  •  in the case of interest income, there is a loan or deposit contract between the applicant and a third party, the terms of which, such as the amount, interest rate and signing dates are similar or close to those of the loan contract under which the interest income is received; and
 
  •  in the case of royalty income, there is a license or transfer agreement between the applicant and a third party, the terms of which are similar to the terms under which the royalty income is received.
 
We believe our offshore holding company is not a PRC resident enterprise. However, we have been advised by our PRC counsel, Jincheng Tongda & Neal, that because there remains uncertainty regarding the interpretation and implementation of the New EIT Law and its implementation rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would be subject to any PRC withholding tax. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise shareholders and ADS holders, your investment in our common shares or ADSs may be materially and adversely affected.
 
The enforcement of the Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.
 
On June 29, 2007, the Standing Committee of the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law introduces specific provisions related to fixed-term employment contracts, part-time employment, probation, consultation with labor union and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining, which together represent enhanced enforcement of labor laws and regulations. According to the Labor Contract Law, an employer is obliged to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must also pay severance to an employee in nearly


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all instances where a labor contract, including a contract with an unlimited term, is terminated or expires. In addition, the government has continued to introduce various new labor-related regulations after the Labor Contract Law. Among other things, new annual leave requirements mandate that annual leave ranging from five to 15 days is available to nearly all employees and further require that the employer compensate an employee for any annual leave days the employee is unable to take in the amount of three times his daily salary, subject to certain exceptions. As a result of these new measures designed to enhance labor protection, our labor costs are expected to increase and we cannot assure you that our employment practices do not or will not violate the Labor Contract Law and other labor-related regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.
 
Risks Related to this Offering
 
There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.
 
Prior to this initial public offering, there has been no public market for our shares or ADSs. Our ADSs have been approved for listing on the NYSE. Our shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.
 
Our negotiations with the underwriters determined the public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the public offering price.
 
The market price for our ADSs may be volatile.
 
The market price for our ADSs is likely to be volatile and subject to wide fluctuations in response to factors including the following:
 
  •  regulatory developments in our target markets affecting us, our customers or our competitors;
 
  •  announcements of studies and reports relating to the quality of our services or those of our competitors;
 
  •  changes in the economic performance or market valuations of other companies that provide mobile security and management solutions;
 
  •  actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
 
  •  changes in financial estimates by securities research analysts;
 
  •  conditions in the value-added telecommunication or Internet services industries;
 
  •  announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;
 
  •  additions to or departures of our senior management;


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  •  fluctuations of exchange rates between the RMB and the U.S. dollar;
 
  •  release or expiry of lock-up or other transfer restrictions on our outstanding common shares or ADSs; and
 
  •  sales or perceived potential sales of additional common shares or ADSs.
 
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of any particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
 
Because our public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.
 
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their common shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $8.75 per ADS, representing the difference between the public offering price of $11.50 per ADS, and our net tangible book value per ADS as of December 31, 2010, after giving effect to the automatic conversion of our preferred shares immediately upon the completion of this offering, and our issuance of Class B common shares for all exercised options after this offering and the net proceeds to us from this offering. In addition, you will experience further dilution when common shares are issued in connection with the exercise of share options in the future.
 
Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.
 
We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.
 
Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
 
Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.
 
Sales of our ADSs or common shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 229,109,213 common shares outstanding including 38,750,000 Class A common shares represented by ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining common shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the


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lock-up period at the discretion of the representatives. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.
 
Upon completion of this offering, certain holders of our common shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs, in the public market could cause the price of our ADSs to decline.
 
You may not have the same voting rights as the holders of our common shares and may not receive voting materials in time to be able to exercise your right to vote.
 
Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
 
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.
 
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
 
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our common shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of common shares your ADSs represent. However, the depositary may, at its discretion, decide that it is impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
 
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 transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.


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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of our directors and officers reside outside the United States.
 
We are incorporated in the Cayman Islands and conduct a majority of our operations in China through our PRC subsidiary and consolidated affiliated entities. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”
 
Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2010 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
 
As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
 
You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.
 
We intend to use the net proceeds of this offering for investments in technology, infrastructure and research and development efforts, the expansion of sales and marketing efforts, and other general corporate purposes, among others. However, our management will have considerable discretion in the application of the net proceeds received by us. For more information, see “Use of Proceeds.” You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.


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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 common shares and ADSs may view as beneficial.
 
Upon the completion of this offering, our common shares will be divided into Class A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of Class B common shares are entitled to ten votes per share. We will issue Class A common shares represented by our ADSs in this offering. All of our outstanding common shares prior to the offering will be redesignated as Class B common shares and our outstanding preferred shares will be automatically converted into Class B common shares upon the completion of this offering. In addition, all options issued prior to the completion of this offering entitle option holders to the equivalent number of Class B common shares once the options are vested and exercised. Due to the disparate voting powers attached to these two classes, we anticipate that our existing shareholders and option holders who have exercised their vested options will collectively hold approximately 98.0% of the total voting power of our outstanding common shares immediately after this offering assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs and will have considerable influence over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. In particular, our three founders, Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi, and their affiliates will beneficially own approximately 24.0% of our outstanding common shares, representing 28.3% of our total voting power after this offering, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs. 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 common shares and ADSs may view as beneficial.
 
Our memorandum and articles of association will contain anti-takeover provisions that could adversely affect the rights of holders of our common shares and ADSs.
 
We will adopt an amended and restated memorandum and articles of association that will become effective immediately upon the closing of this offering. Our new memorandum and articles of association will contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
 
Our corporate actions are substantially controlled by our directors, executive officers and other principal shareholders, who can exert significant influence over important corporate matters, which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.
 
After this offering, our directors, executive officers and principal shareholders will collectively hold approximately 78.1% of the total voting power of our outstanding common shares. These shareholders, if acting together, could exert substantial influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. Our three founders in particular, Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi, together beneficially own 27.0% of our outstanding common shares as of the date of this prospectus and will beneficially own 24.0% of our outstanding common shares immediately after this offering. In addition, two of our directors, Mr. James Ding and Mr. Weiguo Zhao, together beneficially own 34.3% of our outstanding common shares as of the date of this prospectus through their respective venture capital funds in which


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each of them indirectly and beneficially owns interests. Mr. Ding and Mr. Zhao together will beneficially own 28.3% of our outstanding common shares and 33.3% of our aggregate voting power immediately after this offering. If our founders and directors retain their shares in our company, they will continue to have substantial influence over our company in the foreseeable future. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. In addition, these persons could divert business opportunities away from us to themselves or others.
 
We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or common shares to significant adverse United States income tax consequences.
 
Depending upon the value of our ADSs and common shares and the nature of our assets and income over time, we could be classified as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes. Based upon our current income and assets (taking into account the proceeds from this offering) and projections as to the value of our ADSs and common shares pursuant to the offering, we do not presently expect to be classified as a PFIC for the current taxable year or the foreseeable future. While we do not expect to become a PFIC, if our market capitalization is less than anticipated or subsequently declines we may be a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. 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, including ascertaining the fair market value of our assets on a quarterly basis and the character of each item of income we earn, 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 to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation — Material United States Federal Income Tax Considerations”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or common 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 common shares. For more information see the section titled “Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Considerations.”
 
We will incur increased costs as a result of being a public company.
 
As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and the NYSE, have detailed requirements concerning corporate governance practices of public companies including Section 404 relating to internal control over financial reporting. We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” 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 some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
 
  •  our goals and strategies;
 
  •  our future business development, financial condition and results of operations;
 
  •  the expected growth of the mobile security and productivity services market in China and globally;
 
  •  our expectations regarding demand for and market acceptance of our products and services;
 
  •  our expectations regarding the retention and strengthening of our relationships with key business partners and customers;
 
  •  competition in our industry in China and globally; and
 
  •  relevant government policies and regulations relating to our industry.
 
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary — Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The mobile security and productivity industry may not grow at the rate projected by market data, or at all. The failure of this market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the mobile security and productivity industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data is later found to be


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incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
 
The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately $79.0 million, or approximately $91.4 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and the estimated offering expenses payable by us.
 
The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We plan to use the net proceeds of this offering as follows:
 
  •  approximately $25.0 million for the expansion of sales and marketing efforts;
 
  •  approximately $15.0 million for investments in technology, infrastructure and research and development activities; and
 
  •  the balance for other general corporate purposes, including working capital needs, and for potential acquisitions of complementary businesses (although we are not currently negotiating any such acquisitions).
 
The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.
 
Pending use of the net proceeds as described above, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.
 
In using the proceeds of this offering, as an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding to our PRC subsidiary only through loans or capital contributions and to our consolidated affiliated entities only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend loans to our PRC subsidiary and consolidated affiliated entities or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risks Related to Our Corporate Structure — 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 this offering to make loans to our PRC subsidiary and consolidated affiliated entities or to make additional capital contributions to our PRC subsidiary, which may materially and adversely affect our liquidity and our ability to fund and expand our business.”


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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 subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation — Regulations on Dividend Distribution.” Our board of directors has complete discretion on whether to distribute dividends, subject to the approval of our shareholders. 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 common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our Class A common shares, if any, will be paid in U.S. dollars.


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CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2010:
 
  •  on an actual basis;
 
  •  on a pro forma basis to reflect (i) the automatic conversion of all of our outstanding preferred shares into 114,637,272 Class B common shares immediately upon the closing of this offering; and (ii) the issuance of 25,369,000 Class B common shares to employees and consultants who exercised their vested options in February 2011; and
 
  •  on a pro forma as adjusted basis to reflect (i) the automatic conversion of all of our outstanding preferred shares into 114,637,272 Class B common shares immediately upon the closing of this offering; (ii) the issuance of 25,369,000 Class B common shares to employees and consultants who exercised their vested options in February 2011; and (iii) the sale of 38,750,000 Class A common shares in the form of ADSs by us in this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                         
    As of December 31, 2010
            Pro Forma
    Actual   Pro Forma   As Adjusted
    (in thousands of dollars)
 
Series A convertible preferred shares, $0.0001 par value, 33,250,000 shares authorized, 33,250,000 shares issued and outstanding as of December 31, 2010; none outstanding on a pro forma basis as of December 31, 2010
    3,242              
Series B redeemable convertible preferred shares, $0.0001 par value, 34,926,471 shares authorized, 34,926,471 shares issued and outstanding as of December 31, 2010; none outstanding on a pro forma basis as of December 31, 2010
    16,638              
Series C redeemable convertible preferred shares, $0.0001 par value, 29,687,500 shares authorized, 29,687,500 shares issued and outstanding as of December 31, 2010; none outstanding on a pro forma basis as of December 31, 2010
    16,983              
Series C-1 redeemable convertible preferred shares, $0.0001 par value, 16,773,301 shares authorized, 16,773,301 shares issued and outstanding as of December 31, 2010; none outstanding on a pro-forma basis as of December 31, 2010
    14,115              
Equity:
                       
Common shares, $0.0001 par value, 250,000,000 shares authorized, 50,352,941 shares issued and outstanding as of December 31, 2010, 190,359,213 Class B common shares issued and outstanding on a pro forma basis, and 35,714,290 Class A common shares and 190,359,213 Class B common shares issued and outstanding on a pro forma as adjusted basis, as of December 31, 2010
    5       19       23  


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    As of December 31, 2010
            Pro Forma
    Actual   Pro Forma   As Adjusted
    (in thousands of dollars)
 
Additional paid-in capital
    12,006       67,191       146,138  
Accumulated deficit
    (21,994 )     (21,994 )     (21,994 )
Accumulated other comprehensive income
    1,592       1,592       1,592  
                         
Total NetQin Mobile Inc.’s shareholders’ (deficit)/equity
    (8,391 )     46,808       125,759  
                         
Non-controlling interest
    68       68       68  
Total shareholders’ (deficit)/equity
    (8,323 )     46,876       125,827  
                         
Total capitalization
    42,655       46,876       125,827  
                         

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DILUTION
 
If you invest in our ADSs, your interest will be diluted to the extent of the difference between the public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the conversion of our preferred shares and the fact that the public offering price per common share is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares.
 
Our net tangible book value as of December 31, 2010 was approximately $42.5 million, or $0.84 per common share as of that date, and $4.20 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per common share, after giving effect to the conversion of all outstanding preferred shares into Class B common shares immediately upon the completion of this offering and our issuance of Class B common shares for all exercised options after this offering and the net proceeds we will receive from this offering, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
Without taking into account any other changes in net tangible book value after December 31, 2010, other than to give effect to the conversion of all outstanding preferred shares into Class B common shares immediately upon the completion of this offering, our issuance of Class B common shares for all exercised options after this offering and our sale of the ADSs offered in this offering at the public offering price of $11.50 per ADS after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2010 would have been $125.7 million, or $0.55 per outstanding common share and $2.75 per ADS. This represents an immediate dilution in net tangible book value of $0.29 per common share and $1.45 per ADS to the existing shareholders and an immediate dilution in net tangible book value of $1.75 per common share and $8.75 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:
 
                 
    Per Common
   
    Share   Per ADS
 
Public offering price
  $ 2.30     $ 11.50  
Net tangible book value per share as of December 31, 2010
  $ 0.84     $ 4.20  
Pro forma net tangible book value per share after giving effect to the conversion of our preferred shares
  $ 0.26     $ 1.30  
Pro forma net tangible book value per share after giving effect to the conversion of our preferred shares and this offering
  $ 0.55     $ 2.75  
Amount of dilution in net tangible book value per share to new investors in the offering
  $ 1.75     $ 8.75  
 
The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual public offering price of our ADSs and other terms of this offering determined at pricing.


