UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

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

OR

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

For the Fiscal Year Ended December 31, 2011

OR

     ¨For the Fiscal Year Ended December 31, 2010
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to

OR

     ¨For the transition period fromto
OR
oSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report

Date of event requiring this shell company report

Commission file number: 0001-33800

SEARCHMEDIA HOLDINGS LIMITED

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

Floor 13, Central Modern Building,
468 Xinhui

K-Wah Center #38-03,

1010 Middle Huaihai Road, Shanghai, China, 200060

200031

(Address of principal executive offices)

Wilfred Chow

Chief Financial Officer
Floor 13, Central Modern Building,
468 Xinhui

K-Wah Center #38-03,

1010 Middle Huaihai Road, Shanghai, China, 200060
200031

Tel: +86-21-6227-8018
+86-21-5401-0959

Fax: 86-21-6227-8008
86-21-3461-5667

Email: smhl@searchmediaholdings.com

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

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

Title of each class

     
Title of each class

Name of each exchange on which registered

Ordinary Shares, $0.0001 Par Value  NYSE Amex
  NYSE MKT
Warrants  NYSE AmexMKT

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

None

(Title of Class)

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

None

(Title of Class)


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

20,889,89721,687,497 Ordinary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o¨ Yes  þx No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o¨ Yes  þx No

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þx Yes  o¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o¨ Yes  þx No

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

Large Accelerated Filer   oAccelerated Filer   oNon-Accelerated Filer   þ

Large Accelerated Filer  ¨                Accelerated Filer  ¨                Non-Accelerated Filer  x

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

U.S. GAAP  x

International Financial Reporting Standards as issued by the

International Accounting Standards Board  ¨

Other  ¨

þ

International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other   o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17  o¨
Item 18  o¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o¨ Yes  þx No

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

o¨ Yes  o¨ No

 


TABLE OF CONTENTS

        Page
NOTE REGARDING FORWARD-LOOKING STATEMENTS   1  

PART I

   54  
 Item 1     54  
 Item 2     54  
 Item 3     54  
 Item 4     2429  
 Item 4A     4149  
 Item 5     4149  
 Item 6     5666  
 Item 7     6274  
 Item 8     6578  
 Item 9     6780  
 Item 10     6981  
 Item 11     7588  
 Item 12     7588  

PART II

   7589  
 Item 13     7589  
 Item 14     7589  
 Item 15     7589  
 Item 16A16     7891  
 Item 16B16A     7891  
 Item 16C16B  91
Item 16CPrincipal Accountant Fees and Services   7891  
 Item 16D     7992  
 Item 16E     7992  
 Item 16F     7993  
 Item 16G     7993  
Item 16HPART IIIMine Safety Disclosure   7993  

PART III

  Item 17   7993  
 Item 1817     8093  
 Item 1918     8093  
Item 19Exhibits94

EX-8.1

EX-12.1

EX-12.2

EX-13.1

EX-13.2

 

i


NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report onForm 20-F contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in Part I, “Item 3 Key Information — D. Risk Factors” of this Annual Report onForm 20-F.20-F. We do not undertake any obligation to update forward-looking statements. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:

There is substantial doubt as to our ability to continue as a going concern, which could adversely affect our ability to meet our ongoing financing needs as well as to obtain third party financing.

There is substantial doubt as to our ability to continue as a going concern, which could adversely affect our ability to meet our ongoing financing needs as well as to obtain third party financing.
We may not have sufficient liquidity to pay earn-out payments when they come due, which could materially and adversely affect our operations.
We have a history of significant operating losses and our future revenue and operating profitability are uncertain.
We have identified material weaknesses in our internal control over financial reporting and we have had to restate our historical financial statements.
We are subject to ongoing securities litigation and a government inquiry in the United States.
Deterioration of economic conditions and a resulting decrease in demand for advertising services would materially and adversely affect our financial condition and results of operations and limit our growth prospects.
A business strategy of making acquisitions subjects us to all of the risks inherent in identifying, acquiring and operating newly acquired businesses.
Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and growth potential.

We may not have sufficient liquidity to pay earn-out payments when they come due, which could materially and adversely affect our operations.

We have a history of significant operating losses and our future revenue and operating profitability are uncertain.

We have identified material weaknesses in our internal control over financial reporting and we have had to restate our historical financial statements.

We are subject to a government inquiry in the United States.

Deterioration of economic conditions and a resulting decrease in demand for advertising services would materially and adversely affect our financial condition and results of operations and limit our growth prospects.

A business strategy of making acquisitions subjects us to all of the risks inherent in identifying, acquiring and operating newly acquired businesses.

Future charges due to possible impairments of acquired assets may have a material adverse effect on our financial condition and results of operations.

We face significant competition for advertising spending from operators of new and traditional advertising networks. If we cannot successfully compete, our results of operations would be materially and adversely affected.

If we fail to develop and maintain relationships with site owners, managers and sublessors that provide us access to desirable locations and network platforms, our growth potential and our business could be harmed.

Failures to obtain site owners' consents or objections from site owners to the installations of our media products could lead to termination of our contracts or installations, which would harm our results of operations.

We face significant competition for advertising spending from operators of new and traditional advertising networks. If we cannot successfully compete, our results of operations would be materially and adversely affected.
We have a limited operating history which may make it difficult for you to evaluate our business and prospects.
If we fail to develop and maintain relationships with site owners, managers and sublessors that provide us access to desirable locations and network platforms, our growth potential and our business could be harmed.

1


The shareholders of Jingli Shanghai may have potential conflicts of interest with us.

If we are unable to obtain or retain desirable placement locations for our advertising poster frames and outdoor billboards on commercially advantageous terms, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.

Our business depends substantially on the continuing efforts of our executive officers, senior management, and other key employees, and our business may be severely disrupted if we lose their services.

Failures to obtain site owners’ consents or objections from site owners to the installations of our media products could lead to termination of our contracts or installations, which would harm our results of operations.
If we are unable to obtain or retain desirable placement locations for our advertising poster frames and outdoor billboards on commercially advantageous terms, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
The shareholders of Jingli Shanghai may have potential conflicts of interest with us.
Our business depends substantially on the continuing efforts of our senior executives, and our business may be severely disrupted if we lose their services.
If we are unable to adapt to changing advertising trends of advertisers and consumers, we will not be able to compete effectively and we will be unable to increase or maintain our revenues, which may materially and adversely affect our business prospects and revenues.
Our growth could suffer if we fail to expand our media networks to include new media offerings, media platforms or enter into new markets.
If site managers or owners shut down our displays for site maintenance or other reasons, our business could be adversely affected.
Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We rely on computer software and hardware systems in managing our operations; any failure in these systems could adversely affect our business, financial condition and results of operations.
We have no business liability, disruption or litigation insurance, and we could incur substantial costs if our business is disrupted due to natural disasters, litigation or other business interruptions.
Our operating results are difficult to predict and may fluctuate from period to period.
If the PRC government determines that the contractual arrangements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
We rely on contractual arrangements with Jingli Shanghai and its shareholders for our China operations, which may not be as effective in providing operational control as would be the case through ownership of a controlling equity interest in such operating entities.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
If advertising registration certificates are not obtained for advertisements on our outdoor billboard or rapid transit networks, we may be subject to fines.
Our outdoor billboards, light boxes and neon signs are subject to municipal zoning requirements, governmental approvals and administrative controls. If we are required to tear down our billboards, light boxes or neon signs as a result of these requirements, approvals or controls, our operations could be materially and adversely affected.

If we are unable to adapt to changing advertising trends of advertisers and consumers, we will not be able to compete effectively and we will be unable to increase or maintain our revenues, which may materially and adversely affect our business prospects and revenues.

Our growth could suffer if we fail to expand our media networks to include new media offerings, media platforms or enter into new markets.

If site managers or owners shut down our displays for site maintenance or other reasons, our business could be adversely affected.

Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

We rely on the proper operation and maintenance of our computer system. Any malfunction, capacity constraint or operation interruption for any extended period may have an adverse impact on our business.

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

We have no business liability, disruption or litigation insurance, and we could incur substantial costs if our business is disrupted due to natural disasters, litigation or other business interruptions.

Our operating results are difficult to predict and may fluctuate from period to period.

If the PRC government determines that the contractual arrangements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

We rely on contractual arrangements with Jingli Shanghai and its shareholders for our China operations, which may not be as effective in providing operational control as would be the case through ownership of a controlling equity interest in such operating entities.

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

If advertising registration certificates are not obtained for advertisements on our outdoor billboard or rapid transit networks, we may be subject to fines.

Our outdoor billboards, light boxes and neon signs are subject to municipal zoning requirements, governmental approvals and administrative controls. If we are required to tear down our billboards, light boxes or neon signs as a result of these requirements, approvals or controls, our operations could be materially and adversely affected.

If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income and our non-PRC shareholders could be subject to certain PRC taxes.

2


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

Uncertainties with respect to the PRC legal system could adversely affect us.
We may be subject to, and may expend significant resources in defending against, government actions and civil suits based on the content and services we provide through our network.
Governmental control of currency conversion may materially and adversely affect the value of your investment. Substantial limitations may be imposed on the removal of funds from the PRC to the Company, or the infusion of funds by us to our subsidiaries and affiliates located in the PRC.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may prevent us from making loans or capital contributions to our PRC operating subsidiaries and affiliated entities.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
Any health epidemics and other outbreaks, or war, acts of terrorism and other man -made or natural disasters could severely disrupt our business operations.
We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
In the future, our Board of Directors may be subject to potential deadlock.
As a foreign private issuer, we will be exempt from certain SEC requirements that provide stockholders with protections and information that must be made available to stockholders of U.S. public companies.
Because we do not intend to pay dividends on our ordinary shares for the foreseeable future, stockholders will benefit from an investment in our ordinary shares only if those shares appreciate in value.
Voting control by executive officers, directors and other affiliates of the company may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.
The NYSE Amex may delist our securities from quotation on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
A significant number of shares are eligible for future sale by our stockholders and the sale of those shares could adversely affect the stock price.
There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Business Combination, which could result in significantly greater U.S. federal income tax liability to us.
There is a risk that we will be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. holders of ordinary shares or warrants of SearchMedia.
If you acquire (directly, indirectly, or constructively) 10% or more of our shares, you may be subject to taxation under the “controlled foreign corporation,” or CFC rules.
We may choose to redeem our outstanding warrants at a time that is disadvantageous to the warrant holders, preventing such holders from realizing the potential economic value of their warrants.

3

We may be subject to, and may expend significant resources in defending against, government actions and civil suits based on the content and services we provide through our network.


Governmental control of currency conversion may materially and adversely affect the value of your investment. Substantial limitations may be imposed on the removal of funds from the PRC to the Company, or the infusion of funds by us to our subsidiaries and affiliates located in the PRC.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may prevent us from making loans or capital contributions to our PRC operating subsidiaries.

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

Any health epidemics and other outbreaks, or war, acts of terrorism and other man -made or natural disasters could severely disrupt our business operations.

We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

As a foreign private issuer, we will be exempt from certain SEC requirements that provide stockholders with protections and information that must be made available to stockholders of U.S. public companies.

Because we do not intend to pay dividends on our ordinary shares for the foreseeable future, stockholders will benefit from an investment in our ordinary shares only if those shares appreciate in value.

Voting control by executive officers, directors and other affiliates of the company may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

The NYSE MKT may delist our securities from quotation on its exchange, which could limit investors' ability to make transactions in our securities and subject us to additional trading restrictions.

A significant number of shares are eligible for future sale by our stockholders and the sale of those shares could adversely affect the stock price.

There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Business Combination, which could result in significantly greater U.S. federal income tax liability to us.

There is a risk that we will be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. holders of ordinary shares or warrants of SearchMedia.

If you acquire (directly, indirectly, or constructively) 10% or more of our shares, you may be subject to taxation under the “controlled foreign corporation,” or CFC rules.

We may choose to redeem our outstanding warrants at a time that is disadvantageous to the warrant holders, preventing such holders from realizing the potential economic value of their warrants.

Our warrant holders may not be able to exercise their warrants, which may significantly reduce their economic value and create liability for us.

Unless otherwise indicated or required by the context, all references in this Annual Report on Form 20-F to “we,” “us,” “our,” “SearchMedia Holdings,” or the “Company” refer to SearchMedia Holdings Limited and its consolidated subsidiaries, and all references to “SearchMedia International” refer to SearchMedia International Limited and its consolidated subsidiaries before completion of the Business Combination on October 30, 2009 (as defined below).

4


PART I

Item 1Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2Offer Statistics and Expected Timetable

Not applicable.

Item 3Key Information

A.
Item 1Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2Offer Statistics and Expected Timetable
Not applicable.
Item 3Key Information
A.Selected Financial Data

This annual report on Form 20-F contains the consolidated statements of operations data for our company for the years ended December 31, 2008, 2009, 2010 and 20102011 and the selected consolidated balance sheet data for our company as of December 31, 20092010 and 20102011 have been derived from our audited financial statements included elsewhere in this annual report.

The consolidated statements of operations data for our company for the years ended December 31, 2006 and 2007 have been omitted from the Selected Financial Data per the instructions to Item 3 of Form 20-F. As previously disclosed in the Explanatory Note to our Annual Report on Form 10-K for the year ended December 31, 2009 filed on November 1, 2010, the historical financial statements of SearchMedia International for the years ended December 31, 2007 and December 31, 2008 were restated as a result of the analysis of our financial statements for the year ended December 31, 2009. After we completed the business combination pursuant to which we (1) redomiciled from Delaware to the Cayman Islands, as a Cayman Islands exempt company and (2) completed the acquisition of Search Media International, resulting in Search Media International becoming a wholly-owned subsidiary of SearchMedia Holdings (the “Business Combination”) and in connection with our preparation of the Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we identified accounting irregularities and potential financial and operational improprieties, relating to transactions and financial reporting matters that occurred under the management of SearchMedia International before the Business Combination, which were not previously identified as a result of material weaknesses in our internal control over financial reporting. These material weaknesses related to, among other things: (i) recording of various erroneous transactions by certain employees; (ii) recording of certain assets and other accounting irregularities related to acquisitions; (iii) diligence and approval of questionable transactions; and (iv) confirmation of payments related to acquisitions.

We have restated the consolidated financial statements of SearchMedia International Limited as of and for the year ended December 31, 2008, but we omitted the consolidated Selected Financial Information for the years ended December 31, 2006 and 2007 to avoid undue reliance on SearchMedia International Limited financial information for these periods.

this period.

You should read the selected consolidated financial data in conjunction with those financial statements and the accompanying notes and “Item 5. Operating and Financial Review and Prospects.”

5


Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
             
  For the Years Ended December 31 
  2008  2009  2010 
  (Amounts in thousands, except share data) 
Selected consolidated statement of operations data
            
Net revenues $41,685  $37,741  $48,967 
Cost of revenues  (30,624)  (28,059)  (36,454)
          
Gross profit
  11,061   9,682   12,513 
          
Operating expenses:            
Sales and marketing  (6,117)  (3,384)  (4,462)
General and administrative  (13,135)  (13,832)  (12,203)
          
Loss from operations
  (8,191)  (7,534)  (4,152)
          
Other income/(expense)            
Interest income  131   11   24 
Interest expense  (2,717)  (1,962)  (45)
Decrease in fair value of liability warrant     824    
Gain/(loss) on extinguishment of notes  (4,400)  6,669    
Loss on impairment of goodwill and intangible assets  (13,953)  (15,749)  (39,411)
Loss on abandonment of lease  (46)  (550)  (1,256)
Loss on impairment of fixed assets  (2,135)      
Loss on disposal of fixed assets  (2,121)  (15)  (4)
Other income/ (expense), net        (368)
Foreign currency transaction loss, net  (167)  (24)  (7)
          
Total other expense  (25,408)  (10,796)  (41,067)
 
Loss before income taxes
  (33,599)  (18,330)  (45,219)
Provision for income taxes  (1,481)  (4,319)  (1,420)
          
Net loss
 $(35,080) $(22,649) $(46,639)
          
Net loss from operations per share:            
Basic and diluted $(0.0162) $(0.0044) $(0.0022)
Weighted average number of shares outstanding — Basic and diluted  2,169,269   5,100,465   20,796,789 
         
  As of December 31, 
  2009  2010 
  (In thousands) 
Selected consolidated balance sheet data
        
Cash and cash equivalents $29,398  $7,554 
Accounts receivable, net  12,996   18,065 
Goodwill  45,891   45,955 
Total assets  99,765   86,871 
Acquisition consideration payable  16,381   39,195 
Total liabilities  51,365   86,408 
Net assets  48,400   463 
Total equity  48,400   463 

   For the Years Ended December 31 
   2008  2009  2010  2011 
   (Amounts in thousands, except share data) 

Selected consolidated statement of operations data

     

Net revenues

  $41,685   $37,741   $48,967   $55,571  

Cost of revenues

   (30,624  (28,059  (36,454  (45,788
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   11,061    9,682    12,513    9,783  
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating expenses:

     

Loss on impairment of goodwill

   (13,953  (15,749  (39,411  (27,927

Loss on impairment of intangible assets

   —      —      —      (2,723

Gain on termination of VIEs

   —      —      —      9,551  

Change of fair value of acquisition consideration payable

   —      —      —      10,681  

Gain from extinguishment of acquisition consideration payable

   —      —      —      4,340  

Loss on abandonment of lease

   (46  (550  (1,256  —    

Loss on impairment of fixed assets

   (2,135  —      —      —    

Loss on disposal of fixed assets

   (2,121  (15  (4  —    

Sales and marketing

   (6,117  (3,384  (4,462  (6,722

General and administrative

   (13,135  (13,832  (12,203  (10,221
  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from operations

   (26,446  (23,848  (44,823  (13,238
  

 

 

  

 

 

  

 

 

  

 

 

 

Other income/(expense)

     

Interest income

   131    11    24    34  

Interest expense

   (2,717  (1,962  (45  (89

Decrease in fair value of liability warrant

   —      824    —      —    

Gain/(loss) on extinguishment of notes

   (4,400  6,669    —      —    

Foreign currency transaction loss, net

   (167  (24  (7  (4

Other income/ (expense), net

   —      —      (368  (79
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other income/ (expense)

   (7,153  5,518    (396  (138

Loss before income taxes

   (33,599  (18,330  (45,219  (13,376

Provision for income taxes

   (1,481  (4,319  (1,420  (83
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

  $(35,080 $(22,649 $(46,639 $(13,459

Net loss from operations per share:

     

Basic and diluted

  $(16.17 $(4.44 $(2.24 $(0.64

Weighted average number of shares outstanding — Basic and diluted

   2,169,269    5,100,465    20,796,789    20,994,015  

   As of December 31, 
   2010   2011 
   (In thousands) 

Selected consolidated balance sheet data

    

Cash and cash equivalents

  $7,554    $4,630  

Accounts receivable, net

   18,065     15,822  

Goodwill

   45,955     16,926  

Total assets

   86,871     50,449  

Acquisition consideration payable

   39,195     23,238  

Total liabilities

   86,408     63,902  

Net assets

   463     (13,453

Total equity

   463     (13,453

B.
B.Capitalization and Indebtedness

Not applicable.

C.
C.Reasons for the Offer and Use of Proceeds

Not applicable.

D.
D.Risk Factors

Risk Related to Our Business and Operations

There is substantial doubt as to our ability to continue as a going concern, which could adversely affect our ability to meet our ongoing financing needs as well as to obtain third party financing.

As indicated in the report on our financial statements issued by our auditors, Marcum Bernstein & Pinchuk LLP, there is “substantial doubt” about our ability to continue as a going

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concern. As of December 31, 20102011 our current liabilities exceeded our current assets by $39.4$31.0 million and our net shareholders’ equity was $0.5a deficit of $13.5 million. Our cash and cash equivalent as of December 31, 20102011 was $7.6$4.6 million. We cannot assure you that our business will generate sufficient cash flow from operations in the future to service our debts and make necessary capital expenditures, in which case we may (i) seek additional financing, (ii) dispose of certain assets or (iii) seek to refinance some or all of our debts. We are also taking a number of other actions to address the issue, including amendment of earn-out agreements which provides for extensionsatisfies such payment obligations with shares instead of the payment time period,cash, seeking funding from existing shareholders and adopting other cost-saving strategies. We cannot assure you that any of the alternatives above can be implemented on satisfactory terms, if at all. The inclusion of the substantial doubt language in the audit report about our ability to continue as a going concern could affect our ability to obtain financing from third parties or could result in increased costs of such financing.

We may not have sufficient liquidity to pay earn-out payments when they come due, which could materially and adversely affect our operations.

We are obligated to pay earn-out payments over the next two to three years in connection with our acquisitions of a number of advertising businesses. We estimate that $29.0As of December 31, 2011, the amount of our earn-outs payable within one year was $23.2 million, of which $16.8 million is payable within the next twelve months from the date of this Annual Report on Form 20-F and $10.2 million is payable after the next twelve months. We also estimate that more than 50% of the earn-out payable is payable in stock.

cash. Based on the current cash position and forecast for the restremainder of the payment period, we believe that we currently dowould not have sufficient capital to pay the required cash earn-out payments over the next twelve months.

In addition, dueApril 2012, our board of directors approved and authorized a capped pool of 7 million ordinary shares to a varietybe issued to certain ex-owners of factors which cannot presently be ascertained, including without limitation, the amountsubsidiaries (“Integration Program”) for the purpose of working capital that we have available,converting and eliminating the outstanding earn-out liabilities. On May 2, 2012, the Company divested Zhejiang Continental Advertising Co. Ltd. (“Zhejiang Continental”) back to its previous owners and eliminated the related earn-out liability of $8.2 million in exchange for the issuance of 1 million ordinary shares of the Company. Through the divestiture of Zhejiang Continental, the Company has materially reduced its outstanding cash earn-out liabilities to $8.6 million. The Company is renegotiating payment terms with the remaining acquired subsidiaries and the financial performance of bothgoal is to eliminate all cash earn-out liabilities through the companyIntegration Program. If the imbalance between earn-outs payable and the acquired companies entitled to receive an earn-out payment, there can be no assurance that we will have sufficient liquidity to meet our long-term earn-out obligations. If such failurecurrent cash position cannot be remedied through renegotiation of the terms of such earn-outs with the acquiringacquired companies or the raising ofif we are unable to raise the required proceeds on reasonable terms, our operations are likely to be adversely and materially impacted.

If the earn-out obligations of the remaining acquired subsidiaries are not extinguished pursuant to our Integration Program, our ability to raise additional capital may be jeopardized. Furthermore, our business strategy to pursue organic growth and the viability of new concessions and other projects is dependent upon our ability to raise new funding.

We have a history of significant operating losses and our future revenue and operating profitability are uncertain.

We recorded a net loss of $46.6$13.5 million for the year ended December 31, 20102011 and we ended the year with an accumulated deficit of $122.2$13.5 million. In addition, we recorded a net loss of approximately $22.6$46.6 million for the year ended December 31, 2009.2010. Loss from operations reduced from $7.5$44.8 million in 20092010 to $4.2$13.2 million in 2010.2011. The greater net loss in 2010 was due to impairment charges which were non-cash. We may continue to incur operating losses for the foreseeable future, and such losses may be substantial. We will need to increase revenue in order to generate sustainable operating profit. Given our history of operating losses, we cannot be certain that we will be able to achieve operating profitability on an annual basis. Our failure to achieve profitability could adversely affect the trading price of our common stockordinary shares and our ability to raise additional capital.

We have identified material weaknesses in our internal control over financial reporting and we have had to restate our historical financial statements.

In August 2010, we announced that we would restate the financial statements of SearchMedia International as of and for the year ended December 31, 2008, to, among other things, correct an overstatement of revenue of $47.0 million in 2008. We restated our financial statements for the year ended December 31, 2008, which was filed in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on November 1, 2010.

After the Business Combination and in connection with our preparation of the Annual Report on Form 10-K filed November 1, 2010, we identified accounting irregularities and potential financial and operational improprieties, relating to transactions and financial reporting matters that occurred under the management of SearchMedia International before the Business Combination, which were not previously identified as a result of material weaknesses in our internal control over financial reporting. These material weaknesses relate to, among other things: (i) recording of various erroneous transactions by certain employees; (ii) recording of certain assets and other accounting irregularities related to acquisitions; (iii) diligence and approval of questionable transactions; and (iv) confirmation of payments related to acquisitions.

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We have implemented and we plan to further implement steps to address these material weaknesses and improve our internal control over financial reporting. However, the implementation of these measures may not fully address these control weaknesses, and to date these control weaknesses have not been remediated in full. If we fail to implement and maintain the adequate internal control procedures in a timely manner, we may not be able to conclude that we have effective internal control over financial reporting. Furthermore, we cannot be certain we will effectively remediate our control weaknesses or that restatements will not occur in the future. The preparation and filing of restatements could create a significant strain on our internal resources and cause delays in our filing of quarterly or annual financial results, increase our financial accounting and related costs, and divert management’s attention from the operation of our business.

We arewere subject to ongoing securities litigation and a government inquiry in the United States.

We and certain of our current and former directors and executive officers arewere defendants in a federal securities class action in the United States. The amended complaint allegesalleged that the defendants violated Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder by making false and misleading statements regarding our acquisition of SearchMedia International and by overstating SearchMedia International’s financial results during the period April 1, 2009 through August 20, 2010 (“Proposed Class Period”). The Company and certain of its co-defendants have moved to dismiss the claims asserted against them. We cannot predictus and our current and former directors and executive officers were dismissed with prejudice in April 2012 after we reached a court-approved, class-wide settlement with the outcomeplaintiffs. The order dismissing those claims is subject to certain appeal rights. The claims asserted against the remaining defendants, who were not part of the motion to dismiss. Moreover, we cannot predict ifsettlement, were dismissed by the court will certify a class.

without prejudice and could be refiled by the plaintiffs.

In addition, we have been notified that the U.S. Securities and Exchange Commission, Los Angeles Regional Office, is conducting a formal investigation regarding the issues that are the subject of our restatement of financial results announced on August 20, 2010. We are cooperating fully with the SEC during this investigation process. We cannot predict the cost or potential liabilities associated with responding to the SEC investigation or any related investigations or litigation that may arise from the matters under inquiry.

We have notified our insurance carriers of these matters.the SEC investigation. One carrier, which issued a directors’ and officers’ liability policy that applies to part of the Proposed Class Period, has informed the Company that it formed the view that its policy does not provide coverage for these matters.the SEC investigation. Accordingly, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters.the SEC investigation or any related litigation that may arise from the matters under inquiry. Litigation and regulatory actions or proceedings can be time consuming and expensive, and could divert management time and attention from our business, which could have a material adverse effect on our

revenues and results of operations. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results. Finally, we cannot provide any assurance that the final outcome of these mattersthe SEC investigation or any related litigation that may arise will not have a material adverse effect on our business, results of operations, or financial condition.

Deterioration of economic conditions and a resulting decrease in demand for advertising services would materially and adversely affect our financial condition and results of operations and limit our growth prospects.

Demand for our advertising services, and the resulting advertising spending by our clients on our network, is affected significantly by prevailing economic conditions. The current economic downturns in global markets have impacted, and are expected to further impact, materially and adversely, the advertising spending of our existing and potential multinational clients and, as the crisis spreads to China, the advertising spending of our existing and potential domestic clients. With a severe decline in economic conditions, clients who would normally spend on a broad range of traditional and new media may curtail their overall spending or concentrate their advertising spending on one medium. As we derive most of our revenues from our billboard and in-elevator advertising networks, a decrease in demand for advertising media in general and for our advertising media or advertising networks in particular would materially and adversely affect our financial condition and results of operations and limit our growth prospects. In addition, our clients who are adversely affected by the worsened economic conditions may delay paying the advertising fees to us, which would adversely affect our liquidity and results of operations.

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A business strategy of making acquisitions subjects us to all of the risks inherent in identifying, acquiring and operating newly acquired businesses.

Our growth strategy includes acquiring new businesses to complement and expand our existing operations. In the future, we may continue to make acquisitions of, or investments in, businesses that we believe could complement or expand our current business or offer growth opportunities. ToWe may experience difficulties in identifying potential acquisition candidates that end,complement our current business at appropriate prices, or at all. Many of our competitors may also compete with us for acquisition candidates, which can increase the price of acquisitions and reduce the number of available acquisition candidates. Therefore, we cannot assure you that our acquisition strategy will be successful and we may spendexpend significant management time and resources in analyzing and negotiating acquisitions or investments that are not consummated. TheFurthermore, the ongoing process of integrating theseacquired businesses is distracting, time consuming, expensive, and requires continuous optimization and allocation of resources. To that end, we have implemented a subsidiary integration program. The subsidiary integration program may not be successful and we may be unable to fully integrate the subsidiaries. If we are unsuccessful in integrating the subsidiaries, it could affect our financial controls and the timely reporting requirements over our subsidiaries. Additionally, if we use stock as consideration, this would have a dilutive effect on existing stockholders. If we use cash, this would reduce our liquidity and impact our financial flexibility. We may seek debt financing for particular acquisitions, which may not be available on commercially reasonable terms, or at all. We face all the risks associated with a business acquisition strategy, including, but not limited to:

the potential disruption of our existing businesses, including the diversion of management attention and the redeployment of resources;

the potential disruption of our existing businesses, including the diversion of management attention and the redeployment of resources;
entering new markets or industries in which we have limited prior experience;
failure to identify in due diligence key issues specific to the businesses we seek to acquire or the industries or other environments in which they operate, or, failure to protect against contingent liabilities arising from those issues;
unforeseen or hidden liabilities;
difficulties in integrating, aligning and coordinating organizations which will likely be geographically separated and may involve diverse business operations and corporate cultures;
difficulties in integrating and retaining key management, sales, research and development, production and other personnel;
potential loss of key employees, clients or distribution partners of the acquired businesses;
difficulties in incorporating the acquired business into our organization;
the potential loss of customers, distributors or suppliers;
adverse effects on our existing business relationships with our advertisers;
difficulties in integrating or expanding information technology systems and other business processes to accommodate the acquired businesses;
risks associated with integrating financial reporting and internal control systems;
the potential for future impairments of goodwill if the acquired business does not perform as expected;
the inability to obtain necessary government approvals for the acquisition, if any; and
successfully operating the acquired business.

entering new markets or industries in which we have limited prior experience;

failure to identify in due diligence key issues specific to the businesses we seek to acquire or the industries or other environments in which they operate, or, failure to protect against contingent liabilities arising from those issues;

unforeseen or hidden liabilities;

difficulties in integrating, aligning and coordinating organizations which will likely be geographically separated and may involve diverse business operations and corporate cultures;

difficulties in integrating and retaining key management, sales, research and development, production and other personnel;

potential loss of key employees, clients or distribution partners of the acquired businesses;

difficulties in incorporating the acquired business into our organization;

the potential loss of customers, distributors or suppliers;

adverse effects on our existing business relationships with our advertisers;

difficulties in integrating or expanding information technology systems and other business processes to accommodate the acquired businesses;

risks associated with integrating financial reporting and internal control systems;

the potential for future impairments of goodwill if the acquired business does not perform as expected;

the inability to obtain necessary government approvals for the acquisition, if any; and

successfully operating the acquired business.

If we cannot overcome these challenges, we may not realize actual benefits from past and future acquisitions, which will impair our overall business results. If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.

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Failure to manage our growth could strain our management, operational and other resources, which could materially and adversely affect our business and growth potential.
We experienced rapid expansion in recent years, which resulted, and will continue to result, in substantial demand on our management resources. To manage our growth, we must develop and improve our existing administrative and operational systems and our financial and management controls, and further expand, train and manage our work force. We also need to incur substantial costs and spend substantial resources in connection with these efforts. We may not have the resources to revamp our systems and controls, recruit or train our personnel, or afford to incur the costs and expenses in order to successfully manage our growth. Failure to manage our growth may materially and adversely affect our business and growth potential.
Future charges due to possible impairments of acquired assets may have a material adverse effect on our financial condition and results of operations.

A portion of our assets is comprised of goodwill and other intangible assets, which may be subject to future impairment that would result in financial statement write-offs. Goodwill and other intangible assets represent approximately 57.5%33.6% of our total assets at December 31, 2010.2011. If there is a material change in our business operations or prospects, the value of the intangible assets we have acquired or may acquire in the future could decrease significantly. On an ongoing basis and at least annually, we will evaluate, partially based on discounted expected future cash flows, whether the carrying value of such intangible assets may no longer be recoverable, in which case a charge to earnings may be necessary. Any future determination requiring the write-off of a significant portion of unamortized intangible assets, although not requiring any additional cash outlay, could have a material adverse effect on our financial condition, results of operations and stock price.

We face significant competition for advertising spending from operators of new and traditional advertising networks. If we cannot successfully compete, our results of operations would be materially and adversely affected.

We face competition for general advertising spending from operators of many other forms of advertising networks, such as television, print media, Internet and other types of out-of-home advertising.

Our success depends on the continuing and increased interest of advertising clients and agencies in in-elevator, outdoor billboard, and transit advertising as components of their advertising strategies. Advertisers may elect not to use our services if they believe that the viewing public is not receptive to advertising platforms we offer or that these platforms do not provide sufficient value as effective advertising mediums. If we cannot successfully compete for advertising spending against traditional, Internet and other types of out-of-home advertising, we will be unable to generate sufficient revenues and cash flows to operate our business, and our results of operations could be materially and adversely affected.

For in-elevator and billboard advertising spending, we face competition from different players across different platforms and in different cities where we operate. For our in-elevator advertising platform, we compete primarily against large regional operators and other nationwide operators some of which have substantially more financial resources than we have. For our billboard advertising platform, we compete against mostly local or regional outdoor billboard owners and operators, as the outdoor billboard market in China is largely fragmented. For our transit advertising platform, we compete against other seasoned operators. We compete for advertising spending on these platforms generally on the basis of network coverage, service quality and brand name. If we cannot compete successfully for advertising spending on these platforms, our market share and our results of operations would suffer.

We have a limited operating history which may make it difficult for you to evaluate our business and prospects.
SearchMedia International entered the out-of-home advertising market in 2005. We have been a public company since 2009. Accordingly, we have a limited operating history for our current operations upon which you can evaluate the viability and sustainability of our business and our acceptance by advertisers.

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If we fail to develop and maintain relationships with site owners, managers and sublessors that provide us access to desirable locations and network platforms, our growth potential and our business could be harmed.

