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CMGE Reports Fourth Quarter And Full Year 2012 Unaudited Financial Results

Research and development expenses as a percentage of net revenue increased to 34.0% in the fourth quarter of 2012, from 15.8% in the fourth quarter of 2011 and 21.3% in the third quarter of 2012 as the Company continued directing resources towards the development of its new generation of smartphone games and mobile Game Center platform for Android-based smartphones.

Share-based compensation expenses totaled RMB4.0 million (US$0.6 million) during the fourth quarter of 2012, compared with a gain of RMB0.1 million in the fourth quarter of 2011 and expenses of RMB5.1 million in the third quarter of 2012.

Impairment Loss

During the fourth quarter of 2012, the Company recorded a non-cash impairment of goodwill of RMB33.5 million (US$5.4 million) and a non-cash impairment of intangible assets of RMB10.9 million (US$1.8 million). Both impairment charges reflect a decline in the fair value of OWX Holding Co. Ltd. ("OWX"), the Company's subsidiary engaged in the handset design business, the assets of which were mostly acquired in October 2010. The decline in the fair value is largely the result of the Company transitioning the handset design business from feature phone to smartphone design, as prior to 2012 OWX designed mainly handsets for feature phones, and reflects the Company's conservative estimate of the fair value of OWX. The fair-value is estimated using the discounted cash flow model. The Company has largely transitioned to the smartphone handset design business and expects that as the smartphone design business grows the fair value of OWX will increase. However, there is generally uncertainty in estimating an impairment, and future impairments of goodwill and intangible assets may still be possible as a result of changing market conditions.

Operating Income (Loss)

As a result of the above factors, the Company's operating loss was RMB63.7 million (US$10.2 million) during the fourth quarter of 2012, compared with operating income of RMB14.7 million in the fourth quarter of 2011 and operating loss of RMB19.5 million in the third quarter of 2012.

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