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The following table summarizes, on a pro forma basis as of December 31, 2010, the differences between existing shareholders, including holders of our preferred shares that will be automatically converted into Class B common shares upon the completion of this offering and our option holders who have exercised their vested options and will acquire Class B common shares after this offering, and the new investors with respect to the number of common shares (in the form of ADSs or Class A common shares) purchased from us, the total consideration paid and the average price per common share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of common shares does not include common shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.
 
                                                 
                            Average
       
    Common Shares
                Price per
    Average
 
    Purchased     Total Consideration     Common
    Price per
 
    Number     %     Amount     %     Share     ADS  
    (in thousands of dollars, except numbers of shares and percentages)  
 
Existing shareholders
    190,359,213       83.1     $ 51,170,985       36.5     $ 0.27     $ 1.35  
New investors
    38,750,000       16.9     $ 89,125,000       63.5     $ 2.30     $ 11.50  
                                                 
Total
    229,109,213       100.0     $ 140,295,985       100.0                  
                                                 
 
The discussion and tables above assume no exercise of any outstanding stock options. As of the date of this prospectus, there were 19,029,442 Class B common shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.89 per share and there were 13,000,000 Class A common shares available for future issuance upon the exercise of future grants under our 2011 Share Incentive Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.


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ENFORCEABILITY OF CIVIL LIABILITIES
 
We were incorporated in the Cayman Islands in order to enjoy certain benefits, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions, and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include a less developed body of Cayman Islands securities laws that provide significantly less protection to investors as compared to the laws of the United States, and the potential lack of standing by Cayman Islands companies to sue before the federal courts of the United States.
 
Our organizational documents do not contain provisions requiring disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.
 
A majority of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
 
We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
 
Maples and Calder, our counsel as to Cayman Islands law, and Jincheng Tongda & Neal, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:
 
  •  recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
 
  •  entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
 
Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, and which was neither obtained in a manner nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation without any re-examination of the merits of the underlying dispute. However, the Cayman Islands courts are unlikely to enforce a punitive judgment of a United States court predicated upon the liabilities provision of the federal securities laws in the United States without retrial on the merits if such judgment gives rise to obligations to make payments that may be regarded as fines, penalties or similar charges.
 
Jincheng Tongda & Neal has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of


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reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.


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CORPORATE STRUCTURE
 
We commenced operations on October 21, 2005, when our founders incorporated Beijing Technology in the PRC. Beijing Technology is primarily engaged in the research and development of products and services related to mobile security and productivity.
 
On March 14, 2007, NetQin Mobile Inc. was incorporated in the Cayman Islands. Our founders, Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi, currently hold in aggregate 27.0% of our outstanding share capital indirectly through RPL Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands. Our founders, if acting together, could exert substantial influence over our company and our daily operations. After this offering, our founders will collectively beneficially own 24.0% of our outstanding share capital. If our founders retain their shares in our company, they will continue to have substantial influence over our company. After this offering, our directors, executive officers and principal shareholders will collectively hold approximately 78.1% of the total voting power of our outstanding common shares, and we anticipate that our existing shareholders and option holders who have exercised their vested options will collectively hold approximately 98.0% of the total voting power of our outstanding common shares immediately after this offering, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs.
 
On May 15, 2007, we established our wholly owned subsidiary, NetQin Beijing, in Beijing, China. On April 26, 2010, we established NetQin HK, our directly and wholly owned subsidiary, in Hong Kong. In December 2010, we transferred all of the equity interest in NetQin Beijing to NetQin HK. NetQin HK will conduct part of our business activities and operations outside of China. On November 5, 2010, we established NetQin US in the United States, which became the directly wholly owned subsidiary of NetQin Mobile Inc. The major functions of NetQin US include analyzing market information in the U.S. mobile industry. Our international business will be handled by us, NetQin HK and NetQin Beijing, with the allocation of business to be determined by relevant tax considerations, among other things.
 
Applicable PRC laws and regulations currently limit foreign ownership of companies that provide value-added telecommunications services. As a Cayman Islands corporation, we are deemed a foreign legal person under PRC laws. Accordingly, our PRC subsidiary, NetQin Beijing, which is considered a wholly foreign-owned enterprise, is currently ineligible to engage in providing value-added telecommunication services. To comply with these foreign ownership restrictions, we conduct our operations in China primarily through our affiliated entity, Beijing Technology. Dr. Henry Yu Lin, Mr. Xu Zhou and Dr. Vincent Wenyong Shi, all of whom are PRC citizens, each currently owns 52.00%, 33.25% and 14.75% of Beijing Technology, respectively.
 
On June 1, 2009, Beijing Technology obtained 51% of the equity interests in Fuzhou NetQin. As a result, Fuzhou NetQin is 51% owned by Beijing Technology and 49% owned by Fuzhou Huihe Yitong Technology Co., Ltd., a third party entity. Fuzhou NetQin primarily engages in the research and development of mobile software and related products and services.
 
Our wholly owned subsidiary NetQin Beijing has entered into a series of contractual arrangements with Beijing Technology and its respective shareholders, which enable us to:
 
  •  exercise effective control over Beijing Technology;
 
  •  receive substantially all of the economic benefits of Beijing Technology in consideration for the technical and consulting services provided by and the intellectual property rights licensed by NetQin Beijing; and


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  •  have an exclusive option to purchase all of the equity interests in Beijing Technology when and to the extent permitted under PRC laws, regulations and legal procedures.
 
We have been and are expected to continue to be dependent on Beijing Technology to operate our business if the then PRC law does not allow us to directly operate such business in China, or our direct operations will cause a material adverse impact on our business, including but not limited to, the inability to maintain or renew the qualifications, licenses or permits necessary for our business in China. We believe that under these contractual arrangements, we have substantial control over our consolidated affiliated entities and their respective shareholders to renew, revise or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements, or pursuant to certain amendments and changes of the current applicable PRC laws, regulations and rules on terms that would enable us to continue to operate our business in China legally.
 
The following chart illustrates our corporate structure as of the date of this prospectus:
 
(FLOW CHART)
 
(1) Beijing Technology is our consolidated affiliated entity established in China and is 52.00% owned by our chairman and chief executive officer, Dr. Henry Yu Lin, 33.25% owned by one of our directors, Xu Zhou and 14.75% owned by Dr. Vincent Wenyong Shi, our chief operating officer. The three shareholders of Beijing Technology are the three founders of our company. We effectively control Beijing Technology through contractual arrangements. See “Corporate Structure.”
(2) The remaining equity interests are owned by Fuzhou Huihe.
 
Our officers and directors beneficially own in aggregate 70.5% of our outstanding share capital as of the date of this prospectus. Immediately after this offering, our officers and directors will collectively beneficially own 52.7% of our outstanding share capital and 62.1% of our aggregate voting power.
 
The following is a summary of the currently effective contracts among our subsidiary NetQin Beijing, our consolidated affiliated entity Beijing Technology, and the shareholders of Beijing Technology.


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Agreements that Provide Us Effective Control over Beijing Technology
 
Business Operations Agreement.  Pursuant to the business operations agreement dated as of June 5, 2007 among NetQin Beijing, Beijing Technology and the shareholders of Beijing Technology, Beijing Technology must appoint the persons designated by NetQin Beijing to be its directors, general manager, chief financial officer and any other senior officers. Beijing Technology agrees to accept the proposal provided by NetQin Beijing from time to time relating to employment, daily business and financial management. Without NetQin Beijing or its representative’s prior written consent, Beijing Technology shall not conduct any transaction which may materially affect its assets, business, personnel, rights, liabilities or operations. In addition, the shareholders of Beijing Technology irrevocably appointed a person designed by NetQin Beijing as their attorney-in-fact to vote on their behalf on all matters of Beijing Technology requiring shareholder approval, including matters relating to the transfer of any or all of their respective equity interests in Beijing Technology, and appointment of the directors, chief executive officer, chief financial officer, and other senior management members of Beijing Technology. They further agree to withdraw such appointment and appoint another person as their power-in-fact per NetQin’s request in any time. The shareholders of Beijing Technology agree to transfer any dividends, bonus or any other benefits or interests , which they received as the shareholders of Beijing Technology, to NetQin Beijing without any conditions. This agreement is effective until NetQin Beijing ceases to exist. NetQin Beijing may terminate the agreement at any time by providing 30-day’s advance written notice to Beijing Technology and to each of its shareholders. Neither Beijing Technology nor any of its shareholders may terminate this agreement prior to the expiration date.
 
Equity Interest Pledge Agreement.  Pursuant to the equity interest pledge agreement dated as of August 6, 2007 among NetQin Beijing and the shareholders of Beijing Technology, as amended, the shareholders of Beijing Technology pledge all of their respective equity interests in Beijing Technology to NetQin Beijing, to guarantee Beijing Technology and its shareholders’ performance of their obligations under the exclusive technical consulting services agreement, equity disposition agreement and business operations agreement. If Beijing Technology and/or any of its shareholders breach their contractual obligations under these agreements, NetQin Beijing, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. Without NetQin Beijing’s prior written consent, shareholders of Beijing Technology shall not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice NetQin Beijing’s interests. During the term of this agreement, Beijing Technology shall not distribute any dividends or profits; otherwise NetQin Beijing is entitled to receive all of the dividends and profits paid on the pledged equity interests. The equity interest pledge will be effective upon the completion of the registration of the pledge with the competent local branch of the SAIC, and expire when, upon NetQin Beijing’s written confirmation, Beijing Technology and its shareholders have fully performed their obligations under the exclusive technical consulting services agreement, equity disposition agreement and business operations agreement. We are currently in the process of applying for registration of the pledge of Beijing Technology’s equity interests with Beijing Administration for Industry and Commerce.
 
Agreements that Transfer Economic Benefits to Us
 
Exclusive Technical Consulting Services Agreement.  Pursuant to the exclusive technical consulting services agreement dated as of June 5, 2007 between NetQin Beijing and Beijing Technology, NetQin Beijing has exclusive right to provide technical consulting services relating to, among other things, research and development of mobile anti-virus software, training for employees, transfer of research and development technology, public relations, market research and analysis, strategic planning and sales and marketing to Beijing Technology. Without NetQin Beijing’s prior written consent, Beijing Technology shall not engage any third party for any of the technical consulting services provided under this agreement. In addition, NetQin Beijing exclusively owns all intellectual property rights resulting from the performance of this agreement. Beijing Technology agrees to pay a quarterly service fee to NetQin Beijing based on the percentage of revenue of Beijing Technology as set forth in this agreement. During


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the term of this agreement, NetQin Beijing shall have the right to adjust the service fees. The term of this agreement expires upon the dissolution date of NetQin Beijing under the laws and regulations of the PRC. NetQin Beijing can terminate this agreement at any time by providing 30-day’s prior written notice. Beijing Technology is not permitted to terminate this agreement prior to the expiration date.
 
Agreements that Provide Us the Option to Purchase the Equity Interest in Beijing Technology
 
Equity Disposition Agreement.  Pursuant to the equity disposition agreement dated as of June 5, 2007 among NetQin Beijing, Beijing Technology and the shareholders of Beijing Technology, Beijing Technology’s shareholders grant NetQin Beijing or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of their equity interests in Beijing Technology. All of the equity interests in Beijing Technology can be acquired in considerations for the cancellation of all of the loans extended to Beijing Technology’s shareholders under the loan agreements mentioned below. NetQin Beijing or its designated representative(s) have sole discretion to decide when to exercise such options, either in part or in full. NetQin Beijing or its designated representative(s) is entitled to exercise the options an unlimited number of times until all of the equity interests have been acquired, and can freely transfer the option, in whole or in part to any third party. Without NetQin Beijing’s prior written consent, Beijing Technology’s shareholders shall not transfer, donate, pledge, or otherwise dispose of their equity shareholdings in any way. The equity disposition agreement has a term of ten years, but may be extended at the sole option of NetQin Beijing. NetQin Beijing also has the right to require other parties to sign an updated equity disposition agreement instead of extending the existing one.
 
Loan Agreements.  On June 5, 2007, NetQin Beijing and the shareholders of Beijing Technology entered into a loan agreement, pursuant to which NetQin Beijing extended interest-free loans to the shareholders of Beijing Technology with an aggregate amount of RMB6,122,500. In addition, NetQin Mobile Inc. extended a loan in the amount of $250,000 to the shareholders of Beijing Technology with an annual interest rate of 6%. In January 2011, NetQin Mobile Inc., NetQin Beijing and the shareholders of Beijing Technology entered into an agreement, which provides that the sole purpose of the loans in the amounts of RMB6,122,500 and $250,000 is to provide funds necessary for the capital injection of Beijing Technology and that the obligations of the shareholders of Beijing Technology to repay such loans can only be fully performed by the sale of all of its equity interests to NetQin Beijing or its designated representative(s) pursuant to the equity disposition agreement. We refer to these agreements collectively as the loan agreements. Without NetQin Beijing’s prior written consent, the shareholders of Beijing Technology shall not approve any transaction which may significantly affect its assets, operations or liabilities. The term of the loan agreements is ten years, and may be extended if both parties agree in writing.
 