Our ability to generate revenues from advertising sales depends largely on our ability to provide a large network of our media products across media platforms at desirable locations. The effectiveness of our network also depends on the cooperation of site owners and managers to allow us to install the desired types of frames at the desired spots on their properties and, for in-elevator advertising, to keep the elevators in operation and accessible to the viewing public. To address these needs, we must develop and maintain business relationships with site managers and owners and, for a portion of our network, sublessors that consist primarily of advertising companies. Since the ownership of residential and office buildings are fragmented, maintaining these relationships requires considerable operational resources in terms of contract management and site development and maintenance personnel. If we fail to devote the necessary resources to maintaining these relationships or if we fail to perform our obligations under the existing leases, these lessors and sublessors may terminate their leases with us or not renew them upon expiration. In some cases, we have not maintained good relations and some of our leases have been terminated or may be terminated in the future. As there is a limited supply of billboards at desirable locations and a limited number of subway stations, the termination of a significant number of the leases for billboards and light boxes at subway stations could harm our multi-platform growth and operation strategies and our business and prospects could suffer as a result.

Failures to obtain site owners’ consents or objections from site owners to the installations of our media products could lead to termination of our contracts or installations, which would harm our results of operations.

PRC real estate laws and regulations require that we obtain prior consent

Article 7 of site owners and managers for anythe Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Disputes over Partitioned Ownership of Building Areas” provides: “Any commercial use of public areas or facilities of residential properties. We generally enter intoproperties shall belong to the scope of other material matters stipulated in Article 76 -1-7 of Property Law.” Article 76-1-7 of Property Law provides: “other material matters concerning owners’ co-ownership and co-management rights shall be conducted only with the prior consent of owners whose proprietary property area is over 50% of whole property area of the residential quarter and percentage is over 50%.” In accordance with these requirements, we take all reasonable efforts to execute display placementagreements with site owners or owner committees before installing our media products. However, when we cannot locate all site owners or an owner committee has not been established, we execute display agreements with site managers. To comply with PRC real estate laws and regulations, we also need to obtain or urge site managers to obtain prior consent ofWe have obtained proper consents from site owners or owner committees orfor approximately 83% of our operations in terms of cost of sales and site owners. In some circumstances, it is difficult to locate site owners. Ifmanager consents for the remaining approximately 17% of our operations. Furthermore, in the past three years, we enter intohave not had an agreement for display placement withterminated or lost a site manager without thedue to an objection for lack of consent, nor have we received any written objection from the relevantor been sued by any site owners, we could be subjectowner or owner committee due to fineslack of up to RMB0.2 million (approximately $29,000) for each site and be required to remove our advertising posters from the affected building. In addition, site owners who object to the installation of poster frames in their buildings may cause site managers to terminate or fail to renew site contracts with us, which would harm our results of operations.

If we are unable to obtain or retain desirable placement locations for our advertising poster frames and outdoor billboards on commercially advantageous terms, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
Our cost of revenues consists primarily of operating lease cost of advertising space for displaying advertisements, depreciation of advertisement display equipment, amortization of intangible assets relating to lease agreements and direct staff and material costs associated with production and installation of advertisement content. Our operating lease cost represents a significant portion of our cost of revenues. In 2009 and 2010, our operating lease cost accounted for 84.4% and 91.4%, respectively, of our cost of revenues and 62.0% and 64.3% respectively, of our total revenues. In the future, we may need to pay higher amounts in order to renew existing leases, obtain new and desirable locations, or secure exclusivity and other favorable terms. If we are unable to secure commercially advantageous terms or pass increased location costs onto our advertising clients through rate increases, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
consent.

The shareholders of Jingli Shanghai may have potential conflicts of interest with us.

Before December 23, 2011, the Company was subject to risk relating to its variable interest entity structure, which structure was terminated on such date. One of the risks related to potential conflicts of interest the shareholders of Jingli Shanghai may have with us. The shareholders of Jingli Shanghai are also the founders and shareholders of the Company. Conflicts of interests between their dual roles as shareholders of both Jingli Shanghai and the Company may arise. We cannot assure you that when conflicts of interest arise, any or all of these individuals will act in the best interests of the Company or that any conflict of interest will be resolved in our favor. In addition, these individuals may breach or cause Jingli Shanghai to breach or refuse to renew the existing contractual arrangements that allow us to effectively control Jingli Shanghai and receive economic benefits from it. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of Jingli Shanghai, we would have to rely on legal proceedings, the outcome of which is uncertain and could be disruptive to our business.

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We have terminated these contractual arrangements effective December 23, 2011 and our risk under this risk factor has been eliminated starting from December 23, 2011.


If we are unable to obtain or retain desirable placement locations for our advertising poster frames and outdoor billboards on commercially advantageous terms, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.

Our cost of revenues consists primarily of operating lease cost of advertising space for displaying advertisements, depreciation of advertisement display equipment, amortization of intangible assets relating to lease agreements and direct staff and material costs associated with production and installation of advertisement content. Our operating lease cost represents a significant portion of our cost of revenues. In 2010 and 2011, our operating lease cost accounted for 91.4% and 95.7%, respectively, of our cost of revenues and 64.3% and 78.9% respectively, of our total revenues. In the future, we may need to pay higher amounts in order to renew existing leases, obtain new and desirable locations, or secure exclusivity and other favorable terms. If we are unable to secure commercially advantageous terms or pass increased location costs onto our advertising clients through rate increases, our operating margins and earnings could decrease and our results of operations could be materially and adversely affected.

Our business depends substantially on the continuing efforts of our executive officers, senior executives,management and other key employees, and our business may be severely disrupted if we lose their services.

Our future success depends heavily on the continued services of our executive officers, senior executivesmanagement and other key employees, their industry expertise, their experience in business operations and sales and marketing, and their working relationships with our advertising clients as well as the site owners, property developers, property management companies, homeowner associations and relevant government authorities that affect the site contracts with us.

We do not have a long history of working with some of these executive officers, senior executivesmanagement and key employees. If one or more of our senior executives were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. If any of our senior executives join a competitor or forms a competing company, we may lose clients, site contracts, key professionals and staff members.

We have entered into an employment agreement with each of our executive officers, which agreement contains non-competition provisions. However, if a dispute arises between us and our executive officers, there is no assurance that any of these agreements could be enforced, or to what extent they could be enforced, in China, in light of the uncertainties with China’s legal system.

Furthermore, some of the former equity owners of the acquired entities, which we refer to as the "ex-owners", and other employees are important to the collection of long outstanding account receivables. We will continue to require the full and timely cooperation from these individuals in our collection efforts. Any disagreements or disputes with such individuals may cause delays in the collection period or even impact our ability to collect such funds.

Additionally, there are other receivables that we are continuing to attempt to collect that are related to ex-owners and employees. These other receivables include withdrawals and related party transactions that were prevalent at the subsidiary level. Although we are working to collect these funds, these receivables may affect the cash flow of the Company.

If we are unable to adapt to changing advertising trends of advertisers and consumers, we will not be able to compete effectively and we will be unable to increase or maintain our revenues, which may materially and adversely affect our business prospects and revenues.

The competitive market for out-of-home advertising requires us to continuously identify new advertising trends of advertisers and consumers. In response to these new advertising trends, we may need to quickly develop and adopt new formats, features and enhancements for our advertising network and/or cost-effectively expand into additional advertising media and platforms beyond in-elevator, billboards, and transit platform advertising. We may be required to incur, but may not have the financial resources necessary to fund, development and acquisition costs in order to keep pace with new advertising trends. If we fail to identify or respond adequately to these changing advertising trends, demand for our advertising network and services may decrease and we may not be able to compete effectively or attract advertising clients, which would have a material and adverse effect on our business prospects and revenues.

Our growth could suffer if we fail to expand our media networks to include new media offerings, media platforms or enter into new markets.

Currently, our network primarily consists of in-elevator, outdoor billboard and transit advertising. Our growth strategy includes broadening our service offerings and possibly entering into new advertising markets. It is difficult to predict whether consumers and advertising clients will accept our entry into new media markets or accept the new media products or platforms we may offer. It is also difficult to predict whether we will be able to generate sufficient revenues to offset the costs of entering into these new markets or introducing these new products or new media platforms. We may also have limited or no prior experience working with these new products, platforms or markets. If we fail to expand our media network to include new media products, platforms or markets, our growth could suffer as a result.

If site managers or owners shut down our displays for site maintenance or other reasons, our business could be adversely affected.

Under certain site leasing contracts we entered into with site managers or owners, site managers or owners have the right to shut down our displays with prior written notice if they need to inspect or maintain the sites where we have installed advertising displays, or for other reasons such as facility reconstruction. However, under our contracts with our advertising clients, if these displays are shut down for an extended period of time, we are required to substitute these suspended displays with alternative displays. If we cannot reach an agreement with our clients on the alternative displays, we could be required to refund the advertising fees paid by these clients. If a substantial number of our displays are shut down by site managers within a short time period, we may not be able to locate alternative display locations and may incur substantial remedial costs. Our relationships with our advertising clients could also suffer and our financial results could be adversely affected.

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Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
We regard our copyrights, trademarks,

The validity, enforceability, and scope of protection available under intellectual property laws with respect to trademark and trade secrets in China are uncertain and otherstill evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in China may not be as critical to our success. Unauthorized useeffective as in the United States or other western countries. One example of thea protective measure regarding intellectual property, used in our business may adversely affect our business and reputation. We have historically relied on a combination of trademark and copyright law, trade secret protection and restrictions on disclosure to protect our intellectual property rights. We have entered into confidentiality agreements with all our employees. We cannot assure you that these confidentiality agreements will not be breached, or that we will have adequate remedies for any breach.

We arepre-litigation injunction relief, is still in the process of registeringevolving in China the “SearchMedia” trademark and logo used in our business. We cannot assure you that our trademark application will ultimately proceed to registration or will result in registration with scope adequate for our business. Some of our pending applications or registration may be successfully challenged or invalidated by others. If our trademark application is not successful, we may have to use different marks for affected services or technologies, or enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be availablethis protective measure needs more detailed guidance on commercially reasonable terms, if at all.
In addition, monitoring and preventingimplementation. Furthermore, policing unauthorized use of our trademarks and other intellectual propertyproprietary technology is difficult and expensive, and litigationwe may be necessary in the futureneed to resort to litigation to enforce or defend our intellectual property rights. Futureor to determine the enforceability, scope and validity of our proprietary rights or those of others. Any such litigation or an adverse determination in any such litigation, could result in substantialsignificant costs to the Company and a diversion of our resources and management attention.

We rely on the proper operation and maintenance of our computer system. Any malfunction, capacity constraint or operation interruption for any extended period may have an adverse impact on our business.

The satisfactory performance, stability, and security of our computer system and our network infrastructure are critical to our reputation and our ability to attract and retain advertisers. Our information system provides a database of information regarding advertising records and various other facets of the business to assist management and to help ensure effective communication among various departments and offices of our Company. Accordingly, any failure to maintain the satisfactory performance, stability, security and availability of our computer system may cause significant harm to our reputation and to our advertisers’ interest in advertising their products. Any server interruptions, break-downs or system failures, including failures which may be attributable to events within or outside our control, could disruptreduce the attractiveness and availability of our business, as well asproduct offerings. Our computer systems are also susceptible to damage from computer viruses, fires, floods, earthquakes, power losses, telecommunication failures, computer hacking, and similar events. We do not maintain insurance policies covering losses relating to our network systems or other assets. As a result, any capacity constraints or operation interruptions for any extended period may have a materialmaterially adverse effectimpact on our financial conditionrevenues and results of operations.

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

Under PRC law, legal documents for corporate transactions, including contracts such as the leases and sales contracts that our business relies on, are executed using the chops or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with Administration of Industry and Commerce, or AIC.

Although we usually utilize chops to enter into contracts, the registered legal representatives of each of our PRC operating subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops. All designated legal representatives of our PRC subsidiaries are members of our senior management team who owe us fiduciary duties. Accordingly, there is a risk that the registered legal representatives of each of our PRC operating subsidiaries could abuse their authority, for example, by binding the Company with contracts against the Company’s interest or intentions which could result in economic harm or damages as a result of any contractual obligations, or resulting disputes, that might arise. If the party contracting with the Company did not act in good faith under such circumstances, then we could incur costs to nullify such contracts.

We rely on computer softwarethe Company seals, financial chops and hardware systems in managing our operations; any failure in these systems could adversely affect our business financial condition and results of operations.

We are dependent upon our computer software and hardware systems in supporting the sales, scheduling and maintenancelicenses of our network. In addition, we rely on our computer hardwarePRC entities for entering into contracts, conducting banking business, or taking official corporate action of any sort including registering any change to the storage and deliverycomposition of the data onboard of directors or management with the relevant PRC authorities. In order to maintain the physical security of our network. Any system failure which causes interruptions tochops, seals and business licenses and other controlling intangible assets, we generally store these items in secured locations accessible only by the inputauthorized personnel in the local legal and retrieval of data or increases our service time could disrupt our normal network operations. In addition, computer hackers infecting our network with viruses could cause our network to become unavailable.finance departments. Although we believe that our disaster recovery planmonitor such authorized personnel in the local legal and finance departments, there is adequate to handle the failure of our computer software and hardware systems, we cannot assure you that we willno assurance such procedures may be able to effectively carry out this disaster recovery planprevent all instances of abuse or thatnegligence. Accordingly, if any of our authorized personnel in the local legal and finance departments obtain and misuse or misappropriate our corporate chops, seals, business licenses or other controlling intangible assets, we would be able to restore our network operations fast enough to avoid a significantcould incur economic damage and disruption to our business. Any failure inoperations that may necessitate corporate or legal action. Such corporate or legal action could involve significant time and resources to resolve while distracting management from our computer software and/operations. In particular, during any period were we lose effective control of the corporate activities as a result of such misuse or hardware systemsmisappropriation, the business activities of the affected entity could decrease our revenuesbe disrupted and harm our relationships with advertisers and target audiences, which in turnwe could have a material adverse effect onlose the economic benefits of that aspect of our business financial conditionwhich may negatively impact our business and results of operations.
reputation.

We have no business liability, disruption or litigation insurance, and we could incur substantial costs if our business is disrupted due to natural disasters, litigation or other business interruptions.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability or disruption coverage for our operations in China. All industries are subject to legal claims. As a public company, we are particularly susceptible to securities and derivative lawsuits. These claims may be costly to defend and divert the attention of our management and our resources in general. Defense and settlement costs can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal claim or proceeding could have a material effect on our business, financial condition, results of operations or cash flows. Any business disruption or litigation may result in our incurring substantial costs and the diversion of resources.

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Our operating results are difficult to predict and may fluctuate from period to period.

Our operating results are difficult to predict and may fluctuate from period to period. Factors that are likely to cause our operating results to fluctuate include:

our ability to maintain and increase sales to existing advertising clients, attract new advertising clients and satisfy our clients’ demands;

our ability to maintain and increase sales to existing advertising clients, attract new advertising clients and satisfy our clients’ demands;
the frequency of our clients’ advertisements on our network;
remaining competitive with the pricing strategies of our competitors;
effects of strategic alliances, potential acquisitions and other business combinations, and our ability to successfully and timely integrate alliances or acquired businesses into our business;
changes in government regulations in relation to the advertising industry;
lower advertising spending immediately following a major holiday season in China; and
economic and geopolitical conditions in China and elsewhere.

the frequency of our clients’ advertisements on our network;

remaining competitive with the pricing strategies of our competitors;

effects of strategic alliances, potential acquisitions and other business combinations, and our ability to successfully and timely integrate alliances or acquired businesses into our business;

changes in government regulations in relation to the advertising industry;

lower advertising spending immediately following a major holiday season in China; and

economic and geopolitical conditions in China and elsewhere.

Many of the factors discussed above are beyond our control, making our results difficult to predict from period to period. Although we did not experience significant seasonality in our business, except for generally lower sales in periods immediately following major holiday seasons historically, you should not rely on our operating results for prior periods as an indication of our future results. If our revenues for a particular period are lower than expected, we may be unable to reduce our operating expenses for that period by a corresponding amount, which would harm our operating results for that period relative to our operating results from other periods.

Risks Relating to Doing Business in the People’s Republic of China

If the PRC government determines that the contractual arrangements that establishestablished the structure for operating our China business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

Before December 23, 2011, the Company was subject to risk relating to its variable interest entity structure. One of the risks related to potential consequences if the PRC government determined that the contractual arrangements that established the Company's operational control of its China operations did not comply with the applicable PRC laws and regulations. Applicable PRC laws and regulations currently require any foreign entities that invest in the advertising services industry in China to have at least twothree years of direct operations in the advertising industry outside of China. We are a Cayman Islands corporation and a foreign legal person under Chinese laws. Before we acquired 100% of the equity interests of Ad-Icon in 2008, we had not directly operated an advertising business outside of China and thus could not qualify for the requirement of minimum twothree years experience outside China under PRC regulations. Accordingly, our subsidiary, Jieli Consulting, is currently ineligible to apply for the required business license for providing advertising services in China. Therefore, we entered into contractual arrangements with our consolidated variable interest entity in China, Jingli Shanghai, and prior to formation ofShanghai. Jingli Shanghai we operated our advertising business through Shanghai Sige Advertising and Media Co., Ltd., or Sige, Shenzhen Dale Advertising Co., Ltd., or Dale and Beijing Conghui Advertising Co., Ltd., or Conghui. Jingli Shanghai is currentlywas owned by two PRC citizens, Ms. Qinying Liu and Ms. Le Yang, and holdsheld the requisite business license to provide advertising services in China. Jingli Shanghai and its subsidiaries directly operate a portion of our advertising network, enter into display placement agreements and sell advertising spaces to our clients with respect to certain of our operating subsidiaries. In 2010, Ad-Icon Shanghai, a wholly-owned subsidiary of Ad-Icon, acquired some of Jingli Shanghai’s subsidiaries and operates the advertising business through such subsidiaries. Before the remaining subsidiaries of Jingli Shanghai are acquired by Ad-Icon Shanghai and termination to the variable interest entities structure on December 23, 2011, we arewere expected to continue to be dependent on Jingli Shanghai and its subsidiaries to operate a portion of our advertising business. We dodid not have any equity interest in Jingli Shanghai but receivereceived the economic benefits and assume the economic risks of it through various contractual arrangements and certain corporate governance and shareholder rights arrangements. In addition, we have entered into agreements with Jingli Shanghai and each of the shareholders of Jingli Shanghai which allow us to exert control over Jingli Shanghai.

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If we, Jieli Consulting, Jieli Network, Jingli Shanghai or any of our future PRC subsidiaries are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the State Administration for Industry and Commerce, or SAIC, which regulates advertising companies, would have broad discretion in dealing with such violations, including:

revoking the business and operating licenses of Jingli Shanghai or our PRC subsidiary and other affiliated entities, if any;

revoking the business and operating licenses of Jingli Shanghai or our PRC subsidiary and other affiliated entities, if any;
discontinuing or restricting the operations of any transactions among our PRC subsidiary, Jingli Shanghai and its shareholders;
imposing fines, confiscating the income of Jingli Shanghai or our income, or imposing other requirements with which we or our PRC subsidiary and affiliated entities may not be able to comply;
requiring us or our PRC subsidiary and affiliated entities to restructure our ownership structure or operations; or
restricting or prohibiting our use of the proceeds of the Business Combination to finance our business and operations in China.

discontinuing or restricting the operations of any transactions among our PRC subsidiary, Jingli Shanghai and its shareholders;

imposing fines, confiscating the income of Jingli Shanghai or our income, or imposing other requirements with which we or our PRC subsidiary and affiliated entities may not be able to comply;

requiring us or our PRC subsidiary and affiliated entities to restructure our ownership structure or operations; or

restricting or prohibiting our use of the proceeds of the Business Combination to finance our business and operations in China.

The imposition of any of these penalties couldmay result in a material and adverse effect on ourthe Company’s ability to conduct our business,the Company’s business.

We have terminated these contractual arrangements effective December 23, 2011 and our financial condition and resultsrisk of operations.

the imposition of any of these penalties has been eliminated starting from December 23, 2011.

We rely on contractual arrangements with Jingli Shanghai and its shareholders for our China operations, which may not be as effective in providing operational control as would be the case through ownership of a controlling equity interest in such operating entities.

Before December 23, 2011, the Company was subject to risk relating to its variable interest entity structure, which structure was terminated on such date. One of the risks related to the Company's reliance on contractual arrangements with Jingli Shanghai and its shareholders for operational control of its China operations. In April 2008, we acquired 100% of the equity interest in Ad-Icon, a Hong Kong company, which operates an outdoor billboard advertising business. In December 2009, Ad-Icon established Ad-Icon Shanghai in China. In 2010, Ad-Icon Shanghai acquired most of the subsidiaries of Jingli Shanghai, but as of the date of filing of the Annual Report on Form 20-F, Ad-Icon Shanghai has not acquired all remaining subsidiaries of Jingli Shanghai. We have relied and expect to continue to rely on contractual arrangements with Jingli Shanghai and its shareholders to operate a portion of our business in China before we complete the acquisition of all subsidiaries of Jingli Shanghai. For a description of these contractual arrangements, see “Information on the Company —Organizational Structure — Contractual Arrangements with Jingli Shanghai and its Shareholders” in this Annual Report on Form 20-F. These contractual arrangements include an equity pledge agreement, under which the shareholders of Jingli Shanghai pledged their equity interests in Jingli Shanghai to Jieli Consulting. Such pledge was duly created by recording the pledge on Jingli Shanghai’s register of shareholders in accordance with the PRC Collateral Law. According to the PRC Property Rights Law, effective as of October 1, 2007, the pledge needs to be registered with the relevant local branch of the Shanghai Administration of Industry and Commerce. Jingli Shanghai successfully registered the pledge with the Shanghai Administration of Industry and Commerce Chongming Sub-bureau on February 2, 2009. These contractual arrangements may not be as effective as ownership of a controlling equity interest would be in providing us with control over Jingli Shanghai. Under the current contractual arrangements, as a legal matter, if Jingli Shanghai or any of its shareholders failsfail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which may not be effective. For example, if the shareholders of Jingli Shanghai were to refuse to transfer their equity interests in Jingli Shanghai to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith towards us, we may have to take legal action to compel them to perform their contractual obligations. In addition, we may not be able to renew these contracts with Jingli Shanghai and/or its shareholders.

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In addition, if Jingli Shanghai or all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If Jingli Shanghai undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business and our ability to generate revenue.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our affiliated entity, and our ability to conduct our business may be materially and negatively affected.

We have terminated these contractual arrangements effective December 23, 2011 and our risk under this risk factor has been eliminated starting from December 23, 2011.

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

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures may benefit the overall PRC economy, they may also have a negative effect on us. For example, our business, financial condition and results of operations may be adversely affected by changes in tax regulations or the government’s control over capital investments and foreign currencies. As the PRC economy is increasingly linked to the global economy, it is affected in various respects by downturns and recessions of major economies around the world, such as the recent financial and economic crises. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand for our services and products and consequently have a material adverse effect on our business and prospects. The various economic and policy measures enacted by the PRC government to forestall economic downturns or shore up the PRC economy may not succeed and our business could be negatively affected as a result.

If advertising registration certificates are not obtained for advertisements on our outdoor billboard or rapid transit networks, we may be subject to fines.

On May 22, 2006, the SAIC amended the Provisions on the Registration Administration of Outdoor Advertisements, or the new outdoor advertisement provisions. Pursuant to the new outdoor advertisement provisions, advertisements placed on posters, digital displays, light boxes, neon lights via outdoor premises, space, facilities, as well as those placed in rapid transit stations are treated as outdoor advertisements and must be registered in accordance with the local SAIC by “advertising distributors” and advertising registration certificates must be obtained. After review and examination, if an application complies with the requirements, the local SAIC will issue an Outdoor Advertising Registration Certificate for such advertisement. The content, format, specifications, periods and locations of dissemination of the outdoor advertisement must be submitted for filing with the local SAIC.

We require advertisers to apply for and obtain the registration certificates for their advertisements. If an advertiser displays an advertisement without the requisite registration, the relevant local SAICs may require us to disgorge advertising revenues orand may impose fines up to RMB30,000 (approximately USD 4,800) on us.

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Our outdoor billboards, light boxes and neon signs are subject to municipal zoning requirements, governmental approvals and administrative controls. If we are required to tear down our billboards, light boxes or neon signs as a result of these requirements, approvals or controls, our operations could be materially and adversely affected.

Our billboards, light boxes and neon signs are subject to local regulations which may impose detailed requirements regarding municipal zoning requirements and governmental approvals. Each outdoor placement and installation may require a license with specific terms of use. If we, or our lessors or sublessors, violate the terms of the license for the relevant placement and installation for a billboard, light box or neon sign, we could be required to tear it down. We may also be required to tear it down as result of changechanges of municipal zoning requirements or actions taken by local authorities for city beautification, clean-up or other purposes. If we lose a significant number of billboards, light boxes and/or neon signs as a result, our business operations would be materially and adversely impacted. Moreover, if we are unable to perform our advertising contracts as a result of these losses, we may incur remedial costs and our relationships with our advertising clients and financial results could be harmed as a result.

If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income and our non-PRC shareholders could be subject to certain PRC taxes.

Under the New PRC Enterprise Income Tax lawLaw effective January 1, 2008, or the EIT law, 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 EIT at the rate of 25% on its global income. The implementing rules of the EIT law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. The State Tax 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 Circular 82, on April 22, 2009. 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. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, like our company, 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.

If we were to be considered a “resident enterprise” by the PRC tax authorities, our global income would be subject to tax under the EIT law at the rate of 25% and, to the extent we were to generate a substantial amount of income outside of the PRC in the future, we would be subject to additional taxes. In addition, if we were to be considered a “resident enterprise,” the dividends we pay to our non-PRC enterprise shareholders would be subject to withholding tax and our non-PRC enterprise shareholders would be subject to a 10% income tax on any gains they would realize from the transfer of their shares, if such income were sourced from within the PRC.

As of the date of this Annual Report on Form 20-F, no final interpretations on the implementation of the “resident enterprise” designation are available for companies such as ours. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. As a result, we cannot currently determine the likelihood of the Company being designated a “resident enterprise”.

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

We conduct our business primarily through our subsidiaries and affiliated entities in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded 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, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In

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addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after a violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

We may be subject to, and may expend significant resources in defending against, government actions and civil suits based on the content and services we provide through our network.

PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements they prepare or distribute are fair and accurate and are in full compliance with applicable law. Violations of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In cases involving serious violations, the PRC government may revoke an offender’s license for advertising business operations.

As an operator of an advertising medium, we are obligated under PRC law to monitor the advertising content displayed on our network for compliance with applicable law. Although the advertisements displayed on our network may have been previously displayed over public media, we may be required to separately and independently vet these advertisements for content compliance before displaying them on our networks. In addition, for advertising content related to certain types of products and services, such as alcohol, cosmetics, pharmaceuticals and medical procedures, we are required to confirm that the advertisers have obtained requisite government approvals including the advertiser’s operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filings with the local authorities. Previously, we did not strictly abide by these requirements. Any failure to strictly abide by applicable requirements regarding content, pre-approval, or proper filings could result in fines up to RMB30,000 (approximately USD4,800), confiscation of advertising earnings, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information.

We have remedied this noncompliance and have, among other things, employed qualified advertising inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations. In the past three years, we have not received notification from the PRC government for our failure to strictly abide by the requirements regarding content and confirmation that the advertisers obtained the requisite government pre-approval for the content of the advertisement and filings with the local authorities. Also, we have not received any indication that we may be potentially penalized for any previous instances of noncompliance. However, there can be no assurances that we will not be penalized for our past noncompliance or that each advertisement provided by an advertising client is in compliance with relevant PRC advertising laws and regulations or that the supporting documentation and government approvals provided by our advertising clients are accurate and complete.

Moreover, civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of the information displayed on our network. If consumers find the content displayed on our network to be offensive, site managers and owners may seek to hold us responsible for any consumer claims against them or may terminate their relationships with us.

In addition, if the security of our content management system is breached and unauthorized images or text are displayed on our network, viewers or the PRC government may find these images or text to be offensive, which may subject us to civil liability or government censure, and harm our reputation. If our viewers do not believe our content is reliable and accurate, our business model may become less appealing to them and our advertising clients may be less willing to place advertisements on our network. Government censure, investigation or any other government action, or any civil suits against us could divert management time and resources and could have a material and adverse effect on our business, results of operations and financial condition.

Governmental control of currency conversion may materially and adversely affect the value of your investment. Substantial limitations may be imposed on the removal of funds from the PRC to the Company, or the infusion of funds by us to our subsidiaries and affiliates located in the PRC.

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 substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries.

Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with

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certain procedural requirements. However, approval from 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 in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our parent, the Company. As dividends from Chinese operations will be the primary source of revenue production for us, failure to be able to receive such dividends could materially and adversely impact the value of your Company shares and could make it impossible for us to meet our cash flow requirements.

On August 29, 2008, SAFE, issuedpromulgated 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 No. 142. Pursuant142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the convert a RMB may be used. When applying for the conversion of foreign exchange in "capital account", such as foreign exchange received from capital contribution or loans, into RMB, the company is required, except for small amount conversions not exceeding US$50,000 for daily expenses, to submit to the bank the relevant documents supporting such conversion, such as the business contracts, related RMB payment notice, and documents evidencing the use of funds

previously converted from foreign exchange in its capital account. Further, SAFE Circular No. 142 therequires that RMB fundconverted from the settlement of foreign currency denominated registered capital of a foreign-invested enterprise must be used within the business scope as approved by the examination and approval department of the government, and cannotcompany may only be used for domesticpurposes within the company's business scope approved and registered with the local SAIC authority, and may not be used for equity investmentinvestments within the PRC unless it is otherwisespecifically provided for Documents certifying the purposesotherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of RMB fundfunds converted from the settlement of foreign currency denominated registered capital includingof a business contract must alsoforeign-invested company. The use of such RMB may not be submitted for the settlement of the foreign currency. Wechanged without approval from SAFE, and may not in any case be used to providerepay RMB loans if the proceeds of such loans have not yet been used. Violations of SAFE Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. As a result, SAFE Circular 142 may significantly limit our ability to Jingli Shanghai in RMB settledeffectively convert our US dollar infusion of funds from foreign currency capital of Jieli Consulting and Jieli Network. With the strengthened administration on settlement of foreign currency, these previous loan arrangements may no longer be feasible. If the foreign exchange control system prevents Jingli Shanghai from obtaining sufficientour off-shore company into RMB to satisfy its currency demands,be used by our subsidiaries located in the operation of the Company may be materially and adversely affected.

Our subsidiary in Hong Kong, Ad-Icon Company Limited, on December 11, 2009, established Ad-Icon Advertising (Shanghai) Co., Ltd., a wholly-owned subsidiary in China, which is permitted to operate advertising business in China. Through Ad-Icon Shanghai, we can enter into advertising contracts directly with clients and submit those contracts for the purpose of settling foreign currencies. In the meantime, we can submit the business contracts between Jieli Consulting/Jieli Network and Jingli Shanghai for the purpose of settling foreign currencies. According to our PRC counsel to the Company, both alternatives are permissible under PRC laws.
PRC.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may prevent us from making loans or capital contributions to our PRC operating subsidiaries and affiliated entities.

subsidiaries.

As an offshore holding company of our PRC operating subsidiaries, and affiliates, any loans by us to our PRC subsidiaries or consolidated PRC affiliates are subject to PRC regulations and approvals. For example:

example, loans by us to our wholly-owned subsidiaries in China, each of which is a foreign-invested enterprise, to finance the activities cannot exceed statutory limits and must be registered with SAFE, or its local counterpart; and
loans by us to Jingli Shanghai, which is a domestic PRC entity, may require the approval from the relevant government authorities or registration with SAFE or its local counterpart.

We may also decide to finance our wholly-owned subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. Because Jingli Shanghai is a domestic PRC entity, we are not likely to finance our activities by means of capital contributions due to regulatory issues relating to foreign investment in domestic PRC entities, as well as the licensing and other regulatory issues discussed in the “Business — Regulatory Matters” section of this Annual Report on Form 20-F. There can be no assurances that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our subsidiaries or Jingli Shanghai.subsidiaries. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

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

The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. As a result of this policy change, Chinese RMB appreciated approximately 6.4%1.0%, less than 1.0%3.1% and 3.0%5.1% against the U.S. dollar in 2008, 2009, 2010 and 2010,2011, respectively. It is possible that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of Chinese RMB against the U.S. dollar.

Substantially all of our revenues and costs are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi. Thus, a resumption of the appreciation of the Renminbi against the U.S. dollar would, for instance, further increase our costs in U.S. dollar terms. In addition, as we principallymay rely on dividends and other distributions paid to us by our subsidiaries and affiliated entities in China, any significant depreciation of the Renminbi against the U.S. dollar may have a material adverse effect on our revenues and financial condition. In addition, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the

Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our preferred or ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. Any fluctuation of the exchange rate between the Renminbi and the U.S. dollar could also result in foreign current translation losses for financial reporting purposes.

Any health epidemics and other outbreaks, or war, acts of terrorism and other man -made or natural disasters could severely disrupt our business operations.

Our business could be materially and adversely affected by the outbreak of avian influenza, H1N1 Flu, severe acute respiratory syndrome, or SARS, or another epidemic. In recent years, there have been reports on the occurrences of avian influenza and H1N1 Flu in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of avian influenza, H1N1 Flu, SARS or other adverse public health developments in China could require the temporary closure of our offices or prevent our staff from traveling to our clients’ offices to sell our services or provide on site services. Such closures could severely disrupt our business operations and adversely affect our results of operations.

Our operations are vulnerable to interruption and damage from natural and other types of disasters, including snowstorms, earthquakes, fire, floods, environmental accidents, power loss, communications failures and similar events. If any disaster were to occur in the future, our ability to operate our business could be materially impaired.

We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

The company’s conduct of its corporate affairs will be governed by its Memorandum and Articles of Association, and the Company is subject at all times to the Companies Law (2010 Revision) of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders and the fiduciary duties of the directors under Cayman Islands law are governed by the Companies Law (2010 Revision) and/or common law principles derived from cases in the Cayman Islands and in the courts of England (English case law is not binding but is considered persuasive in the courts of the Cayman Islands). The rights of shareholders and the fiduciary duties of directors under Cayman Islands law differ from those established under statutes or judicial precedent in some jurisdictions in the United States. Additionally, the removal of a director from our Board,board of directors, even for cause, may in certain circumstances require the approval of our shareholders. Also, the Cayman Islands has a less developed body of securities law compared to the United States and less developed or judicially interpreted bodies of corporate law compared to many U.S. states, including Delaware.