In the opinion of Jincheng Tongda & Neal, our PRC legal counsel:
 
  •  the ownership structures of our consolidated affiliated entities and our subsidiary in China, both currently and after giving effect to this offering, comply with all existing PRC laws and regulations;
 
  •  the contractual arrangements among NetQin Beijing and Beijing Technology and the shareholders of Beijing Technology that are governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and
 
  •  each of our PRC subsidiary and our consolidated affiliated entities has all necessary corporate power and authority to conduct its business as described in its business scope under its business license. The business licenses of our PRC subsidiary and our consolidated


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  affiliated entities are in full force and effect. Our PRC subsidiary and our consolidated affiliated entities are capable of suing and being sued and may be the subject of any legal proceedings in PRC courts. To the best of Jincheng Tongda & Neal’s knowledge after due inquires, none of our PRC subsidiary, consolidated affiliated entities or their respective assets is entitled to any immunity, on the grounds of sovereignty, from any action, suit or other legal proceedings; or from enforcement, execution or attachment.
 
Risks in Relation to the VIE Structure
 
We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our PRC businesses do not comply with PRC government restrictions on foreign investment in value-added telecommunication services, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors — Risks Related to Our Corporate Structure — If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in Internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “— Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”


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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following selected consolidated financial data for the periods and as of the dates indicated should be read in conjunction with our audited and reviewed consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
Our selected consolidated financial data presented below for the years ended December 31, 2008, 2009 and 2010 and the summary consolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this Selected Consolidated Financial and Operating Data together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. We have not included financial information for the years ended December 31, 2006 and 2007, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2008, 2009 and 2010 cannot be provided on a U.S. GAAP basis without unreasonable effort or expense. Our historical results do not necessarily indicate results expected for any future periods.
 
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars, except for share, per share and per ADS data)
 
Consolidated Statement of Operations Data:
                       
Net revenues:
                       
Premium mobile Internet services
    3,867       5,014       15,268  
Other services
    94       250       2,427  
                         
Total net revenues
    3,961       5,264       17,695  
                         
Cost of revenues(1)
    (2,044 )     (2,812 )     (5,193 )
                         
Gross profit
    1,917       2,452       12,502  
                         
Operating expenses:
                       
Selling and marketing expenses(1)
    (2,404 )     (3,344 )     (4,436 )
General and administrative expenses(1)
    (2,067 )     (2,139 )     (14,750 )
Research and development expenses(1)
    (1,201 )     (2,312 )     (2,959 )
                         
Total operating expenses
    (5,672 )     (7,795 )     (22,145 )
                         
Loss from operations
    (3,755 )     (5,343 )     (9,643 )
                         
Interest income
    86       159       234  
Realized gain/(loss) from available for sale investments
    294       47       (102 )
Foreign exchange losses, net
    (156 )     (2 )     (46 )
Other income/(expenses), net
    (16 )     (12 )     135  
                         
Loss before income taxes
    (3,547 )     (5,151 )     (9,422 )
                         
Income tax expense
    (48 )           (401 )
Share of loss from associate
                (7 )
                         
Net loss
    (3,595 )     (5,151 )     (9,830 )
                         
Net loss attributable to the non-controlling interest
          1       3  
                         
Net loss attributable to NetQin Mobile Inc. 
    (3,595 )     (5,150 )     (9,827 )
                         
Accretion of redeemable convertible preferred shares
    (1,263 )     (1,393 )     (1,533 )
                         


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    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars, except for share, per share and per ADS data)
 
Beneficial conversion feature of redeemable convertible preferred shares
                (5,693 )
Net loss attributable to common shareholders
    (4,858 )     (6,543 )     (17,053 )
                         
Net loss per common share:
                       
Basic
    (0.15 )     (0.15 )     (0.34 )
Diluted
    (0.15 )     (0.15 )     (0.34 )
Net loss per ADS:(2)
                       
Basic
    (0.03 )     (0.03 )     (0.07 )
Diluted
    (0.03 )     (0.03 )     (0.07 )
Weighted average number of common shares outstanding:
                       
Basic
    33,089,052       42,251,533       49,683,230  
Diluted
    33,089,052       42,251,533       49,683,230  
(1) Share-based compensation expenses included in:
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars)
 
Cost of revenues
    5       13       19  
Selling and marketing expenses
    31       35       102  
General and administrative expenses
    1,128       1,087       12,299  
Research and development expenses
    32       43       146  
 
(2) Each ADS represents five Class A common shares.
 
                                 
    As of December 31,
    2008   2009   2010   2010
                (unaudited
                pro forma)(1)
    (in thousands of dollars)
 
Selected Consolidated Balance Sheet Data:
                               
Cash and cash equivalents
    587       1,704       17,966       17,966  
Total current assets
    11,631       7,645       44,611       44,611  
Total assets
    13,253       10,339       48,404       48,404  
Total current liabilities
    1,230       2,161       5,562       5,562  
Total liabilities
    1,230       2,161       5,749       5,749  
Series A convertible preferred shares
    3,242       3,242       3,242        
Series B redeemable convertible preferred shares
    13,717       15,109       16,638        
Series C redeemable convertible preferred shares
                16,983        
Series C-1 redeemable convertible preferred shares
                14,115        
Total shareholders equity/(deficit)
    (4,936 )     (10,173 )     (8,323 )     42,665  
(1) Pro forma basis reflects the conversion of all outstanding preferred shares on a one-for-one basis into an aggregate of 114,637,272 common shares upon the completion of this offering.

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The following table sets forth the calculation of adjusted net income/(loss), which is determined by adding back share-based compensation expenses to our net income/(loss) presented in accordance with U.S. GAAP.
 
                         
    For the Year Ended December 31,
    2008   2009   2010
    (in thousands of dollars)
 
Net loss
    (3,595 )     (5,151 )     (9,830 )
Add back: share-based compensation expenses
    1,196       1,178       12,566  
Adjusted net income/(loss)
    (2,399 )     (3,973 )     2,736  
 
Selected Operating Data
 
We monitor certain key operating metrics that we believe are important to our financial performance. As our business evolves and we continue to gain further insight into our growing business, we may change the method of calculating our key operating metrics to address uncertainties in these metrics or add new key operating metrics to reflect the changes in our business.
 
The number of our registered user accounts overstates the actual number of unique individuals who register to use our products, and our active and user account figures may differ from the actual numbers of active and paying user accounts. For more information, see “Risk Factors — The number of our registered user accounts overstates the number of unique individuals who register to use our products. Our active user and paying user account figures may differ from the actual numbers of active and paying user accounts.”
 
We describe below how we calculate each of the registered user accounts, active user accounts and paying user accounts as well as certain limitations of these calculation metrics.
 
Registered User Accounts.  We define registered user accounts as the cumulative number of user accounts at the end of the period. The number of registered user accounts is not intended to measure the number of individual users, as an individual who has more than one smartphone may create a separate account for each device. We monitor our number of registered user accounts as a measure of the success of our user acquisition strategy.
 
Active User Accounts.  We define active user accounts for a specific period as the registered user accounts that have accessed our services at least once during such period. We monitor our number of active user accounts as a measure of the engagement level of our users.
 
Paying User Accounts.  We define paying user accounts for a specific period as the registered user accounts that have paid or subscribed for our premium services during such period. We monitor our number of paying user accounts as a measure of our ability to monetize our user base.


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The following table sets forth cumulative registered user accounts as of December 31, 2008, 2009 and 2010 and as of March 31, 2011, respectively, as well as the average monthly active user accounts and average monthly paying user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011, respectively.
 
                                 
    As of December 31,   As of March 31,
    2008   2009   2010   2011
    (in millions)
 
Cumulative registered user accounts
    15.18       35.63       71.69       85.97  
China
    12.41       26.88       48.50       57.38  
Overseas
    2.77       8.75       23.19       28.58  
 
                                 
    For the Three Months Ended
    December 31,   March 31,
    2008   2009   2010   2011
    (in millions)
 
Average monthly active user accounts
    5.46       11.96       25.44       30.26  
China
    4.49       9.07       17.39       20.05  
Overseas
    0.97       2.89       8.05       10.21  
Average monthly paying user accounts
    1.03       1.14       3.24       3.67  
China
    1.00       0.97       2.55       2.81  
Overseas
    0.03       0.17       0.69       0.86  


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RECENT DEVELOPMENTS
 
The following table sets forth our selected unaudited condensed consolidated statements of operations information for the three months ended March 31, 2010 and March 31, 2011. We have prepared this selected unaudited condensed consolidated financial information on the same basis as our audited consolidated financial statements. This selected unaudited condensed consolidated financial information reflects all adjustments, consisting only of normal and recurring adjustments, which we consider necessary for a fair statement of our financial position and operating results for the periods presented. We cannot assure you that our results for the three months ended March 31, 2011 will be indicative of our financial results for future interim periods or for the full year ending December 31, 2011. See “Risk Factors — Risks Related to Our Business and Industry — Our quarterly revenues and operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall short of expectations.” Please also refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations.
 
                                 
    For the Three Months Ended March 31,
    2010   2011
    (in thousands
  % of
  (in thousands
  % of
    of dollars)   net revenues   of dollars)   net revenues
 
Selected information of consolidated statement of operations
                               
Net revenues
    2,435       100.0       7,622       100.0  
Cost of revenues*
    (821 )     (33.7 )     (1,503 )     (19.7 )
                                 
Gross profit
    1,614       66.3       6,119       80.3  
Operating expenses:
                               
Selling and marketing expenses*
    (884 )     (36.3 )     (1,453 )     (19.1 )
General and administrative expenses*
    (624 )     (25.6 )     (2,124 )     (27.9 )
Research and development expenses*
    (666 )     (27.4 )     (999 )     (13.1 )
                                 
Total operating expenses
    (2,174 )     (89.3 )     (4,576 )     (60.1 )
                                 
Income/(loss) from operations
    (560 )     (23.0 )     1,543       20.2  
                                 
Income/(loss) before income taxes
    (378 )     (15.5 )     1,717       22.5  
Income tax benefit/(expense)
    (2 )     (0.1 )     11       0.1  
Share of loss from an associate
                (66 )     (0.8 )
                                 
Net income/(loss)
    (380 )     (15.6 )     1,662       21.8  
                                 
* Share-based compensation expense included in:
                               
Cost of revenues
    5       0.2       7       0.1  
Selling and marketing expenses
    15       0.6       69       0.9  
General and administrative expenses
    363       14.9       1,249       16.4  
Research and development expenses
    21       0.9       115       1.5  
 
Net revenues.  Our total net revenue increased by 216.7% from $2.4 million for the three months ended March 31, 2010 to $7.6 million for the three months ended March 31, 2011, primarily due to an increase in net revenues from premium mobile Internet services and, to a lesser extent, to an increase in net revenues from other services. Net revenues from premium mobile Internet services increased 214.3% from $2.1 million in the three months ended March 31, 2010 to $6.6 million in the three months ended March 31, 2011, primarily due to the growth of our average monthly paying user accounts, which in turn reflected the growth of our registered and active user accounts and their increased use of our premium services and, in particular, an increase in the number of our overseas paying user accounts, which generally pay for our products and services at a higher subscription fee level. Our net revenues


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from other sources increased primarily due to an increase in net revenues from secured download and delivery services for mobile applications produced by third parties, which were launched in the fourth quarter of 2009.
 
Cost of revenues.  Our cost of revenue increased by 87.5% from $0.8 million for the three months ended March 31, 2010 to $1.5 million for the three months ended March 31, 2011. The increase was primarily due to (i) an increase in customer acquisition costs primarily as payments to third-party websites and handset manufacturers increased as we acquired more active user accounts through these channels; (ii) an increase in fees charged by mobile payment service providers; and (iii) an increase in staff cost, primarily in the form of salaries and benefits for employees that provide support directly related to our products and services which in turn primarily reflected the expansion of our product and service support teams.
 
General and administrative expenses.  Our general and administrative expenses increased by 250.0% from $0.6 million in the three months ended March 31, 2010 to $2.1 million in the three months ended March 31, 2011. The increase was primarily due to an increase in share-based compensation cost due to the grant of share options in February and March 2011.
 
We went from a net loss of $0.4 million , or 15.6% of revenue, for the three months ended March 31, 2010 to a net income of $1.7 million, or 21.8% of revenue, for the three months ended March 31, 2011.
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
                         
    For the Three Months Ended
    March 31,
  December 31,
  March 31,
    2010   2010   2011
    (in thousands
  (in thousands
  (in thousands
    of dollars)   of dollars)   of dollars)
 
Selected information of consolidated statements of cash flows
                       
Net cash provided by/(used in) operating activities
    (1,537 )     308       1,978  
Net cash provided by investing activities
    1,161       (4,143 )     2,107  
Net cash provided by financing activities
          11,915       2,200  
Net (decrease)/increase in cash and cash equivalents
    (412 )     8,263       6,490  
Cash and cash equivalents at the beginning of the period
    1,704       9,703       17,966  
Cash and cash equivalents at the end of the period
    1,292       17,966       24,456  
 
Net cash provided by operating activities amounted to $2.0 million for the three months ended March 31, 2011, primarily due to net income of $1.7 million adjusted for certain non-cash expenses consisting principally of share-based compensation and an increase in working capital. The increase in working capital was primarily attributed to an increase in accounts receivable of $0.1 million mainly from overseas mobile payment service providers which have longer credit terms, offset by an increase in deferred revenues of $0.3 million due to an increase in the number of pre-paid cards, which have longer subscription periods.
 
Net cash provided by investing activities amounted to $2.1 million for the three months ended March 31, 2011, primarily attributable to proceeds from $2.2 million paid to us in repayment of an advance that we made to Yidatong, offset by $0.1 million spent in purchase of property and equipment and intangible assets which was due to the expansion of our business.


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Net cash provided by financing activities amounted to $2.2 million for the three months ended March 31, 2011, attributable to the proceeds from our issuance of Series C-1 convertible redeemable preferred shares.
 
In addition, in order to provide a more informative context for the increases in the quarter ended March 31, 2011, set forth in the following table is our selected unaudited condensed consolidated statements of operations information for the three months ended December 31, 2010 and March 31, 2011. We have prepared this selected unaudited condensed consolidated financial information on the same basis as our audited consolidated financial statements. This selected unaudited condensed consolidated financial information reflects all adjustments, consisting only of normal and recurring adjustments, which we consider necessary for a fair statement of our financial position and operating results for the periods presented. Please also refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations.
 
                                 
    For the Three Months Ended
    December 31, 2010   March 31, 2011
    (in thousands
  % of
  (in thousands
  % of
    of dollars)   net revenues   of dollars)   net revenues
 
Selected consolidated statement of operations information
                               
Net revenues
    6,263       100.0       7,622       100.0  
Cost of revenues*
    (1,982 )     (31.6 )     (1,503 )     (19.7 )
                                 
Gross profit
    4,281       68.4       6,119       80.3  
Operating expenses:
                               
Selling and marketing expenses*
    (1,580 )     (25.2 )     (1,453 )     (19.1 )
General and administrative expenses*
    (12,242 )     (195.5 )     (2,124 )     (27.9 )
Research and development expenses*
    (908 )     (14.5 )     (999 )     (13.1 )
                                 
Total operating expenses
    (14,730 )     (235.2 )     (4,576 )     (60.1 )
                                 
Income/(loss) from operations
    (10,449 )     (166.8 )     1,543       20.2  
                                 
Income/(loss) before income taxes
    (10,353 )     (165.3 )     1,717       22.5  
Income tax benefit/(expense)
    (167 )     (2.7 )     11       0.1  
Share of loss from an associate
    (5 )     (0.1 )     (66 )     (0.8 )
                                 
Net income/(loss)
    (10,525 )     (168.1 )     1,662       21.8  
                                 
* Share-based compensation expense included in:
                               
Cost of revenues
    6       0.1       7       0.1  
Selling and marketing expenses
    55       0.9       69       0.9  
General and administrative expenses
    11,025       176.0       1,249       16.4  
Research and development expenses
    81       1.3       115       1.5  
 
Net revenues.  Our total net revenues increased by 20.7% from $6.3 million for the three months ended December 31, 2010 to $7.6 million for the three months ended March 31, 2011, primarily due to an increase in net revenues from premium mobile Internet services and, to a lesser extent, to an increase in net revenues from other services. Net revenues from premium mobile Internet services increased 22.5% from $5.4 million in the three months ended December 31, 2010 to $6.6 million in the three months ended March 31, 2011, primarily due to the growth of our average monthly paying user accounts, which in turn reflected the growth of our registered and active user accounts and their increased use of our premium services and, in particular, an increase in the number of our overseas paying user accounts, which generally pay for our products and services at a higher subscription fee


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level. Our net revenues from other sources increased primarily due to an increase in net revenues from secured download and delivery services for mobile applications produced by third parties.
 
Cost of revenues.  Our cost of revenue decreased by 24.2% from $2.0 million for the three months ended December 31, 2010 to $1.5 million for the three months ended March 31, 2011. The decrease was primarily due to the decrease in customer acquisition cost with our increased reliance on viral marketing channel.
 
General and administrative expenses.  Our general and administrative expenses decreased by 82.6% from $12.2 million in the three months ended December 31, 2010 to $2.1 million in the three months ended March 31, 2011. The decrease was primarily due to a decrease in share-based compensation cost because a significant portion of options granted in fourth quarter of 2010 was vested immediately upon grant.
 
We went from a net loss of $10.5 million, or 168.1% of net revenues, for the three months ended December 31, 2010 to a net income of $1.7 million, or 21.8% of net revenues, for the three months ended March 31, 2011.
 
The following table sets forth a summary of our consolidated balance sheets for the periods indicated:
 
                 
    As of
    December 31,
  March 31,
    2010   2011
    (in thousands
  (in thousands
    of dollars)   of dollars)
 
Selected information of consolidated consolidated balance sheets
               
Cash and cash equivalents
    17,966       24,456  
Total current assets
    44,611       56,953  
Total Assets
    48,404       60,494  
Deferred revenue
    2,690       3,389  
Total current liabilities
    5,562       10,113  
Deferred tax liabilities, non-current
    187       168  
Total Liabilities
    5,749       10,281  
Series A convertible preferred shares
    3,242       3,242  
Series B redeemable convertible preferred shares
    16,638       17,036  
Series C redeemable convertible preferred shares
    16,983       16,984  
Series C-1 redeemable convertible preferred shares
    14,115       14,115  
Total shareholders’ deficit
    (8,323 )     (1,164 )


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section headed “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We are a leading software-as-a-service, or SaaS provider of consumer-centric mobile Internet services focusing on security and productivity. According to a January 2011 report prepared by Frost & Sullivan, we are the dominant provider in the mobile security industry in China with a 67.7% market share as of December 31, 2010, as measured by the number of registered user accounts. We provide a comprehensive suite of mobile Internet services that protect mobile users from security threats and enhance their productivity. As of March 31, 2011, the number of registered user accounts for our services reached approximately 85.97 million in over 100 countries, representing a sizeable share of the fast-growing market for mobile Internet services. Our technological innovation and global significance have been widely recognized through distinctions such as the 2011 Technology Pioneer Award bestowed by the Davos World Economic Forum in September 2010.
 
We provide users a comprehensive suite of mobile security and productivity applications for mobile devices. We offer our mobile Internet services to users in China and overseas through our innovative Freemium service business model. Our cloud-client computing platform combines our cloud-side mobile security knowledge repository and our client-side applications to provide mobile anti-malware, anti-spam, privacy protection, data backup and restore and other services to users worldwide. Leveraging our cloud-side resources, we believe we have compiled one of the largest, most comprehensive mobile security knowledge repositories in the world, including mobile malware, spam messages, malicious websites and other threats. In addition, we offer user-centric client-side mobile security and productivity applications optimized for mobile devices. Our industry-leading mobile security knowledge repository grows continually as new security threats are identified through our own technology or through the contribution of security knowledge from our users and mobile ecosystem participants. As a result, as we grow our user base and open our platform to more mobile ecosystem participants, our platform becomes increasingly more powerful, which we believe presents a significant entry barrier to potential competitors.
 
Since our inception, we have focused on building a large and engaged user base. Our cumulative registered user accounts as of December 31, 2008, 2009 and 2010 and as of March 31, 2011 were 15.18 million, 35.63 million, 71.69 million and 85.97 million, respectively. Our average monthly active user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011 were 5.46 million, 11.96 million, 25.44 million and 30.26 million, respectively, and our average monthly paying user accounts for the three months ended December 31, 2008, 2009 and 2010 and March 31, 2011 were 1.03 million, 1.14 million, 3.24 million and 3.67 million, respectively. Substantially all of our users are smartphone users, which we believe have attractive demographic characteristics.
 
We generate revenues primarily through the sale of user subscriptions to our premium mobile Internet services. Our total net revenues increased from $4.0 million in 2008 to $5.3 million in 2009 and to


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$17.7 million in 2010, representing a CAGR of 111.4%. We incurred a net loss of $3.6 million in 2008, $5.2 million in 2009 and $9.8 million in 2010.
 
In February 2011, we granted options to purchase 8,020,000 common shares to Dr. Henry Yu Lin, the chairman of the board of directors and chief executive officer, Dr. Vincent Wenyong Shi, a director and the chief operating officer of our company, and Ying Han, our independent director. The vesting period of these options ranges from one to six years. Our board of directors also approved the acceleration of vesting schedules of employees’ options to purchase 14,994,000 common shares. As a result, we expect to incur a share-based compensation expense totaling approximately $13.3 million from the first quarter of 2011 over the vesting period of these newly granted options. In March 2011, we granted options to purchase 1,111,825 common shares to our executive officer and employees with a vesting period ranging from immediately upon this offering to four years. As a result, we expect to incur a share-based compensation expense totaling approximately $1.7 million from the first quarter of 2011 over the vesting period of these newly granted options. Share-based compensation expenses relating to the February and March option grants and the February option acceleration will materially and adversely affect our financial results in the first quarter of 2011 and in subsequent periods over the vesting period of the newly granted options.
 
Our results of operations are affected by PRC laws, regulations and policies relating to value-added telecommunications services. Due to current legal restrictions on foreign ownership and investment in value-added telecommunications services in China, we rely on a series of contractual arrangements with Beijing Technology to conduct our business in China. We do not hold equity interests in Beijing Technology or its subsidiary. As a result of these contractual arrangements, we are the primary beneficiary of Beijing Technology and its subsidiary and treat them as our consolidated affiliated entities under U.S. GAAP.
 
Factors Affecting Our Results of Operations
 
Our results of operations are affected by, among others, the following factors:
 
The growth of the mobile security and productivity industry
 
Our business and prospects depend on the continued development of the mobile security and productivity industry in China and abroad. As a new industry, the mobile security and productivity industry has only begun to experience substantial growth in recent years in terms of number of users and revenues. The growth of the mobile security and productivity industry is affected by numerous factors, such as users’ general communication experience, technological innovations, development of smart phones and other mobile devices, development of mobile Internet and Internet-based mobile telecommunication services, regulatory changes, and the macroeconomic environment.
 
Our ability to expand our user base
 
Our business is significantly affected by the overall size of our user base, which in turn is determined by, among other factors, (i) user experience of our services and products, (ii) our relationships with key players in the mobile ecosystem such as wireless carriers, handset manufacturers, chipmakers, distributors and retailers and third-party payment processors, (iii) the expansion of our business into overseas markets and (iv) the expansion of our target user base beyond smartphone users to mobile tablets and other Internet-enabled mobile devices.
 
Our ability to monetize our user base
 
Our revenues and results of operations depend to a large extent on our ability to monetize our user base. Our Freemium service business model provides users with free services and the ability to choose a selection of premium, fee-charging services to meet their individual needs. We aim to turn more


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registered user accounts into paying user accounts through up-selling and cross-selling our premium services, among others, the success of which is affected by our ability to continually improve and promote our existing premium products and services, develop and introduce new services and features meeting user needs, and enhance user experience. In addition, our ability to monetize our user base is affected by our pricing power, which in turn depends on various factors such as local consumption levels, market prices for mobile applications, recognition and acceptance of our brand and services, and competition.
 
Our ability to continue to develop and offer new mobile security and productivity services
 
We generate revenues primarily through user subscriptions of our premium mobile security and productivity services, which substantially depends on our ability to continue offering services and products that meet the changing requirements of our users and appropriately price our services and products. As the mobile security and productivity industry evolves and user preferences for mobile security and productivity services and products change, our results of operations depend on our ability to continually research, develop and update our products and services to meet user needs and offer such products at competitive prices. As the industry continues to evolve, we need to introduce products and services which provide competitive advantages over other competing products which may enter the market.
 
Our ability to control our cost of revenues and operating expenses
 
Our cost of revenues includes, among others, user acquisition costs and payments to mobile payment service providers. We pay third parties a fee for each registered user account acquired through them. With our enhanced brand and established market position, we expect the viral marketing channel to become an increasingly important user acquisition channel in our existing markets and, consequently, payments to third parties in connection with user acquisition as a percentage of our total net revenues to decrease over time. In addition, we cooperate with wireless carriers, either directly or through mobile payment service providers, to provide services to users. If we cooperate with wireless carriers through mobile payment service providers, we share the revenues with the mobile payment service providers and the revenue attributed to the mobile payment service provider will be recognized as cost of revenues. We expect payments to mobile payment service providers as a percentage of our total net revenues to decrease as we have increasingly cooperated with wireless carriers directly.
 
Our operating expenses include selling and marketing expenses, general and administrative expenses, and research and development expenses. Our total operating expenses increased from 2008 to 2010, as our business expanded rapidly in its early years and we hired more personnel and incurred more expenses to support marketing and research and development efforts. After becoming a public company, we expect that our operating expenses, excluding the non-cash share based compensation expenses, will increase but at the same time, decrease as a percentage of our total net revenues as we achieve economies of scale. Our results of operations are and will continue to be affected by our ability to control our cost of revenues and operating expenses.
 
Key Operating Metrics
 
We monitor certain key operating metrics that we believe are important to our financial performance. As our business evolves and we continue to gain further insight into our growing business, we may change the method of calculating our key operating metrics to address uncertainties in these metrics or add new key operating metrics to reflect the changes in our business. For details of how we calculate each of these metrics, as well as limitations thereon, see “Selected Consolidated Financial and Operating Data — Selected Operating Data.”


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The following table sets forth cumulative registered user accounts as of December 31, 2008, 2009 and 2010, respectively, as well as the average monthly active user accounts and average monthly paying user accounts for the three months ended December 31, 2008, 2009 and 2010, respectively.
 