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In the future, our Board of Directors may be subject to potential deadlock.
Pursuant to the share exchange agreement and Business Combination, we entered into a voting agreement with China Seed Ventures, L.P., Qinyng Liu, Le Yang, Vervain Equity Investment Limited, Sun Hing Associates Limited, and Linden Ventures, each a previous SearchMedia International shareholder or warrantholder, and Frost Gamma Investments Trust, Robert Fried, Rao Uppaluri, Steven Rubin and Jane Hsiao, each a previous Ideation shareholder, which provides, among other things, that, for a period which commenced on October 30, 2009 and ends on October 30, 2012, each party to the voting agreement will agree to vote in favor of the director nominees nominated by the Ideation representative and the SM Cayman shareholders’ representatives as provided in the share exchange agreement. Our Articles of Association require the approval by a majority of the Directors for many corporate actions. Although our current Board of Directors presently consists of five members, there may be occasions when the previous SearchMedia International shareholders and warrantholders exercise their contractual right to fill the vacancies, which could result in an even number of six or eight board members. Because there are no mechanisms in the voting agreement or our Articles of Association which provide a mechanism to resolve a Board deadlock, it is possible that our Board of Directors may be unable to obtain majority approval in certain circumstances, which would prevent us from taking actions that may be important to our business and operations.
As a foreign private issuer, we will be exempt from certain SEC requirements that provide stockholders with protections and information that must be made available to stockholders of U.S. public companies.

On June 30, 2010, we became a foreign private issuer, which reduces the reporting requirements under the Exchange Act, resulting in fewer costs associated with financial and reporting compliance. For example, as a foreign private issuer we will be exempt from certain provisions applicable to U.S. public companies, including:

the rules requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

the rules requiring the filing with the SEC of quarterly reports on Form 6-K or current reports on Form 6-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act;
provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material non-public information; and
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short swing” trading transactions, or a purchase and sale, or a sale and purchase, of the issuer’s equity securities within less than six months.

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act;

provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material non-public information; and

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short swing” trading transactions, or a purchase and sale, or a sale and purchase, of the issuer’s equity securities within less than six months.

As a foreign private issuer, we filed an annual report on Form 20-F for fiscal year 2010 on June 30, 2011. We filed this annual report on Form 20-F for the year ended December 31, 2011 on or before May 15, 2012, as permitted under Rule 12b-25, and will file an annual report on Form 20-F within six months of the close of fiscal year 2010, and within four months of each fiscal year beginning with fiscal year 2011,2012, and reports on Form 6-K relating to certain material events promptly after we publicly announces these events. However, because of the foregoing filing exemptions, our shareholders will not be afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.

Because we do not intend to pay dividends on our ordinary shares for the foreseeable future, stockholders will benefit from an investment in our ordinary shares only if those shares appreciate in value.

We currently intend to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on factors our board of directors deem relevant, including, among others, our results of operations, financial condition and cash requirements, business prospects, the terms of our credit facilities, if any, and any other financing arrangements. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of our ordinary shares, and there is no guarantee that our ordinary shares will appreciate in value.

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Voting control by executive officers, directors and other affiliates of the company may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

The executive officers, directors and other affiliates of the Company beneficially own over 38%approximately 48% of our voting shares.shares as of May 8, 2012. These shareholders can control substantially all matters requiring approval by our shareholders, including the election of directors and the approval of other business transactions. This concentration of ownership could have the effect of delaying or preventing a change in control of the Company or discouraging a potential acquirer from attempting to obtain control of the Company, which in turn could have a material adverse effect on the market price of ordinary shares or prevent our shareholders from realizing a premium over the market price for their ordinary shares.

The NYSE AmexMKT may delist our securities from quotation on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

If the NYSE AmexMKT delists our securities from trading on its exchange, we could face significant material adverse consequences, including:

a limited availability of market quotations for our securities;

a limited availability of market quotations for our securities;
a reduced liquidity with respect to our securities;
a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
a limited amount of news and analyst coverage for the company; and
a decreased ability to issue additional securities or obtain additional financing in the future.

a reduced liquidity with respect to our securities;

a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

a limited amount of news and analyst coverage for the company; and

a decreased ability to issue additional securities or obtain additional financing in the future.

On April 8, 2011, we received notice of noncompliance with Section 704 of the NYSE AmexMKT Company Guide (the "Company Guide"), which required us to hold our stockholders annual meeting during 2010 for the fiscal year ended December 31, 2009. The ExchangeNYSE MKT notified us on May 5, 2011 that it accepted our plan dated April 6, 2011 and granted us an extension until October 4, 2011 to regain compliance with continued listing standards. We will bewere subject to periodic review by Exchangethe NYSE MKT Staff during its extension period. ThisForm 20-F is being filed on June 30,On September 13, 2011, and we expect to holdheld our 2011 annual general stockholders meeting before the October 4,of shareholders, which also served as our 2010 annual general meeting of shareholders. The NYSE MKT notified us on September 20, 2011 deadline. Followingthat we have resolved the annual general stockholders meeting deficiency referenced in the prior NYSE MKT letter.

On July 15, 2011, the NYSE MKT notified us that we anticipate thatwere not in compliance with (1) Section 1003(a)(i) of the Company Guide because we reported stockholders’ equity of less than $2,000,000 as of December 31, 2010 and losses from continuing operations and net losses in two of our three most recent fiscal years ended December 31, 2010, (2) Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4,000,000 as of December 31, 2010 and losses from continuing operations and net losses in three of our four most recent fiscal years ended December 31, 2010 and (3) Section 1003(a)(iv) of the Company Guide because, in the opinion of the NYSE MKT, our losses and existing financial resources, brought into question whether we will be inable to continue operations and/or meet our obligations as they mature.

On October 6, 2011, the NYSE MKT notified us that our plan to regain compliance had been accepted and that our listing would continue to be subject to the Company demonstrating compliance with the financial impairment standard in Section 7041003(a)(iv) by January 17, 2012, and the minimum stockholders’ equity requirements in Sections 1003(a)(i) and 1003(a)(ii) by January 15, 2013. Based on the information we provided to the NYSE MKT, the NYSE MKT in a letter dated March 7, 2012, notified us that we had made significant progress towards regaining compliance with Sections 1003(a)(iv), 1003(a)(i) and 1003(a)(ii) of the Company Guide.Guide and that we must demonstrate that we had regained compliance with the financial impairment standard included in Section 1003(a)(iv) of the Company Guide by May 21, 2012 and the stockholders’ equity standards included in Sections 1003(a)(i) and 1003(a)(ii) by January 15, 2013.

Our shareholders’ deficit as at December 31, 2011 was $13.5 million. Upon completion of the divesture of Zhejiang Continental and elimination of Haiya’s earn-out liabilities in May 2012, our earn-out payable was reduced by $11.2 million which also significantly reduced our shareholders’ deficit. The Company continues to renegotiate with ex-owners of subsidiaries to convert the remaining earn-out liabilities of $12.0 million into the Company’s common shares under the Integration Program. The Company expects the Integration Program will be substantially completed by the end of the second quarter of 2012. The Company also expects the Convertible Note holders to convert their Notes during 2012 and that will increase our shareholders’ equity by another $3.0 million. The Company expects to regain compliance with the NYSE MKT’s minimum stockholders’ equity requirement standard by January 15, 2013.

We are also required to provide the NYSE MKT with updates in conjunction with the initiatives of our compliance plan as appropriate or upon request but no later than at each quarter completion with our filings with the Securities and Exchange Commission and that any additional shares we issue during the plan periods will require approval of the management committee of the NYSE Regulation.

A significant number of shares are eligible for future sale by our stockholders and the sale of those shares could adversely affect the stock price.

A significant number of our outstanding shares of common stock became eligible for resale beginning October 30, 2010, as a result of the expiration of lock up provisions on resale. If our stockholders whose shares are eligible for resale sell or attempt to sell their stock in the public market, the trading price of our common stock could decline.

There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes after the Business Combination, which could result in significantly greater U.S. federal income tax liability to us.

Section 7874(b) of the Code generally provides that a corporation organized outside the United States which acquires, directly or indirectly, pursuant to a plan or series of related transactions substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% (of either the voting power or the value) of the stock of the acquiring corporation after the acquisition. If Section 7874(b) were to apply to the conversion, then we, as the surviving entity, would be subject to U.S. federal income tax on its worldwide taxable income following the Business Combination as if we were a domestic corporation.

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Although Section 7874(b) should not apply to treat us as a domestic corporation for U.S. federal income tax purposes because the Business Combination should be treated as part of the same transaction and, therefore, this 80% threshold was not reached, due to the absence of full guidance on how the rules of Section 7874(b) will apply to the transactions contemplated by the Business Combination, this result is not entirely free from doubt. As a result, stockholders and warrant holders are urged to consult their own tax advisors on this issue. We intend to take the position that we are a foreign corporation for U.S. federal income tax purposes. The immediately following two risk factors assume that we will be treated as a foreign corporation for U.S. federal income tax purposes.

There is a risk that we will be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. holders of ordinary shares or warrants of SearchMedia.

We will be treated as a PFIC for any taxable year in which either (1) at least 75% of its gross income (looking through certain corporate subsidiaries) is passive income or (2) at least 50% of the average value of its assets (looking through certain corporate subsidiaries) produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we were a PFIC for any taxable year during which a U.S. holder held our ordinary shares or warrants, the U.S. holder may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

Based on the expected composition of the assets and income of the Company and our subsidiaries after the Business Combination, it is not anticipated that we will be treated as a PFIC following the Business Combination. The actual PFIC status of the Company for any taxable year, however, will not be determinable until the conclusion of our taxable year, and accordingly there can be no assurance as to the status of the Company as a PFIC for the current taxable year or any future taxable year. U.S. holders of our securities are urged to consult their own tax advisors regarding the possible application of the PFIC rules.

If you acquire (directly, indirectly, or constructively) 10% or more of our shares, you may be subject to taxation under the “controlled foreign corporation,” or CFC rules.

Each “10% U.S. Shareholder” of a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during a taxable year, and that owns shares in the CFC directly or indirectly through foreign entities on the last day of the CFC’s taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed. In addition, if a person that is or was a “10% U.S. Shareholder” of a CFC during the 5-year period ending on the date on which such person sells or exchanges shares of stock of such corporation recognizes gain such a sale or such person as a dividend to the extent of earnings and profits of the corporation attributable to such stock that were accumulated while such person held the stock while the corporation was a CFC. After 2010, dividends may be taxed at higher rates than long-term capital gains. A foreign corporation is considered a CFC if “10% U.S. Shareholders” own more than 50% of the total combined voting power of all classes of voting stock of the foreign corporation, or the total value of all stock of the corporation. A “10% U.S. Shareholder” is a U.S. person, as defined in the Internal Revenue Code, that owns at least 10% of the total combined voting power of all classes of stock entitled to vote of the foreign corporation. For purposes of determining whether a corporation is a CFC, and therefore whether the more-than-50% and 10% ownership tests have been satisfied, shares owned includes shares owned directly or indirectly through foreign entities or shares considered owned under constructive ownership rules. The attribution rules are complicated and depend on the particular facts relating to each investor. U.S. holders are urged to consult their own tax advisors regarding the possible application of the CFC rules.

23


Risks Relating to Our Stockholders and Warrant holders

We may choose to redeem our outstanding warrants at a time that is disadvantageous to the warrant holders, preventing such holders from realizing the potential economic value of their warrants.

Subject to there being a current prospectus under the Securities Act, we may redeem all of the currently outstanding warrants at any time after they become exercisable at a price of $0.01 per warrant, upon a minimum of 30 days prior written notice of redemption, if and only if, the last sale price of our ordinary shares equals or exceeds $11.50 per share for any 20 trading days within a 30-trading-day period ending three business days before we send the notice of redemption. Calling all of such warrants for redemption could force the warrant holders to:

exercise the warrants and pay the exercise price for such warrants at a time when it may be disadvantageous for the holders to do so;

exercise the warrants and pay the exercise price for such warrants at a time when it may be disadvantageous for the holders to do so;
sell the warrants at the then-current market price when they might otherwise wish to hold the warrants; or
accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants.

sell the warrants at the then-current market price when they might otherwise wish to hold the warrants; or

accept the nominal redemption price which, at the time the warrants are called for redemption, is likely to be substantially less than the market value of the warrants.

Our warrant holders may not be able to exercise their warrants, which may significantly reduce their economic value and create liability for us.

Holders of our warrants will be able to receive shares upon the exercise of the warrants only if:as long as:

Our current registration statement on Form F-3 or a similar registration statement under the Securities Act relating to the ordinary shares underlying the warrants remains effective; and

a current registration statement under the Securities Act relating to the ordinary shares underlying the warrants is then effective; and
such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside.

such shares are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants reside.

A registration statement on Form F-3 covering the shares underlying the warrants is not currently effective. In addition, somewas declared effective as of September 27, 2011. Some states may not permit us to register the shares issuable upon exercise of our warrants for sale. The value of the warrants will be greatly reduced if athe registration statement on Form F-3 covering the shares issuable upon the exercise of the warrants isdoes not filed and declaredremain effective or if the securities are not qualified, or exempt from qualification, in the states in which the holders of warrants reside. We have agreed to qualify for sale the common stock underlying our warrants in each state in which the units issued in the Ideation IPOinitial public offering were initially offered. However we did not agree to qualify such securities in any other state.

Holders of warrants who reside in jurisdictions in which the shares underlying the warrants are not qualified and in which there is no exemption will be unable to exercise their warrants and would either have to sell their warrants in the open market or allow them to expire unexercised, which could result in the filing of claims against and other losses for us.

The Company has extended the expiration dates of certain existing warrants from between November 2012 to December 2013.

Item 4Information on the Company

A.
Item 4Information on the Company
A.History and Development of the Company

History and Development

SearchMedia Holdings’ legal name is SearchMedia Holdings Limited. We are a Cayman Islands exempted company. Our predecessor, Ideation Acquisition Corp., was incorporated on June 1, 2007. SearchMedia operates under The Companies Law (2010 Revision) of the Cayman Islands. Our principal executive offices are located at 13F, Central Modern Building, 468 Xin HuiK-Wah Center #38-03, 1010 Middle Huaihai Road, Putuo District, Shanghai, China, 200060,200031 and our telephone number is 86-2162278018.86-2154010959. Our Internet website address is www.searchmediaholdings.com. The Internet website address provided in this Annual Report on Form 20-F is not intended to function as a hyperlink and information obtained at the address is not and should not be considered part of this Annual Report on Form 20-F and is not incorporated by reference in this Annual Report on
Form 20-F.

24


In order to facilitate fundraising outside of China, SearchMedia International was incorporated in the Cayman Islands on February 9, 2007 and became the holding company of SearchMedia International’s business. On June 1, 2007, SearchMedia International established Jieli Investment Management Consulting (Shanghai) Co., Ltd., (Jieli Consulting), a wholly-owned subsidiary of SearchMedia International in China. Because the operation of an advertising network in China was restricted to PRC domestic entities at the time, SearchMedia International through Jieli Consulting, entered into contractual arrangements with Jingli Shanghai on September 10, 2007.
In October 2009, we acquired SearchMedia International pursuant to a share exchange agreement by and among our predecessor, Ideation Acquisition Corp., a Delaware corporation (“Ideation”), ID Arizona Corp., an Arizona corporation and wholly owned subsidiary of Ideation (“ID Arizona”), SearchMedia International, the subsidiaries of SearchMedia International, and Shanghai Jingli Advertising Co. Ltd., and certain shareholders and warrantholders of SearchMedia International. The share exchange agreement provided for two primary transactions: (1) the redomestication of our predecessor, Ideation, a Delaware corporation, to a Cayman Islands exempted company and (2) the acquisition of SearchMedia International.

On October 30, 2009, we completed the redomestication, which resulted in holders of securities of Ideation holding securities in SearchMedia Holdings. Immediately after the redomestication, we completed the acquisition of SearchMedia International. We refer to the redomestication and acquisition of SearchMedia International together as the Business Combination. As a result of the Business Combination, SearchMedia International became a wholly owned subsidiary of SearchMedia Holdings, and SearchMedia International security holders became security holders of SearchMedia Holdings.

In April

Prior to January 1, 2008, we acquired 100%SearchMedia International incorporated Jieli Investment Management Consulting (Shanghai) Co., Ltd. (“Jieli Consulting”), which in turn entered into contractual agreements with the owners of the equity interest in Ad-Icon, a Hong Kong company operating an outdoor billboard advertising business. Since Ad-Icon, as a Hong Kong investor, is eligibleJingli Shanghai. The arrangement was to facilitate foreign investors to invest in SearchMedia International as the then PRC laws did not allow direct foreign investment or ownership in advertising industrycompanies in the PRC.

In 2008, Jingli, the VIE, acquired 100% or the equity interests of the following subsidiaries:

Name of entity

Place of incorporation

Shanghai Jincheng Advertising Co., Ltd. (“Jincheng”)

PRC

Shaanxi Xinshichuang Advertising Planning Co., Ltd. (“Xinshichuang”)

PRC

Beijing Wanshuizhiyuan Advertising Co., Ltd. (“Wanshuizhiyuan”)

PRC

Shenyang Jingli Advertising Co., Ltd. (“Shenyang Jingli”)

PRC

Qingdao Kaixiang Advertising Co., Ltd. (“Kaixiang”)

PRC

Shanghai Haiya Advertising Co., Ltd. (“Haiya”)

PRC

Tianjin Shengshitongda Advertising Creativity Co., Ltd. (“Shengshitongda”)

PRC

Shanghai Botang Advertising Co., Ltd. (“Botang”)

PRC

Ad-Icon Company Limited (“HK Ad-Icon”)

HKSAR

Changsha Jingli Advertising Co., Ltd. (“Changsha Jingli”)

PRC

Wenzhou Rigao Advertising Co., Ltd. (“Wenzhou Rigao”)

PRC

Wuxi Ruizhong Advertising Co., Ltd. (“Wuxi Ruizhong”)

PRC

On December 11, 2009, HK Ad-Icon established Ad-Icon Advertising (Shanghai) Co., Ltd. (“Ad-Icon Shanghai”), a wholly-owned subsidiary in China, without restriction on main business and operation years, it established a wholly-owned company Ad-Icon Shanghaiwhich is permitted to operate advertising businesses in China. In 2008 and 2010, Ad-Icon Shanghai, acquired 100% of the equity interests in Zhejiang Continental, Shanghai Botang , Shanghai Haiya, Beijing Wanshuizhiyuan, Wuxi Ruizhong and Shenyang Jingli. As of the date of this Annual Report on Form 20-F, Jingli Shanghai still holdsContinental. Furthermore, 100% of the equity interests of our other Chinese affiliates, namely, Tianjinin Botang, Wanshuizhiyuan, Kaixiang, Wuxi Ruizhong and Shenyang Jingli acquired by Jingli Shanghai have been transferred to Ad-Icon Shanghai during 2010 and 2011.

Effective December 23, 2011, the VIE, Jingli Shanghai, and its subsidiaries including Jincheng, Xinshichuang, Haiya, Shengshitongda, Qingdao Kaixiang,Changsha Jingli and Wenzhou Rigao.

Rigao have all ceased their respective advertisement business so that the VIE structure is no longer required or in place. The Company terminated the VIE's arrangements and ceased to consolidate the financial results of the VIE and its subsidiaries effective December 23, 2011. On May 2, 2012, the Company divested 100% of the equity interests in Zhejiang Continental back to its original selling shareholders.

B.
B.Business Overview

Business Overview

We are a multi-platform media company operating primarily in the out-of-home advertising industry. Out-of-home advertising typically refers to advertising media in public places, such as billboards, in-elevator displays, street furniture and transit area displays. Our core outdoor billboard and in-elevator platforms are complemented by our transit advertising platform, which together enables us to provide multi-platform, “one-stop shop” services for our local, national and international clients.

Targeting the rapidly growing number of urban and increasingly affluent consumers in China, we deploy our advertising network across the following select media platforms:

  

Outdoor billboard platform. As of December 31, 2010,2011, we operate a network of about 1,000750 high-impact billboards in 15 cities, including Beijing, Hong Kong, Qingdao, Shanghai, Shenyang, Hangzhou, Shenzhen, Guangzhou, Chongqing and Chengdu. Our billboards are mostly large format billboards deployed in commercial centers and other desirable areas with heavy vehicle or foot traffic.

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In-elevator platform. As of December 31, 2010, our2011, we operate a network of about 150,000 printed and digital poster frames delivered targeted advertising messages inside elevators to captive audiences in high-rise residential and office buildings in 70over 50 major cities in China. TheOnly approximately 30,000 frames were managed upon concession contracts signed directly with media owners. In the first quarter of 2012, we downsized our operations and currently we primarily resell in-elevator platform is characterizedmedia assets mostly owned by its low cost structure and minimal capital requirements and targets the affluent urban population that is highly desired by advertisers.other business partners.

  

Transit advertising platform. As of December 31, 2010,2011, we actacted as an agency for a subway network in addition to a bus advertising network of 5,000 buses in Beijing.

Our multi-platform offerings are cross-marketed by a sales force located in 1516 offices across China. Our advertising clients are from industries ranging from telecommunications, insurance and banking, to automobile, real estate, electronics and fast moving consumer goods.

We expect to expand our billboard holdingsown concessions and revenue through acquisitions and organic expansion, while utilizing organic growth to grow our elevator and transit holdings, and capitalize on the growth opportunities in China’s out-of-home advertising and other emerging media markets. For the years ended December 31, 2008, 2009, 2010 and 2010,2011, we had revenue of $41.7 million, $37.7 million, $49.0 million and $49.0$55.6 million and a net loss of $35.1 million, $22.6 million, $46.6 million and $46.6$13.5 million respectively. At the years ended December 31, 20092010 and 2010,2011, we had total assets of $99.8$86.9 million and $86.9$50.4 million, respectively.

Our shareholders’ deficit as at December 31, 2011 was $13.5 million. Upon completion of the divesture of Zhejiang Continental and elimination of Haiya’s earn-out liabilities in May 2012, our earn-out payable was reduced by $11.2 million which also significantly reduced our shareholders’ deficit. The Company continues to renegotiate with ex-owners of subsidiaries to convert the remaining earn-out liabilities of $12.0 million into the Company’s common shares under the Integration Program. The Company expects the Integration Program will be substantially completed by the end of the second quarter of 2012. The Company also expects the Convertible Note holders to convert their Notes during 2012 and that will increase our shareholders’ equity by another $3.0 million. The Company expects to regain compliance with the NYSE MKT’s minimum stockholders’ equity requirement standard by January 15, 2013.

Our Business

The following table sets forth a breakdown of our total revenues by category for the periods indicated:

             
  For the years ended December, 31 
  2008  2009  2010 
  (In thousands) 
In-elevator networks  7,405   7,025   9,117 
Outdoor billboards  31,932   28,854   35,762 
Transits  2,348   1,862   4,088 
          
Total net revenue  41,685   37,741   48,967 
          

   For the years ended December, 31 
   2009   2010   2011 
   (In thousands) 

In-elevator networks

   7,025     9,117     8,278  

Outdoor billboards

   28,854     35,762     39,697  

Transits

   1,862     4,088     7,596  

Total net revenue

   37,741     48,967     55,571  
  

 

 

   

 

 

   

 

 

 

SearchMedia Holdings Limited is a holding company and, through its consolidated subsidiaries and variable interest entities (“VIEs”) (collectively the “Group”), is principally engaged in the provision of advertising services in the out-of-home advertising industry. The Group’s advertising service revenues generated from customers outside the PRC is less than 10% of the Group’s total consolidated revenues and the Group’s total long-lived tangible assets located outside the PRC is less than 10% of the Group’s total consolidated long-lived tangible assets. Consequently no geographic information is presented.

Advertising Network

We are one of the largest operators of integrated outdoor billboard and in-elevator advertising networks in China. We have coverage of 70over 50 cities, including larger cities such as Hong Kong, Shanghai, Hangzhou, Beijing, Guangzhou and Shenzhen. As of December 31, 20102011 our advertising network included high-impact billboards, neon signs and light boxes, poster frames located in commercial and residential buildings, and an agency for transit advertising.

Media Products

Our core outdoor billboard and in-elevator portfolios are complemented by our transit advertising platform, which together create an attractive multi-platform, “one-stop shop” service for our local, national and international advertising clients.

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Outdoor Billboard Platform

As of December 31, 2010,2011, we operate a network of about 1,000750 high-impact billboards in 15 cities, including Beijing, Hong Kong, Qingdao, Shanghai, Shenyang, Shenzhen, Guangzhou, Hangzhou, Chongqing and Chengdu. Our billboards are mostly large format billboards, banners, light boxes and other outdoor postings deployed in commercial centers and other desirable areas with heavy vehicle and/or foot traffic. Our goal is optimize our billboard portfolio in locations that are desirable for our advertisers while maximizing the profitability of our concession leases.

Our target audiences for these advertisements are mid- to high-income shoppers, pedestrians and car-driving consumers. We believe our billboard advertisements effectively increase our advertising clients’ brand awareness. We intend to continue to bid for high-profile projects that will bring positive media exposure, leading to greater market acceptance and brand recognition for our company. Management plans to continue to build our nationwide portfolio of traditional outdoor billboard properties through organic expansion and strategic acquisitions.

In-Elevator Platform

We install

Our in-elevator poster frames are located primarily on the inside of elevators of modern high-rise buildings in 70and reach a network of over 50 cities across 27 provinces in China, including Shanghai, Beijing, Guangzhou and Shenzhen. We typically install twoTwo to three poster frames are typically installed in each elevator. The in-elevator platform is characterized by its low cost structure and minimal capital requirements and targets the affluent urban population that is highly desired by advertisers. As of December 31, 2010,2011, our elevator advertising network consisted of about 150,000 poster frames.frames, of which, approximately 30,000 frames were managed upon concession contracts signed by us directly with media owners. In the first quarter of 2012, we downsized our operations and currently we primarily resell in-elevator media assets mostly owned by other business partners.

Our business partners are independent local poster frame media operators at multiple second tier and third tier cities. We do not have ownership interests with these business partners and we have no related party relationships with them. When our clients establish multi-city advertising campaigns through the Company, we resell our business partners’ in-elevator media assets as an agent. Since our business partners are located in cities where we do not own media assets, we have no material conflict of interest or competing interest resulting from selling our business partners’ in-elevator media assets as an agent. As of the first quarter of 2012, the Company has executed approximately 100 cooperative agreements with our business partners. The terms of these agreements range from one month to one year, such that the agreements have various expiration points

during the year. Under these agreements, neither party can terminate unilaterally unless there is a breach of contract. The cooperative agreements typically do not include provisions for automatic renewal. However, the Company retains the right of first refusal after the expiration of these cooperative agreements. We continue to renew cooperative agreements as we deem appropriate. The in-elevator advertising platform allows us to target captive audiences comprised of middle- and high-end businesses and consumer groups.

Poster frames may take the followingtwo forms:

  

Printed Poster Frames. We specialize in high impact-printed posterThese are frames which are made of several materials in various sizes suitable for a wide range of display messages. Our printed poster frames mainly includeposting paper and illuminated poster frames;

Paper poster framesare conventional poster frames made of paperposters advertisements with a visual size of 540mm by 390mm; and390mm

  Illuminated poster framesare posters encased in thin metal boxes and illuminated by LED optical fiber. The visual size of such posters is typically 540mm by 390mm.

Digital poster frames. These poster frames are LCD screens with memory card slots that allow the screens to change images at regular intervals. Our digital poster frames change images in loops, with typically six images within each 60-second loop. The visual size of the screens is typically 405mm by 305mm.

We sell advertising space on our poster frame network on a per display basis. For each frame that is upgraded from printed poster frame to digital frame, up to six multiple digital images can now be displayed inside each physical frame and we increasesincrease our available advertising inventory and opportunities for revenue.

Recently, we scaled down some of our operations and closed four unprofitable offices under our subsidiary Ad-Icon Shanghai that were involved in the elevator business. We will continue to serve those markets by relying on our other subsidiaries to represent us in the cities affected by the closings. This strategic decision will reduce the overlap in resources and also minimize overhead expenses. As a result of our strategic decision to close these offices, we have reduced the number of media screens from our current portfolio by 20,000 screens. As a result of the office closings, we were able to subsequently downsize the sales & marketing and assets development team to reduce overhead expenses and to improve our operating margins.

SubwayTransit Advertising Platform

We manage an agency that includes a network of light boxes in subways with sizes ranging from 1.5m by 1.75m to 1.5m by 3.5m.

Bus Advertising Platform
Commencing in the second quarter of 2010, we began managingrepresent a network of approximately 5,000 buses for bus-body advertising in Beijing. This advertising consists of large format sticker advertising.

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Advertising Clients
With coverage in 70 cities and a broad range of media offerings, we have attracted

We are able to support a large and diverse base of local, national and international advertisers. We have a highly diversified advertising baseadvertisers with coverage of nationalover 50 cities and international clients, in addition to a broad client listrange of local advertisers.media offerings These advertising clients are from diverse industries ranging from telecommunications, insurance and banking, to automobiles, real estate, electronics and fast-moving consumer goods.

We enter into most of our advertising contracts with advertising agencies. We also enter into a portion of advertising contracts with direct clients. Our top five advertising clients in aggregate accounted for approximately 23.1%29.1% of our advertising service revenues for the year ended December 31, 2010.

2011.

A typical advertising contract specifies the duration, site location, types and number of advertising placements, price and payment terms with our advertising clients. Before placing an advertisement, we typically review the advertisement content to be displayed, the relevant approvals for displaying the content, the registered trademark of the client and other materials required by applicable laws.

Generally, our minimum advertising period is 7 days. The contract terms generally range from one to three months for elevator advertisements, six months to 24 months for billboards, one to three months for subway advertisements and one to six months for bus advertisements. In general, we base our listed price on a number of factors, including locations, quantity of displays, scale, types of audience, nature of communities and duration of clients’ advertising campaigns. We increase our listed prices from time to time to reflect changes in market prices.

Relationships with Site Managers and Owners

We lease spaces in office and residential buildings, subway stations and other high traffic commercial areas to install poster frames, billboards, neon signs and light boxes. Establishing and maintaining long-term relationships with site managers and owners are critical aspects of our business.

We lease billboard locations from managers of commercial centers and other desirable areas of heavy vehicle or foot traffic, such as outside walls of commercial buildings, bus stops and main roads. The term of a location leasing contract is generally one to five years. We are responsible for periodic monitoring, maintenance and repair of frames. Under most of the leasing contracts, we are granted a right of first refusal with respect to renewals. The rental terms and fees under our location leasing contracts vary considerably depending on the city, location, and number of billboards that may be installed.

We lease elevators in high traffic high-rise buildings from property developers, property management companies or homeowner associations. We target both high-rise residential buildings and office buildings. The term of an elevator leasing contract is generally one to three years. The rental terms and fees under our elevator leasing contracts vary considerably depending on the city, location and size of the building and number of flat-panel poster frames that may be installed. Upon entering into a leasing contract, we can install the pre-agreed poster frames in the elevator area usually in three days. We are responsible for periodic maintenance and repair of elevator poster frames. Under a typical lease agreement, a lessor is not allowed to move, remove, damage or hide from view our poster frames, and is required to inform us immediately in the event of any damage to our poster frames. The rental terms and fees under our elevator leasing contracts vary considerably depending on the city, location and size of the building and number of flat-panel poster frames that may be installed.

Sales

As of December 31, 2010,2011, our sales efforts were spearheaded by a team of approximately 11090 advertising sales personnel in 1312 cities. Our sales personnel generally have prior sales experience in China’s advertising industry and, once hired, receive training to gain a deeper understanding of the out-of-home advertising market, our advertising network, our competitive strengths and the value propositions we offer our advertising clients. We also provide our sales personnel with current data that measures the effectiveness of our advertising network and case studies of successful campaigns conducted on our network. Our sales personnel typically earn commissions on sales, in addition to base salaries.

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We supplement our sales efforts by providing value-added advisory services to some of our clients, especially small-size local clients. Each sale starts with a thorough understanding of a client’s advertising needs that leads to tailored solutions that optimize advertising spending on our network. In these services, we assess the clients’ media needs and budgets, assist in allocating media resources across the various media platforms and assist with the creative process in the design and placement of the poster frames.

Competitive Advantages

We believe we enjoy the following advantages over our competitors:

Nationwide coverage and leading market share.With a nationwide coverage of 70over 50 cities throughout China and Hong Kong, we are one of the largest operators of out-of-home advertising media networks in China. We believe our market share and experience have enabled us to build a strong brand and reputation in the industry and have allowed us to attract a highly diversified advertising base of national and international clients, in addition to a broad client list of local advertisers. We believe our growing nationwide coverage, our market share and diversified, effective advertising media platforms will continue to help us expand our client base and media portfolio, create significant barriers to entry in existing markets and provide added leverage in our quest to expand to new geographic and advertising markets.

Extensive advertising network across multiple media platforms. We believe our extensive advertising network across multiple media platforms allows us to act as a “one-stop shop” for advertising clients that seek nationwide distribution of advertising content across multiple advertising channels, including outdoor billboards, elevators, subway stations and buses.transits. The site-specific billboards and frames in our large portfolio further combine nationwide marketing with the benefit of precision targeting of audiences. These attributes allow us to accommodate clients that desire to scale and optimize their advertising solutions based on their advertising budgets, targeted audiences and nature of marketing. Additionally, we believe that many of our clients are often using in-elevator advertising for promotional purposes, as opposed to only brand awareness, which is a core strategy for these advertisers regardless of the economic climate. We believe the appeal of our scalable, targeted and effective advertising solutions will continue to attract new and recurring clients.

Scalable revenue model.Each of our media platforms can be characterized by a low cost structure and low level of capital expenditures required for expansion, which we expect will allow us to cost-efficiently expand and scale our operations in response to market conditions and new opportunities. We believe our expansion opportunities, both geographic and in new advertising markets, can be further characterized by low incremental cost and high marginal profit, as we continue to leverage our existing resources.