                         
    As of December 31,
    2008   2009   2010
    (in millions)
 
Cumulative registered user accounts
    15.18       35.63       71.69  
China
    12.41       26.88       48.50  
Overseas
    2.77       8.75       23.19  
 
                         
    For the Three Months Ended
    December 31,
    2008   2009   2010
    (in millions)
 
Average monthly active user accounts
    5.46       11.96       25.44  
China
    4.49       9.07       17.39  
Overseas
    0.97       2.89       8.05  
Average monthly paying user accounts
    1.03       1.14       3.24  
China
    1.00       0.97       2.55  
Overseas
    0.03       0.17       0.69  
 
Description of Certain Statement of Operations Items
 
Net Revenues
 
We recognize revenues net of business tax and related surcharges. We derive our net revenues primarily from premium mobile Internet services. We focus on mobile security and productivity services and provide for free the basic functions of such services, such as the malware scanning, anti-spam, contact back-up and restore functions. We charge our users a subscription fee for subscribing to our premium services, such as access to continual updates of our virus library and advanced privacy protection services, on a monthly, three-month, six-month or twelve-month basis. We also charge our users for virus library updates on a pay-per-use basis. In addition, we derive a small portion of our net revenues from other sources, such as secured download and delivery services for mobile applications produced by third parties and providing technology development services to third parties.
 
We collect net revenues from premium mobile Internet services through three payment channels. First, we cooperate with wireless carriers, either directly or through mobile payment service providers, to provide services to users. In this payment channel, wireless carriers charge a fixed percentage of the total user payment as a fee primarily for billing and collection services. We recognize net revenues excluding the fees retained by wireless carriers. If we cooperate with wireless carriers through mobile payment service providers, we pay a fee to the mobile payment service providers and the amounts attributed to mobile payment service providers are recognized as costs of revenues. Second, we sell prepaid cards to customers through independent distributors and recognize net proceeds from the distributors as net revenues. Third, users can subscribe for our services directly through our website and make payments through third-party payment processors. We recognize the proceeds collected through third-party payment processors as net revenues. The service fees charged by third-party payment processors are recognized as cost of revenues. See “— Critical Accounting Policies — Revenue Recognition and Deferred Revenue.”


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The following table sets forth the principal components of our net revenues by amount and as a percentage of our total net revenues for the periods indicated.
 
                                                 
    For the Year Ended December 31,
    2008   2009   2010
    $   %   $   %   $   %
    (in thousands of dollars, except for percentages)
 
Premium mobile Internet services
    3,867       97.6       5,014       95.3       15,268       86.3  
Other services
    94       2.4       250       4.7       2,427       13.7  
                                                 
Total net revenues
    3,961       100.0       5,264       100.0       17,695       100.0  
                                                 
 
Net revenues from premium mobile Internet services increased significantly from 2008 to 2009 and from 2009 to 2010, due primarily to (i) the growth of our paying user accounts, which in return reflected the growth of our registered and active user accounts and their increased use of our premium services, (ii) an increase in our overseas paying user accounts as a percentage of our total paying user accounts, as our overseas paying user accounts generally have higher net revenues per user account, and (iii) to a lesser extent, an increase in the subscription fee rates of our Mobile Anti-virus and Mobile Manager services for new users in China since the fourth quarter of 2009. We price our products and services based on various factors, including, among other things, local consumption levels, market prices for mobile applications, recognition and acceptance of our brand and services, and competition.
 
Overseas users account for an increasing portion of our net revenues as we further expand our presence in overseas markets. Net revenues attributable to overseas users as a percentage of our total net revenues increased from 7.4% in 2008 to 21.0% in 2009 to 35.1% in 2010.
 
We launched the secured download and delivery services for mobile applications produced by third parties in the fourth quarter of 2009. Net revenues from such services, which are recorded in other revenues, increased substantially in 2010 with increased use of these services by our users.
 
Cost of Revenues
 
Cost of revenues primarily consists of: (i) payments to third parties in connection with user acquisition, (ii) salaries and benefits for employees that provide customer services and other support directly related to our products and services, and (iii) payments paid to or retained by mobile payment service providers and third-party payment processors.
 
We acquire users primarily through viral marketing, or word-of-month marketing, pre-installation and online download. We provide online downloads of our products and services via various third-party websites, including online advertising networks, Internet portals and mobile application stores. We pay such third parties a fee for each registered user account acquired through them. Payments to these third parties increased from 2008 to 2009 and from 2009 to 2010 as we acquired more registered user accounts through them during these periods. With our enhanced brand and established market position, we expect the viral marketing channel to become an increasingly important user acquisition channel in existing markets and, consequently, payments to third parties in connection with user acquisition as a percentage of our total net revenues to decrease over time. We also pay fees to handset manufacturers to pre-install our applications on their handsets.
 
Salaries and benefits for employees that provide customer services and other support directly related to our products and services increased from 2008 to 2009 and from 2009 to 2010, primarily reflecting the expansion of customer services and product support teams.


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We cooperate with wireless carriers, either directly or through mobile payment service providers, to provide services to users. If we cooperate with wireless carriers through mobile payment service providers, we pay a fee to the mobile payment service providers and the amounts attributed to mobile payment service providers are recognized as costs of revenues. Substantially all of our net revenues were collected through wireless carriers and mobile payment service providers in 2008 and 2009, and approximately 60% of our net revenues were collected through wireless carriers and mobile payment service providers in 2010. Net revenues collected through our top mobile payment service provider, Yidatong, contributed 52.7%, 20.0% and 21.4% of our total net revenues in 2008, 2009 and 2010, respectively. Yidatong charges us a lower fee rate than other mobile payment service providers through which we cooperate with wireless carriers. See also “Risk Factors — Risks Related to Our Business and Industry — We depend on wireless carriers and mobile payment service providers for the collection of a substantial portion of our revenues, and any loss or deterioration of our relationship with wireless carriers or mobile payment service providers may result in disruptions to our business operations and the loss of revenues.” The remaining net revenues were collected through prepaid cards and third-party payment channels including Alipay in China, Paypal overseas and also UnionPay, credit cards and debit cards in general. Having prepaid cards and third-party payment channels further diversifies our payment channels and reduces our dependence on existing wireless carriers and mobile payment service providers. Because we recognize net proceeds from the prepaid card distributors as net revenues, using the prepaid card payment channel to collect revenues has also decreased our cost of revenue. In 2010, a larger portion of our net revenues was collected through prepaid cards and third-party payment channels as compare to that of 2009, and we expect this trend to continue in the foreseeable future.
 
Cost of revenues also includes an allocation of our share-based compensation charges. See “— Critical Accounting Policies — Share-based compensation.”
 
Operating Expenses
 
Our operating expenses consist of (i) selling and marketing expenses, (ii) general and administrative expenses, and (iii) research and development expenses. We expect our operating expenses to continue to increase as our business grows. The following table sets forth the components of our operating expenses by amount and as a percentage of total operating expenses for the periods indicated.
 
                                                 
    For the Year Ended December 31,
    2008   2009   2010
    $   %   $   %   $   %
    (in thousands of dollars, except for percentages)
 
Selling and marketing expenses
    2,404       42.4       3,344       42.9       4,436       20.0  
General and administrative expenses
    2,067       36.4       2,139       27.4       14,750       66.6  
Research and development expenses
    1,201       21.2       2,312       29.7       2,959       13.4  
                                                 
Total operation expenses
    5,672       100.0       7,795       100.0       22,145       100.0  
                                                 
 
Selling and Marketing Expenses.  Selling and marketing expenses consist primarily of marketing and promotional expenses and salaries, benefits and commissions for our sales 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. We expect our general and administrative expenses to increase in the future as our business continues to grow and we incur increased costs related to complying with our compliance and reporting obligations under the U.S. securities laws as a public company.


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Research and Development Expenses.  Research and development expenses consist primarily of salaries and benefits for research and development personnel. We expect our research and development expenses to increase as we intend to hire more research and development personnel to increase performance levels of existing products and services and develop new products and services.
 
Operating expenses also include an allocation of our share-based compensation charges. See “— Critical Accounting Policies — Share-based compensation.”
 
Taxation
 
Cayman Islands
 
We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, payment of dividends by us to our shareholders is not subject to withholding tax in the Cayman Islands.
 
Hong Kong
 
Entities incorporated in Hong Kong are subject to Hong Kong profit tax at a rate at 16.5% since the beginning of 2008, the effective date that the Hong Kong government promulgated a 1% decrease in the profit tax rate Our Hong Kong subsidiary, NetQin HK, is currently subject to 16.5% profit tax in Hong Kong.
 
China
 
PRC Enterprise Income Tax
 
Prior to January 1, 2008, our subsidiary, NetQin Beijing was governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises. Beijing Technology, its subsidiary, and FuZhou NetQin was governed by the local income tax laws, which we collectively referred to as the previous income tax laws and rules. Pursuant to the previous income tax laws and rules, NetQin Beijing, Beijing Technology and Fuzhou NetQin are generally subject to Enterprise Income Taxes, or EIT, at a statutory rate 33%, which comprises 30% national income tax and 3% local income tax. An enterprise qualified as a “high and new technology enterprise” is entitled to a preferential tax rate of 15% and is further entitled to an EIT exemption for its first three years of operations and a 50% tax reduction to 7.5% for the subsequent three years and 15% thereafter.
 
On March 16, 2007, the National People’s Congress adopted the new Corporate Enterprise Income Tax Law, or the New CIT Law, which became effective from January 1, 2008 and replaced the existing separate income tax laws for domestic enterprises and foreign-invested enterprises by adopting a uniform income tax rate of 25%. Preferential tax treatments will continue to be granted to entities that are qualified as “high and new technology enterprises strongly supported by the State,” or conducted business in encouraged sectors.
 
In addition, under the New CIT Law, effective from January 1, 2008, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. The withholding tax rate is 5% for the parent company in Hong Kong if the parent company is the beneficial owner of the dividend and approved by the PRC tax authority to enjoy the preferential tax benefit. The withholding tax rate is 5% for the parent company in Hong Kong and 10% for the parent company in other countries which do not enter into tax treaties with PRC. This new withholding tax imposed on the dividend income received from our PRC subsidiaries will reduce our net income. On February 22, 2008, the Ministry of Finance and State Tax Bureau jointly issued a


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circular which stated that for foreign invested enterprises, all profits accumulated up to December 31, 2007 are exempted from withholding tax when they are distributed to foreign investors.
 
Beijing Technology is qualified as a high and new technology enterprise under the New CIT Law. Accordingly, it was subject to a rate of 7.5% from 2008 to 2010, and will be subject to a rate of 15% thereafter so long as it continues to qualify as a high and new technology enterprise. The CIT rate has been approved by Beijing Haidian District State Tax Bureau as a transitional treatment to allow the Beijing Technology to continue to enjoy its unexpired tax holiday provided by the previous income tax laws and rules. Beijing Technology has not submitted any payment to CIT for the year ended December 31, 2010.
 
Fuzhou NetQin is subject to a prevailing income tax rate of 25%.
 
Our other subsidiary, NetQin Beijing, is subject to the prevailing income tax rate of 25% on taxable income for each of the years ended December 31, 2008, 2009 and 2010.
 
The New CIT Law also provides that an enterprise established under the laws of foreign countries or regions but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules of the new CIT law merely define the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” Based on a review of surrounding facts and circumstances, we do not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history the New CIT Law, should we be treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.
 
PRC Business Tax
 
Under the relevant PRC tax laws, our business operations in the PRC are subject to PRC business tax at the rate of 3% or 5%, for mobile security services, and 5% for other services. In addition, we must pay certain related surcharges that amount to 10% of our PRC business tax. We recognize PRC business tax and the related surcharges when revenue is earned.
 
Internal Control Over Financial Reporting
 
In preparing our consolidated financial statements as of and for the years ended December 31, 2008, 2009 and 2010, we and our independent registered public accounting firm identified one material weakness and other deficiencies in our internal control over financial reporting. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
The material weakness identified related to the lack of sufficient staff with U.S. GAAP knowledge to address complex U.S. GAAP accounting issues and to prepare and review financial statements and related disclosures under U.S. GAAP. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting, as we and they will be required to do once we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified. Following the identification of this material weakness and other


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control deficiencies and in connection with preparation of our consolidated financial statements, we performed additional review procedures, including a thorough review of journal entries, U.S. GAAP adjustments, disclosures and reconciliations for key accounts, to ensure the completeness and accuracy of the consolidated financial statements prepared in accordance with U.S. GAAP.
 
To remedy our control deficiencies, we have adopted several measures to improve our internal control over financial reporting. We recently hired additional finance and accounting personnel, including a vice president in finance and a finance manager with U.S. GAAP and SEC reporting experience. In addition, we have (i) provided, and intend to continue to provide, on-going training to our accounting and operating personnel across different subsidiaries, consolidated affiliated entities and departments to improve their U.S. GAAP accounting knowledge; (ii) established and strengthened our IT systems and controls related to the IT systems to ensure proper record keeping, (iii) engaged an outside consultant to assist us in preparing for compliance with Section 404 of the Sarbanes-Oxley Act, and (iv) begun the process of developing and applying a comprehensive manual with detailed guidelines on accounting policies and procedures under U.S. GAAP. We are also in the process of, among other things, evaluating our financial accounting system for adequacy and potential upgrades, and will perform a comprehensive assessment and review to improve the documentation of key processes and controls for financial reporting in the first quarter of 2011. We will continue to implement measures to remedy our internal control deficiencies in order to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. See “Risk Factors — Risks Related to Our Business and Industry — If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.”
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
 
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that our accounting policies with respect to revenue recognition, share-based compensation, impairment of long-lived assets, income taxes and investments in an associate company represent critical accounting policies that reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included elsewhere in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.