Strong management team.We have strengthened our management team at the corporate level with the addition of several key executives since the completion of the merger, who bring operational, financial and management experiences from both multinational and leading domestic companies. Through a series of acquisitions in different cities in 2008 and 2010, we also retained experience regional senior management at the acquired subsidiaries to help build the businesses. Under the leadership of our management at a corporate and subsidiary level, we have been able to pursue acquisitions and build our sales force, increase brand awareness and build a diverse client base.

Competition

As a multi-platform media company with presence in 70a coverage of over 50 cities in China and Hong Kong, we compete with different players across our platforms and cities of operation. We compete for advertising clients generally on the basis of network coverage, service quality, technology, media offerings, services and brand name. We have built our competitive position primarily on our nationwide coverage, leading market share, and our ability to offer broad geographic coverage, diverse media platforms and quality services.

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Outdoor billboard platform. As the outdoor billboard market in China is largely fragmented with no clear nationwide leader, we compete primarily with other local or regional outdoor billboard owners and operators. We also compete with operators of other forms of outdoor media, including digital outdoor displays and street furniture advertising.

  

In-elevator platform. We compete primarily with other nationwide operators of in-elevator poster frame advertising. We may face competition in individual cities from local and regional players and new entrants into the local and regional market from time to time.

  

Transit platform. We compete with other operators of subway light box and bus-body advertising.

We also compete for the advertising budget of advertisers with other operators of out-of-home advertising and operators of other advertising media including television, radio, newspapers, magazines and the Internet.

Although we do not experience significant seasonality in our business, advertising spending is affected by holidays and one-time events. Advertising spending for outdoor media typically decreases during the Chinese New Year, which occurs in the first calendar quarter of each year, and increases in the last calendar quarter.

Intellectual Property

The “SearchMedia”

Our brand, trade secrets and our other intellectual property rights contribute to our competitive advantage in the outdoor advertising market in China. To protect our brands and our other intellectual property, we rely on a combination of trademark law, trade secret protection and copyrightrestriction on disclosure laws in China as well as imposing procedural and contractual confidentiality and invention assignment obligations on our employees, consultants and others.

While we cannot assure you that our efforts will deter others from misappropriating our intellectual properties, we will continue to create and protect our intellectual property rights in order to maintain our competitive position.

Regulatory Matters

We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the National People’s Congress, and several ministries and agencies under its authority including the State Administration for Industry and Commerce, or SAIC, which regulates the advertising industry.

PRC Advertising Law was promulgated in 1994. In addition, the State Council, SAIC and other ministries and agencies have issued regulations that regulate our business as discussed below.

Restrictions on Foreign Ownership in the Advertising Industry

The principal regulations governing foreign ownershipinvestment in the advertising industry in China include:

  The Catalogue for Guiding Foreign Investment in Industry (2007)

Administrative Regulations on Foreign-Invested Advertising Enterprises (2008); and

  The Administrative Regulations

Notice on Foreign-investedthe Relevant Issues regarding Establishing Foreign-Invested Advertising Enterprises (2004), as amended in 2008; and

The Notice Regarding Investment in the Advertising Industry by Foreign Investors Throughthrough Equity Acquisitions (2006).

These regulations require

Under the Administrative Regulations on Foreign-Invested Advertising Enterprises, there are no longer any maximum foreign entitiesshareholding percentage restrictions that directly invest in thewere previously applicable to foreign-invested advertising industry in Chinaenterprises. However, foreign investors are required to have at least twothree years of direct operations in theprior experience operating an advertising industry outside of China. Since December 10, 2005, foreign investors that have operated in the advertising industrybusiness outside of China as their main business for at least three years have been permittedbefore they may receive approval to directly own a 100% interest in an advertising companiescompany in China. Notwithstanding the aforementioned provisions, Hong Kong and MacaoForeign investors that have operated in thewith at least two years of prior experience operating an advertising industry have been permitted to directly own a 100% interest in advertising companies inbusiness outside of China starting from January 1, 2004, without restriction onas their main business and operation years comparedare allowed to other foreign investors.

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PRC laws and regulations prohibit the transfer of any approvals, licenses or permits, including business licenses containingestablish a scope of business that permits engaging in thejoint venture with domestic advertising industry. Therefore, we, through Jieli Consulting, entered into contractual arrangements with Jingli Shanghai.
We believe that there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations. If the PRC government determines that the agreements establishing the structure for operating our PRCenterprises to operate an advertising business do not comply with PRC government restrictions on foreign investment in the advertising industry, we could be subject to severe penalties. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — If the PRC government determines that the contractual arrangements that establish the structure for operating SearchMedia’s China business do not comply with applicable PRC laws and regulations, SearchMedia could be subject to severe penalties.”
China.

Regulation of Advertising Services

The principal regulationsSAIC is the government agency responsible for regulating advertising activities in China. Regulations governing advertising businesses in Chinabusiness mainly include:

  PRC Advertising

Advertisement Law of the People’s Republic of China (1994);

  The Advertising

Administrative Regulations for Advertising (1987); and

  The Implementing

Implementation Rules for the Advertising Administrative Regulations for Advertising (2004).

Business License for Advertising Companies
PRC advertising laws and

According to the regulations stipulatelisted above, companies that companies engagingengage in advertising activities must obtain from the SAIC or its local branchbranches a business license thatwhich specifically includes operation ofoperating an advertising business within its business scope. An enterprise engaging in an advertising business as specified in its business scope of business. Furthermore, ifdoes not need to apply for an advertising operation license, provided that such enterprise is not a company sets up a new site outside ofradio station, television station, newspaper or magazine publisher or any other entity as specified in the location where it is registered to conduct advertising business, the company shall register with the local SAIC where the site is located to obtain a branch business license for the site. Companies and brancheslaws or administrative regulations. Enterprises conducting advertising activities without such licensesa license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations, and revocation of their business license or other licenses.operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. Ad-Icon Shanghai, Jingli Shanghai and their subsidiaries and branches have obtained such business licenses from the local branch of the SAIC as required by the existing PRC regulations.

Advertising Content

The PRC advertising laws and regulations set forth certain content requirements for advertisements in China which includeincluding, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest, among others. Advertisements for anesthetic, psychotropic, toxic or radioactive drugsinterest. Advertisers, advertising operators and advertising publishers are also prohibited. The dissemination of tobacco advertisements via media is prohibited, as is the display of tobacco advertisements in any waiting lounge, theater, cinema, conference hall, stadium or other public area. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through out-of-home, radio, film, television, print and other forms of media, together with any other advertisements which are subject to censorshiprequired by administrative authorities according to relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination. We do not believe that advertisements containing content subject to such restriction or censorship comprise a material portion of the advertisements displayed on our media format.

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PRC advertising laws and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute areis true and in full compliance with the applicable law. In providing advertising services, advertising operators and advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain products that are subject to government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been obtained. ViolationViolations of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branchbranches may revoke the violator’sviolators’ licenses or permits for their advertising business operations. Furthermore, advertisers,

Business License for Advertising Companies

According to the regulations listed above, companies that engage in advertising operatorsactivities must obtain from the SAIC or its local branches a business license which specifically includes operating an advertising distributorsbusiness within its business scope. An enterprise engaging in an advertising business as specified in its business scope does not need to apply for an advertising operation license, provided that such enterprise is not a radio station, television station, newspaper or magazine publisher or any other entity as specified in the laws or administrative regulations. Enterprises conducting advertising activities without such a license may be subject to civil liability ifpenalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation.

Advertising Content

The PRC advertising laws and regulations set forth certain content requirements for advertisements in China including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisers, advertising operators and advertising publishers are required by PRC advertising laws and regulations to ensure that the content of the advertisements they infringe onprepare or distribute is true and in full compliance with the legal rightsapplicable law. Violations of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and interests of third parties inorders to publish an advertisement correcting the course ofmisleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke the violators’ licenses or permits for their advertising business.

business operations.

Outdoor Advertising

The Advertising Law stipulates that the exhibition and display of outdoor advertisements must not:

utilize traffic safety facilities or traffic signs;

utilize traffic safety facilities or traffic signs;
impede the use of public facilities, traffic safety facilities or traffic signs;
obstruct commercial or public activities or create an eyesore in urban areas;
be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; or
be placed in areas prohibited by the local governments from having outdoor advertisements.

impede the use of public facilities, traffic safety facilities or traffic signs;

obstruct commercial or public activities or create an eyesore in urban areas;

be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; or

be placed in areas prohibited by the local governments from having outdoor advertisements.

In addition to PRC Advertising Law, the SAIC promulgated the Outdoor Advertising Registration Administrative Regulations on December 8, 1995, as amended on December 3, 1998 and May 22, 2006, respectively, which govern the outdoor advertising industry in China.

Outdoor advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to submit a registration application form and other supporting documents for registration. If the application complies with the requirements, the local SAIC will issue an Outdoor Advertising Registration Certificate for such advertisement. The content, format, specifications, periods and locations of dissemination of the outdoor advertisement must be submitted for filing with the local SAIC and shall not be changed without approval. After the outdoor advertisement is registered, if it is not displayed within three months, an application shall be filed with the original registration authorities for cancellation. Outdoor advertising facilities must be safely installed and should be maintained on a regular basis to ensure safety and neatness. Advertising content must be true and lawful and not contain any misleading statements.

Local authorities have also issued detailed regulations on operation of outdoor advertising that may prohibit outdoor advertisements in certain areas or through certain facilities or may require that concession rights be obtained through a bidding process for public spaces. In cities where we base our operations, including Shanghai, Beijing, Qingdao, Hangzhou, and Shenyang, the placement and installation of outdoor advertising facilities are subject to municipal zoning requirements and governmental approvals. Each outdoor advertising facility requires a license for placement and installation with specific terms of use for a certain number of year.

Regulations on Dividend Distribution

The principal regulations governing dividend distributions of wholly foreign-owned companies include:

The Company Law of the PRC (1993), as amended in 2005;

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Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000; and


Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001.

Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000; and
Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001.
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards. In addition, a wholly foreign-owned company is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its reserve fund until the accumulated amount of such fund reaches 50% of its registered capital. At the discretion of a wholly foreign-owned company, it may allocate a portion of its after-tax profits, based on PRC accounting standards, to its staff welfare and bonus fund. The reserve fund and staff welfare and bonus fund are not distributable as cash dividends. Under the relevant PRC law, no net assets other than the accumulated after-tax profits can be distributed as dividends.

Regulations on Trademarks

The PRC Trademark Law (amended in 2001) and the PRC Trademark Implementing Regulations provide the basic legal framework for the regulation of trademarks in China, and the SAIC is responsible for the registration and administration of trademarks throughout the country. The PRC has adopted a “first-to-file” principle with respect to trademarks.

Under PRC law provides that eachTrademark Law of China, the required process for successful registration of a trademark consists of the following acts constitutes infringement of the exclusive right to use a registered trademark:

steps:

 (1)The Company would determine whether there is an identical or similar trademark in the advertisement industry in the Chinese trademark data system.

 use of(2)The Company would submit the trademark application documents to the Chinese trademark authority.

(3)If the trademark application documents are accepted, the Chinese trademark authority would issue a trademark that is identical with or similar to a registered trademark in respect of the same or similar commodities without the authorizationnotice on pre-approval of the trademark registrant;and would make a public announcement of the pre-approval of the trademark.

 (4)sale of commodities infringing upon the exclusive right to use the trademark;
counterfeiting or making, without authorization, representations of a registered trademark of another person, or sale of such representations of a registered trademark;
changing a registered trademark and selling products on which the altered registered trademark is used without the consentAlthough anyone can make an objection within three months after public announcement of the trademark registrant;pre-approval, if no objection has been initiated by the expiration of that three month period, the Chinese trademark authority will issue a trademark certificate to the applicant and
otherwise infringing upon will make a public announcement of the exclusive right of another person to use a registered trademark.trademark certificate.
In

With regard to the PRC, aSearchMedia trademark owner who believesregistration, the Company completed step (1) of the process by the end of 2010. However, after further review, the Company does not consider the “SearchMedia” trademark essential to our advertising agency business, hence we have suspended the trademark is being infringed has three options:

Option 1: The trademark owner can provide his trademark registration certificate and other relevant evidence to the SAIC or its local branches, which can, in its discretion, launch an investigation. The SAIC may take actions such as ordering the infringer to immediately cease the infringing behavior, seizing and destroying any infringing products and representations of the trademark in question, closing the facilities used to manufacture the infringing products or imposing a fine. If the trademark owner is dissatisfied with the SAIC’s decision, he may, within 15 days of receiving such decision, institute civil proceedings in court.
Option 2: The trademark owner may institute civil proceedings directly in court. Civil remedies for trademark infringement include:
injunctions;
requiring the infringer to take steps to mitigate the damage (i.e., publish notices in newspapers); and
damages which are measured by either the gains acquired by the infringer from the infringement, or the losses suffered by the trademark owner, including expenses incurred by the trademark owner to claim and litigate such infringement. If it is difficult to determine the gains acquired by the infringer from the infringement, or the losses suffered by the trademark owner, the court may elect to award compensation of not more than RMB500,000.

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application.


Option 3: If the trademark infringement is so serious as to constitute a crime, the trademark owner may file a complaint with the police, and the infringer is subject to investigation for criminal liability in accordance with PRC laws.
SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options

On October 21, 2005, the SAFE issued a titledregulation entitled “Circular on several issues concerning foreign exchange regulation of corporate finance and roundtrip investments by PRC residents through special purpose companies incorporated overseas,” or Circular No. 75, which became effective as of November 1, 2005.

According to Circular No. 75:

prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;

prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;
an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and
an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China.

an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and

an amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China.

Moreover, Circular No. 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC before issuance of Circular No. 75 are required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. Failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents and onshore company to penalties under PRC foreign exchange administration regulations.

On January 5, 2007, the SAFE issued the Implementing Rules of the Administrative Measures for Individual Foreign Exchange, or the Individual Foreign Exchange Rule, which, among other things, specifies approval requirements for a PRC citizen’s participation in the employee stock holding plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, the SAFE issued the Processing Guidance on Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rule.

According to the Stock Option Rule, if a PRC domestic individual participates in any employee stock holding plan or stock option plan of an overseas listed company, a PRC domestic agent or the PRC subsidiary of such overseas listed company must, among others things, file, on behalf of such individual, an application with the SAFE to obtain approval for an annual

allowance with respect to the purchase of foreign exchange in connection with stock purchase or stock option exercise as PRC domestic individuals may not directly use overseas funds to purchase stocks or exercise stock options. Such PRC individuals’ foreign exchange income received from the sale of stocks and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign currency account in PRC opened and managed by the PRC subsidiary of the overseas listed company or the PRC agent before distributing them to such individuals.

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On February 15, 2012, SAFE promulgated the Notice regarding Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option Plan of Overseas-Listed Companies, or Stock Option Notice, which substitutes the Stock Option Rule promulgated by SAFE on March 28, 2007. Under the Stock Option Notice, the domestic individuals as defined under the Foreign Exchange Administration Regulations who are granted stock options or other incentive alternatives by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.

Our PRC citizen employees who may be granted stock options, restricted share awards of the Company, or PRC optionees, will be subject to the Stock Option Rule. If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rule, we and/or our PRC optionees may be subject to fines and other legal sanctions and we may be prevented from granting additional options or other awards of the Company to our PRC employees.

In addition, the General Administration of Taxation has issued certain circulars concerning employee stock options. Pursuant to these circulars, our employees working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.

Regulation on Overseas Listing

In August 2006, six PRC regulatory agencies promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors, or the M&A Rules, regulating the mergers and acquisitions of domestic enterprises by foreign investors. The M&A Rules became effective in September 2006, and was amended on June 22, 2009, and the rules, among other things, purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange, especially in the event that the SPV acquires shares of or equity interests in the PRC companies in exchange for the shares of offshore companies. On September 21, 2006, the CSRC issued a clarification that sets forth the criteria and process for obtaining any required approval from the CSRC.

There is still uncertainty as to how the new regulations will be interpreted or implemented or whether prior approval from CSRC is required under the new regulations for the listing and trading of our shares on NYSE Amex. See “Risk Factors — Risk Related to Doing Business in the People’s Republic of China— The approval of the China Securities Regulatory Commission, or the CSRC, may be required under a recently adopted PRC regulation.MKT. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for SearchMedia to grow through acquisitions.”

Regulations on Taxation

On March 16, 2007, the National People’s Congress, the PRC legislature, passed the newEnterprise Income Tax Law, or the new EIT Law which became effective on January 1, 2008. On December 6, 2007, the State Council approved and promulgated theImplementation Rules of PRC Enterprise Income Tax Law, which took effect simultaneously with the new EIT Law.

The new EIT Law applies a uniform 25% Enterprise Income Tax rate to both foreign-invested enterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors. Furthermore, dividends out of earnings paid by a foreign-invested enterprise to a non-resident shareholder are subject to a withholding tax of 10%, which may be reduced under any applicable bi-lateral tax treaty between the PRC and the jurisdiction where the non-resident shareholder resides. Under the new EIT Law and Implementation Rules, an enterprise registered under the laws of a jurisdiction outside the PRC may be deemed a PRC tax resident if its place of effective management is in the PRC, and an enterprise’s place of effective management may be deemed to be in the PRC if the PRC is the location of its “de facto management bodies”, which are defined as the bodies that have substantial and overall management and control over such aspects as the operations, personnel, accounting, and properties of the enterprise. See “Risk Factors — Risk Related to Doing Business in the People’s Republic of China — If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income and our non-PRC shareholders could be subject to certain PRC taxes.”

Pursuant to theArrangement between Mainland of the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Incomesigned on August 21, 2006, a company incorporated in Hong Kong will be subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiaries if it is deemed the beneficial owner by PRC tax authorities and holds a 25% or more equity interest in that particular PRC subsidiary at the time of the distribution, or at a rate of 10% if it holds less than a 25% equity interest in that subsidiary or is not the beneficial owner of the income.

Pursuant to thePRC Individual Income Tax Law, or the Individual Income Tax Law, adopted on December 29, 2007 and amended on June 30, 2011, individuals who are domiciled in the PRC or who are not domiciled but have resided in the PRC for at least one year are required to pay Individual Income Taxes in accordance with the Individual Income Tax Law on income derived from sources in and outside the PRC. For those individuals who are neither domiciled in nor residents of the PRC, or who are not domiciled and reside for less than one year in the PRC, are required to pay Individual Income Taxes in accordance with this law on income derived from sources within the PRC.

C.
C.Organizational Structure

The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries asbefore and after the termination of the date of this Annual ReportVIEs on Form 20-F.

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December 23, 2011.


SMHL Organization Chart Before December 23, 2011

(FLOW CHART)
LOGO

SMHL Organization Chart After December 23, 2011

LOGO

refers to equity control Ad-Icon Company Limited (HK) (17) Shanghai Botang Advertising Co. Ltd (4) Shanghai Haiya Advertising Co. Ltd (5) Tianjin Shengshitongda Advertising Creativity Co. Ltd (12) Shanghai Jincheng Advertising Co. Ltd (13) Shaanxi Xinshichuang Advertising Planning Co. Ltd (14) Qingdao Kaixiang Advertising Co. Ltd.(10) Wenzhou Rigao Advertising Co. Ltd (11) Wuxi Ruizhong Advertising Co. Ltd (7) Beijing Wanshuizhiyuan Advertising Co. Ltd (6) Offshore Onshore Zhejiang Continental Advertising Co. Ltd (9) Jieli Network Technology Development (Shanghai)Co. Ltd (2) Shenyang Jingli Advertising Co. Ltd (8) SearchMedia Holdings Limited (NYSE AMEX: IDI) Great Talent Holdings Ltd. (16) refers to contractual control Changsha Jingli Advertising Co. Ltd (15) SearchMedia International Limited Shanghai Jingli Advertising Co. Ltd (3) Ad-Icon Advertising (Shanghai) Co. Ltd (18) Jieli Investment Management Consulting (Shanghai)Co. Ltd (1)

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(1)Jieli Investment Management Consulting (Shanghai) Co., Ltd., or Jieli Consulting, a Chinese limited liability company, 100% owned by SearchMedia International.
(2)Jieli Network Technology Development (Shanghai) Co., Ltd, or Jieli Network, a Chinese limited liability company, 100% owned by SearchMedia International.International for the purpose of facilitating foreign capital investment into the PRC.
(3)Shanghai Jingli Advertising Co., Ltd, or Jingli Shanghai, a Chinese limited liability company, 60% owned by Ms. Qinying Liu, a Chinese citizen, and 40% owned by Ms. Le Yang, a Chinese citizen.
(4)Shanghai Botang Advertising Co., Ltd, or Shanghai Botang, a Chinese limited liability company, 100% owned by Ad-Icon Shanghai.
(5)Shanghai Haiya Advertising Co., Ltd, or Shanghai Haiya, a Chinese limited liability company, 100% owned by Ad-Icon Shanghai.
(6)(4)Beijing Wanshuizhiyuan Advertising Co., Ltd, or Beijing Wanshuizhiyuan , a Chinese limited liability company, 100% owned by Ad-Icon Shanghai.
(7)(5)Wuxi Ruizhong Advertising Co., Ltd., or Wuxi Ruizhong, a Chinese limited liability company, 100% owned by Ad-Icon Shanghai.
(8)(6)Shenyang Jingli Advertising Co., Ltd., or Shenyang Jingli, a Chinese limited liability company, 100% owned by Ad-Icon Shanghai.
(9)(7)Zhejiang Continental Advertising Co, Ltd., or Zhejiang Continental, a Chinese limited liability company, 100% owned by Ad-Icon Shanghai. Zhejiang Continental was disposed on May 2, 2012.
(10)(8)Qingdao Kaixiang Advertising Co., Ltd., or Qingdao Kaixiang, a Chinese limited liability company, 100% owned by Jingli Shanghai.
(11)Wenzhou Rigao Advertising Co., Ltd., or Wenzhou Rigao, a Chinese limited liability company, 100% owned by Jingli Shanghai.
(12)Tianjin Shengshitongda Advertising Creativity Co., Ltd, or Tianjin Shengshitongda, a Chinese limited liability company, 100% owned by Jingli Shanghai.
(13)Shanghai Jincheng Advertising Co., Ltd, or Shanghai Jincheng, a Chinese limited liability company, 100% owned by Jingli Shanghai. [inactive]
(14)Shaanxi Xinshichuang Advertising Planning Co., Ltd., or Shaanxi Xinshichuang, a Chinese limited liability company, 100% owned by Jingli Shanghai. [inactive]
(15)Changsha Jingli Advertising Co., Ltd., or Changsha Jingli, a Chinese limited liability company, 100% owned by Jingli Shanghai. [inactive]
(16)Great Talent Holdings Limited, or Great Talent, a company incorporated under the laws of Hong Kong, 100% owned by SearchMedia International. [inactive]
(17)(9)Ad-Icon Company Limited, or Ad-Icon, a company incorporated under the laws of Hong Kong, 100% owned by SearchMedia International.
(18)(10)Ad-Icon Advertising (Shanghai) Co., Ltd., or Ad-Icon Shanghai, a Chinese limited liability company, 100% owned by Ad-Icon.
(11)Quanwei Advertising (Shanghai) Co. Ltd., or Quanwei, a Chinese limited liability company, 100% owned by Ad-Icon.

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MostBefore the termination of the VIE, most of our advertising business in China is currentlywas provided through Ad-Icon Shanghai and its subsidiaries, with a portion of our operations provided through our contractual arrangements with our consolidated PRC variable interest entities, namely, Jingli Shanghai, and its subsidiaries. Our consolidated PRC variable interest entities hold the requisite licenses to provide advertising services in China. Our subsidiary, Jieli Consulting, has entered into a series of contractual arrangements with Jingli Shanghai and its subsidiaries and shareholders under which:

we are able to exert effective control over our consolidated PRC variable interest entities;

we are able to exert effective control over our consolidated PRC variable interest entities;
a substantial portion of the economic benefits of our consolidated PRC variable interest entities are transferred to us; and
we have an exclusive option to purchase all or part of the equity interests in our consolidated PRC variable interest entities in each case when, and to the extent, permitted by PRC law.

a substantial portion of the economic benefits of our consolidated PRC variable interest entities are transferred to us; and

we have an exclusive option to purchase all or part of the equity interests in our consolidated PRC variable interest entities in each case when, and to the extent, permitted by PRC law.

At the time of the termination of the VIE on December 23, 2011, Jingli Shanghai still held 100% of the equity interests of our other Chinese affiliates, namely, Tianjin Shengshitongda, Shanghai Jincheng, Shaanxi Xinshichuang, Changsha Jingli and Wenzhou Rigao. Upon termination of the VIE structure with Jingli Shanghai, we had no equity ownership in or contractually control over these entities.

Great Talent Holdings Ltd., (“Great Talent”), a Hong Kong company, was established by SearchMedia International in early 2008. SearchMedia International originally intended to utilize this entity for tax planning purposes. In April 2008, SearchMedia International acquired Ad-Icon Company Limited (HK) and determined not to use Great Talent for tax planning purposes. As such, Great Talent has remained inactive since it was established.

VIEs arrangements (Terminated as of December 23, 2011)

A variable interest entity (“VIE)” is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

If the Company determines that it has operating power and the obligation to absorb losses or receive benefits, the Company consolidates the VIE as the primary beneficiary, and if not, does not consolidate. The Company’s involvement constitutes power that is most significant to the entity when it has unconstrained decision-making ability over key operational functions within the entity.

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not claims against the Company’s general assets.

PRC regulations currently prohibit or restrict foreign ownership of media and advertising business with the exception that foreign entities that directly invest in the advertising industry in China are required to have at least three years of direct operations in the advertising industry outside of China pursuant to the Administrative Regulations on Foreign-invested Advertising Enterprises (2004, as amended in 2008). As a Cayman Islands corporation, the Company is deemed a foreign legal person under PRC laws. Prior to the incorporation of Ad-Icon Shanghai, a WOFE permitted to operate advertising businesses in China, and to comply with PRC laws and regulations, the Company conducts substantially all of its operations through its VIE. The VIE is wholly owned by certain ex-employees of the Company (“nominee shareholders”).

Upon the formation of the VIE, the Company entered into various agreements with the VIE, through which, the Company holds all of the variable interests of the VIE. Details of key agreements with the VIE are as follows:

Contractual Arrangements with Jingli Shanghai and its Shareholders

Jieli Consulting’s relationships with Jingli Shanghai and its shareholders are governed by a series of contractual arrangements. Under PRC laws, each of Jingli Shanghai and Jieli Consulting is an independent legal person and neither of them is exposed to liabilities incurred by the other party. Other than pursuant to the contractual arrangements between Jingli Shanghai and Jieli Consulting, Jingli Shanghai is not required to transfer any other funds generated from its operations to Jieli Consulting. On September 10, 2007, Jieli Consulting entered into contractual arrangements, and in April 2009, the contracts were restated by relevant parties as follows:

Agreements That Provide Effective Control over Our Affiliated Entities

Loan Agreement. Agreement.Pursuant to the loan agreement dated September 10, 2007 between Jieli Consulting and the shareholders of Jingli Shanghai, namely Ms. Qinying Liu and Ms. Le Yang, Jieli Consulting granted an interest-free loan to each shareholder. The principal amounts of the loans to Ms. Qinying Liu and Ms. Le Yang were $6.7 million and $4.5 million, respectively, in proportion with their respective original capital contributions to Jingli Shanghai. The term of the loan agreement is 10 years and may be extended for another ten years automatically unless Jieli Consulting terminates the agreement in a written form three months before the expiration date of the agreement. The loan can be repaid only with the proceeds from the transfer of the shareholder’s equity interest in Jingli Shanghai to Jieli Consulting or another person designated by Jieli Consulting at the minimum price permitted by then applicable PRC law. Jieli Consulting may accelerate the loan repayment upon certain events, including if a shareholder dies, loses action capacity, no longer works for Jingli Shanghai or any affiliate of Jingli Shanghai, or commits a crime, or if Jieli Consulting so informs a shareholder as permitted by then applicable PRC law.

Equity Pledge Agreement.Agreement. Pursuant to the equity pledge agreement dated September 10, 2007 among Jieli Consulting, Jingli Shanghai, and theits shareholders, of Jingli Shanghai, namely Ms. Qinying Liu and Ms. Le Yang, each shareholder has pledged all of her equity interest in Jingli Shanghai to Jieli Consulting to guarantee the performance of the shareholders’ and Jingli Shanghai’s obligations under the loan agreement, the exclusive call option agreement, and the exclusive technical consulting and service agreement. If Jingli Shanghai or any of its shareholders breaches its respective contractual obligations under these agreements, Jieli Consulting, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholders agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their equity interest in Jingli Shanghai without the prior written consent of Jieli Consulting. The equity pledge agreement will expire after Jingli Shanghai and its shareholders fully perform their respective obligations under the loan agreement, the exclusive call option agreement and the exclusive technical consulting and service agreement.

agreement, each briefly described in this section of the Form 20-F.

Exclusive Call Option Agreement. Agreement.Under the exclusive call option agreement dated September 10, 2007 among Jingli Shanghai, theits shareholders, of Jingli Shanghai and Jieli Consulting, Jingli Shanghai and its shareholders irrevocably granted Jieli Consulting or its designated person an exclusive option to purchase, when and to the extent permitted under then applicable PRC law, all or part of the equity interests in Jingli Shanghai. The exercise price for all of the equity interests of Jingli Shanghai is the minimum price permitted by then applicable PRC law or a higher price determined by Jieli Consulting. Unless this exclusive call option agreement is terminated on an earlier date as agreed upon by

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the parties to the agreement, the term of the agreement is ten years and may be extended for another ten years automatically unless Jieli Consulting terminates the agreement in writing three months before the expiration date of the agreement. Pursuant to this call option agreement,

The shareholders of Jingli Shanghai may not change the articles of association, bylaws, registered capital or shareholding structure of Jingli Shanghai, without the prior written consent of Jieli Consulting;

The shareholders of Jingli Shanghai may not change the articles of association, bylaws, registered capital or shareholding structure of Jingli Shanghai, without the prior written consent of Jieli Consulting;
Jingli Shanghai may not acquire or merge with any third parties, or invest in any third parties, without the prior written consent of Jieli Consulting;
Jingli Shanghai may not generate, delegate, guarantee for, or allow any existing indebtedness without the prior consent or confirmation of Jieli Consulting, except in the ordinary courses of business;
Jingli Shanghai may not enter into any material contracts with the contractual price exceeding RMB1.0 million without the prior written consent of Jieli Consulting, except in the ordinary courses of business;
Jingli Shanghai may not grant loans or guaranties to any third parties, without the prior written consent of Jieli Consulting;
Jingli Shanghai may not transfer, pledge, have caused any encumbrances, or otherwise dispose of any shares of Jingli Shanghai, without the prior written consent of Jieli Consulting;
Jingli Shanghai may not declare or pay any dividends without the prior written consent of Jieli Consulting; upon the request of Jieli Consulting, Jingli Shanghai shall declare and pay all distributable dividends to its shareholders; and
The shareholders of Jingli Shanghai may only appoint the persons nominated by Jieli Consulting as directors of Jingli Shanghai, upon request of Jieli Consulting.

Jingli Shanghai may not acquire or merge with any third parties, or invest in any third parties, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not generate, delegate, guarantee for, or allow existing any indebtedness without the prior consent or confirmation of Jieli Consulting, except in the ordinary courses of business;

Jingli Shanghai may not enter into any material contracts with the contractual price exceeding RMB1.0 million without the prior written consent of Jieli Consulting, except in the ordinary courses of business;

Jingli Shanghai may not grant loans or guaranties to any third parties, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not transfer, pledge, have caused any encumbrances, or otherwise dispose of any shares of Jingli Shanghai, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not declare or pay any dividends without the prior written consent of Jieli Consulting; upon the request of Jieli Consulting, Jingli Shanghai shall declare and pay all distributable dividends to its shareholders; and

The shareholders of Jingli Shanghai may only appoint the persons nominated by Jieli Consulting as directors of Jingli Shanghai, upon request of Jieli Consulting.

Power of Attorney. Attorney.The shareholders of Jingli Shanghai have executed a power of attorney to Mr. Guojun Liang, which irrevocably authorizes Mr. Liang (who is the husband of Ms. Qinying Liu), to vote as such shareholders’ attorney-in-fact on all of the matters of Jingli Shanghai requiring shareholder approval.

Agreements That Transfer Economic Benefits to Jieli Consulting

Exclusive Technical Consulting and Service Agreement. Agreement.Pursuant to the exclusive technical consulting and service agreement dated September 10, 2007 between Jingli Shanghai and Jieli Consulting, Jieli Consulting has the exclusive and irrevocable right to provide to Jingli Shanghai technical consulting services related to the business operations of Jingli Shanghai. Jingli Shanghai agrees to pay annual technical service fees to Jieli Consulting based on the actual services provided by Jieli Consulting. If Jingli Shanghai does not generate net profits in a fiscal year, Jieli Consulting agrees not to charge services for that year. The term of this agreement is 10 years commencing on September 10, 2007 and may be extended automatically for another 10 years unless Jieli Consulting terminates the agreement by a written notice three months before the expiration date.

We believe

The agreements above did not provide substantive kick-out right of the VIE to unilaterally terminate the contracts and the VIE could not force termination by paying a termination fee. The VIE also need to agree to an extension of fixed term. As a result of these agreements, Jieli Consulting exercised effective control over the VIE, received substantially all of the economic benefits and residual interest and absorbs all of the risks and expected losses from the VIE, and had an exclusive call option to purchase all the equity interest in the VIE at a minimal price. Therefore, Jieli Consulting was considered as the primary beneficiary of the VIE and accordingly the financial statements of these VIE were consolidated in the Company’s consolidated financial statements.

The Company believes that there areJieli Consulting’s contractual arrangements with the VIE were in compliance with PRC law and were legally enforceable. However, uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Ifin the PRC government determines thatlegal system could limit the agreements that establishCompany’s ability to enforce these contractual arrangements and if the structure for operating our PRC advertising network businesses do not comply with applicable restrictions on foreign investmentshareholders of the VIE were to reduce their interest in the advertising industry, we could be subjectCompany, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to severe penalties including being prohibited from continuing our operation. See “Risk Factors — Risks Relatingact contrary to Doing Businessthe contractual terms, for example by influencing the VIE not to pay the service fees when required to do so.

The Company’s ability to control the VIE also depended on the voting power obtained under the power of attorney, described above. Jieli Consulting had the power to vote on all matters requiring shareholder approval in the People’s RepublicVIE. As noted above, the Company believed the power of China — Ifattorney is legally enforceable but may not be as effective as direct equity ownership.

In addition, if the PRC government determines that thelegal structure and contractual arrangements that establish the structure for operating our China business do not comply with applicablewere found to be in violation of any existing PRC laws and regulations, wethe PRC government could, among other things:

revoke the Company’s business and operating licenses;

require the Company to discontinue or restrict operations;

restrict the Company’s right to issue the invoice and collect revenues;

block the Company’s websites;

require the Company to restructure the operations in such a way as to compel the Company to establish a new enterprise, re-apply for the necessary licenses or relocate our businesses, staff and assets;

impose additional conditions or requirements with which the Company may not be able to comply; or

take other regulatory or enforcement actions against the Company that could be subjectharmful to severe penalties.”the Company’s business.

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Since 2008, SearchMedia International has rapidly expanded its advertising network throughThe imposition of any of these penalties may result in a material and adverse effect on the acquisitionCompany’s ability to conduct the Company’s business. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the activities of the following advertising companiesVIE and its subsidiaries or the right to receive its economic benefits, the Company would no longer be able to consolidate the VIE. The Company does not believe that any penalties imposed or actions taken by the PRC government would result in China and Hong Kong:
In January 2008, Jingli Shanghai acquired 100% of the equity interest in Shaanxi Xinshichuang Advertising Planning Co., Ltd., a Chinese company primarily engaged in elevator advertising business;
In January 2008, Jingli Shanghai acquired 100% of the equity interest in Qingdao Kaixiang Advertising Co., Ltd., a Chinese company primarily engaged in outdoor billboard advertising business;
In January 2008, Jingli Shanghai acquired 100% of the equity interest in Shanghai Jincheng Advertising Co., Ltd., a Chinese company operating advertisings in cafeterias of office buildings;
In January 2008, Jingli Shanghai acquired 100% of the equity interest in Beijing Wanshuizhiyuan Advertising Co., Ltd., a Chinese company primarily engaged in outdoor billboard advertising business;
In January 2008, Jingli Shanghai acquired 100% of the advertising business of Shenyang Xicheng Advertising Co., Ltd., a Chinese company primarily engaged in outdoor billboard advertising business. Jingli Shanghai subsequently transferred such business and related assets into Shenyang Jingli Advertising Co., Ltd., a newly incorporated Chinese company;
In February 2008, Jingli Shanghai acquired 100% of the equity interest in Shanghai Haiya Advertising Co., Ltd., a Chinese company operating rapid transit advertising business;
In April 2008, Jingli Shanghai acquired 100% of the advertising business of Beijing Youluo Advertising Co., Ltd., a Chinese company primarily engaged in outdoor billboard advertising business. Jingli Shanghai subsequently transferred such business and related assets into Shanghai Botang Advertising Co., Ltd., a newly incorporated Chinese company;
In April 2008, Jingli Shanghai acquired 100% of the equity interest in Tianjin Shengshitongda Advertising Creativity Co., Ltd., a Chinese company operating elevator advertising business;
In April 2008, SearchMedia International acquired 100% of the equity interest in Ad-Icon Company Limited, a Hong Kong company operating outdoor billboard advertising business;
In July 2008, Jingli Shanghai acquired 100% of the equity interest in Changsha Jingli Advertising Co., Ltd., a Chinese company operating elevator advertising business;
In July 2008, Jingli Shanghai acquired 100% of the equity interest in Wenzhou Rigao Advertising Co., Ltd., a Chinese company operating elevator advertising business;
In July 2008, Jingli Shanghai acquired 100% of the equity interest in Wuxi Ruizhong Advertising Co., Ltd., a Chinese company operating elevator advertising business; and
In May 2010, Ad-Icon Shanghai acquired 100% of the equity interest in Zhejiang Continental Advertising Co., Ltd., a Chinese company primarily engaged in the outdoor billboard advertising business.
On December 11, 2009, Ad-Icon Company Limited, or Ad-Icon, established Ad-Icon Advertising (Shanghai) Co., Ltd., a wholly-owned subsidiary in China, which is permitted to operate advertising businesses in China. In 2010, Ad-Icon Advertising (Shanghai) Co., Ltd., or Ad-Icon Shanghai, acquired 100%the liquidation of the equity interests in Zhejiang Continental Advertising Co, Ltd. Furthermore, 100% ofCompany, Jieli Consulting, or the equity interests inVIE.

Effective December 23, 2011, the VIE, Shanghai BotangJingli Advertising Co., Ltd. (“Jingli”), Shanghai Haiya Advertising Co., Ltd., Beijing Wanshuizhiyuan Advertising Co., Ltd., Wuxi Ruizhong Advertising Co., Ltd. and Shenyang Jingli Advertising Co., Ltd acquired by Jingli Shanghaiits subsidiaries have been transferred to Ad-Icon Shanghai. As of the date of this Annual Report on Form 20-F, Jingli Shanghai still holds 100% of the equity interests of the other Chinese affiliates mentioned above.

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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 and regulations. 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 findsall ceased their respective advertisement business so that the agreements that establish theVIE structure for operating our PRC media related businesses do not comply with PRC government restrictions on foreign investmentis no longer required or in the media industry, we could be subject to severe penalties including being prohibited from continuing our operations. See “Item 3.D. Key information — Risk factors — Risks related to the regulation of our business and to our structure.”
place.

D.
D.Property, Plant and Equipment

Our headquarters are located at 13F, Central Modern Building, 468 Xin HuiK-Wah Center #38-03, 1010 Middle Huaihai Road, Putuo District, Shanghai, China, 200060,200031, where we lease approximately 880100 square meters of office space. As of December 31, 2010,2011, our offices in 1312 cities occupy an aggregate of approximately 41504,150 square meters of leased space.

Item 4AUnresolved Staff Comments
Item 4AUnresolved Staff Comments

Not applicable.

Item 5Operating and Financial Review and Prospects
Item 5Operating and Financial Review and Prospects

You should read the following discussion in conjunction with our consolidated financial statements and related notes included in this Annual Report onForm 20-F.20-F. This Annual Report on Form 20-F contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, or intentions regarding our business, financial condition, results of operations, strategies, or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in Part I, “Item 3.D Key Information — Risk Factors” of this Annual Report onForm 20-F.20-F. We do not undertake any obligation to update forward-looking statements. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.

Overview

We are a multi-platform media company operating primarily in the out-of-home advertising industry. Out-of-home advertising typically refers to advertising media in public places, such as billboards, in-elevator displays, street furniture and transit area displays. We are one of the largest operators of integrated outdoor billboard and in-elevator advertising networks in China. Our core outdoor billboard and in-elevator platforms are complemented by our transit advertising platform, which together enables us to provide multi-platform, “one-stop shop” services for our local, national and international clients.

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Targeting the rapidly growing number of urban and increasingly affluent consumers in China, we deploy our advertising network across the following select media platforms:

  

Outdoor billboard platform. As of December 31, 2010,2011, we operate a network of about 1,000750 high-impact billboards with over 600,000500,000 square feet of surface display area in 15 cities, including Beijing, Hong Kong, Qingdao, Shanghai, Shenyang, Shenzhen, Guangzhou, Hangzhou, Chongqing and Chengdu. Our billboards are mostly deployed in commercial centers and other desirable areas with heavy vehicle or foot traffic.

  

In-elevator platform. As of December 31, 2010, our2011, we operate a network of about 150,000 printed and digital poster frames delivered targeted advertising messages inside elevators to captive audiences in high-rise residential and office buildings in 70over 50 major cities in China. The in-elevator platform is characterized by its low cost structure and minimal capital requirements and targets the affluent urban population that is highly desired by advertisers.Only approximately 30,000 frames were managed upon concession contracts signed directly with media owners.

  

Transit advertising platform. As of December 31, 2010,2011, we areacted as an agency for subway advertising and a bus advertising network of 5,000 buses in Beijing.

Our multi-platform offerings are cross-marketed by a sales force located in 1516 offices across China. Our advertising clients are from industries ranging from telecommunications, insurance and banking, to automobile, real estate, electronics and fast moving consumer goods.

During December of 2011 and year to date of 2012, the Company has streamlined the business by eliminating unprofitable or under-performing operations such as Shanghai, Beijing, Guangzhou, and Shenzhen in-elevator businesses, other subsidiaries that were eliminated as a result of the VIE structure termination, and divested Zhejiang Continental back to its previous owners and eliminated the related earn-out liability (please refer to liquidity and capital resources section for more details). The Company believes that the cost savings from eliminating the remaining earn-out obligations pursuant to the separation agreement for Zhejiang Continental frees up the Company’s resources for use in other more promising opportunities.

As a result of the aforementioned business streamlining, sales and marketing team and headquarter headcount had been downsized to reduce overhead costs and improve cashflow.

If the Company's earn-out obligations for the remaining acquired subsidiaries are not extinguished pursuant to our Integration Program, our ability to raise additional capital may be jeopardized. Furthermore, our business strategy to pursue organic growth and the viability of new concessions and other projects is dependent upon our ability to raise new funding.

We expect to continue expanding our billboard holdingsown concessions through acquisitions and organic expansion while utilizing organic growth to grow our elevator and transit holdings, and capitalize on the growth opportunities in China’s out-of-home advertising and other emerging media markets.

Industry Trends and Uncertainties

Operating results are affected by these factors that impact the out-of-home advertising industry in China:

  

Growth of the PRC economy and the advertising industry. The growth of the PRC economy affects the size and growth rate of the advertising industry in China. As the advertising industry is typically sensitive to general economic conditions, any slowdown in the economy, such as the recent worldwide economic downturn, could directly and adversely affect the overall advertising spending in China by multinational and domestic advertisers. The amount and timing of collection of advertising fees from advertisers may also be negatively impacted as a result, which could in turn affect our liquidity and results of operations.

  

Advertising spending and budget cycle of advertisers. Advertising spending and budget cycle of advertisers will affect

the amount and timing of demand for our service offerings. In a contracted economy, the budget size for advertising may be reduced. Advertisers may have shorter budget cycles, may contract for shorter-term advertising promotions and may seek a media platform with higher average returns on their advertising spending.

  

Advertisers’ marketing strategy and budget. Our revenues depend on advertising spending budgeted by our clients for out-of-home advertising, including offerings through our outdoor billboard, in-elevator displays, street furniture and transit advertising platforms. The level of acceptance of our platforms by advertisers and the value of its advertising network relative to its low cost, as perceived by our advertisers, affect our business growth.

  

Competition and pricing pressure. The level of competition in the out-of-home advertising market from existing operators and new market entrants for clients and for media assets could affect opportunities for growth, influence prices that we could charge for our advertising services, and affect the leasing cost of advertising space. We compete for advertising clients generally on the basis of network coverage, service quality, technology, media offerings, services and brand name.

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Seasonality and One-Time Events. Although we do not experience significant seasonality in our business, advertising spending is affected by holidays and one-time events. Advertising spending for outdoor media typically decreases during the Chinese New Year, which occurs in the first calendar quarter of each year, and increases in the last calendar quarter.

  

Laws regulating advertising in the PRC. A change in PRC law or government practice regulating the advertising industry in general and our service platforms in particular could affect our results of operations, in terms of compliance costs and scope of advertising services offered to clients.

Company Specific Trends and Uncertainties

Our operating results are also directly affected by company-specific factors, including the following:

  

Ability to maintain market position and expand into new cities. The market for out-of-home advertising services is relatively new andcontinues to evolve rapidly, evolving, and as a multi-platform media company with a presence in major cities in China, we compete with different players across our platforms and cities of operation. For our in-elevator advertising platform, we compete primarily with other nationwide operators of in-elevator poster frame advertising. We may face competition in individual cities from local and regional players and new entrants into the local and regional market from time to time. For our billboard advertising platform, we compete against mostly local or regional outdoor billboard owners and operators, as the outdoor billboard market in China is largely fragmented. For our transit advertising platform, we compete against other operators of subway light box and bus-body advertising. We also compete for the advertising budget of advertisers with other operators of out-of-home advertising and operators of other advertising media including television, radio, newspapers, magazines and the Internet. Our continued ability to maintain our market position is central to our ability to attract new clients, expand relationships with site owners and managers and increase our revenues.

  

Ability to expand client base and increase the number of advertising contracts and average revenues per contract. Our ability to expand our client base and increase the number of advertising contracts and average revenues per contract is a key driver of our revenue growth. We believe our extensive advertising network across multiple media platforms allows us to act as a “one-stop shop” for advertising clients that seek nationwide distribution of advertising content across multiple advertising channels, including outdoor billboards, elevators and subway stations.

  

Ability to sign and extend site leases for lower rentals. Our ability to generate revenues and increase profitability from advertising sales depends largely on our ability to provide a large network of our media products across media platforms at desirable locations on commercially advantageous terms. The effectiveness of our network also depends on the cooperation of site owners and managers to allow us to install the desired types of poster frames at the desired spots on their properties and, for in-elevator advertising to keep the elevators in operation and accessible to the viewing public. In some cases, we have not maintained good relations and some of our leases have been terminated or may be terminated in the future.

  

Ability to integrate acquired companies. We acquired a number of advertising businesses in 2008 inand 2010. We have been in the process of integrating and centralizing the operational accounting, legal, human resource and administrative functions of the acquired companies. Due to certain corporate issues and unpaid earnoutearn-out obligations, such efforts, to date, have not fully met our expectations which create a substantial risk that we may not be able to fully realize the anticipated benefits of these acquisitions. The extent to which we are able to successfully integrate the acquired companies into our business, in terms of sales and marketing, client service, growth strategy and corporate culture, will impact our results of operations.

Ability to shorten accounts receivable collection period. As is consistent with the payment termsoperations, financial control, and collection practice of the advertising industry in China, the collection period of our accounts receivable is relatively long, which generally range from three months to six months or longer from the invoicing date. Relative to direct advertising clients, the collection period is longer for accounts receivable from advertising agency clients. We expect such practice to continue in the foreseeable future. The onset and deepening of the recent globalinternal control over financial and economic crises could negatively impact the cash flows of our multinational and local clients and, in turn, the amount and timing of the collection of accounts receivable from them.reporting.

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Ability to cross-sell. Our ability to increase revenues by effectively leveraging our multi-platform advertising network will be determined by our ability to integrate our sales efforts and successfully implementing cross-selling sales initiatives. To further implement cross-selling initiatives, we plan to employ an integrated sales approach under which we will coordinate the sales and maintenance teams across platforms and geographic regions and provide them with the proper incentive structure to encourage more cohesive and consistent services to our clients and a heightened awareness of opportunities to cross-sell our media offerings while optimizing advertising solutions for our clients.clients

  

Long outstanding accounts receivables days. As our accounts receivables are closely tied with our key sales employees and ex-owners of our subsidiaries, full and timely cooperation from these individuals are imperative in our accounts receivables collection. Any disagreement or dispute with such individuals due to certain corporate issues and unpaid earn-out bligations may cause delays in accounts receivables collection or even their recoverability.

Other receivables due to ex-owners withdrawals from the subsidiary and related party transactions. Such transactions are prevalent at the subsidiary level and may affect the cashflow of the group.

Ability to retain key employees and sales people. Recruiting and retaining a team of senior executives, key employees and sales team with industry knowledge and experience is essential to our continued success.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, estimate of useful lives of intangible assets, impairment of goodwill and other intangibles, cash flow forecasts, share-based compensation expense, and contingencies and litigation liabilities. We base our estimates on historical experience, known or expected trends, independent valuations and various other assumptions that are believed to be reasonable under the circumstances based on information available as of the date of the issuance of these financial statements. The results of such assumptions form the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The current economic environment and its potential effect on us and our clients have combined to increase the uncertainty inherent in such estimates and assumptions. Future results could be significantly affected if actual results were to be different from these estimates and assumptions.

We believe the following critical accounting policies govern our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

We recognize advertising service revenue on a straight-line basis over the period in which the customer advertisement is to be displayed, which typically ranges from 1 month to 2 years, starting from the date we first display the advertisement. Written contracts are entered into between us and our customers to specify the price, the period and the location at which the advertisement is to be displayed. Revenue is only recognized if the collectability of the advertising service fee is probable.

We generate advertising service revenues from the sales of frame space on the poster frame network, advertising time slots on traditional billboard networks and the sale of advertising services through our transit based media. In the majority of advertising arrangements, we act as a principal in the transaction and record advertising revenues on a gross basis. The associated expenses are recorded as cost of revenues. In some instances we are considered an agent and recognize revenue on a net basis.

Customer payments received in excess of the amount of revenue recognized are recorded as deferred revenue in the consolidated balance sheet, and are recognized as revenue when the advertising services are rendered.

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Accounts receivable and allowance for doubtful accounts

Accounts receivable consist of amounts billed but not yet collected and unbilled receivables. Unbilled receivables relate to revenues earned and recognized, but which have not been billed by us in accordance with the terms of the advertising service contract. The payment terms of our service contracts with its customers vary and typically require an initial payment to be billed or paid at the commencement of the service period, progress payments to be billed during the service period, and a final payment to be billed after the completion of the service period. None of our accounts receivable bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in our existing accounts receivable. Management determines the allowance based on historical write-off experience and reviews of customer-specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to its customers.

As of December 31, 20092010 and 2010,2011, our accounts receivable includes amounts earned and recognized as revenues of US$2.46.1 million and US$6.12.1 million, respectively but not yet billed (unbilled receivables). Management expects all unbilled receivables to be billed and collected within 12 months of the balance sheet date.

As December 31, 2010,2011, we provided a $3.2$4.5 million reserve against accounts receivable. Management’s estimate of the appropriate reserve on accounts receivable at December 31, 20102011 was based on the aged nature of these accounts receivable. In making its judgment, management assessed its customers’ ability to continue to pay their outstanding invoices on a timely basis, and whether their financial position might deteriorate significantly in the future, which would result in their inability to pay their debts to us.

Goodwill and Intangible Assets

Goodwill and other intangible assets are accounted for in accordance with the provisions of FASB ASC 350 “Intangibles — Goodwill and Other”. We account for business acquisitions using the acquisition method of accounting. Before 2009, goodwill consists of the cost of acquired businesses in excess of the fair value of the net assets acquired. Other intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of an intent to do so.

Beginning January 1, 2009, goodwill is measured as the excess of a over b below:

a.

The aggregate of the following:

1.

The consideration transferred measured in accordance ASC 805, which generally requires acquisition-date fair value.

2.

The fair value of any non-controlling interest in the acquiree.

3.

In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.

b.

The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with ASC 805.

Under FASB ASC 350, goodwill, including any goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have indefinite useful lives, are not amortized.

During the year ended December 31, 2008, we acquired the respective advertising businesses of Shanghai Jincheng, Shaanxi Xinshichuang, Qingdao Kaixiang, Beijing Wanshuizhiyuan, Shenyang Jingli, Shanghai Haiya, Shanghai Botang, Ad-icon, Tianjin Shengshitongda, Wenzhou Rigao, and Wuxi Ruizhong (“acquired entities”).

Pursuant to a series of acquisition agreements signed with each of the acquired entities’ ex-owners in 2008 and 2010, the purchase

45


consideration for each acquisition would be settled in cash and is contingent based on the operational results agreed and confirmed by us and each of the acquired entities’ ex-owners for each individual 12-month period in a 2-year earn-out period following respective acquisition dates (“earn-out period”). The contingent purchase price considerationacquisitions in 2008 were based on a pre-determined multiple of net income for each entity is payable when each individual 12-month period during the earn-out period is completed andfirst two years after the operational results are agreed and confirmed. As such,acquisition. At the purchase price allocation cannot be completed untilacquisition dates in 2008, the contingencies are resolved. Therefore,Company accounted for the contingent consideration was not determinable beyond a reasonable doubt at the date of acquisition under FAS 141 and no goodwill was recognized due to the contingent nature of the consideration. However, a liability isBased on the Group’s audited operating results through December 31, 2009 and the amended acquisition agreements during December 31,2010, the Company recorded foradditional consideration payable which resulted in additional goodwill in 2010. As such, the estimatedGroup recognized contingent consideration in 2010 and then immediately recognized goodwill impairment when the implied fair value of identifiable netthe goodwill was lower than the carrying value.

In April 2009, the FASB issued Staff Position No. FSP FAS 141(R)-1,“Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“ASC Topic 805-20”). This updated guidance amended the accounting treatment for assets acquired, which representsand liabilities arising from contingencies in a business combination and requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined. For the amount of negative2010 acquisition, the contingent consideration was initially recognized at fair value based on best estimate and goodwill upon initial purchase price allocation.was recognized in accordance with ASC Topic 805-20. Upon resolution of the contingency, adjustment to goodwill or against the identifiable net assets is to be made in accordance with ASC Topic 805.

made.

The initial allocation of purchase price for all acquisitions made in 2008 was based on valuations performed by independent valuation firms using the multiple period excess earnings method.

At the initial allocation of purchase price, we also estimate fair value of acquired intangible assets including customer relationship and lease agreements. Our intangible assets are amortized on a straight line basis over their respective estimated useful lives, which are the periods over which the assets are expected to contribute directly or indirectly to our future cash flows. Our intangible assets represent customer relationship, lease agreements, and non-compete agreement, which have estimated useful lives ranging from 0.5 to 4.4 years.

Impairment of long-lived assets

a) Impairment of goodwill

We test goodwill for possible impairment in the fourth quarter of each fiscal year or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Circumstances that could trigger an impairment test between annual tests include, but are not limited to:

a significant adverse change in the business climate or legal factors;

a significant adverse change in the business climate or legal factors;
an adverse action or assessment by a regulator;
unanticipated competition;
loss of key personnel;
the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of; and
a change in reportable segments; and/or results of testing for recoverability of a significant asset group within a reporting unit.

an adverse action or assessment by a regulator;

unanticipated competition;

loss of key personnel;

the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of; and

a change in reportable segments; and/or results of testing for recoverability of a significant asset group within a reporting unit.

We utilize a two-step method to perform a goodwill impairment review. In the first step, we determine the fair value of the reporting unit using expected future discounted cash flows and estimated terminal values. If the net book value of the reporting unit exceeds the fair value, we would then perform the second step of the impairment test which requires allocation of the reporting unit’s fair value of all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. The implied fair value of the goodwill is then compared to the carrying value to determine impairment, if any.

As of December 31, 20092010 and 2010,2011, we had a goodwill balance of $45.9$46.0 million and $46.0$16.9 million, respectively, which is not deductible for tax purposes. The results of our annual impairment test resulted in a goodwill impairment loss of $39.4 million mainly due to our billboard and agency service business in 2010, and $15.7$27.9 million for our billboard and agency service business in 2009,2011, as the valuations indicated that the fair value of the businesses were less than the carrying value.

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For the methodology for the fair value used to determine the goodwill impairment, we applied the income approach where the discounted cash flow analysis has been performed to estimate the total enterprise value. Under this approach, the free cash flow to the Company was first estimated and then the after tax weighted average cost of capital was used to discount the cash flow to calculate the estimated value.

Application of goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit which could trigger impairment.

In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates. We may incur additional goodwill impairment charges in the future although we cannot predict whether this will occur.

As at the year ended December 31, 2010 and 2011, we performed the goodwill impairment test based on the actual net income in 2010 and 2011 which is significantly lower than the 2008 and 2009 net income. This indicated that the historical operating results will not be indicative of future operating results. The primary drivers in our assumptions that resulted in the goodwill impairment charges includes:

the decline in business performance and divestiture of Zhejang Continental in 2012;

significantly reduced projected future cash flow based on actual financial results;

an increase in the discount rate to discount our future cashflow;

the acquisition took place before the financial crisis in 2008. The overall business dropped significantly due to the economic downturn. We do not expect a recovery of the economy in our cash flow projections;

the ex-owners had less incentive to expand the business after the earn-out period; and

the synergy of consolidating and integrating multiple acquired businesses is lower than what we expected.

b) Impairment of long-lived assets other than goodwill

Indefinite-lived intangible assets are assessed for impairment at least annually based on comparisons of their respective fair values to their carrying values. Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with FASB ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets”.

Assets.”

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates.

In fourth quarter of 2008, we determined that a substantial portion of equipment for billboard displays related to the Shanghai Bund project may not be effectively utilized in the future due to the decision to halt marketing plans due to the unfavorable economic environment and concession site reconstruction. As a result, we recorded a $2.1 million impairment loss during the year ended December 31, 2008. There was no impairment loss for the years ended December 31, 2009 and 2010.
For the year ended December 31, 2008, we recorded an impairment loss on intangible assets in the amount of $0.9 million associated with our transit business due to the cancellation of major subway concession contracts which were acquired at acquisition. There was no impairment loss for the years ended December 31, 2009 and 2010.

Fair Value of Financial Instruments

FASB ASC 820 “Fair Value Measurements and Disclosures” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

These tiers include:

Level 1 – defined as observable inputs such as quoted prices in active markets;
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Level 1 – defined as observable inputs such as quoted prices in active markets;

47

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and


Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Except for promissory notes, theThe fair value of ourthe Group’s financial assets and liabilities approximate their carrying amount because of the short-term maturity of these instruments. Based on management judgment,The Group’s option and acquisition consideration payable fall into Level 3 and there were no transfers in or out of Level 3 during the fair value of the promissory notes is not materially different from its carrying value with reference to observable market transactions between market participants comparative with us and promissory note investors which are the best information available in the circumstances.
years presented.

Share-based payments

Our accounts for share-based payments in accordance with ASC Topic 718, “Compensation—Stock Compensation”. Under ASC 718, we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the costs over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. For awards with performance conditions, the compensation expense is based on the grant-date fair value of the award, the number of shares ultimately expected to vest and the vesting period.

We determined the estimated grant-date fair value of share options based on the Binomial Tree option-pricing model using the following assumptions:

         
Options granted to employee: 2009 2010
Risk-free rate of return  3.43%  2.744%-4.142%
Weighted average expected option life 10 years 10 years
Expected volatility rate  40.30%  64.00%
Dividend yield  0%  0%

Options granted to employee:

  2009 2010 2011

Risk-free rate of return

  3.43% 2.744 %-4.142% 2.35%

Weighted average expected option life

  10 years 10 years 10 years

Expected volatility rate

  40.3% 64.00% 102.20%

Dividend yield

  0% 0% 0%

The expected volatility in the table above was based on the weighted average volatility of several comparable U.S. listed companies in the advertising industry with operations in the PRC. Since we were a private company at the time the options were issued, we estimated the potential volatility of its ordinary share price by referring to the weighted average volatility of these comparable companies because management believes that the weighted average volatility of such companies is a reasonable benchmark to use in estimating the expected volatility of our ordinary shares.

Because our share options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation model may not provide an accurate measure of the fair value of our share options. Although the fair value of share options is determined in accordance with ASC Topic 718, Compensation—Stock Compensation, using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Recently issued accounting standards

In January 2010,May 2011, the FASBFinancial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-05, “Compensation — Stock Compensation (Topic 718)”2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This standard codifies EITF Topic D-110 Escrowed Share Arrangements and the Presumption of Compensation and is effective immediately. The provisions of ASU 2010-05 did not have a material effect on the financial position, results of operations or cash flows of the Company and is effective immediately.

In January 2010,2011-04 amended the FASB issued ASU 2010-06, “FairAccounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures (Topic 820)”: Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures aboutconverge the fair value measurements onmeasurement guidance in US GAAP and International Financial Reporting Standards (“IFRSs”). Some of the basisamendments clarify the application of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3existing fair value measurements. Those disclosures aremeasurement requirements, while other amendments change particular principles in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures. ASU 2011-04 is effective for fiscal years beginning after December 15, 2010,2011 and for interim periods within those fiscal years. Early adoption is permitted.should be applied prospectively. The provisions ofGroup does not expect that ASU 2010-06 did not2011-04 will have a material effectsignificant impact on the financial position,its consolidated results of operations or cash flows offinancial position.

In June 2011, the Company.

In February 2010, FASB issued ASU No. 2010-092011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASC Topic 855”ASU 2011-05”), which removes. ASU 2011-05 eliminates the requirement foroption to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires an SEC filerentity to disclosepresent items of net income, other comprehensive income and total comprehensive income either in a datesingle continuous statement of comprehensive income or in both issued and revised financialtwo separate but consecutive statements. This amendment shall be applied prospectively for interim or annual financial periods ending after June 15, 2010. We do not believe the adoption will have a material effect on our financial statements.

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In February 2010,December 2011, the FASB issued ASU 2010-10, “Consolidation2011-12,Comprehensive Income (Topic 810)”. The amendments220): Deferral of the Effective Date for Amendments to the consolidation requirementsPresentation of Topic 810 resulting from the issuanceReclassifications of Statement 167 are deferred for a reporting entity’s interestItems Out of Accumulated Other Comprehensive Income in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The deferral is primarily the result of differing consolidation conclusions reached by the International Accounting Standards BoardUpdate No. 2011-05 (“IASB”ASU 2011-12”) for certain investment funds when compared with the conclusions reached under Statement 167. The deferral is effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with. ASU 2011-12 defers the effective date of Statement 167. Early application is not permitted. The provisions of ASU 2010-10 are effective for the Company beginningchanges in 2010. The adoption of ASU 2010-10 did not have a material impact on the financial position, results of operations or cash flows of the Company.
In March 2010, the FASB issued ASU 2010-11, “Derivative and Hedging (Topic 815)”. All entitiesASI 2011-05 that enter into contracts containing an embedded credit derivative feature relatedrelate to the transferpresentation of credit risk that is not onlyreclassification adjustments for each component of other comprehensive income in the form of subordination of one financial instrument to another will be affected by the amendments in this Update because the amendments clarify that the embedded credit derivative scope exception in paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11 is effective at the beginning of the reporting entity’s first fiscal quarter beginning after June 15, 2010. The provisions of ASU 2010-11 are not expected to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718)”. This Update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.both net income and other comprehensive income. The amendments in the ASU’s do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2010-132011-05 and ASU 2011-12 are both effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.2011 and must be applied retrospectively. The provision ofGroup will be required to adopt ASU 2010-13 are not expected2011-05 and ASU 2011-12 no later than the quarter beginning January 1, 2012. As the ASUs require additional presentation only, there will be no impact to have a material effect on the financial position,Group’s consolidated results of operations or cash flows of the Company.
financial position.

In December 2010,September 2011, the FASB issued ASU 2010-28, “When to Perform Step 2 of theNo. 2011-08,Intangibles-Goodwill and Other (Topic 350): Testing Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”Impairment (“ASU 2011-08”). This ASU amends guidance for Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units,2011-08 gives an entity is requiredthe option to perform Step 2 of the goodwill impairment test iffirst assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment exists.test described in Topic 350. Previous guidance required an entity to test goodwill for impairment by first comparing the fair value of a reporting unit with its carrying amount. ASU 2010-282011-08 is effective for fiscal yearsannual and interim periodsgoodwill impairment tests performed for fiscal years beginning after December 15, 2010, with early adoption not permitted.2011. The Group will be required to adopt ASU 2011-08 as of January 1, 2012 and does not expect that the adoption of ASU 2010-282011-08 will have a materialsignificant impact on its financial position,consolidated results of operations or cash flows.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. This ASU specifies that if a public company presents comparative financial statements, the entity should only disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

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position.


A.
A.Operating Results

Results of Operations

For the Year ended December 31, 20102011 compared to the Years ended December 31, 20092010 and December 31, 20082009

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of incomeoperations for the years ended December 31, 2008, 2009, 2010 and 2010:

                     
  For the Years Ended December 31,  Increase/  Increase/ 
(Amount in thousands) 2008  2009  2010  (Decrease)%  (Decrease) % 
              2009 vs 2008  2010 vs 2009 
Revenues $41,685  $37,741  $48,967   (9%)  30%
Cost of revenues  (30,624)  (28,059)  (36,454)  (8%)  30%
                  
Gross profit
  11,061   9,682   12,513   (12%)  29%
                  
Operating expenses          
Sales and marketing expenses  (6,117)  (3,384)  (4,462)  (45%)  32%
General and administrative expenses  (13,135)  (13,832)  (12,203)  5%  (12%)
                  
Total operating expenses  (19,252)  (17,216)  (16,665)  (10%)  (3%)
                  
Loss from operations
  (8,191)  (7,534)  (4,152)  (8%)  (45%)
Other income/(expense)                    
                     
Interest income  131   11   24   (92%)  118%
Interest expense  (2,717)  (1,962)  (45)  (28%)  (98%)
Increase in fair value of liability warrant     824         (100%)
(Loss)/Gain on extinguishment of the notes  (4,400)  6,669      252%  (100%)
Loss on impairment of goodwill and intangible assets  (13,953)  (15,749)  (39,411)  13%  150%
Loss on abandonment of lease  (46)  (550)  (1,256)  1096%  128%
Loss on impairment of fixed assets  (2,135)        (100%)   
Loss on disposals of fixed assets  (2,121)  (15)  (4)  (99%)  (73%)
Other income/ (expense), net        (368)      
Foreign currency transaction loss, net  (167)  (24)  (7)  (86%)  (71%)
                  
Total other expense
  (25,408)  (10,796)  (41,067)  (58%)  280%
                  
 
Loss before income taxes
  (33,599)  (18,330)  (45,219)  (45%)  147%
Provision for income taxes  (1,481)  (4,319)  (1,420)  192%  (67%)
                  
Net loss
 $(35,080) $(22,649) $(46,639)  (35%)  106%
                  
2011:

   For the Years Ended December 31,  Increase/
(Decrease)%
  Increase/
(Decrease) %
 

(Amount in thousands)

  2009  2010  2011   
            2010 vs 2009  2011 vs 2010 

Revenues

  $37,741   $48,967   $55,571    30  13

Cost of revenues

   (28,059  (36,454  (45,788  30  26
  

 

 

  

 

 

  

 

 

   

Gross profit

   9,682    12,513    9,783    29  (22%) 
  

 

 

  

 

 

  

 

 

   

Operating expenses

      

Loss on impairment of goodwill

   (15,749  (39,411  (27,927  150  (29%) 

Loss on impairment of intangible assets

   —      —      (2,723  —      —    

Gain on termination of VIEs

   —      —      9,551    —      —    

Change of fair value of acquisition consideration payable

   —      —      10,681    —      —    

Gain from extinguishment of acquisition consideration payable

   —      —      4,340    —      —    

Loss on abandonment of lease

   (550  (1,256  —      128  (100%) 

Loss on disposals of fixed assets

   (15  (4  —      (73%)   (100%) 

Sales and marketing expenses

   (3,384  (4,462  (6,722  32  51

General and administrative expenses

   (13,832  (12,203  (10,221  (12%)   (16%) 
  

 

 

  

 

 

  

 

 

   

Total operating expenses

   (33,530  (57,336  (23,021  71  (60%) 
  

 

 

  

 

 

  

 

 

   

Loss from operations

   (23,848  (44,823  (13,238  88  (70%) 

Other income/(expense)

      

Interest income

   11    24    34    118  42

Interest expense

   (1,962  (45  (89  (98%)   98

Increase in fair value of liability warrant

   824    —      —      (100%)   —    

Gain on extinguishment of the notes

   6,669    —      —      (100%)   —    

Other income/ (expense), net

   —      (368  (79  —      (79%) 

Foreign currency transaction loss, net

   (24  (7  (4  (71%)   (43%) 
  

 

 

  

 

 

  

 

 

   

Total other income/ (expense)

   5,518    (396  (138  (107%)   (65%) 
  

 

 

  

 

 

  

 

 

   

Loss before income taxes

   (18,330  (45,219  (13,376  147  (71%) 

Provision for income taxes

   (4,319  (1,420  (83  (67%)   (94%) 
  

 

 

  

 

 

  

 

 

   

Net loss

  $(22,649 $(46,639 $(13,459  106  (71%) 
  

 

 

  

 

 

  

 

 

   

Revenue. We generate our revenues from providing advertising services over our network which consists primarily of the following platforms:

Outdoor billboard platform. We typically sign advertising contracts with terms ranging from 6 to 24 months for billboard advertisements. Each contract will typically specify the billboard location, measurement and the price. The contract price varies substantially from contract to contract, based on the location and measurement of the billboard. Deposits or progress payments are typically required at various stages of the contract performance, such as signing of contract, confirmation of content and completion of service period.
In-elevator platform. We typically sign advertising contracts with terms ranging from 1 to 6 months for in-elevator advertisements. Typically, we negotiate for a contract price for covering a set of cities or districts within cities. We may sometimes help certain clients design a detailed plan, based on the contract price and targeted demographics, with particular buildings where the advertisements will be displayed within the cities or districts specified under the contract. Progress payments are typically required at various stages of the contract performance.