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Revenue Recognition
 
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and/or service has been performed, the price is fixed or determinable and collection is reasonably assured. Revenue is recorded net of business tax and related surcharges.
 
Revenues presented in the consolidated statements of operations include revenues from premium mobile Internet services and other services.
 
Premium Mobile Internet Services
 
Premium mobile Internet services revenues are derived principally from providing premium security and productivity services to end users. The basic functions of mobile security and productivity services, including anti-virus, anti-malware, anti-spam, privacy protection, data backup and recovery are free of charge. The software providing the basic service is offered to end users through pre-installation on mobile handsets or free downloads from mobile Internet websites or our website. Customers are charged for updating the anti-virus database on a pay-per-use basis or for subscribing to the premium security and productivity services including continuous update of anti-virus basis, continuous update of the semantics of anti-spam, and advanced privacy protection on a monthly, three-month, six-month, or twelve-month basis. We recognize revenue for premium services considered to be software-related (e.g., mobile security services) in accordance with industry specific accounting guidance for software and software related transactions. For premium services where the customer does not take possession of a fully functioning software (e.g., mobile productivity services), we recognize revenue pursuant to ASC 605, Revenue Recognition. Provided collectability is probable, revenue is recognized over the usage period which is the same for software-related services and services where software is incidental to the provision of the services. Basic functions and customer support are provided to end users free of charge, whether they subscribe to our services or not. Customer arrangements may include premium security and productivity services which are multiple elements. Revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element. Fair value is generally determined by vendor specific objective evidence (“VSOE”). For all the periods presented, the usage period for the elements in arrangements that include multiple elements is the same. No allocation was performed as there is no impact from the allocation on revenue recognized.
 
Revenue for pay-per-use services is recognized on a per use basis when the update is made. Revenue for the subscription services is recognized on a straight-line basis over the estimated service period provided all revenue recognition criteria have been met.
 
The payment channels include wireless carriers, mobile payment service providers, prepaid cards, and third-party payment processors. These three payment channels are used in both China and overseas markets.
 
Wireless Carriers and Mobile Payment Service Providers
 
We contract with mobile payment service providers, which in turn contract with wireless carriers, to provide the mobile Internet services to end users. In China, mobile payment service providers have the exclusive licenses to contract with wireless carriers in offering mobile Internet services to the customers and they are only responsible for billing and collection from wireless carriers as intermediaries. We, via mobile payment service providers, cooperate with wireless carriers to provide mobile Internet services to the customers and wireless carriers’ role primarily includes billing and collection services. Under certain circumstances, we also act as a mobile payment service provider ourselves and contract directly with wireless carriers. Fees paid for premium service are charged to the customers’ telephone bills and shared with mobile payment service provider and us, after the wireless carriers’ deduction of their own service charges Each party’s share of total billings is fixed pursuant to the co-operative arrangements between mobile payment service provider and us.


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We recognize and report our premium mobile Internet services revenues on a gross basis, based on our and mobile payment service providers’ portions of the gross billing to customers under these co-operative arrangements, as we have the primary responsibility for accepting the contract and fulfilling obligations under the premium mobile Internet services, we determine the price and product specifications, and we have full discretion in selecting mobile payment service providers; and thus we are considered to be the principal in the transaction. The amounts attributed to mobile payment service providers’ share are recognized as costs of revenues.
 
We recognize our revenues net of the amounts retained by the wireless carriers. We do not enter into the arrangements directly with the wireless carriers except when we act as a mobile payment service provider ourselves. Wireless carriers determine the percentage they charge for premium mobile Internet services, and from the customer’s perspective, we believe the service is viewed as provided jointly by wireless carriers and us. Accordingly, in these cases, we believe we and the wireless carriers do not act as each other’s agents. Therefore, the revenues recognized are net of the amounts retained by the wireless carriers.
 
To recognize premium mobile Internet services revenues, we rely on wireless carriers and mobile payment service provider to provide us with the billing confirmations for the amount of services they have billed to their mobile customers. At the end of each reporting period, when the wireless carriers or mobile payment service providers have not provided us the monthly billing confirmations, we use information generated from its internal system as well as the historical data to estimate the amount of collectable premium mobile Internet services fees and to recognize revenue. Historically, there have been no significant adjustments to the revenue estimates.
 
Prepaid Cards
 
We sell prepaid cards to customers through independent distributors. Those independent distributors will sell the prepaid cards directly to the end customers. Customers can then use the prepaid cards to subscribe to the premium services. Once the customers activate the premium service using the prepaid card, we start to recognize its revenues on a straight-line basis over the estimated service period. As we do not have control of, and generally does not know, the ultimate selling price of the prepaid cards sold by the distributors, net proceeds from the distributors are used to record our revenues.
 
Third Party Payments
 
The customer can subscribe to our premium services directly through our website, with billing and payment being handled by third-party payment processors. Under these circumstances, we have the primary responsibility for accepting and fulfilling our obligations, and therefore recognize the revenue on a gross basis. The service fees charged by third-party payment processors are recognized as costs of revenue.
 
Other Services
 
Other revenues are derived principally from fees paid by third party business partners for referring customers to them and providing technology development service. We recognize referral revenue on a gross basis when the referral occurs and the technology development revenue when the performance is completed.
 
Impairment of Long-Lived Assets
 
The carrying amounts of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to future undiscounted net cash flows expected to be generated by the assets. Such assets are considered to be


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impaired if the sum of the expected undiscounted cash flow is less than carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. No impairment of long-lived assets was recognized for any of the periods presented.
 
Allowance for Doubtful Accounts
 
An allowance for doubtful accounts is recorded in the period in which a loss is determined to be probable. We review the accounts receivable on a periodic basis and make specific allowances based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. If any of our intermediaries with significant outstanding accounts receivable balances were to become insolvent or unable to make payments in a timely manner, or refuse to pay us, we would have to make further provisions or write off the relevant amounts if the potential for recovery is considered remote. No significant allowance has been provided on accounts receivable for the periods presented.
 
Share-based Compensation
 
On June 7, 2007, our board of directors passed a resolution to adopt the 2007 Global Share Plan. The 2007 Global Share Plan provides for the granting of options to selected employees, directors, and non-employee consultants to acquire common shares of our company at an exercise price as determined by our board or the administrator appointed by the board at the time of grant. The maximum number of common shares in respect of which options may be granted under the 2007 Global Share Plan is 44,415,442. Based on the public offering price of $11.50 per ADS, or $2.30 per Class A common share, the aggregate intrinsic value of our total outstanding share options as of March 31, 2011, which amounted to options to purchase 19,046,442 common shares, would be US$26.9 million. The following table sets forth the options granted under the 2007 Global Share Plan that were outstanding as of March 31, 2011.
 
                                             
                Weighted-Average
       
        Exercise
  Intrinsic
  Fair Value of
  Fair Value of
  Type of
Date of Option Grant   Options Granted   Price   Value(1)   Options   Common Shares   Valuation
        ($)   ($)   ($)   ($)    
 
August 8, 2007
    4,105,000       0.07       2.23       0.040       0.062     Retrospective
November 8, 2007
    5,850,000       0.07       2.23       0.088       0.124     Retrospective
February 8, 2008
    3,769,500       0.25       2.05       0.072       0.136     Retrospective
August 8, 2008
    1,580,000       0.25       2.05       0.092       0.163     Retrospective
April 8, 2009
    4,649,500       0.25       2.05       0.132       0.221     Retrospective
December 8, 2009
    1,044,000       0.25       2.05       0.197       0.307     Retrospective
August 8, 2010
    5,096,500       0.40       1.90       0.262       0.447     Retrospective
November 8, 2010
    222,000       0.40       1.90       0.672       0.939     Contemporaneous
December 15, 2010
    3,604,117       0.40       1.90       1.272       1.550     Contemporaneous
December 15, 2010
    5,500,000       0.07       2.23       1.485       1.550     Contemporaneous
February 28, 2011
    8,020,000       1.52       0.78       1.620       2.170     Contemporaneous
March 15, 2011
    1,020,942       1.52       0.78       1.469       2.190     Contemporaneous
March 15, 2011
    90,883       0.40       1.90       1.790       2.190     Contemporaneous
                                             
Total
    44,552,442                                      
(1) As determined based on the difference between the exercise price of the options and the public offering price of $11.50 per ADS, or $2.30 per Class A common share.
 
In March 2011, our board of directors passed resolutions to terminate the 2007 Global Share Plan and to adopt the 2011 Share Incentive Plan. The 2011 Share Incentive Plan provides for the granting of options, restricted shares or restricted share unit awards to directors, employees and consultants. As of


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the date of this prospectus, no share-based awards have been granted under the 2011 Share Incentive Plan.
 
Share-based compensation expense for all share-based awards granted to employees is determined based on the grant date fair value of the award and are recognized as an expense using graded vesting method, net of estimated forfeitures, over the requisite service period, which is generally the vesting period.
 
We account for awards to non-employee consultants are measured at fair value at the earlier of the commitment date or the date the services are completed. Generally, the measurement date of the fair value of the awards we issued is the date on which the non-consultant’s performance is completed. These awards are remeasured at each reporting date using the fair value as at each period end until the measurement date. The expense is recognized using the graded vesting method. Changes in fair value between the interim reporting dates are attributed in the same manner used to recognize the original compensation cost.
 
In determining the fair value of our equity instruments, we referred to valuation reports prepared by an independent third-party appraisal firm, based on data we provided. The valuation reports provided us with guidelines in determining the fair value of the equity instruments, but the determination was made by our management.
 
In determining the fair value of our stock options, the binomial option pricing model was applied. The key assumptions used to determine the fair value of the options at the relevant grant dates in 2008, 2009 and 2010 were as follows. 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.
 
We estimated the risk-free rate based on the yield to maturity of China Sovereign bond denominated in U.S. dollars as at the option valuation date. Exercise multiple is estimated as the ratio of fair value of stock over the exercise price as at the time the option is exercised, based on a consideration of research study regarding exercise pattern based on historical statistical data. A multiple of three was used for the options granted in 2007 and two for other dates in the valuation analysis. Life of the stock options is the expected remaining contract life of the option. Based on the option agreement, the contract life of the option is 10 years commencing from the option granted date, at each valuation date, the remaining life of option should be the life between the valuation date and the expiry date of option. The expected volatility at the date of grant date and each option valuation date was estimated based on historical volatility of comparable companies for the period before the grant date with length commensurate with the life of the options. We have no history or expectation of paying dividends on our common shares.
 
If factors change and we employ different assumptions for estimating share-based compensation expenses in future periods or if we decide to use a different valuation model, our share-based compensation expenses in future periods may differ significantly from what we have recorded in prior periods and could materially affect our operating income, net income and net income per share.
 
As a private company with no quoted market in our common shares, we need to estimate the fair value of our common shares at the relevant grant dates for employee options and at each reporting date for non-employee options. The determination of the fair value of our common shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of each grant.


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In determining the fair values of our common shares as of each award grant date before December, 2010, three generally accepted approaches to value were considered: cost, market and income approaches. While useful for certain purposes, the cost approach is generally not considered applicable to the valuation of a company as a going concern, as it does not capture the future earning potential of the business. The comparability of our peer companies’ financial metrics and the relevance of the market approach were also considered low since our target market and stage of development are different from those of the publicly listed companies in the same industry. In view of the above, we determined that the income approach is the most appropriate method to derive the fair values of our common shares. In addition, we took into consideration of the guidance prescribed by the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.
 
The income approach involves applying appropriate discount rates to estimated cash flows that are subject to a number of assumptions. These assumptions include: no material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key personnel and technical staff to support our ongoing operations; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain and subjective. The risks associated with achieving the estimated cash flow were assessed in selecting the appropriate discount rates, which had been determined to be 35%, 34%, 33%, 31%, 30%, 30%, 27% and 23% as of February 8, 2008, August 8, 2008, December 31, 2008, April 8, 2009, September 30, 2009, December 8, 2009, August 8, 2010 and November 8, 2010, respectively. The discount rates were based on the estimated market required rate of return for investing in our company, or weighted average cost of capital, or WACC, which was derived by using the Capital Asset Pricing Model, a method that market participants commonly use to price securities. The change in WACC was the combined result of the changes in the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk premium, size of our company, scale of our business and our ability in achieving forecast projections.
 
A discount for lack of marketability, or DLOM, was also applied to reflect the fact that there is no ready public market for our shares as we are a closely held private company. When determining the discount for lack of marketability, the Black-Scholes option model was used. Under the 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. Based on the analysis, DLOM of 33%, 33%, 33%, 32%, 31%, 30%, 20% and 15% were used for the valuation of our common shares as of February 8, 2008, August 8, 2008, December 31, 2008, April 8, 2009, September 30, 2009, December 8, 2009, August 8, 2010 and November 8, 2010 respectively.
 
The option-pricing method was used to allocate equity value of our company to preferred and common shares, taking into account the guidance prescribed by the Practice Aid. This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. The volatility of our shares was estimated based on the historical volatility of comparable listed companies’ shares. Had we used different estimates of volatility, the allocations between preferred and common shares would have been different.
 