Outdoor billboard platform. We typically sign advertising contracts with terms ranging from 6 to 24 months for billboard advertisements. Each contract will typically specify the billboard location, measurement and the price. The contract price varies substantially from contract to contract, based on the location and measurement of the billboard. Deposits or progress payments are typically required at various stages of the contract performance, such as signing of contract, confirmation of content and completion of service period.

50

In-elevator platform. We typically sign advertising contracts with terms ranging from 1 to 6 months for in-elevator advertisements. Typically, we negotiate for a contract price for covering a set of cities or districts within cities. We may sometimes help certain clients design a detailed plan, based on the contract price and targeted demographics, with particular buildings where the advertisements will be displayed within the cities or districts specified under the contract. Progress payments are typically required at various stages of the contract performance.


Transit advertising platform. We typically sign advertising contracts with terms ranging from one to three months for subway and bus advertisements. The price typically consists of advertising fees and production fees for subway and bus advertisements.fees. Typically, the contracts specify a certain combination of subway stations and bus lines and we have the discretion to assign specific subway light boxes and bus lines for each contract. Service payments are typically required at pre-specified dates prior to the completion of the contract.

We recognize advertising service revenues on a straight-line basis over the period in which the advertisement is required to be displayed, starting from the date we first display the advertisement. We only recognize revenue if the collectability of the service fee is probable. The amount of advertising service revenues recognized is net of business taxes and surcharges ranging between 8% and 9%.

Our revenue generation is affected by the number of advertising contracts we enter into with clients and the average revenues per contract. The number of our advertising contracts is also driven by client-specific factors such as timing of introduction of new advertising campaigns, seasonality of clients’ operations and growth of business sectors in which our clients operate. Depending on client demand, the number of service contracts with our clients varies from period to period. The loss of, or significant reduction in, business from any major client without replacement clients could adversely impact our operating results. Conversely, the addition of a major advertising service contracts may significantly increase our revenues.

Our revenues per contract are affected by factors affecting out-of-home advertising service providers. As we typically negotiate for the overall contract amount before providing an advertising plan with specific display locations, average revenues per contract are particularly affected by the acceptance of our platforms as part of the marketing strategies and budgets of our clients.

Revenues for the year ended December 31, 20102011 were $55.6 million compared to $49.0 million compared tofor the year ended December 31, 2010 and $37.7 million for the year ended December 31, 2009 and $41.7 million for the year ended December 31, 2008.2009. Revenue in 20102011 increased primarily due to the better economic environment in 2010 and the expansion of outdoor billboard elevator and transit platform.agency services. The newlyCompany acquired subsidiary, Zhejiang Continental, contributed $4.4 million of revenue to our billboard businessnew clients mainly in 2010. In addition, the number of our contracts increased from 1,403 in 2009 to 1,509 in 2010.electronic and auto industry. We intend to increase the number of contracts in the future in addition to increasing the average revenue per contract.

Cost of revenues. The cost of revenues consists primarily of operating lease cost of advertising space for displaying advertisements, depreciation of advertisement display equipment, amortization of intangible assets relating to lease agreements and direct staff and material costs associated with production and installation of advertisement content.

Cost of revenues for the year ended December 31, 20102011 was $45.8 million compared to $36.5 million compared tofor the year ended December 31, 2010 and $28.1 million for the year ended December 31, 2009 and $30.6 million for the year ended December 31, 2008.2009. The costs of revenues for both periods primarily consisted of leasing cost to site owners and managers. The increase in cost of revenues in 20102011 was primarily due to the increase in number of elevator framesoutdoor billboards and outdoor billboardsagency costs throughout the year. The cost of revenues as a percentage of revenues was 74.4%82.4% for 2010,2011, as compared to 74.4% for 20092010 and 73.5%74.3% for 2008.2009. The slight changes wereincrease in 2011 was due primarily to changesthe increase in the mixprovision of service offeringsagency services which had higher cost of revenues than self owned billboards and the cost associated with our network expansion. We intend to increase our margins in the future through enhancing our occupancy rates while also increasing our average revenue per contract.
elevators.

Gross profit. Our gross profit for the year ended December 31, 20102011 was $9.8 million compared to $12.5 million compared tofor the year ended December 31, 2010 and $9.7 million for the year ended December 31, 2009 and $11.1 million for the year ended December 31, 2008 which is in line with the change in net revenues throughout the year.2009. Our gross margin decreased from 26.5% in 2008 to 25.7% in 2009 and increased to 25.6% in 2010 and decreased to 17.6% in 2011 due primarily to changes in the mix of service offerings.

The contribution of agency services revenue to the total revenue for the year ended December 31, 2009, 2010 and 2011 was 57.2%, 59.5% and 75.7% respectively. Our average gross profit margin for agency service is 12.6%.

Operating expenses. Selling and marketing expenses consist of marketing and promotion, amortization of intangible assets relating to customer relationship and sales commissions, payroll, traveling expenses, transportation and advertising expenses incurred by our selling and distribution team. General and administrative expenses consist primarily of salaries and benefits for management and administrative personnel, share-based compensation, rental and utility expenses.

51


Recently, we scaled down some of our operations and closed four unprofitable offices under our subsidiary Ad-Icon Shanghai that were involved in the elevator business. We will continue to serve those markets by relying on our other subsidiaires to represent us in the cities affected by the closings. This strategic decision will reduce the overlap in resources and also minimize overhead expenses. As a result of our strategic decision to close these offices, we have reduced the number of media screens from our current portfolio by 20,000 screens. As a result of the office closings, we were able to subsequently downsize the sales & marketing and assets development team to reduce overhead expenses and to improve our operating margins.

Total operating expenses for the year ended December 31, 20102011 were $16.7$23.0 million compared to $17.2$57.3 million for the year ended December 31, 20092010 and $19.3$33.5 million for the year ended December 31, 2008.2009. The significant components of operating expenses are set forth below:

  

Loss on impairment of goodwill and intangible assets. As a result of the reduction of the estimated value of the reporting units as part of annual impairment tests, goodwill and intangible assets were reduced by $15.7 million in 2009, $39.4 million in 2010 and $30.7 million in 2011, respectively.

Gain on termination of VIE. The Group recognized gain of $9.6 million on the termination of VIEs at December 23, 2011.

Change of fair value of acquisition consideration payable. On May 31, 2010, the Group acquired 100% of the equity interest in Zhejiang Continental. The consideration was based on a predetermined earn-out formula applied to audited operating results through December 31, 2010 and 2011. At the acquisition date, the contingent consideration payable was recognized at fair value based on historical and forecast operational results agreed to and confirmed by the Group. As at December 31, 2011, the contingent consideration of Zhejiang Continental was resolved and there was a reduction of total consideration compared to the initial estimated contingent purchase price. An adjustment to contingent consideration of $10.7 million was recognized to the income statements. On May 2, 2012, the Company divested Zhejiang Continental back to the previous owners. See “Liquidity and Capital Resources” section for details.

Gain from extinguishment of acquisition consideration payable. The contingent consideration of Kaixiang, Wuxi Ruizhong and HK Ad-Icon were partially settled in 2011 and a gain of $4.3 million was recognized to the income statement due to issuance of the Company’s shares at a price lower than the price initially agreed at acquisition.

Sales and marketing expenses. Sales and marketing expenses waswere $6.7 million for the year ended December 2011 compared to $4.5 million for the year ended December 31, 2010 compared toand $3.4 million for the year ended December 31, 2009, and $6.1 million for the year ended December 31, 2008, primarily due to the changes in sales commissions in line with the net revenues and increase in marketing expenses for expansion of business.expenses.

  

General and administrative expenses. General and administrative expenses were $10.2 million for 2011 compared to $12.2 million for 2010 compared toand $13.8 million for 2009 and $13.1 million for 2008.2009.

The following table describes our general and administrative expenses for the years ended December 31, 2008, 2009, 2010 and 2010.2011. The increase in bad debt expenses in 20092010 and 20102011 is primarily due to an increase in bad debt for elevator and billboards subsidiaries. Staff salary declinedincreased from $5.5 million in 2008 to $2.8 million in 2009 as a result of increased efficiencies in our infrastructure and a reduction in staff. Staff salary increasedto $3.1 million in 2010 is primarily due to a new acquisition and expansion of business. Staff salary declined in 2011 as a result of reduction in staff. Professional fees in 2009 were higher than 20082010 and 2010,2011, primarily due to the expenses related to the completion of the Business Combination. Share based compensation represents amortization of fair value of options and shares granted to our staff. The amount increased in 2010 due to more options granted after the Business Combination.

             
  For the Years Ended December 31 
(Amounts in thousands) 2008  2009  2010 
 
Bad debt expense $703  $1,611  $2,197 
Professional fee  3,321   4,759   2,435 
Salary expense  5,466   2,785   3,066 
Rental expense  1,854   1,643   524 
Share-based compensation  308   403   2,107 
Other G&A expense  1,483   2,631   1,874 
          
  $13,135  $13,832  $12,203 
          

   For the Years Ended December 31 

(Amounts in thousands)

  2009   2010   2011 

Bad debt expense

  $1,611    $2,197    $2,905  

Professional fee

   4,759     2,435     1,947  

Salary expense

   2,785     3,066     2,846  

Rental expense

   1,643     524     488  

Share-based compensation

   403     2,107     771  

Other G&A expense

   2,631     1,874     1,264  
  

 

 

   

 

 

   

 

 

 
  $13,832    $12,203    $10,221  
  

 

 

   

 

 

   

 

 

 

Other expensesincome/ (expenses). Total other expensesincome/ (expenses) for the year ended December 31, 2011 were $(0.1) million compared to $(0.4) million for the year ended December 31, 2010 were $41.1 million compared to $10.8and $5.5 million for the year ended December 31, 2009 and $25.4 million for the year ended December 31, 2008.2009. Significant components of the other expenses are set forth below:

  

Interest expense. Interest expense costs in 2009 and 2008 consist predominately of non-cash financial charges related to

investments in SearchMedia International prior to the completion of the Business Combination. The 2008 amount primarily relates to the amortization of convertible promissory notes discount of $0.9 million, interest of $0.7 million on the convertible promissory notes and $0.6 million interest on New Note, First Interim Notes and short-term loan from a third party lender. The 2009 amount primarily consists of $1.0 million of interest expense on the convertible promissory note. The Business Combination was closed in October 2009 and no related interest was incurred in 2010.2010 and 2011.

  

Gain/LossGain on extinguishment of the notes. On September 17, 2008, certain notes issued by SearchMedia International in March 2008 were cancelled by the holder. The notes, with a principal sum of $10 million plus accrued interest of $0.6 million and all the related conversion rights, were cancelled in exchange for a new note with a principal sum of $15 million, which bears interest at 12% per annum and has no conversion right. As a result of the cancellation of the notes in exchange for the promissory note, a loss on extinguishment of the notes of $4.4 million was recognized in the statement of income for the year ended December 31, 2008, which represented the difference between the carrying value of the new note of $15.0 million and the sum of the carrying value of the convertible promissory notes of $10.0 million, plus related accrued interest of $0.6 million. The 2009 amount represents fair value gain on extinguishment of the Promissory Note at the closure of reverse acquisition in October, 2009.

52

Provision for income taxes.Income tax expense was $4.3 million in 2009, $1.4 million in 2010 and $0.1 million in 2011. Although we had consolidated net loss, the PRC statutory tax rate was 25% for our subsidiaries with net income. The decrease of income tax expense in 2011 is mainly due to reduce in deferred tax liabilities as a result of the impairment on goodwill and intangible assets in Zhejiang Continental.


Loss on impairment of goodwill and intangible assets. As a result of the reduction of the estimated value of the reporting units as part of annual impairment tests, goodwill was reduced by $14.0 million in 2008, $15.7 million in 2009 and $39.4 million in 2010, respectively.
Loss on disposal and impairment of fixed assets. In the fourth quarter of 2008, we determined that a substantial portion of equipment for billboard displays related to the Shanghai Bund project may not be effectively utilized in the future due to the decision to halt marketing plans due to the unfavorable economic environment and concession site reconstruction. As a result, we recorded a $2.1 million impairment loss. We also disposed of approximately $2.1 million of digital and poster frame in the year ended December 31, 2008. Loss on disposal of fixed assets were immaterial in 2009 and 2010.
Provision for income taxes. Income tax expense was $1.5 million in 2008, $4.3 million in 2009 and $1.4 million in 2010. Although we had consolidated net loss, the PRC statutory tax rate was 25% for our subsidiaries with net income.
Net loss. As a result of the foregoing, we had a net loss of $13.5 million for the year ended December 31, 2011, as compared to a net loss of $46.6 million for the year ended December 31, 2010 as compared toand a net loss of $22.6 million for the year ended December 31, 2009 and a net loss of $35.1 million for the year ended December 31. 2008.
2009.

Effect of Inflation

The rates of inflation experienced in recent years have had no material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.

Foreign Currency

The Group’s reporting currency is the United States dollar (“US$”). The functional currency of the Company is the US$, whereas the functional currency of the Company’s consolidated subsidiaries and VIEs in the PRC is the Renminbi (“RMB”) and the functional currency of the Company’s subsidiaries in the Hong Kong Special Administrative Region is the Hong Kong Dollars (“HK$”), as the PRC and HKSAR are the primary economic environments in which the respective entities operate. Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign currency. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.

Transactions denominated in currencies other than the functional currency are translated into the respective functional currency at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in a currency other than the functional currency are translated into the functional currency using the applicable exchange rate at each balance sheet date. The resulting exchange differences are recorded in “foreign currency transaction gain (loss)” in the consolidated statements of operations.

The assets and liabilities of the Company’s consolidated subsidiaries and VIEs are translated into the US$ reporting currency using the exchange rate at each balance sheet date. Revenue and expenses of these entities are translated into US$ at average rates prevailing during

the year. Equity accounts are translated at historical exchange rates. Gains and losses resulting from translation of these entities’ financial statements into the US$ reporting currency are recorded as a separate component of “accumulated other comprehensive income” within shareholders’ deficit/equity. We do not have any foreign currency forward contracts.

53


Cash Flow Analysis

The following table presents a summary of our cash flows and beginning and ending cash balances for the years ended December 31, 2008, 2009, 2010 and 2010:

             
  For the Years Ended December 31, 
(Amounts in thousands) 2008  2009  2010 
 
Net cash provided by/ (used in) operating activities $(1,451) $(8,775) $1,670 
Net cash used in investing activities  (24,704)  (40,593)  (20,152)
Net cash provided by/ (used in) financing activities  24,676   73,665   (3,465)
Foreign currency translation adjustment  242   5   103 
          
Net increase/(decrease) in cash and cash equivalents  (1,237)  24,302   (21,844)
          
Cash and cash equivalents at beginning of year  6,333   5,096   29,398 
          
Cash and cash equivalents at end of year $5,096  $29,398  $7,554 
          
2011:

   For the Years Ended December 31, 

(Amounts in thousands)

  2009  2010  2011 

Net cash provided by/ (used in) operating activities

  $(8,775 $1,670   $(2,852

Net cash used in investing activities

   (40,593  (20,152  (902

Net cash provided by/ (used in) financing activities

   73,665    (3,465  611  

Foreign currency translation adjustment

   5    103    219  
  

 

 

  

 

 

  

 

 

 

Net increase/(decrease) in cash and cash equivalents

   24,302    (21,844  (2,924
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at beginning of year

   5,096    29,398    7,554  
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

  $29,398   $7,554   $4,630  
  

 

 

  

 

 

  

 

 

 

Cash Flows from Operating Activities. Net cash flows from operating activities were $(1.5) million, $(8.8) million, $1.7 million and $1.7$(2.9) million for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively. The decrease in net cash flows fromused in operating activities in 2009 was primarily duemainly attributed to the decrease in accounts payable, accrued expenses and other payables.loss from operations excluding non-cash items. The increase in net cash flows from operating activities in 2010 was primarily due to the decrease in loss from operations excluding non-cash items and increase in accounts payable and accrued expenses in 2010. The decrease in amountnet cash flows from operating activities in 2011 was primarily due to the loss from related parties in 2010.

operations excluding non-cash items.

Cash Flows from Investing Activities. Net cash used in investing activities was $24.7$(40.6) million, $40.6$(20.2) million and $20.2$(0.9) million for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively.

The decrease in cash used in investing activities in 20102011 compared to 20092010 and 20082009 was primarily due to:
a $19.4 million increase in cash paid for acquisitions in 2009 compared to 2008 and a $20.4 million decrease in cash paid for acquisitions in 2010 compared to 2009; and
a $3.3 million decrease in capital expenditures in 2009 compared to 2008.
to reduce in amount of cash used for acquisition payment.

Cash Flows from Financing Activities. Net cash used inflows from financing activities was $3.5$73.7 million, $(3.5) million and $0.6 million for the yearyears ended December 31, 2010.2009, 2010 and 2011 respectively. Net cash provided by financing activities were $73.7 million for the year ended December 31, 2009 and $24.7 million for the year ended December 31, 2008.in 2011 mainly arose from short term bank loan. Net cash used in financing activities in 2010 mainly arose from repurchase of warrants. Net cash provided by financing activities in 2009 is primarily attributed to $76.1 million proceeds from the Business Combination and a $5.0 million repayment in promissory note in 2009 compared to $9.3 million funding of new convertible notes and $12.0 million funding of promissory notes in 2008.

2009.

Cash and Cash Equivalents

Our cash balance at December 31, 20102011 was $7.6$4.6 million, representing a decrease of $21.8$3.0 million from $29.4$7.6 million at December 31, 2009.

2010.

B.
B.Liquidity and Capital Resources

Our working capital from operations decreasedincreased by $39.0$8.4 million to $39.4$31.0 million net current liabilities at December 31, 20102011 as compared to net current liabilities of $0.4$39.4 million at December 31, 2009.2010. Approximately $23.2 million of the net current liabilities in 2011 is attributable to earn-out obligations. The increasedecrease in net current liabilities in 2011 was primarily due to a reduction in cash after paymentsettlement of certain earn-out obligations and an additional contingent earn-out payable incurreddeconsolidation of VIE during 2010.the year. Total current assets decreased by $14.8$2.9 million from $50.6 million at December 31, 2009 to $35.8 million at December 31, 2010.2010 to $32.9 million at December 31, 2011. The decrease in current assets was primarily due to the decrease in cash.

cash and cash equivalent.

We are obligated to pay earn-out payments during 2011 and over the next one to two yearstwelve months in connection with our acquisitions of a number of advertising businesses. The amount of earn-out consideration typically depends, among other factors, on the annual financial resultsnet income under USGAAP of an acquired entity in a two-year post-closing period starting from the date of

54


acquisition based on mutual written agreement by us and the ex-owners of the subsidiaries. During the second and third quartersThe range of 2010, we amended the earn-out agreements with seven of our subsidiaries. The amended earn-out agreements providemultiples for the extensioneach of the time period by onepost-closing periods is from 2.2X to more than two years for required cash and stock payments.3.5X. As a result of the aforementioned amendments and previous payments, we estimate the remaining earn-out payable is approximately $39.2 million as of December 31, 2010. Of such2011, our earn-out payable was approximately $29.0$23.2 million, of which $16.8 million is payable in either cash orand $6.4 million is payable in stock within the next twelve months and $10.2 million is payable in stock after the next twelve months. For the $29.0 million earn-out payable within twelve months, $17.0 million is payable in cash with the possibility of getting extension of the payment time from ex-shareholders. The remaining $12.0 million is payable in stock. No additional contingent earn-out consideration was incurred during 20112012 up to the date of this Annual Report.
Based on

In April 2012, the current cash positionCompany’s board of directors approved and forecastauthorized a capped pool of 7 million common shares to be issued to ex-owners of subsidiaries, (“Integration Program”) for the restpurpose of the payment period we may not have sufficient capital to pay the requiredconverting and eliminating our earn-out payments in cash over the next twelve months.liabilities. In addition due to a varietyeliminating the earn-out liabilities from the Company’s balance sheet, the secondary purpose of factors which cannot presently be ascertained, including without limitation,this Integration Program is to further align the amountinterest of working capitalour subsidiaries and shareholders and provide additional incentives for new concessions that we have available, and the financial performancebenefit all of both us and the acquired companies entitled to receive an earn-out payment, there can be no assurance that we will have sufficient liquidity to meet our long-term earn-out obligations and raises substantial doubt as to our ability to continueoperations as a going concern. If such failure cannot be remedied through renegotiationgroup, as well as enhance the Company’s liquidity and capitalization. On May 2, 2012, the Company divested Zhejiang Continental back to its previous owners and eliminate the related earn-out liability of the terms of such earn-outs with the acquired companies or the raising of the required proceeds on reasonable terms, our operations are likely to be adversely and materially impacted.

Our short term borrowing of $0.7$8.2 million as of December 31, 2010 represents two short-term bank loans2011, in exchange for the issuance of $0.561 million shares of the Company. The Company believes that the cost savings from not carrying out the remaining earn-out obligations pursuant to the acquisition agreement for Zhejiang Continental frees up the Company’s resources for use in other more promising opportunities. Also, the Company obtained a wavier from Haiya to eliminate the consideration payable of $3.0 million in May 2012.

Through the divestiture of Zhejiang Continental and $0.17 million.the wavier from Haiya, the Company has materially reduced its outstanding earn-out liabilities to $12.0 million while focusing on its remaining subsidiaries to build shareholder value. Through the Integration Program, we expect that the cash earn-out obligations will be fully eliminated within the second quarter of 2012, and that we do not need to fully utilize the shares in the Integration Program as a result of previous corporate restructuring actions undertaken to further improve performance and terminate operations which are not likely to be profitable for the Company going forward. In addition, the improved liquidity and capitalization following these corporate actions will better allow the Company to embark on new out-of-home media initiatives and nationwide concessions.

In February 2012, the Company entered into an agreement for a new $3.0 million Convertible Note (the “Note”) with its existing major shareholder and several other investors including an affiliate of the Company’s Chief Executive Officer. The short-term loan of $0.56 million bearsNote has a one year term and borrowings bear interest at 6%a rate of 10% per annumannum. In addition, the Note is convertible into the Company’s common shares at $1.25 per share. We utilized part of the Note to fund the repurchase of shares at an average price per share of $0.25 from the partial settlement of the arbitration with predecessor shareholders. Other proceeds from the Note are anticipated to be utilized for new concessions, acquisitions and matures on April 13, 2011. The loan of $0.17 million bears interest at 14.2308% per annumgeneral working capital purposes.

To reduce or eliminate the net current liabilities from our financial statements, the Company has also engaged tax professionals to look into reducing the business tax and matures on September 21, 2011. Both loansincome tax liabilities currently reported under current liabilities through various restructuring methodologies. While we do not contain anyexpect that many of these reported tax liabilities will ever be required to be paid by the Company, they nevertheless must remain on our financial covenants.

statements as current tax liabilities due to applicable US accounting principles.

We do not anticipate having any material capital expenditures for the next twelve months except for some limited frames and billboard structures as replacements. Our operating lease obligations as of December 31, 20102011 for the next twelve months were $15.9are $13.3 million. We believe that we will be able to fund our capital expenditures, operating lease payments and our anticipated operating cash requirements for at least the next twelve months and satisfy any remaining obligations from our working capital and anticipated cash flows from operations.

In addition, we may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. Accordingly, we may seek to issue debt or equity securities or obtain a credit facility. Any issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is possible that, when we need additional cash resources, financing will only be available to us in amounts or on terms not acceptable to us or that financing will not be available at all.

Our shareholders’ deficit as at December 31, 2011 was $13.5 million. Upon completion of the divesture of Zhejiang Continental and elimination of Haiya’s earn-out liabilities in May 2012, our earn-out payable was reduced by $11.2 million which also significantly reduced our shareholders’ deficit. The Company continues to renegotiate with ex-owners of subsidiaries to convert the remaining earn-out liabilities of $12.0 million into the Company’s common shares under the Integration Program. The Company expects the Integration Program will be substantially completed by the end of the second quarter of 2012. The Company also expects the Convertible Note holders to convert their Notes during 2012 and that will increase our shareholders’ equity by another $3.0 million. The Company expects to regain compliance with the NYSE MKT’s minimum stockholders’ equity requirement standard by January 15, 2013.

C.
C.Research and Development, Patents and Licenses, etc.

The information required by this item is inapplicable.

not applicable.

D.
D.Trend Information

Please refer to “—Overview” for a discussion on the most significant recent rendstrends in our production, sales, costs and selling prices. In addition, please refer to discussions included in this Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably likely to have a material effect on our revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

55


E.
E.Off-Balance Sheet Arrangements

We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

F. Tabular Disclosure of Contractual Obligations

F.Tabular Disclosure of Contractual Obligations

The following table sets forth the Company’s known contractual obligations as of December 31, 2010:

                     
  Payments due by period 
      Less          More 
      than 1  1-3      than 5 
Contractual Obligations ($000) Total  year  years  3-5 years  years 
Operating Lease Obligations $21,108  $15,898  $4,979  $231  $ 
Other Long-Term Liabilities Reflected on the Company’s Balance Sheet (1)  39,195   29,033   10,162       
                     
                
Total $60,303  $44,931  $15,141  $231  $ 
2011:

   Payments due by period 

Contractual Obligations ($000)

  Total   Less
than 1
year
   1-3
years
   3-5 years   More
than  5

years
 

Accounts payable in relation to advertising agreements

  $14,167    $14,167    $—      $—      $—    

Operating Lease Obligations

   13,334     11,600     1,734     —       —    

Other Long-Term Liabilities Reflected on the Company’s Balance Sheet (1)

   23,238     23,238     —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $50,739    $49,005    $1,734    $—      $—    

(1)Represents consideration payable in connection to our acquisitions of a number of advertising businesses.

Item 6Directors, Senior Management and Employees

A.
Item 6Directors, Senior Management and Employees
A.Directors and Senior Management

Directors

The following table sets forth the names and ages of our directors, each of whom has served as a director as of the date of this annual report.

NameAge

Robert Fried

   52  
NameAge
Robert Fried

Chi-Chuan (Frank) Chen

   5153  
Qinying Liu

Jeffrey Yunan Ren

   4836  

Steven D. Rubin

   5051  
Glenn Halpryn

Peter Tan

   5039  
Chi-Chuan Chen

Paul Conway

   5242  

The following additional information is provided for each of the directors listed above.

Mr. Robert Friedhas served as Co-Chairman of the Boardboard of Directorsdirectors since the Business Combination in October 2009. Mr. Fried served as the President and Chief Executive Officer and a member of the board of directors of Ideation from November 2007 to October 2009. Mr. Fried is a digital media entrepreneur and accomplished film producer. Since 1990, Mr. Fried has served as President of Fried Films, a motion picture production company he founded in 1990. Mr. Fried has produced or served as executive producer for 15 films, including “Rudy,” “The Boondock Saints,” “Man of the Year” and “Collateral.” Mr. Fried won an Academy Award for the Live Action Short Film “Session Man.” Mr. Fried has founded several digital media companies including Spirit EMX, parent of spiritclips.com, a popular internet-based inspirational content company for which Mr. Fried presently serves as CEO; and WhatsHotNow.com, for which Mr. Fried served as Chief Executive Officer from July 1999 until June 2001. From December 1994 until June 1996, Mr. Fried was President and Chief Executive Officer of Savoy Pictures, a unit of Savoy Pictures Entertainment, Inc. Savoy Pictures Entertainment was sold to Silver King Communications, which is now a part of InterActive Corp, in 1996. From 1983 to 1990, Mr. Fried held several executive positions including Executive Vice President in charge of Production for Columbia Pictures, Director of Film Finance and Special Projects for Columbia Pictures and Director of Business Development at Twentieth Century Fox. Mr. Fried holds an M.S. from Cornell University and an M.B.A. from the Columbia University Graduate School of Business.

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Mr. Fried brings entrepreneurial, leadership and digital media experience to the board of directors. Mr. Fried’s experience as an executive producer and executive officer in media related industries provides broad understanding and expertise that strengthens the board of directors’ collective knowledge, capabilities and experience.
Ms. Qinying Liuhas served as Co-Chairmen of the Board of Directors since the Business Combination in October 2009. Ms. Liu is a co-founder of Jieli Consulting and previously served as the chairman of SearchMedia International. She has also been the general manager of Shanghai Lifang Trading Co., Ltd since 2004, a Chinese trading company. Before the founding of Jieli Consulting, she was chairman of Sige from 2004 to November 2007 and Shanghai Qinjun from 2003 to June 2008. She also served as chief representative of the Shanghai Office of GETA Company, a Germany special power tools manufactory from 1993 to 2000. Ms. Liu received her master’s degree in media and communication from Renmin University of China. She obtained her bachelor’s degree in chemistry from East China University of Science and Technology.
Ms. Liu brings multi-platform media industry experience to the board of directors. Ms. Liu is also a founder of SearchMedia International.
Mr. Steven D. Rubinhas served as a member of the Board of Directors since the Business Combination in October 2009. Mr. Rubin served as the Secretary of Ideation from June 2007 to October 2009. Mr. Rubin has been the Executive Vice President of OPKO Health, Inc. since May 2007 and a director of OPKO Health, Inc. since February 2007 and is a member of The Frost Group LLC. Mr. Rubin currently serves on the Boards of Directors of OPKO Health, Inc., Non-Invasive Montoring Systems, Inc., PROLOR Biotech, Inc., Neovasc, Inc., Kidville, Inc., which operates upscale learning and play facilities for children, Tiger X Medical, Inc., a producer and distributor of orthopedic and spinal medical devices, Castle Brands, Inc., a marketer of premium spirits, Dreams, Inc., a vertically integrated sports licensing and products company, and Safestitch Medical, Inc., a developmental stage FDA-registered medical device company focused on the development of medical devices that manipulate tissues for the treatment of obesity, gastroesophageal reflux disease, hernia formation, esophageal obstructions, Barrett’s Esophagus, upper gastrointestinal bleeding, and other intraperitoneal abnormalities through endoscopic and minimally invasive surgery. Mr. Rubin previously served as the Senior Vice President, General Counsel and Secretary of IVAX Corporation from August 2001 until September 2006.
Mr. Rubin brings leadership, business and legal experience to the board of directors. Mr. Rubin has advised companies in several aspects of business, transactional, and legal affairs for more than 20 years. His experience as a practicing lawyer, general counsel, and board member to multiple public companies has given him broad understanding and expertise, particularly relating to strategic planning and acquisitions.
Mr. Glenn L. Halprynhas served as a member of the Board of Directors since the Business Combination in October 2009 and served as a director of Ideation from December 2008 to October 2009. Since August 2010, Mr. Halpryn has served as a Director of ChromaDex Corporation, a public company that along with its subsidiaries supply phytochemical reference standards and reference materials, related contract services, and products for the dietary supplement, nutraceutical, food and beverage, functional food, pharmaceutical and cosmetic markets. Mr. Halpryn serves as Chair of the Nominating and Corporate Governance Committee and has served on the Audit Committee of ChromaDex Corporation since May 2010. Mr. Halpryn has been the Chief Executive Officer and a director of Transworld Investment Corporation, a private investment company, since June 2001. Mr. Halpryn currently serves as a director of Sorrento Therapeutics, Inc., a biopharmaceutical company, and Castle Brands Inc., a developer and international marketer of premium branded spirits. From September 2008 until May 2010, Mr. Halpryn also served as a director of Winston Pharmaceuticals, Inc., a pharmaceutical company specializing in skin creams and pain medications. From October 2002 to September 2008, Mr. Halpryn served as a director of Ivax Diagnostics, Inc. Mr. Halpryn served as Chairman of the board of directors and Chief Executive Officer of Orthodontix, Inc. (now Protalix Biotherapeutics, Inc.) from April 2001 to December 2006. From April 1988 to June 1998, Mr. Halpryn was Vice Chairman of Central Bank, a Florida state-chartered bank. Since June 1987, Mr. Halpryn has been the President of and a beneficial holder of stock of United Security Corporation, a broker-dealer registered with FINRA.
Mr. Halpryn brings leadership and business experience to the board of directors. Mr. Halpryn has advised companies in several aspects of business and transactional affairs. His experience as a board member to multiple public companies has given him broad understanding and expertise.

57


Mr. Chi-Chuan (Frank) Chenhas served as a member of the Boardboard of Directorsdirectors since the Business Combination in October 2009. Mr. Chen is a Vice President and Special Assistant to the Chief Executive Officer at Ruentex Group. He has served in the Investment Management Department at Ruentex Group since 1987. Mr. Chen holds a B.S. in chemical engineering and an MBA from National Taiwan University.

Mr. Chen brings investment management experience to the board of directors. Mr. Chen’s 20 years of experience in the investment management department of Ruentex Group provides broad knowledge, experience and insights to the board of directors.

Executive OfficersMr. Jeffrey Yunan Ren

The following individuals are our current executive officers.
NameAgePosition
Paul Conway41Chief Executive Officer
Wilfred Chow45Chief Financial Officer
Garbo Lee53President
Xiaotu Hu40Executive Vice President
All officers serve until they resign or are replaced or renamed at the discretion has served as a member of the Boardboard of Directors.
directors and the Chairman of the Audit Committee since February 2012. Mr. Ren currently serves as an independent director of Prince Frog International Holdings Limited, a public company focusing on the manufacture and distribution of child care products and household hygiene products in China and trading on the Hong Kong Stock Exchange, and serves as a board director of numerous private companies. From June 2010 to March 2012, Mr. Ren served as President of Bicon International (HK) Limited, a pharmaceutical investment holding company based in Hong Kong. Previously, Mr. Ren served as an Executive Director at UBS Investment Bank in Hong Kong from 2008 to 2010 and as a Vice President at Lehman Brothers in Hong Kong from 2006 to 2008. Prior to 2006, Mr. Ren served as an attorney with such international law firms as Skadden, Arps, Clifford Chance and Perkins Coie. Mr. Ren holds an LLM from Harvard Law School, and is a graduate of Beijing University Law School (LLB and Graduate Program).

Mr. Ren brings investment management, corporate finance and legal experience to the board of directors. Mr. Ren has advised companies in Asian markets as a corporate executive, as a board member, as an investment banker and as an attorney with major international law firms. His experience provides the board of directors and the audit committee with international finance experience and knowledge of Asian markets.

Mr. Steven D. Rubin has served as a member of the board of directors since the Business Combination in October 2009. Mr. Rubin served as the Secretary of Ideation from June 2007 to October 2009. Mr. Rubin has been the Executive Vice President - Administration of OPKO Health, Inc. since May 2007 and a director of OPKO Health, Inc. since February 2007 and is a member of The following additional information is providedFrost Group LLC. Mr. Rubin served as the Senior Vice President, General Counsel and Secretary of IVAX Corporation from August 2001 until September 2006. Mr. Rubin currently serves on the board of directors of Opko Health, Inc., Dreams, Inc., a vertically integrated sports licensing and products company, Safestitch Medical, Inc., a medical device company, PROLOR Biotech, Inc., a development stage biopharmaceutical company, Kidville, Inc., which operates large, upscale facilities, catering to newborns through five-year-old children and their families and offers a wide range of developmental classes for our current executive officers.

newborns to 5 year olds, Non-Invasive Monitoring Systems, Inc., a medical device company, Tiger X Medical, Inc., previously an early-stage orthopedic medical device company specializing in designing, developing and marketing reconstructive joint devices and spinal surgical devices, Castle Brands, Inc., a developer and marketer of premium brand spirits, and Neovasc, Inc., a company developing and marketing medical specialty vascular devices.

Mr. Rubin brings leadership, business and legal experience to the board of directors. Mr. Rubin has advised companies in several aspects of business, transactional, and legal affairs for more than 23 years. His experience as a practicing lawyer, general counsel, and board member to multiple public companies has given him broad understanding and expertise, particularly relating to strategic planning and acquisitions.

Mr. Paul Conwayhas served as our Chief Executive Officer sinceOffice from February 2010.2010 to February 2012. Mr. Conway currently serves as a consultant to the Company. From 1998 through January 2010, Mr. Conway worked at Oppenheimer & Co., Inc., where he served as Managing Director of Media Investment Banking from January 2009 to January 2010, as Executive Director of Media Investment Banking from January 2006 to January 2009, and as Director of Media Investment Banking from January 2003 to January 2006. Mr. Conway holds a B.B.A. from the University of Miami and an M.B.A. from the Columbia University Graduate School of Business.

Mr. Conway brings media related investment banking management experience to the board of directors. Mr. Conway’s prior experience as the Chief Executive Officer of the Company and his investment banking management experience provide industry related knowledge and insights to the board of directors.

Executive Officers

The following individuals are our current executive officers.

Name

Age

Position

Peter Tan

39Chief Executive Officer

Wilfred Chow

46Chief Financial Officer

Garbo Lee

54President

All officers serve until they resign or are replaced or renamed at the discretion of the board of directors.

The following additional information is provided for our current executive officers.

Mr. Peter Tanhas served as our Chief Executive Officer since February 2012. Mr. Tan is currently the chairman of TGC Partners Limited and managing director of TGC Financial Partners Limited, an investment advisory firm which he founded in 2009. He was also partner and part of the founding team of SIG China, the China-based private equity fund of leading U.S. hedge fund Susquehanna International Group (SIG). Mr. Tan has been actively involved in more than 40 investments in China, 12 of which were eventually listed on international stock exchanges. He has been particularly active in the media space over the past decade, and was an early investor in Airmedia and other Chinese media companies. Mr. Tan formerly served as a board member or observer of multiple companies prior to their U.S. listing, including Home Inns, E-House and Bona Entertainment Group. He was also a director at Ocean Butterflies International and 51credit. Mr. Tan is currently a director of Cathay Industries, a specialty chemical manufacturer based in China. Prior to co-founding SIG China, Mr. Tan was a lawyer with White & Case LLP and Perkins Coie LLP, where he was qualified to practice in England, Hong Kong and Singapore, and where he founded the private equity & venture capital practices and advised emerging-growth companies on fundraising transactions throughout their lifecycle.

Mr. Tan brings more than fifteen years of global investment, corporate finance and corporate law experience to the board of directors. Mr. Tan is knowledgeable about China's media and entertainment industries. His experience as a board member, as a founder of a private equity firm and as an attorney with major international law firms has given him knowledge as a leading specialist on public and private equity and venture capital investments in Greater China. Mr. Tan provides the board of directors with knowledge regarding the media industry in China and insights into pursuing accretive acquisitions and opportunities in the future.

Mr. Wilfred Chowhas served as our Chief Financial Officer since January 2010. From April 2006 through December 2009, Mr. Chow was Senior Vice President of American Oriental Bioengineering, a pharmaceutical company,company. Prior to that, he was Chief Financial Officer of Aptegrity Inc. He also held senior positions in PriceWaterhouseCoopers and from January 2005 through March 2006,Deloitte & Touche in both the New York and Hong Kong office. Mr. Chow washas over 20 years of experience in the financial markets. He received his bachelor’s degree in economics from the University of Hong Kong and M.B.A. from the University of Leicester, United Kingdom. Mr. Chow is a financial consultant with PriceWaterhouseCoopers.

certified public accountant in the United States.

Ms. Garbo Leehas served as our President since the Business Combination in October 2009. Ms. Lee served as the president of SearchMedia International from March 2009 to October 2009. Prior to that, she was the chief operating officer of SearchMedia International. Ms. Lee has over 24 years of experience in the advertising industry. Prior to joining SearchMedia International, Ms. Lee was a general manager of Sony BMG Music Entertainment (PRC) Inc., a Chinese music marketing and distribution company under Sony BMG Music Entertainment, a global recorded music joint venture headquartered in the New York City, from 2005 to 2007. She served as general manager of Coming Age Communication Co. Ltd., a China-based integrated marketing company, from 2002 to 2004. From 2000 to 2002, she worked as managing director and vice president of Doyle Dane Bernbach (DDB) Shanghai, an advertising and integrated marketing company under Omnicom Group in China. From 1984 to 2000, Ms. Lee worked for various companies under WPP Group. Ms. Lee received her bachelor’s degree in arts from International Christian University in Tokyo, Japan.

Mr. Xiaotu Huhas

Johnny Lo served as the our Executive Vice President since July 2010.Chief Operating Officer beginning on September 2011. On May 14, 2012, the Company terminated Mr. Hu is the General ManagerLo and ceased any future acquisition of Beijing Wanshuizhiyuan, one of our subsidiaries, since 2006. From 2002 to 2005, Mr. Hu was the General Manager of Beijing Da Hua Global Advertising Co. Ltd., an advertisingLo’s company, in Beijing.

Sky Media Company.

There are no family relationships among the members of SearchMedia Holdings’ board of directors or the members of SearchMedia Holdings’ senior management.

58


No director or member of senior management has any arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which such director or member of senior management was selected as a director or member of senior management of SearchMedia Holdings.

B.
B.Compensation

For the year ended December 31, 2010,2011, we paid aggregate cash compensation of approximately $1.0$0.9 million to our directors and executive officers. No executive officer is entitled to any severance benefits upon termination of his or her employment with our company except for Paul Conway,Peter Tan, Wilfred Chow and Garbo Lee.

The aggregate remuneration paid and benefits in kind granted to our executive officers for the year ended December 31, 20102011 was approximately $0.7$0.6 million. In addition beginning on October 30, 2009, non-employee members of the board of directors are paid an annual cash fee of $20,000 payable per quarter. Committee chairmen receive an additional annual fee of $5,000.$5,000 other than Mr. Tan during his time as audit committee chairman and Mr. Ren, each of whom received an annualized fee of $20,000 as audit committee chairman. Mr. Fried and Mr. Rubin also received $75,000 and $40,000, respectively, as fees paid in connection with consulting agreements. The aggregate remuneration paid to the directors or accrued by us for fiscal year ended December 31, 20102011 was $0.3 million.

Share Incentives

In January 2008, in order to attract and retain the best available personnel, we adopted the 2008 share incentive plan, or the plan to purchase a maximum of 1,796,492 shares in our company. As of August 13, 2010, subject to shareholder approval which was received in September of 2011, the board of directors voted to reserve 3,000,000 shares for issuance under the plan.

The following table summarizes, as of May 31, 2011,April 30, 2012, the options and restricted shares granted to our directors and executive officers and other individuals as a group, without giving effect to options that were exercised or terminated.

                 
  Common           
  Shares           
  Underlying           
  Granted           
  Options/ or  Exercise        
  Restricted  Price      Expiration 
  Shares  ($/share)  Grant Date  Date 
Name:                
Paul Conway  250,000   6.05  February 1, 2010 January 31, 2020
   100,000     February 1, 2010  (1)      
Wilfred Chow  225,000   2.62  January 4, 2010 August 20, 2020
Garbo Lee  *   7.14  January 11, 2010 January 10, 2020
Robert Fried  *   7.14  January 11, 2010 January 10, 2020
Glenn Halpryn  *   7.14  January 11, 2010 January 10, 2020
Steve Rubin  *   7.14  January 11, 2010 January 10, 2020
Chi-Chuan Chen  *   7.14  January 11, 2010 January 10, 2020
Larry Lu  *   7.14  January 11, 2010 January 10, 2020
Jianzhong Qu  *   7.14  January 11, 2010 January 10, 2020
Earl Yen  *   7.14  January 11, 2010 January 10, 2020
Other individuals as a group  937,576   (2)  (2)        (3)      
Total  1,757,576             

   Common
Shares
Underlying
Granted
Options/ or
Restricted
Shares
  Exercise
Price
($/share)
  Grant Date  Expiration
Date
 

Name:

     

Peter Tan

   75,000    1.06    February 8, 2012    February 7, 2022  
   400,000    1.10    February 13, 2012    February 12, 2022  

Paul Conway

      1.65    March 27, 2012    March 27, 2012(1) 
      —      March 27, 2012    —  (1) 

Wilfred Chow

      2.62    January 4, 2010    August 20, 2020  

Garbo Lee

      7.14    January 11, 2010    January 10, 2020  

Robert Fried

      7.14    January 11, 2010    January 10, 2020  
      1.06    February 8, 2012    February 7, 2022  

Glenn Halpryn (2)

      7.14    January 11, 2010    January 10, 2020  

Steve Rubin

      7.14    January 11, 2010    January 10, 2020  
      1.06    February 8, 2012    February 7, 2022  

Chi-Chuan Chen

      7.14    January 11, 2010    January 10, 2020  
      1.06    February 8, 2012    February 7, 2022  

Jeffrey Ren

      1.55    March 21, 2012    March 20, 2022  

Other individuals as a group

   1,207,576     (3)    (3)    (4) 

Total

   2,435,909     

*Less than one percent of the outstanding ordinary shares.
(1)Vest on the three-year anniversaryMr. Conway’s earlier grant of the date250,000 stock options and 100,000 restricted shares were terminated pursuant to his separation agreement and he received a new grant of grant.100,000 stock options and 33,333 restricted shares.
(2)Mr. Halpryn resigned from the board of directors effective June 30, 2011.
(3)Options/restricted shares were granted to other individuals on various exercise price and various dates
(3)(4)Other individuals’ options expire on various dates.

59


The following paragraphs describe the principal terms of our 2008 share incentive plan:

Plan Administration. SearchMedia Holdings’sHoldings’ board of directors, or a committee designated by the board or directors, will administer the plan. The committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of each award grant.

Types of Awards. The types of awards SearchMedia International may grant under the plan include the following.

options to purchase SearchMedia Holding’s ordinary shares;

options to purchase SearchMedia Holding’s ordinary shares;
restricted shares, which represent non-transferable ordinary shares, that may be subject to forfeiture, restrictions on transferability and other restrictions; and
restricted share units, which represent the right to receive SearchMedia Holdings’s ordinary shares at a specified date in the future, which may be subject to forfeiture.

restricted shares, which represent non-transferable ordinary shares, that may be subject to forfeiture, restrictions on transferability and other restrictions; and

restricted share units, which represent the right to receive SearchMedia Holdings’ ordinary shares at a specified date in the future, which may be subject to forfeiture.

Award Document. Awards granted under SearchMedia International’s plan are each evidenced by an award document that sets forth the terms, conditions and limitations for each grant, including the exercise price, the number of shares to which the award pertains, the conditions upon which an option will become vested and exercisable and other customary provisions.

Eligibility. SearchMedia Holdings International may grant awards to (i) its employees, directors and consultants, and (ii) employees, directors and consultants of any of its parents or subsidiaries and of any entity in which SearchMedia Holdings or any of its parents or subsidiaries holds a substantial ownership interest. Incentive share options may be granted to employees of SearchMedia International, or any of its parents or subsidiaries, and may not be granted to employees of a related entity or to independent directors or consultants.

Acceleration of Awards upon Change of Control and Corporate Transactions. Unless otherwise provided in the award agreement: 1) the outstanding awards will accelerate by one year upon occurrence of a change-of-control transaction where the successor entity does not convert, assume or replace SearchMedia International’s outstanding awards under the plan; 2) in the event of a corporate transaction as defined in the plan, including certain amalgamations, arrangements, consolidations or schemes of arrangement and the transfer of all or substantially all of the company’s assets, each outstanding award that is not assumed or replaced by the successor entity will become fully vested and immediately exercisable provided that the related grantee’s continuous service with SearchMedia International shall not be terminated before that date; and 3) furthermore, in the event of a corporate transaction, each outstanding award that is assumed or replaced by the successor entity will become fully vested and immediately exercisable immediately upon termination of the participant’s employment or service within twelve (12) months of the Corporate Transaction without cause.

Term of the Awards. The term of each award grant shall be stated in the award agreement, provided that the term for an option shall not exceed ten years from the date of the grant, unless shareholder approval is obtained for amending the plan to extend the exercise period for an option beyond ten years from the date of the grant.

Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies, the vesting schedule.

Transfer Restrictions. Except as otherwise provided by the committee that administers the plan, awards granted under the plan may not be assigned, transferred or otherwise disposed of by the award holders other than by will or the laws of descent and distribution.

60


Termination and Amendment of the Plan. Unless terminated earlier, the plan will expire on, and no award may be granted pursuant to the plan after, the tenth anniversary of its effective date. With the approval of SearchMedia Holdings’sHoldings’ board of directors, the committee that administers the plan may amend or terminate the plan, except that shareholder approval shall be obtained to the extent necessary or desirable to comply with applicable laws or stock exchange rules, or for amendments to the plan that increase the number of shares available under the plan, permit the committee to extend the term of the plan or the exercise price of an option beyond ten years from the date of grant or result in a material increase in benefits or a change in eligibility requirements.

C.
C.Board Practices

The directors of SearchMedia Holdings will serve as directors until the next Annual Meeting or until their successors are duly elected and qualified. The directors have served in that capacity since the Business Combination.

All officers serve until they resign or are replaced or renamed at the discretion of the Boardboard of Directors.

directors.

Board Committees

The board of directors has established an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee.

Audit Committee Members and Financial Expert

The Boardboard of Directorsdirectors has established an Audit Committee. During 2011, Mr. Glenn Halpryn served as the chairman of the Audit Committee until his resignation from the board of directors on June 30, 2011. Mr. Peter Tan served as the chairman of the Audit Committee from July 1, 2011 until February 8, 2012 when he was appointed Chief Executive Officer. Upon his appointment to the board of directors on February 25, 2012, Mr. Jeffrey Ren took his place on the Audit Committee as chairman. The Audit Committee currently consists of Glenn HalprynJeffrey Ren (Chair) and Chi-Chuan Chen. The Boardboard of Directorsdirectors has determined that Mr. HalprynRen meets the attributes of an “audit committee financial expert” within the meaning of SEC regulations and is “independent” within the meaning of the listing standards of NYSE AmexMKT and applicable SEC regulations. Xiaoming LuMessrs. Halpryn and Tan were considered “audit committee financial experts” and “independent” when they served onas the chairman of the Audit Committee from December 2009 to August 2010.Committee. The Audit Committee operates pursuant to the Charter of the Audit Committee of the Boardboard of Directorsdirectors of SearchMedia Holdings Limited which was amended on August 6, 2010.

Compensation Committee Members

The Compensation Committee currently consists of Glenn HalprynRobert Fried and Steve Rubin. The Compensation Committee operates pursuant to the Charter of the Compensation Committee of the Boardboard of Directorsdirectors of SearchMedia Holdings Limited which was approved on December 8, 2009.

Corporate Governance and Nominating Committee Members

The Corporate Governance and Nominating Committee currently consists of Glenn HalprynRobert Fried and Steve Rubin. The Corporate Governance and Nominating Committee operates pursuant to the Charter of the Corporate Governance and Nominating Committee of the Boardboard of Directorsdirectors of SearchMedia Holdings Limited which was approved on December 8, 2009.

Code of Ethics

We have adopted a Code of Ethics applicable to our directors, officers and employees including our Chief Executive Officer, Chief Financial Officer and principal accounting officer. A copy of our Code of Ethics is available on our website atwww.searchmediaholdings.com. We intend to post amendments to or waivers from our Code of Ethics (to the extent applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer or to our directors) on our website. Our website is not part of this Annual Report on Form 20-F.

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Compensation of Directors

Our Compensation Committee recommends director compensation to the board of directors. No compensation was paid to any SearchMedia Holdings directors for services rendered prior to the Business Combination; however, certain individuals were reimbursed for out-of-pocket expenses incurred in connection with activities on the company’s behalf. From January 1, 2009 to October 30, 2009, no fees were paid to the non-employee members of the board of directors. Beginning on October 30, 2009, theThe non-employee members of the board of directors receive an annual cash fee of $20,000 that is payable per quarter. The committee chairmen receive an additional $5,000 annual fee. Except for Mr. Fried and Mr. Rubin, each non-employee member of the board of directors was granted 25,000 stock options in 2010, which fully vestvested on January 11, 2011 and which expire January 11, 2020. Mr. Fried and Mr. Rubin were granted 50,000 stock options in 2010, which fully vestvested on January 11, 2011 and which expire on January 11, 2020.

D. Employees
Mr. Tan was paid a cash fee of $20,000 as the chairman of the Audit Committee until he resigned on February 8, 2012. Mr. Ren was appointed as the chairman of the Audit Committee beginning February 25, 2012 and currently receives the cash fee of $20,000 as the chairman of the Audit Committee. In 2012, Mr. Fried, Mr. Rubin, and Mr. Chen were granted 100,000 stock options, 75,000 stock options, and 25,000 stock options, respectively, as members of the board of directors. Messrs. Fried, Rubin, and Chen's stock options fully vest on February 8, 2013. In March of 2012, Mr. Ren was granted 25,000 stock options which fully vest on February 24, 2013. Additionally, upon his appointment as Chief Executive Officer, Mr. Tan was granted 400,000 stock options, which vest pro rata over three years beginning February 13, 2013. Mr. Tan was also granted 75,000 stock options, as a member of the board of directors, that fully vest on February 8, 2013. All stock options expire 10 years after the grant date.

D.Employees

As of March 31, 2011,2012, we had approximately 300192 employees, including 4021 business development personnel, 11064 sales and marketing personnel, 7037 maintenance and operation personnel, 3070 finance and 50 administrative personnel. All of our employees are full-time. None of our employees are covered by a collective bargaining agreement. We manage our own staff recruitment. We consider our relations with our employees to be generally good.

We are required by applicable PRC regulations to contribute for our employees certain amounts, based on our employees’ aggregate salaries, to a defined contribution pension plan, a medical insurance plan, a housing fund, an unemployment insurance plan, a personal injury insurance plan and a maternity insurance plan. We believe that we have made the required payments in compliance with the applicable laws and regulations since our inception.

E.
E.Share Ownership

Please see Item 6.B and Item 7

Item 7Major Shareholders and Related Party Transactions

A.
Item 7Major Shareholders and Related Party Transactions
A.Major Shareholders

The following table sets forth certain information as of June 20, 2011May 8, 2012 concerning the beneficial ownership of the ordinary shares by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding ordinary shares, (ii) each of our directors serving on June 20, 2011,May 8, 2012, (iii) each current executive officer, and (iv) all of our current executive officers and directors as a group. Unless indicated below, all holders listed below have sole voting power and investment power over the shares beneficially owned by them. Unless noted otherwise, the address of each person listed below is Floor 13, Central Modern Building, 468 Xin HuiK-Wah Center #38-03, 1010 Middle Huaihai Road, Shanghai, China, 200060.

         
      Percentage of Class of 
  Ordinary Shares  Ordinary Shares 
Beneficial Owner Beneficially Owned (1)  Beneficially Owned (%) 
Officers and Directors Qinying Liu (2)  989,085   4.7%
Robert N. Fried(3)  1,307,465   6.3%
Steven D. Rubin(4)  363,870   1.7%
Glenn Halpryn (5)  40,860   * 
Chi-Chuan Chen (6)  25,000   * 
Garbo Lee (7)  57,056   * 
Paul Conway (8)  86,333   * 
Wilfred Chow (9)  77,000   * 
Xiaotu Hu      
All directors and executive officers as a group (9 persons)  2,946,669   13.9%
5% Holders
        
Dr. Phillip Frost, M.D. (10)  5,273,169   22.5%
Deutsche Bank AG, HK Branch(11)  2,399,995   11.4%
China Seed Ventures, L.P.(12)  2,445,083   11.2%
Linden Ventures II(13)  1,982,820   9.2%
Heartland Advisors Inc. (14)  1,600,000   7.7%
Luxor Capital Group, LP (15)  1,323,954   6.4%
200031.

Beneficial Owner

  Ordinary Shares
Beneficially Owned (1)
   Percentage of Class of
Ordinary Shares
Beneficially Owned (%)
 

Officers and Directors

Peter Tan (2)

   160,000      

Robert N. Fried(3)

   1,323,264     6.9

Steven D. Rubin(4)

   363,870     1.9

Jeffrey Yunan Ren

   0       

Chi-Chuan Chen (5)

   25,000      

Garbo Lee (6)

   63,722      

Wilfred Chow (7)

   152,000      

Paul Conway(12)

   3,000      

All directors and executive officers as a group (8 persons)

   2,090,856     10.6

5% Holders

    

Dr. Phillip Frost, M.D. (8)

   7,412,033     32.1

China Seed Ventures, L.P.(9)

   1,194,626     6.5

Heartland Advisors Inc. (10)

   1,200,000     6.5

Luxor Capital Group, LP (11)

   1,306,632     7.1

Deutsche Bank AG, HK Branch (13)

   2,399,995     12.8

*The person beneficially owns less than 1% of SearchMedia Holdings’ outstanding common shares.

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(1)Based on 20,858,66118,472,570 shares outstanding as of June 20, 2011.May 8, 2012.
(2)Excludes 600,000Includes 160,000 ordinary shares issuable upon the conversion of a convertible note in favor of an affiliate of Mr. Tan at a conversion price of $1.25 per share. The convertible note is convertible into shares within 60 days of the date of this annual report on Form 20-F.
(3)Includes exercisable warrants to Mrs. Liu’s husband converted at the exchange ratio (0.0675374) and 40,522purchase 590,793 ordinary shares beneficially owned by Mrs. Liu’s husband. Includes 25,000and includes 50,000 ordinary shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.May 8, 2012.
(3)(4)Includes exercisable warrants to purchase 593,793153,000 ordinary shares and includes 50,000 ordinary shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.May 8, 2012.
(4)(5)Includes exercisable warrants to purchase 153,00025,000 ordinary shares and includes 50,000 shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.May 8, 2012.
(5)(6)Includes 63,722 ordinary shares and exercisable warrants to purchase 3,172 ordinary shares beneficially owned by Halpryn Capital Partners LLC and includes 25,000 shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.May 8, 2012.
(6)(7)Includes 25,000150,000 ordinary shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.May 8, 2012.
(7)Includes 57,056 shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.
(8)Includes 83,333 shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.
(9)Includes 75,000 shares of common stock underlying options that are currently exercisable or exercisable within 60 days after June 20, 2011.
(10)Includes exercisable warrants to purchase 2,626,4342,785,599 ordinary shares.shares and 2,000,000 ordinary shares issuable upon the conversion of a convertible note at a conversion price of $1.25 per share. The convertible note is convertible into shares within 60 days of the date of this annual report on Form 20-F. Ownership is as reported in the Schedule 13D/A filed by Dr. Phillip Frost, M.D. on December 24, 2009.November 22, 2011 and additional information known to the Company. The business address of Dr. Frost, M.D. is 4400 Biscayne Blvd., Suite 1500, Miami, Florida 33137.
(9)Includes 140,000 ordinary shares issuable upon the conversion of a convertible note at a conversion price of $1.25 per share. Ownership is as reported in the Schedule 13D filed by China Seed Ventures, L.P. on January 21, 2010 and additional information known to the Company. The business address of China Seed Ventures, L.P. is Room 104 Building 18, No. 800 Huashan Road, Shanghai, China.
(10)Ownership is as reported in the Schedule 13G/A filed by Heartland Advisors Inc. on February 10, 2012. The business address of Heartland Advisor Inc is 789 North Water Street, Milwaukee, Wisconsin 53202.
(11)

Ownership is as reported in the Schedule 13G/A filed by Luxor Capital Group, LP on February 14, 2012. The business address of Luxor Capital Group, LP is 1114 Avenue of the Americas, 29th Floor, New York, New York 10036.

(12)Excludes 58,087 shares to be issued to Mr. Conway pursuant to the terms of the May 2012 settlement agreement with the Company.
(13)Does not exclude ordinary shares to be returned to the Company pursuant to that certain settlement agreement effective May 11, 2012 between the Company and Deutsche Bank AG, HK Branch. Includes exercisable warrants to purchase 255,427 ordinary shares. Ownership is as reported in the Schedule 13G filed by Deutsche Bank AG, HK Branch on November 10, 2009. The business address of Deutsche Bank AG, HK Branch is Theodor-Heuss-Allee 70, 60468 Frankfurt am Main, Federal Republic of Germany.
(12)Includes exercisable warrants to purchase 903,318 ordinary shares. Ownership is as reported in the Schedule 13D filed by China Seed Ventures, L.P. on January 21, 2010. The business address of China Seed Ventures, L.P. is Room 104 Building 18, No. 800 Huashan Road, Shanghai, China.
(13)Includes exercisable warrants to purchase 714,025 ordinary shares. Ownership is as reported in the Schedule 13G filed by Linden Ventures II on November 6, 2009. The business address of Linden Ventures II is C/O Appleby, 56 Admin Drive, Wickhams Cay 1, PO Box 3190, Road Town, Tortola, British Virgin Islands.
(14)Ownership is as reported in the Schedule 13G/A filed by Heartland Advisors Inc. on February 10, 2011. The business address of Heartland Advisor Inc is 789 North Water Street, Milwaukee, Wisconsin 53202.
(15)Ownership is as reported in the Schedule 13G/A filed by Luxor Capital Group, LP on February 14, 2011. The business address of Luxor Capital Group, LP is 1114 Avenue of the Americas, 29th Floor, New York, New York 10036.

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None of our major shareholders have different voting rights from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly. The Company is not aware of any arrangement that may, that may, at a subsequent date, result in a change of control of the Company.

Equity Compensation Plan Information

The following table lists all securities authorized for issuance and outstanding under our equity compensation plans at December 31, 2010:

             
          Number of securities 
          remaining available 
          for future issuance 
          under equity 
  Number of securities to  Weighted average  compensation plans 
  be issued upon exercise  exercise price of  (excluding 
Plan category of outstanding options  outstanding options  outstanding options) 
Equity compensation plans approved by security holders  1,326,890  $3.97   351,693 
Equity compensation plans not approved by security holders (1)        1,203,508 
          
Total  1,326,890  $3.97   1,555,201 
          
2011:

Plan category

  Number of securities to
be issued upon exercise
of outstanding options
   Weighted average
exercise price of
outstanding options
   Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding
outstanding options)
 

Equity compensation plans approved by security holders

   1,367,195    $4.22     1,461,766  
  

 

 

   

 

 

   

 

 

 

B.
(1)In August 2010, the Board of Directors approved an increase in the number of shares reserved for issuance under the plan to 3,000,000 and such increase will be presented for shareholder approval.
B.Related Party Transactions

Certain Relationships and Related Transactions

The Audit Committee reviews and approves transactions in which SearchMedia Holdings was or is to be a participant, where the amount involved exceeded or will exceed $120,000 annually and any of our directors, executive officers or their immediate family members had or will have a direct or indirect material interest. We have a written policy stating that the Audit Committee is responsible for reviewing and, if appropriate, approving or ratifying any related party transactions. The related party transaction will not be approved unless at a minimum it is for our benefit and is upon terms no less favorable to us than if the related party transaction was with an unrelated third party.

Transactions with SearchMedia International’s Shareholders and Senior Management Personnel

Convertible Promissory Notes

In February 2012, the Company entered into an agreement for a new $3.0 million Convertible Note with its existing major shareholder and Affiliated Entitiesseveral other investors including an affiliate of Companies Acquiredthe Company’s Chief Executive Officer. The Note has a one year term and borrowings bear interest at a rate of 10% per annum. In addition, the Note is convertible into the Company’s common shares at $1.25 per share.

Share buyback with shareholders

In January 2012 and May 2012, the Company reached settlement agreements for the arbitration between the Company and certain of its predecessor shareholders related to matters from the Share Exchange Agreement signed October 30, 2009. Pursuant to the settlement agreement (i) 2,471,968 shares will be repurchased by Shanghai Jingli

the Company at an average price per share of $0.25 and such shares will be retired, (ii) 2,029,700 shares will be surrendered and cancelled without consideration, and (iii) 1,624,993 warrants will be surrendered and cancelled without consideration. As of the date of this report, 742,959 shares were returned for no consideration, 2,471,968 shares were purchased for an average price of $0.25 share and 1,624,993 warrants were surrendered and canceled without consideration.

Advance to senior management personnel

For the year ended December 31, 2010,2011, revenue of $0.1$0.05 million was recorded, which represents amounts received or receivable from affiliated entities of senior management personnel of certain companies acquired by Shanghai Jinglithe Company for SearchMedia International’s provision of advertising services to such affiliated entities. For the year ended December 31, 2010, expenses for leases of advertising space of $0.6 million was recorded, which represent amounts paid or payable by SearchMedia International to the affiliated entities of senior management personnel of certain companies acquired by Shanghai Jingli for leases of advertising space from these affiliated entities.

64


As of December 31, 2010, $1.02011, $2.1 million was payable to SearchMedia Internationalthe Company as advances made by SearchMedia Internationalthe Company to the senior management personnel. The advances are secured by the contingent purchase price payable to the previous owners of the acquired companies. The advances were subsequently settled due to disposition of Zhejiang Continental or charged to the income statement as expenses upon receipt of the former owners' reimbursement reports. We have not made any material advances during 2012, however we have made some non-material advances in 2012 relating to travel and business expenses.

As of December 31, 2011, $0.4 million was payable to the senior management personnel of certain companies acquired by Shanghai Jingli.

As of December 31, 2010, $1.9 million was payable by SearchMedia International to the senior management personnel of certain companies acquired by Shanghai Jingli as operating expenses paid on behalf of SearchMedia Internationalthe Company by such personnel.
As

Director Independence

The board of December 31, 2010, $0.05 million was payable by SearchMedia International to affiliated companies of certain companies acquired by Shanghai Jingli for leases of advertising space.

Director Independence
The Board of Directorsdirectors undertook a review of each director’sMessrs. Fried, Rubin and Chen’s independence in October 2010. Additionally, upon Mr. Tan’s appointment effective June 30, 2011 and Mr. Ren’s appointment in February 2012, the board reviewed the independence of Mr. Tan and Mr. Ren, respectively. During this review, the Boardboard of Directorsdirectors considered transactions and relationships between each director or any member of his or her immediate family and us and our subsidiaries and affiliates. The Boardboard of Directorsdirectors also examined transactions and relationships between directors or their known affiliates and members of our senior management or their known affiliates. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent under applicable laws and regulations and the NYSE AmexMKT listing standards. As a result of our review of the relationships of each of the members of the Boardboard of Directors,directors, the Boardboard of Directorsdirectors affirmatively determined that a majority of our directors, including Messrs. Fried, Rubin, HalprynChen, Ren and Chen,Rubin, are “independent” directors within the meaning of the listing standards of NYSE AmexMKT and applicable law.

C.
C.Interests of Experts and Counsel

Not applicable.