The fair value of our common shares increased from $0.307 per share as of December 8, 2009 to $0.447 per share as of August 8, 2010, primarily due to the following reasons:
 
  •  the overall economic growth in our principal geographic markets led to an increased market demand for our services;


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  •  we experienced an increase of 236.2% in net revenues from $5.3 million in 2009 to $17.7 million in 2010;
 
  •  as our business grew, the discount rate used for valuation of our share, decreased from 30% for the December 8, 2009 valuation to 26% for the August 8, 2010 valuation; and
 
  •  the increased likelihood of marketability of our common equity as a result of this pending offering, DLOM decreased from 30% for the December 8, 2009 valuation to 20% for the August 8, 2010 valuation.
 
The fair value of our common shares increased from $0.447 per share as of August 8, 2010 to $0.939 per share as of November 8, 2010, primarily due to the following reasons:
 
  •  We experienced a significant growth of 50.8% in net revenues from $3.6 million in the second quarter of 2010 to $5.4 million in the third quarter of 2010.
 
  •  We completed a Series C-1 financing on November 8, 2010 that priced our Series C-1 preferred shares at $0.842 per share on a fully diluted basis. This arm’s length transaction provides us with additional capital required for our rapid expansion and gives support to the fair value of our shares.
 
  •  Our performance in 2010 has proven the viability of our business strategy and execution capability and has enhanced our credibility. This will reduce the perceived risk of realizing the financial forecast going forward and thus the discount rate used for our valuation decreased from 27% for the August 8, 2010 valuation to 23% for the November 8, 2010 valuation.
 
  •  As a result of this offering, DLOM used for our valuation decreased from 20% for the August 8, 2010 valuation to 15% for the November 8, 2010 valuation.
 
On December 15, 2010, we granted options to purchase 9,104,117 common shares to our employees. We started using market approach by assessing the trading multiples of guideline companies as benchmarks in estimating the equity value of our common shares as of December 15, 2010. This is the basis which potential investors that issued term sheets to us used in negotiating a purchase price with us back in November 2010.
 
Our guideline companies were trading at 11 to 20 times their 2012 forecast earnings, with an average 2012 P/E multiple of 16 times. As compared to the guideline companies, although we have higher revenue growth and higher profit margin, we are still a private company that is comparatively smaller in size; thus we used a lower-than-average 2012 P/E multiple of 12 times to estimate the equity value of our common shares as of December 15, 2010. This multiple used in our valuation is approximately the same as the P/E multiple implicitly suggested through the offering price indicated by potential private equity investors in November 2010.
 
The fair value of our common shares increased from $0.939 per share as of November 8, 2010 to $1.55 per share as of December 15, 2010, primarily due to the following reasons:
 
  •  We almost completed a full year of operations with satisfactory and promising results. Net revenues increased by 15.8% from $5.4 million in the third quarter of 2010 to $6.3 million in the fourth quarter of 2010. This continues to prove our management’s capability in business execution.


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  •  We strengthened our senior management team with the recruitment of a chief financial officer with extensive experience in corporate finance and capital markets.
 
  •  In late November 2010, we discussed with a few financial investors interested in investing in our company and received signed term sheets from two of them which specified a consideration of $1.57 and $1.78 per share on a fully-diluted basis.
 
  •  On December 15, 2010, there was a transaction between our existing shareholders and new investors in which the consideration paid was $1.99 per share on a diluted basis. Although the transaction size is small as compared to the Company’s overall value at that time, the implication of this arm’s length transaction is significant. This transaction, together with the term sheet signed by the two potential investors in late November 2010, as disclosed above, suggested that the market viewed our company favorably.
 
  •  If our ADSs are successfully listed on NYSE, we expect that the listing will allow us to have easier access to the capital markets in terms of fund raising, including equity financing and bank borrowing with lower financing cost. Therefore, our weighted average cost of capital, which was also a component of the previous valuation of our common shares under income approach, should be affected favorably by our initial public offering and thus should increase our enterprise and common share value.
 
  •  The initial public offering process was underway and, as a result, DLOM used for our valuation decreased from 15% for the November 8, 2010 valuation to 10% for the December 15, 2010 valuation.
 
On February 28, 2011, we granted options to purchase 8,020,000 common shares to three director and executive officers.
 
Due to the proximity of an expected initial public offering, we used trading multiples of guideline companies as benchmarks in estimating the equity value of our common shares, which we believe is a method that is commonly used in pricing shares for an initial public offering. Our guideline companies were trading at 11 to 22 times their 2012 forecast earnings, with an average 2012 P/E multiple of 17 times. As compared to the guideline companies, we are still a private company that is smaller in size, but with our plan to become public and our higher revenue growth and higher profit margin forecast, we believe the average 2012 P/E multiple for the guideline companies is appropriate in determining the equity value of our common shares as of February 28, 2011.
 
We believe that the increase in the fair value of our common shares from $1.55 per share as of December 15, 2010 to $2.17 per share as of February 28, 2011 was primarily attributable to the following factors:
 
  •  We achieved significant progress in our business operations in the first two months of 2011. The number of our paying user accounts increased from approximately 3.4 million in December 2010 to approximately 3.8 million in February 2011. In addition, we launched new products for BlackBerry and iPhone and new productivity and cloud services such as Smart Calendar in the first two months of 2011. We also entered into business agreements with several smartphone manufacturers and new user acquisition channels, which we expect will help us further expand and develop our business. We believe that our actual performance in the first two months of 2011 demonstrated the viability of our business strategy and execution capacities, which reduced the perceived risk of realizing our financial forecast going forward.


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  •  As our business grows, our weighted average cost of capital was affected favorably and thus increased our enterprise and common stock value.
 
  •  We made good progress in our preparation for this initial public offering, as a result of which DLOM used for our valuation decreased from 10% for the December 31, 2010 valuation to 4% for the February 28, 2011 valuation.
 
  •  Due to the proximity of the expected initial public offering, we have started to use trading multiples of guideline companies as benchmarks in estimating the equity value of our common shares, which we believe is commonly used in pricing shares for an initial public offering.
 
In March 2011, we granted options to purchase 1,111,825 common shares to our executive officers and employees with a vesting period ranging from immediately upon this offering to four years.
 
Due to the proximity of an expected initial public offering, we have used trading multiples of guideline companies as benchmarks in estimating the equity value of our common shares, which we believe is a method that is commonly used in pricing shares for an initial public offering.
 
Our guideline companies were trading at 11 to 24 times of their 2012 forecast earnings, with an average 2012 P/E multiple of 17 times. As compared to the guideline companies, we are a private company that plans to soon become public, smaller in size but yet higher in revenue growth and profit margin forecast; thus we believe the average 2012 P/E multiple for the guideline companies is appropriate in determining the equity value of our common shares as of March 15, 2011.
 
The fair value of our common shares increased from $2.17 per share as of February 28, 2011 to $2.19 per share as of March 15, 2011, primarily attributable to the decrease of marketability discount used for our valuation from 4% to 3%.
 
Determining the value of our share-based compensation expenses requires the input of highly subjective assumptions, including the expected life of the share-based awards, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, our share-based compensation expenses could be materially different in the future.
 
Income Taxes
 
Current income tax are provided on the basis of income for financial reporting purpose, adjusted for income and expense items which are not assessable or deductible for income tax purpose, in accordance with the regulations of the relevant tax jurisdictions, deferred income taxes are accounted for using the liability approach which requires the recognition of income taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
 
We currently have deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, all of which are available to reduce future tax payable in our significant tax jurisdictions. The largest component of our deferred assets are operating loss carryforwards generated


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by our PRC subsidiary and VIE due to their historical operating losses. In assessing whether such deferred tax assets can be realized in the future, we need to make judgments and estimates on the ability of each of our PRC subsidiary and VIE to generate taxable income in the future years. To the extent that we believe it is more likely than not that some portion or the entire amount of deferred tax assets will not be realized, we established a total valuation allowance to offset the deferred tax assets. As of December 31, 2008 and 2009, we recognized a total valuation allowance of $0.9 million and $0.4 million, respectively, As of December 31, 2010, a total valuation allowance of $0.5 million was recognized against deferred tax assets. If we subsequently determine that all or a portion of the carryforwards are more like than not to be realized, the valuation allowance will be released, which will result in a tax benefit in our consolidated statements of operations.
 
We adopted the guidance on accounting for uncertainty in income taxes on January 1, 2008. The guidance prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining its provision for income taxes. We did not have any adjustment to the opening balance of retained earnings as of January 1, 2008 as a result of the implementation of the guidance. We did not have any interest and penalties associated with tax positions for the years ended December 31, 2008, 2009 and 2010. As of December 31, 2008 and 2009 and 2010, we did not have any significant unrecognized uncertain tax positions.
 
Accounting for Investments in an Associate Company
 
In 2010, we signed agreements with Beijing Feiliu, under which we paid $2.5 million to Beijing Feiliu in exchange of (i) 33% of equity interest in Beijing Feiliu, and (ii) the commitment by Beijing Feiliu to obtain new users for us free of charges for two years. We believe this commitment represents a future benefit to us as customer acquisition costs would have been incurred by us to obtain these users. We estimate separately the fair value of our equity investment and the fair value of the prepaid customer acquisition cost.
 
For the fair value of equity investment, we engaged an independent third party appraiser, to assist in the assessment. The cost approach was not applied as it tends to understate the value of business with great earning potential. As Beijing Feiliu is a loss making, new start-up company, detailed financial projections of the Company beyond one year could not be developed. Therefore, the income approach cannot be used to generate a meaningful valuation result. We only use the guidance company method of the market approach to assess the fair value of Beijing Feiliu.
 
Under guidance company method, financial ratios of comparable companies are analyzed to determine a value for the subject company. This method also employs market price data of stocks of corporations engaged in the same or a similar line of business as that of the subject company. We have identified six comparable companies whose business nature is similar to that of Beijing Feiliu and whose stocks of these corporations are actively traded in a public, free, and open market, either on an exchange or over-the-counter. We have calculated different value measures or market multiples of the guideline companies to induce a series of multiples that are considered representative of the industry average. Then, we applied the relevant industry multiplies to the subject company to determine a value for Beijing Feiliu. We calculated one-year leading enterprise value, or EV, to sales, EV to earnings before interest and tax, EBIT, and P/E multiples of the above six comparable companies when applicable. The multiples of the guideline companies was computed based on their market capitalization as of the Valuation Date, and the estimation of their 2011 net profit, EBIT and sales extracted from the market consensus estimates. We have also considered the multiple adjustments to address the difference


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between the guideline companies and Beijing Feiliu Based on the Guideline Company Method, we come up with the equity value of Beijing Feiliu on a non-controlling and non-marketable basis. Since Feiliu is private and has no liquid market for its stock, its stock should worth less than an otherwise comparable stock listed in public markets, i.e. non-marketable stock should have a discount to marketable stock. Therefore we have considered a lack of marketability discount when pro-rating the estimated 100% equity value of Beijing Feiliu to the value of 33% equity interest of Beijing Feiliu.
 
For the fair value of prepaid customer acquisition cost, we evaluated and analyzed the customer acquisition cost that the Company paid to independent third parties for activities that are similar to the customer acquisition activity Beijing Feiliu was providing to the Company. Based on the above evaluation and analysis, we have determined the average customer acquisition cost per user and multiple it by the number of users to be developed as described in the agreement between Beijing Feiliu and us.
 
Based on the relative fair value of equity investment and prepaid customer acquisition cost, we allocated $1.0 million as equity investment and $1.5 million as prepaid customer acquisition cost.
 
Results of Operations
 
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that you may expect for any future period.
 
                                                 
    For the Year Ended December 31,
    2008   2009   2010
        % of Net
      % of Net
      % of Net
    $   Revenues   $   Revenues   $   Revenues
    (in thousands of dollars, except for percentages)
 
Net Revenues:
                                               
Premium mobile Internet services
    3,867       97.6       5,014       95.3       15,268       86.3  
Other services
    94       2.4       250       4.7       2,427       13.7  
                                                 
Total net revenues
    3,961       100.0       5,264       100.0       17,695       100.0  
                                                 
Cost of revenues(1)
    (2,044 )     (51.6 )     (2,812 )     (53.4 )     (5,193 )     (29.3 )
                                                 
Gross profit
    1,917       48.4       2,452       46.6       12,502       70.7  
                                                 
Operating expenses:
                                               
Selling and marketing expenses(1)
    (2,404 )     (60.7 )     (3,344 )     (63.5 )     (4,436 )     (25.1 )
General and administrative expenses(1)
    (2,067 )     (52.2 )     (2,139 )     (40.6 )     (14,750 )     (83.4 )
Research and development expenses(1)
    (1,201 )     (30.3 )     (2,312 )     (43.9 )     (2,959 )     (16.7 )
                                                 
Total operating expenses
    (5,672 )     (143.2 )     (7,795 )     (148.0 )     (22,145 )     (125.2 )
Loss from operations
    (3,755 )     (94.8 )     (5,343 )     (101.4 )     (9,643 )     (54.5 )
                                                 
Interest income
    86       2.2       159       3.0       234       1.3  
Realized gain/(loss) from available for sale investments
    294       7.4       47       0.9       (102 )     (0.6 )


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    For the Year Ended December 31,
    2008   2009   2010
        % of Net
      % of Net
      % of Net
    $   Revenues   $   Revenues   $   Revenues
    (in thousands of dollars, except for percentages)
 
Foreign exchange losses, net
    (156 )     (3.9 )     (2 )           (46 )     (0.3 )
Other income/(expense), net
    (16 )     (0.4 )     (12 )     (0.2 )     135       0.8  
                                                 
Loss before income taxes
    (3,547 )     (89.5 )     (5,151 )     (97.7 )     (9,422 )     (53.3 )
Income tax expense
    (48 )     (1.2 )                 (401 )     (2.3 )
Share of loss from associate
                            (7 )      
                                                 
Net loss
    (3,595 )     (90.7 )     (5,151 )     (97.7 )     (9,830 )     (55.6 )
                                                 
(1) Share-based compensation expenses included in:
 
                                                 
    For the Year Ended December 31,
    2008   2009   2010
        % of Net
      % of Net
      % of Net
    $   Revenues   $   Revenues   $   Revenues
    (In thousands of dollars, except for percentages)
 
Cost of revenues
    5       0.1       13       0.2       19       0.1  
Selling and marketing expenses
    31       0.8       35       0.7       102       0.6  
General and administrative expenses
    1,128       28.5       1,087       20.7       12,299       69.5  
Research and development expenses
    32       0.8       43       0.8       146       0.8  
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Net Revenues.  Our total net revenues increased by 236.2% from $5.3 million in 2009 to $17.7 million in 2010, due primarily to an increase in net revenues from premium mobile Internet services and, to a lesser extent, to an increase in net revenues from other services. Net revenues from premium mobile Internet services increased by 204.5% from $5.0 million in 2009 to $15.3 million in 2010, primarily due to the growth of our average monthly paying user accounts, which in turn reflected the growth of our registered and active user accounts and their increased use of our premium services, and, in particular, an increase in the number of our overseas paying user accounts, which generally pay for our products and services at a higher subscription fee level. The number of our registered user accounts increased from 35.63 million as of December 31, 2009 to 71.69 million as of December 31, 2010. The number of our average monthly active user accounts increased from 11.96 million in the three months ended December 31, 2009 to 25.44 million in the three months ended December 31, 2010. In line with the increase in our average monthly active user accounts, our average monthly paying user accounts increased from 1.14 million in the three months ended December 31, 2009 to 3.24 million in the three months ended December 31, 2010. Overseas users account for an increasing portion of our net revenues as we further expand premium mobile Internet services in overseas markets. In the three months ended December 31, 2009, we had 0.17 million overseas average monthly paying user accounts, which was 14.9% of the total average monthly paying user accounts for that period, while in the three months ended December 31, 2010, we had 0.69 million overseas average monthly paying user accounts, which amounted to 21.3% of the total average monthly paying user accounts for that period. Net revenues attributable to overseas users as a percentage of our total net revenues increased from 21.0% in 2009 to 35.1% in 2010. The increase in net revenues from premium mobile Internet services also reflected a 25% increase in the subscription fees of our Mobile Antivirus and Mobile Manager services for new users in China since the fourth quarter of 2009. Our net revenues from other services increased from $0.3 million in 2009 to $2.4 million in 2010, primarily due to an increase in net revenues from secured download and delivery services for mobile applications produced by third parties, which were launched in the fourth quarter of 2009.

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Cost of Revenues.  Our cost of revenues increased by 84.7% from $2.8 million in 2009 to $5.2 million in 2010. The increase was primarily due to (i) an increase in customer acquisition cost from $1.4 million in 2009 to $2.5 million in 2010, primarily as payments to third-party websites and handset manufacturers increased as we acquired more active user accounts through these channels; (ii) an increase in fees charged by mobile payment service providers from $0.3 million in 2009 to $1.0 million in 2010; and (iii) an increase in staff cost, primarily in the form of salaries and benefits for employees that provide support directly related to our products and services, from $0.5 million in 2009 to $0.8 million in 2010, which in turn primarily reflected the expansion of our product and service support teams.
 
Gross Profit and Margin.  As a result of the foregoing, our gross profit increased from $2.5 million in 2009 to $12.5 million in 2010. Our gross margin increased significantly from 46.6% in 2009 to 70.7% in 2010. This increase was primarily due to (i) the fact that we collected a larger portion of our net revenues through prepaid card distributors in 2010 than 2009, since we launched the prepaid card payment channel in the fourth quarter of 2009. As we recognize net proceeds from prepaid card distributors as net of revenues, the cost of revenues associated with revenues gained through prepaid card distributors is lower, increasing our gross margin; (ii) the fact that a larger portion of our net revenues, from 21.0% in 2009 to 35.1% in 2010, were generated from overseas users who generally pay for our products and services at a higher subscription fee level than Chinese users and the fact that a higher portion of overseas users pay for our products and services by prepaid cards which have lower cost of revenues; and (iii) a 25% increase in the subscription fee rates of Mobile Anti-virus and Mobile Manager for new users in China since the fourth quarter of 2009.
 
Operating Expenses.  Our operating expenses increased by 184.1% from $7.8 million in 2009 to $22.1 million in 2010.
 
Selling and Marketing Expenses.  Our selling and marketing expenses increased by 32.7% from $3.3 million in 2009 to $4.4 million in 2010. This increase was primarily due to an increase in staff costs, including salaries, benefits and commissions to our sales and marketing personnel, from $0.8 million in 2009 to $1.6 million in 2010.
 
General and Administrative Expenses.  Our general and administrative expenses increased substantially from $2.1 million in 2009 to $14.8 million in 2010. This increase was primarily due to an increase in share-based compensation expenses for our general and administrative personnel from $1.1 million in 2009 to $12.3 million in 2010. The significant increase in the share-based compensation cost for 2010 was due to the grant of share options in December 2010, a significant portion of which was immediately vested upon grant.
 
Research and Development Expenses.  Our research and development expenses increased by 28.0% from $2.3 million in 2009 to $3.0 million in 2010. This increase was primarily due to the hiring of more research and development personnel which led to an increase in staff cost from $1.8 million in 2009 to $2.2 million in 2010 and an increase in share-based compensation for our research and development personnel which contributed to an increase in compensation cost from $43,002 in 2009 to $145,646 in 2010.
 
Loss from Operations.  As a result of the foregoing, our loss from operations increased by 80.5% from $5.3 million in 2009 to $9.6 million in 2010.
 
Income Tax Expenses.  Our income tax expenses were $0 in 2009 and $0.4 million in 2010. The income tax expenses accrued for the 2010 was mainly attributable to our subsidiaries in China.


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Net Loss.  As a result of the foregoing, our net loss increased from $5.2 million in 2009 to $9.8 million in 2010.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Net Revenues.  Our total net revenues increased by 32.9% from $4.0 million in 2008 to $5.3 million in 2009, primarily due to an increase in net revenues from premium mobile Internet services. Net revenues from premium mobile Internet services increased by 29.7% from $3.9 million in 2008 to $5.0 million in 2009, primarily due to the growth in our average monthly paying user accounts, which in turn reflected an increase in the growth of the number of our registered and active user accounts and their increased use of our premium services and, in particular, an increase in the number of our overseas paying user accounts, which generally pay for our products and services at a higher subscription fee level. The number of our registered user accounts increased from 15.18 million as of December 31, 2008 to 35.63 million as of December 31, 2009. The number of our average monthly active user accounts increased from 5.46 million in the three months ended December 31, 2008 to 11.96 million in the three months ended December 31, 2009. As a result of the increase in our average monthly active user accounts, our average monthly paying user accounts increased from 1.03 million in the three months ended December 31, 2008 to 1.14 million in the three months ended December 31, 2009. Overseas users account for an increasing portion of our net revenues as we further expand premium mobile Internet services in overseas markets. In the three months ended December 31, 2008, we had 30,000 overseas average monthly paying user accounts, which were 2.9% of the total average monthly paying user accounts for that period, while in the three months ended December 31, 2009, we had 170,000 overseas average monthly paying user accounts, which were 14.9% of the total average monthly paying user accounts for that period. Net revenues attributable to overseas users as a percentage of our total net revenues increased from 7.4% in 2008 to 21.0% in 2009.
 
Cost of Revenues.  Our cost of revenues increased by 37.6% from $2.0 million in 2008 to $2.8 million in 2009. The increase was primarily due to (i) an $0.3 million increase in user acquisition costs from $1.1 million in 2008 to $1.4 million as we acquired more registered user accounts through third-party websites and handset pre-installation (ii) an 0.2 million increase in customer service cost from $43,981 in 2008 to $208,214 in 2009, and (iii) an $0.1 million increase in staff cost, primarily in the form of salaries and benefits for employees that provide support directly related to our products and services, from $0.4 million in 2008 to $0.5 million in 2009, which in turn primarily reflected the expansion of our product and service support teams. Although the number of our cumulative registered user accounts increased from 15.18 million as of December 31, 2008 to 35.63 million as of December 31, 2009, payments to mobile payment service providers decreased slightly, from $0.34 million in 2008 to $0.30 million in 2009, as we increasingly cooperated with wireless carriers directly.
 
Gross Profit and Margin.  As a result of the foregoing, our gross profit increased by 27.9% from $1.9 million in 2008 to $2.5 million in 2009, and our gross margin was relatively stable, being 48.4% in 2008 compared to 46.6% in 2009.
 
Operating Expenses.  Our operating expenses increased by 37.4% from $5.7 million in 2008 to $7.8 million in 2009.
 
Selling and Marketing Expenses.  Our selling and marketing expenses increased by 39.1% from $2.4 million in 2008 to $3.3 million in 2009. This increase was due in part to the expansion of our sales team which increased our sales and marketing staff compensation cost from $0.05 million in 2008 to $0.08 million in 2009 and increased spending on marketing and advertising activities from $1.5 million in 2008 to $1.8 million in 2009.
 
General and Administrative Expenses.  Our general and administrative expenses were relatively stable and were $2.1 million in each of 2008 and 2009.


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Research and Development Expenses.  Our research and development expenses increased significantly by 92.5% from $1.2 million in 2008 to $2.3 million in 2009. This increase was primarily due to the expansion of our research and development team, including the hiring of some senior engineers.
 
Loss from Operations.  As a result of the foregoing, our loss from operations increased by 42.3% from $3.8 million in 2008 to $5.3 million in 2009.
 
Income Tax Expenses.  Our income tax expenses were approximately $48,000 in 2008 and $0 in 2009. The income tax expenses in 2008 was attributable by a subsidiary of us in China.
 
Net Loss.  As a result of the foregoing, our net loss increased by 43.3% from $3.6 million in 2008 to $5.2 million in 2009.


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Our Selected Quarterly Results of Operations
 
The following table sets forth our unaudited condensed consolidated quarterly results of operations for each of the eight quarters in the period from January 1, 2009 to December 31, 2010. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Results for a particular quarter are not necessarily indicate the results to be expected for any other quarter or for any year.
 
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    For the Three Months Ended
    Mar 31, 2009   Jun 30, 2009   Sep 30, 2009   Dec 31, 2009   Mar 31, 2010   Jun 30, 2010   Sep 30, 2010   Dec 31, 2010
        % of Net
      % of Net
      % of Net
      % of Net
      % of Net
      % of Net
      % of Net
      % of Net
    $   Revenues   $   Revenues   $   Revenues   $   Revenues   $   Revenues   $   Revenues   $   Revenues   $   Revenues
    (in thousands of dollars, except for percentages)
 
Net revenues
                                                                                                                               
Premium mobile Internet services revenues
    963       90.6       1,132       94.9       1,476       96.5       1,443       97.6       2,147       88.2       3,105       86.6       4,654       86.0       5,362       85.6  
Other services
    100       9.4       61       5.1       53       3.5       36       2.4       288       11.8       482       13.4       756       14.0       901       14.4  
Total net revenues
    1,063       100.0       1,193       100.0       1,529       100.0       1,479       100.0       2,435       100.0       3,587       100.0       5,410       100.0       6,263       100.0  
                                                                                                                                 
Cost of revenues(1)
    (718 )     (67.5 )     (663 )     (55.6 )     (714 )     (46.7 )     (717 )     (48.5 )     (821 )     (33.7 )     (1,058 )     (29.5 )     (1,332 )     (24.6 )     (1,982 )     (31.6 )
                                                                                                                                 
Gross profit
    345       32.5       530       44.4       815       53.3       762       51.5       1,614       66.3       2,529       70.5       4,078       75.4       4,281       68.4  
                                                                                                                                 
Operating expenses:
                                                                                                                               
Selling and marketing expenses*
    (428 )     (40.3 )     (801 )     (67.1 )     (1,072 )     (70.1 )     (1,043 )     (70.5 )     (884 )     (36.3 )     (959 )     (26.7 )     (1,013 )     (18.7 )     (1,580 )     (25.2 )
General and administrative expenses*
    (539 )     (50.7 )     (542 )     (45.4 )     (510 )     (33.4 )     (548 )     (37.1 )     (624 )     (25.6 )     (798 )     (22.2 )     (1,086 )     (20.1 )     (12,242 )     (195.5 )
Research and development expenses*
    (485 )     (45.6 )     (553 )     (46.4 )     (617 )     (40.4 )     (657 )     (44.4 )     (666 )     (27.4 )     (633 )     (17.6 )     (752 )     (13.9 )     (908 )     (14.5 )
                                                                                                                                 
Total operating expenses
    (1,452 )     (136.6 )     (1,896 )     (158.9 )     (2,199