Item 8Financial Information

A.
Item 8Financial Information
A.Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal or Arbitration Proceedings

Shareholder Lawsuits in the United States

A shareholder complaint was filed on September 13, 2010 by Sid Murdeshwar against SearchMedia Holdings, the former Ideation officers and directors and certain of the SearchMedia Holdings’ officers and directors (the “Individual Defendants”) as a purported class action on behalf of the shareholders of SearchMedia Holdings in the United States District Court for the Central District of California. The case was filed under the captionSid Murdeshwar, Individually and on Behalf of All Others Similarly Situated, Plaintiff v. SearchMedia Holdings Limited f/k/a Ideation Acquisition Corp., Robert N. Fried, Phillip Frost, Rao Uppaluri, Steven D. Rubin, Glenn Halpryn, Thomas E. Beier, David H. Moskowitz, Shawn Gold, Garbo Lee, Paul Conway, Qinying Liu, Earl Yen, and Jennifer Huang, Defendants.

A separate shareholder complaint was filed on December 23, 2010 by Hymie Akst against SearchMedia Holdings, the former Ideation officers and directors and certain of the SearchMedia Holdings’ officers and directors (the “Individual Defendants”) as a purported class action on behalf of the shareholders of SearchMedia Holdings in the United States District Court for the Southern District of Florida. The case was filed under the captionHymie Akst, Individually and on Behalf of All Others Similarly Situated, Plaintiff v. SearchMedia Holdings Limited f/k/a Ideation Acquisition Corp., Robert N. Fried, Phillip Frost, Rao Uppaluri, Steven D. Rubin, Glenn Halpryn, Thomas E. Beier, David H. Moskowitz, Shawn Gold, Garbo Lee, Paul Conway, Qinying Liu, Earl Yen, and Jennifer Huang, Defendants.

65


On February 17, 2011, theMurdeshwaraction was transferred to the United States District Court for the Southern District of Florida. TheAkstplaintiffs voluntarily dismissed their action on February 23, 2011. On April 11, 2011, theMurdeshwarplaintiffs amended their complaint.
The amended complaint, alleges,alleging, among other things, that the directors of SearchMedia Holdings violated the federal securities laws by making false and misleading statements regarding Ideation’s acquisition of the target company, SearchMedia International, and by overstating SearchMedia International’s financial results. The amended complaint further allegesalleged that the Individualindividual Defendants are liable for the alleged misrepresentations as controlling persons. The complaint seekssought certification of a class of SearchMedia Holdings’ shareholders who purchased or otherwise acquired SearchMedia Holdings securities between April 1, 2009 and August 20, 2010, and all persons who were holders of SearchMedia Holdings on October 2, 2009, an award of compensatory damages, an award of reasonable fees and costs incurred in thisthe action, and such other relief as the Court deems just and proper.

In August 2011, the Court dismissed the claims pertaining to alleged misstatements and omissions made about SearchMedia International's financial results and future prospects, but did not dismiss the claims regarding the alleged misstatements and omissions in Ideation's proxy statement.

In September 2011, after attending a mediation, SearchMedia Holdings and certain of the individual Defendants (Robert Fried, Phillip Frost, Rao Uppaluri, Steven Rubin, Glenn Halpryn, Thomas Beier, David Moskowitz and Shawn Gold) (the “Settling Defendants”) reached a tentative settlement with theAkstPlaintiffs.

Under the terms of the settlement, SearchMedia Holdings' D&O insurer agreed to pay $2.75 million in exchange for a release of the claims asserted against the Settling Defendants by theAkstplaintiffs and the putative class members. SearchMedia Holdings and the other Settling Defendants did not admit to any wrongdoing. The Court has ordered that any defendant insettlement does not include a release of the Murdeshwar actionPlaintiffs' claims against SearchMedia International or Defendants Garbo Lee, Qinying Liu, Earl Yen, Jennifer Huang and Paul Conway, who ishave not been served with the amended complaint by July 29, 2011 will becomplaint. In January 2012, the court dismissed without prejudice. On May 2, 2011, the Company and the Individual Defendants who have been served filed a motion to dismissprejudice the claims asserted against these remaining Defendants for the plaintiffs' failure to timely effect service on them. The Court has not yet ruled

On April 23, 2012, the court held a final fairness hearing on the motionsettlement. There were no objections to dismiss. A mediation is scheduled for July 26, 2011.

the settlement. On April 24, 2012, the court signed a final judgment approving the settlement and dismissing the lawsuit with prejudice.

Securities and Exchange Commission Investigation

On November 30, 2010, the SEC served a Subpoena Duces Tecum (the “Subpoena”) on SearchMedia Holdings pursuant to a formal Order of Investigation dated November 12, 2010, seeking documents regarding SearchMedia’s financial restatement and alleged accounting improprieties. On March 16, 2011, the SEC served an additional subpoena on the SearchMedia Holdings seeking additional documents regarding SearchMedia’s financial restatement and alleged accounting improprieties. We are cooperating fully with the SEC’s investigation and intend to continue to do so.

To date, we have produced over approximately 80% of the total responsive documents and continue to collect and review documents responsive to the subpoena duces tecum to supplement the production.

LawsuitsLawsuit in China

In June 2010,February 2012, the original shareholders (the “Plaintiffs”) of Shaanxi Xinshichuang Advertisement Marketing Co., Ltd. (“Shaanxi Co”), filed a civil lawsuit (“Lawsuit”) with the Shanghai Chongming County People’s Court (“Chongming Court”) against Shanghai JingliWuxi Ruizhong Advertisement Co., Ltd. (“Jingli Shanghai”). In 2008, Jingli Shanghai acquired 100% equity interest in Shaanxi Co from the Plaintiffs. In the Lawsuit, the Plaintiffsfiled an arbitration application with China International Economic and Trade Arbitration Commission (CIETAC Shanghai) against Ad-Icon Shanghai. The original Wuxi shareholders claimed that JingliAd-Icon Shanghai owed them RMB 14,592,680 (approximately USD 2.2 million) (“Total Claim”) relatingapproximately $0.7 million related to the unpaid stock consideration for the equity interest of Wuxi Ruizhong. On October 21, 2011, SearchMedia issued 132,272 shares to the person entrusted by the original Wuxi Shareholders, which we deemed payment in Shaanxi Co, interest, reimbursement of certain operating expenses, liquidated damages and court fees.

In March 2011,full for the Chongming Court issued a judgment (“Judgment”) ordering Jingli Shanghai to pay the Plaintiffs an aggregate of RMB 7,761,537 (approximately U.S. $ 1.2 million) plus accrued interests and a percentagestock earn-out consideration payable. As of the court fees.
In late March 2011, Jingli Shanghai appealed the Judgment to the Shanghai Second Intermediate People’s Court (“Appellate Court”). Jingli Shanghai has based its appeal on various legal arguments including, among others, that the Chongming Court: (i) applied incorrect laws and regulations; (ii) accepted incorrect facts; and (iii) did not duly follow all legal procedures.
At the timedate of this filing,Annual Report on Form 20-F, the Appellate Court has yet to render a ruling.
case is still in the arbitration process.

SearchMedia Arbitration Claim Against Prior Shareholders

Pursuant to the terms of the Share Exchange Agreement dated October 29, 2009, SearchMedia Holdings commenced claims against the former shareholders and directors of SearchMedia International Limited for fraud and for breaches of representations, warranties and covenants contained in the Share Exchange Agreement. SearchMedia Holdings is seeking the return of all of the shares from China Seed Ventures, L.P., Qinying Liu, Deutsche Bank AG, Le Yang, Sun Hing Associates LTD., and Vervain Equity Investments Limited (collectively, the “SM Shareholders”), as well as damages in excess of the trade-in value of the shares held by the SM Shareholders. While the arbitration is still in the procedural stage, SearchMedia Holdings has entered into binding settlements with China Seed Ventures, L.P., Qinying Liu, Le Yang and Deutsche Bank AG. Consideration for these settlements involve both the return of shares and the repurchase of shares for below-market price amounts. The matter is currently pending at the International Centre for Dispute Resolution.

66


In addition, from time to time, we may be subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not currently a party to any legal proceeding or investigation, except the shareholder complaint described above, that in the opinion of our management, is likely to have a material adverse effect on our business or financial condition.

Dividend Policy

We have not paid any dividends on our common stock to date and do not intend to pay dividends at this time.

B.
B.Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9The Offer and Listing

A.
Item 9The Offer and Listing
A.Offer and Listing Details

Our common stock and warrants are listed on the NYSE AmexMKT under the symbols IDI and IDI.WS, respectively. The closing price for the securitiesour ordinary shares on June 24, 2011,May 14, 2012, the most recent trading day before the date of this Annual Report on Form 20-F, was $1.95 and $0.13, respectively.

$1.91. The closing price for our warrants on April 30, 2012, the last day the NYSE MKT reports trading activity in our warrants, was $0.13.

The table below sets forth, for the periods indicated, the high and low bid prices for the securities as reported on the NYSE AmexMKT in U.S. dollars. These quotations reflect inter-dealer prices, without markup, markdown or commissions, and may not represent actual transactions.

                         
  Annual High and Low Market Prices for the Five Most 
  Recent Full Financial Years 
  Units (1)  Common Stock  Warrants 
  High  Low  High  Low  High  Low 
Full Financial Year
                        
2006 $  $  $  $  $  $ 
2007(2) $8.01  $7.85  $7.20  $7.20  $0.70  $0.70 
2008 $8.10  $6.85  $8.10  $6.75  $0.71  $0.03 
2009 $9.82  $7.17  $9.20  $7.09  $3.14  $0.03 
2010 $  $  $7.55  $1.62  $2.25  $0.19 

   Annual High and Low Market Prices for the Five  Most
Recent Full Financial Years
 
   Units (1)   Common Stock   Warrants 
   High   Low   High   Low   High   Low 

Full Financial Year

            

2007(2)

  $8.01    $7.85    $7.20    $7.20    $0.70    $0.70  

2008

  $8.10    $6.85    $8.10    $6.75    $0.71    $0.03  

2009

  $9.82    $7.17    $9.20    $7.09    $3.14    $0.03  

2010

  $—      $—      $7.55    $1.62    $2.25    $0.19  

2011

  $—      $—      $3.50    $0.47    $0.35    $0.05  

(1)During the fourth quarter of 2009, trading in the units was suspended.
(2)This table sets forth the range of high and low sales prices for the units, common stock and warrants for the applicable portion of the year ended December 31, 2007. The units commenced public trading on November 20, 2007, and the common stock and warrants commenced public trading separately on December 26, 2007. The table also includes price information for Ideation Acquisition Corp. securities before the Business Combination.

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   High and Low Market Prices for each Full Financial
Quarter for the Two Most Recent Years
and the Subsequent Quarters
 
   Units (1)   Common Stock   Warrants 
   High   Low   High   Low   High   Low 

2010

            

First Quarter

  $—      $—      $7.55    $4.51    $2.25    $0.80  

Second Quarter

  $—      $—      $6.14    $3.01    $1.20    $0.40  

Third Quarter

  $—      $—      $3.63    $1.62    $0.58    $0.22  

Fourth Quarter

  $—      $—      $3.65    $1.68    $0.50    $0.19  

2011

            

First Quarter

  $—      $—      $3.50    $1.71    $0.35    $0.12  

Second Quarter

  $—      $—      $2.72    $1.42    $0.35    $0.13  

Third Quarter

  $—      $—      $2.03    $1.13    $0.35    $0.11  

Fourth Quarter

  $—      $—      $1.97    $0.47    $0.17    $0.05  

2012

            

First Quarter

  $—      $—      $1.85    $0.50    $0.19    $0.06  

Second Quarter (through May 14, 2012)

  $—      $—      $1.93    $1.51    $0.14    $0.08  


                         
  High and Low Market Prices for each Full Financial 
  Quarter for the Two Most Recent Years 
  and the Subsequent Quarters 
  Units (1)  Common Stock  Warrants 
  High  Low  High  Low  High  Low 
2009
                        
First Quarter $7.70  $7.17  $7.55  $7.18  $0.15  $0.03 
Second Quarter $8.72  $7.41  $7.86  $7.50  $0.69  $0.11 
Third Quarter $9.82  $8.15  $7.99  $7.69  $1.69  $0.48 
Fourth Quarter (1) $  $  $9.20  $7.09  $3.14  $1.41 
2010
                        
First Quarter $  $  $7.55  $4.51  $2.25  $0.80 
Second Quarter $  $  $6.14  $3.01  $1.20  $0.40 
Third Quarter $  $  $3.63  $1.62  $0.58  $0.22 
Fourth Quarter $  $  $3.65  $1.68  $0.50  $0.19 
2011
                        
First Quarter $  $  $3.50  $1.71  $0.35  $0.12 
Second Quarter $  $  $2.72  $1.42  $0.35  $0.13 
(through June 24, 2011)                        
(1)During the fourth quarter of 2009, trading in the units was suspended.
                     
  High and Low Market Prices for each of the Most Recent Six Months
  Units (1) Common Stock Warrants
  High Low High Low High Low
2011                    
January $— $— $3.50  $2.81  $0.35  $0.23 
February $— $— $3.28  $2.34  $0.35  $0.20 
March $— $— $2.67  $1.71  $0.20  $0.12 
April $— $— $2.72  $1.42  $0.35  $0.13 
May $— $— $2.17  $1.99  $0.30  $0.20 
June (through June 24, 2011) $— $— $2.10  $1.81  $0.22  $0.13 

   High and Low Market Prices for each of the Most  Recent Six Months 
   Units (1)   Common Stock   Warrants 
   High   Low   High   Low   High   Low 

2011

            

December

  $—      $—      $3.50    $2.81    $0.35    $0.23  

2012

            

January

  $—      $—      $1.35    $0.50    $0.15    $0.06  

February

  $—      $—      $1.85    $0.96    $0.15    $0.12  

March

  $—      $—      $1.82    $1.32    $0.19    $0.09  

April

  $—      $—      $1.93    $1.51    $0.14    $0.08  

May (through May 14, 2012)(2)

  $—      $—      $1.92    $1.80    $—      $—    

(1)During the fourth quarter of 2009, trading in the units was suspended.
(2)During May 2012, the warrants were not traded.

As of June 20, 2011,May 8, 2012, there were, of record, twenty-seven36 holders of common stock, eleven11 holders of warrants and no holders of units.

We have not paid any dividends on our common stock to date and do not intend to pay dividends at this time.

B.
B.Plan of Distribution

Not applicable.

C.
C.Markets

See the first paragraph of Item 9A above.

D.
D.Selling Shareholders

Not applicable.

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E.
E.Dilution

Not applicable.

F.
F.Expenses of the Issue

Not applicable.

Item 10Additional Information

A.
Item 10Additional InformationShare Capital

Not applicable.

B.
A.Share Capital

Not applicable.
B.Memorandum and Articles of Association

We incorporate by reference into this annual report the description of the Memorandum and Articles of Association of SearchMedia Holdings Limited contained in our Current Report on Form 8-K first filed with the Commission on November 5, 2009.

C.
C.Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.

D.
D.Exchange Controls

Please see the discussion regarding regulations of dividend distributions found in Regulatory Matters under Item 4.B

E.
E.Taxation

The following summary of the material Cayman Islands and United States federal income tax consequences of an investment in our common shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands.

United States Federal Income Taxation

The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) under present law of an investment in the common shares. This discussion applies only to U.S. Holders that hold the common shares as capital assets (generally, property held for investment) and that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

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The following discussion does not address the tax consequences to any particular investor or to persons in special tax situations such as:

banks and other financial institutions;

banks and other financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
U.S. expatriates;
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding a common share as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;
persons who acquired common shares pursuant to the exercise of any employee share option or otherwise as compensation; or
partnerships or other pass-through entities, or persons holding common shares through such entities.

insurance companies;

regulated investment companies;

real estate investment trusts;

broker-dealers;

traders that elect to use a mark-to-market method of accounting;

U.S. expatriates;

tax-exempt entities;

persons liable for alternative minimum tax;

persons holding a common share as part of a straddle, hedging, conversion or integrated transaction;

persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;

persons who acquired common shares pursuant to the exercise of any employee share option or otherwise as compensation; or

partnerships or other pass-through entities, or persons holding common shares through such entities.

INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES.

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of our common shares and you are, for U.S. federal income tax purposes,

an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust that (i) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

an individual who is a citizen or resident of the United States;

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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia;


an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

a trust that (i) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

The tax treatment of a partner in a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) that holds our common shares will depend on the status of such partner and the activities of such partnership. If you are a partner in such partnership, you should consult your tax advisors.

Taxation of dividends and other distributions on the common shares

Subject to the passive foreign investment company rules discussed below, the gross amount of any distributions we make to you with respect to common shares generally will be includible in your gross income as dividend income on the date of receipt by you but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your common shares, and then, to the extent such excess amount exceeds your tax basis in your common shares, as capital gain. We currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as a capital gain under the rules described above.

With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable years beginning before January 1, 2011, dividends may be taxed at the lower capital gains rate applicable to “qualified dividend income,” provided that (i) either (a) the common shares, as applicable, are readily tradable on an established securities market in the United States or (b) we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (ii) we are neither a passive foreign investment company nor treated as such with respect to you (as discussed below) for the taxable year in which the dividend was paid and the preceding taxable year and (iii) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, common shares will be considered for purposes of clause (i) above to be readily tradable on an established securities market in the United States if they are listed on the NYSE Amex,MKT, as are our common shares. If we are treated as a “resident enterprise” for PRC tax purposes under the New EIT Law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. For more information regarding the New EIT Law, see “Item 3.D. Key Information — Risk Factors — Risks relatedRelating to Doing Business in the regulationPeople’s Republic of our business and to our structure— We may be treated asChina—If we were deemed a resident enterprise for“resident enterprise” by PRC tax purposes andauthorities, we could be subject to tax on our global income mayand our non-PRC shareholders could be subject to certain PRC tax under PRC tax law, which would have a material adverse effect on our results of operations.taxes.” You should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend income for dividends paid with respect to our common shares.

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the common shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

If PRC withholding taxes apply to dividends paid to you with respect to our common shares, subject to certain conditions and limitations, such PRC withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. For more information regarding such PRC withholding taxes, see “Item 3.D. Key Information — Risk Factors — Risks related—Risks Relating to Doing Business in the regulationPeople’s Republic of our business and to our structure — Foreign holders of our common shares mayChina —If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to PRC withholding tax on dividends payable by usour global income and on gains realized on the sale of our common shares if we are classified as anon-PRC shareholders could be subject to certain PRC ‘resident enterprise.’taxes.” The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances.

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Taxation of disposition of common shares

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a common share equal to the difference between the amount realized (in U.S. dollars) for the common share and your tax basis (in U.S. dollars) in the common share. The gain or loss generally will be a capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the common share for more than one year, you may be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any gain or loss that you recognize on a disposition of common shares will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a “resident enterprise” for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC withholding

taxes were to be imposed on any gain from the disposition of the common shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. For more information regarding such PRC withholding taxes, see “Item 3.D. Key Information — Risk Factors — Risks related—Risks Relating to Doing Business in the regulationPeople’s Republic of our business and to our structure — Foreign holders of our common shares mayChina —If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to PRC withholding tax on dividends payable by usour global income and on gains realized on the sale of our common shares if we are classified as anon-PRC shareholders could be subject to certain PRC ‘resident enterprise.’taxes.” You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances.

Passive foreign investment company

Based on the market price of our common shares, the value of our assets, and the composition of our income and assets, although not free from doubt, we do not believe that we were a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for our taxable year ended December 31, 2010.2011. However, the application of the PFIC rules is subject to uncertainty in several respects, including how the contractual arrangements between us and our affiliated entities will be treated for purposes of the PFIC rules, and we cannot assure you that the U.S. Internal Revenue Service will not take a contrary position. A non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year if either:

at least 75% of its gross income for such year is passive income; or

at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.

at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.

For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In applying this rule, however, it is not clear whether the contractual arrangements between us and our affiliated entities will be treated as ownership of stock.

We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our common shares, fluctuations in the market price of the common shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC.

If we are a PFIC for any taxable year during which you hold common shares, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold the common shares, unless we cease to be a PFIC and you make a “deemed sale” election with respect to the common shares, as applicable. If such election is made, you will be deemed to have sold the common shares you hold at their fair market value and any gain from such deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, your common shares with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.

72


For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess distribution” you receive and any gain you recognize from a sale or other disposition (including a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year

that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these special tax rules:

the excess distribution or recognized gain will be allocated ratably over your holding period for the common shares;

the excess distribution or recognized gain will be allocated ratably over your holding period for the common shares;
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and
the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and

the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses) from a sale or other disposition of the common shares cannot be treated as capital, even if you hold the common shares as capital assets.

If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or indirect equity investments in other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of the common shares you own bears to the value of all of our common shares, and you may be subject to the rules described in the preceding two paragraphs with respect to the shares of such lower-tier PFICs that you would be deemed to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the PFIC rules described above regarding excess distributions and recognized gains. If you make a mark-to-market election for the common shares, you will include in income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market value of the common shares you hold as of the close of your taxable year over your adjusted basis in such common shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as any gain from the actual sale or other disposition of the common shares, will be treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss from the actual sale or other disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or loss amounts. The tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower capital gains rate applicable to qualified dividend income (discussed above under “— Taxation of dividends and other distributions on the common shares”) would not apply.

The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our common shares are listed on the NYSE Amex,

MKT, which is a qualified exchange or other market for these purposes. Consequently, if the common shares continue to be listed on the NYSE AmexMKT and are regularly traded, and you are a holder of common shares, we expect that the mark-to-market election would be available to you if we were to become a PFIC. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC rules described above regarding excess distributions and recognized gains with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.

73


Alternatively, a U.S. Holder of stock of a PFIC may make a “qualified electing fund” election with respect to such corporation to elect out of the PFIC rules described above regarding excess distributions and recognized gains. A U.S. Holder that makes a qualified electing fund election with respect to a PFIC will generally include in income for a taxable year such holder’spro rata share of the corporation’s income for the taxable year. However, you may make a qualified electing fund election with respect to your common shares only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.

Under newly enacted legislation, unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. Prior to such legislation, a U.S. shareholder of a PFIC was required to file U.S. Internal Revenue Service Form 8621 only for each taxable year in which such shareholder received distributions from the PFIC, recognized gain on a disposition of the PFIC stock, or made a “reportable election.” If we become a PFIC, you should consult your tax advisors regarding any reporting requirements that may apply to you.

You are strongly urged to consult your tax advisor regarding the application of the PFIC rules to your investment in common shares.

Information reporting and backup withholding

Dividend payments with respect to common shares and proceeds from the sale, exchange or other disposition of common shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. Under newly enacted legislation, for taxable years beginning after March 18, 2010, certain individuals holding the common shares other than in an account at a financial institution may be subject to additional information reporting requirements. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information in a timely manner.

F.
F.Dividends and Paying Agents

Not applicable.

G.
G.Statement by Experts

Not applicable.

H.
H.Documents on Display

We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.

The SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is www.sec.gov . The information on that website is not a part of this annual report.

We are subject to periodic reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and

74


other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders under the federal proxy rules contained in Sections 14(a), (b) and (c) of the Exchange Act, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. The registration statements, reports and other information so filed can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.

I.
I.Subsidiary Information

Not applicable.

Item 11Quantitative and Qualitative Disclosures About Market Risk
Item 11Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 12Description of Securities Other than Equity Securities

Not applicable.

PART II

Item 13Defaults, Dividend Arrearages and Delinquencies
Item 13Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 14Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15Controls and Procedures
Item 15Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed by a registrant in reports filed or furnished under the Securities Exchange Act of 1934 (the “Exchange Act”) is properly recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to the registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010.2011. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. As described below, under “Management’s Annual Report on Internal Control Over Financial Reporting,” material weaknesses were identified in our internal control over financial reporting as of December 31, 2010. Based on the evaluation described above, our principal executive officer2011 and principal financial officer have concluded that, as of December 31, 2010,a result our disclosure controls and procedures were not effective to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms, and (2) that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow for timely decisions regarding required disclosure.

75

of December 31, 2011.


Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

A material weakness in internal control over financial reporting (as defined in Auditing Standard No. 2 of the Public Company Accounting Oversight Board) is a significant deficiency in internal control over financial reporting, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim

financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010,2011, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.

On August 20, 2010, we announced that as a result of

In connection with the continued internal analysisaudit of our financial statements for the year ended December 31, 2009, the audit committee of our board of directors (the “Audit Committee”), based on management’s recommendation, determined that the historical financial statements of SearchMedia International for the years ended December 31, 2007 and December 31, 2008 should be restated. Management and the Audit Committee2011, we have identified several key areas of a material weakness incertain matters involving our internal control over financial reporting that are primarily responsible for the restatement of our 2007constitute material weaknesses. The material weaknesses identified result from inadequate tax staff and 2008inadequate integrated financial statements. These areas are:

Revenue recognitionsystems and accounts receivable issues;
Disclosure, approval, and documentation of related entity transactions;
Recording of various erroneous transactions by certain employees;
Recording of certain assets and other accounting irregularities related to acquisitions;
Diligence and approval of questionable transactions; and
Confirmation of payments related to acquisitions.
Our management and audit committee have developed a list of identified goals and directives to enhance our internal control over financial reporting withand closing processes. Specifically, the goalfollowing items were identified:

insufficient tax staff commensurate to reconcile the China statutory tax and US GAAP differences and for SEC requirements;

lack of remediatinga fully integrated financial consolidation and reporting system, which requires extensive manual analysis, reconciliation and adjustments in order to produce financial statements for external reporting purposes;

insufficient review of account reconciliations to ensure that all unreconciled items, such as collectibility assessment of accounts receivable, are identified and resolved in a timely manner.

As a result of the material weaknesses, identified above. Our full board of directors has adopted these recommendations, and we have made significant progress on our remediation plan.

There were significant changes in our internal control over financial reporting that occurred during the period ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect,described above, our internal control over financial reporting as a result of the implementation of the remediation plan. The following changes addressDecember 31, 2011 was not effective. We have taken some steps to remediate the material weaknesses described above. We have added additional accounting and tax staff.

In addition, we are in the process of developing and implementing further plans to remediate deficiencies in the areas of tax, policies, and procedures and controls. However, additional measures may be necessary, and the measures we expect to take to improve our internal controls may not be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that such material weakness or other material weaknesses would not result in a material misstatement of our annual or interim financial statements. In addition, other material weaknesses or significant deficiencies may be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our internal control overreported financial reporting identified during year ended December 31, 2010:

information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

Item 16 [Reserved]

Item 16AAudit Committee Financial Expert

The Company has hired more qualified accountants at its corporate offices and subsidiary locations.

76


The Company identified key control points for continuous monitoring of and design effective controls for each business cycle, particularly with regard to revenues/accounts receivable and expenses/accounts payable.
The Company updated an accounting manual and provided training to all relevant employees.
The Company worked with legal counsel and external consultants and developed a complete set of written compliance policies and provided regular tailored training to relevant senior management on following issues:
-Fiduciary duties of officers and directors;
-Foreign Corrupt Practices Act risks;
-Insider trading;
-Code of Business Ethics and Conduct;
-Sarbanes Oxley and importance of accurate financial statements with focus on China-related accounting risks;
-Third party whistleblower.
The Company improved diligence and approvalboard of transactions, repository of documentation to support supplier and client contracts and undertake the following:
-Strengthened contracts review and authorization processes;
-Revised internal contracts review and authorization policy;
-Implemented checklists of documentation that must be provided and filed for each material contract;
-Strengthened advertising monitoring reports system and obtain client’s feedback;
-Continue regular updating of business intelligence on counterparties.
A re-assessment of the effectiveness of our internal control over financial reporting was performed as of December 31, 2010; management identified material weaknesses in internal control over financial reporting are as follows:
Revenue recognition and accounts receivable recoverability review;
Disclosure, approval, and documentation of transactions among entities related to prior owners of acquired subsidiaries (which we refer to as “related entity transactions”);
As a result of this deficiency in our internal control over financial reporting, we did not detect errors in an overstatement of approximately $3.0 million in revenue for the year ended December 31, 2010 and have to make additional accounts receivable provision of approximately $1.2 million. We also have reclassification entries of approximately $1.0 million as related parties transactions.
The Company continues to improve management of sales contracts and accounts receivable by implementing the following measures:
Revise accounts receivable credit policy and conduct more regular bad debt reviews and evaluation of provisions;
Ensure effective implementation of aging analysis and update collection reports more frequently;
Commissioning selective periodic independent confirmations to confirm that advertisements have been placed in accordance with agreements, particularly in connection with high value sales where the client is not an 4A’s (defined as “American Association of Advertising Agencies”) company.
Clarify and mitigate related-party issues, identify and implement control points for each process, including requiring divestment of shareholders’ personal interests where appropriate;

77


Improve transparency of financial reporting procedures; and
Increase internal controls, in particular regarding subsidiaries’ cash.
Item 16AAudit Committee Financial Expert
The Board of Directorsdirectors has determined that Mr. HalprynJeffrey Ren meets the attributes of an “audit committee financial expert” within the meaning of SEC regulations and is “independent” within the meaning of the listing standards of NYSE AmexMKT and applicable SEC regulations.

Item 16BCode of Ethics
Item 16BCode of Ethics

We have adopted a Code of Ethics applicable to our directors, officers and employees including our Chief Executive Officer, Chief Financial Officer and principal accounting officer. A copy of our Code of Ethics is available on our website atwww.searchmediaholdings.com. We intend to post amendments to or waivers from our Code of Ethics (to the extent applicable to our Chief Executive Officer, Chief Financial Officer or principal accounting officer or to our directors) on our website. Our website is not part of this Annual Report on Form 20-F.

Item 16CPrincipal Accountant Fees and Services
Item 16CPrincipal Accountant Fees and Services

The following table presents fees for professional services rendered by Marcum Bernstein & Pinchuk LLP (“MarcumBP”), our independent registered public accounting firm, for the audit of our annual financial statements, fees for audit-related services, tax services and all other services. MarcumBP was formed pursuant to a joint venture agreement between the practice of Bernstein & Pinchuk LLP (“B&P”), our former independent registered public accounting firm, and Marcum LLP. Accordingly, B&P effectively resigned as the Company’s independent registered public accounting firm and MarcumBP became the Company’s independent registered public accounting firm. The change in the Company’s independent registered public accounting firm was approved by the Audit Committee of the Company’s Boardboard of Directorsdirectors on April 22, 2011.

         
  Fiscal  Fiscal 
  2010  2009(1)(2) 
Audit fees $350,000  $450,000 
Audit related fees      
Tax fees      
All other fees      
       
  $350,000  $450,000 
(1)Does not include fees of KPMG. KPMG served as the auditor for SearchMedia International during Fiscal 2009. KPMG’s fees during Fiscal 2009 consisted of $1,038,078 of audit fees and $30,900 of all other fees. On May 7, 2010, KPMG resigned as our auditor.
(2)Does not include fees of Rothstein, Kass & Company (“Rothstein”), Ideation’s independent registered public accountant for Fiscal 2009, through completion of the Business Combination. Rothstein’s fees during Fiscal 2009 consisted of $40,260.

   Fiscal
2011
   Fiscal
2010
 

Audit fees

  $350,000    $350,000  

Audit related fees

   42,453     —    

Tax fees

   —       —    

All other fees

   —       —    
  

 

 

   

 

 

 
  $392,453    $350,000  

All audit related services, tax services and other services were pre-approved by our Audit Committee, which concluded that the provision of such services by Rothstein and Marcum Bernstein & Pinchuk LLP were compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. Our Audit Committee must review and pre-approve both audit and permitted non-audit services provided by the independent registered public accounting firm and shall not engage the independent registered public accounting firm to perform any non-audit services prohibited by law or regulation. At each Audit Committee meeting, our Audit Committee receives updates on the services actually provided by the independent registered public accounting firm, and management may present additional services for pre-approval. Our Audit Committee has delegated to the Chairman of the Audit Committee the authority to evaluate and approve engagements on behalf of the Audit Committee in the event that a need arises for pre-approval between regular Audit Committee meetings. If the Chairman so approves any such engagements, he will report that approval to the full Audit Committee at the next Audit Committee meeting.

78


Each year, the independent registered public accounting firm’s retention to audit our financial statements, including the associated fee, is approved by our Audit Committee before the filing of the preceding year’s Annual Report on Form 10-K or Form 20-F.

Item 16DExemptions from the Listing Standards for Audit Committees
Item 16DExemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers
DuringItem 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers

In January 2010,2012 and May 2012, the Company repurchased in aggregate, 1,738,500reached settlement agreements with certain predecessor shareholders to repurchase ordinary shares or have the ordinary shares or warrants in the open market for total consideration of $3,808 under a Board authorized plan.

surrendered and cancelled without consideration.

ISSUER PURCHASES OF EQUITY SECURITIES

                       
 
                   (d) Maximum 
                   Number (or 
              (c) Total Number of  Approximate Dollar 
              Warrants Purchased  Value) of Warrants 
              as Part of Publicly  that May Yet Be 
    (a) Total Number of  (b) Average Price  Announced Plans or  Purchased Under the 
 Period  Warrants Purchased  Paid per Warrant  Programs  Plans or Programs 
 January 1, 2010 - January 31, 2010   1,738,500   $2.19    1,738,500   $1,190,562  
 

Period

  (a) Total Number of
Ordinary Shares or
Warrants Purchased
  (b) Average Price
Paid per Ordinary
Share or Warrant
  (c) Total Number of
Ordinary Shares or
Warrants Purchased
as Part of Publicly
Announced Plans or
Programs
   (d) Maximum
Number (or
Approximate Dollar
Value) of Ordinary
Shares or Warrants
that May Yet Be
Purchased Under the
Plans or Programs
 

January 1, 2012 – January 31, 2012

   3,214,927  0.25‡   3,214,927     N/A  

January 1, 2012 – January 31, 2012

   1,624,993  0†   1,624,993     N/A  

May 1, 2012 –

May 14, 2012

   1,286,741  0  1,286,741     N/A  

X
Item 16FChangeRepresents a transaction in Registrant’s Certifying Accountantordinary shares.
YRepresents a transaction in warrants.
Of the 3,214,927 ordinary shares, there were (A) 2,471,968 ordinary shares repurchased at an average price of $0.25 and such shares were retired and (B) 742,959 ordinary shares surrendered and cancelled without consideration. The ordinary shares were repurchased or surrendered pursuant to settlement agreements with certain predecessor shareholders.
The warrants were surrendered and cancelled without consideration pursuant to settlement agreements with certain predecessor shareholders. The cancelled warrants had strike prices ranging from $0.001 to $7.88 per share.
*The 1,286,741 ordinary shares were surrendered and cancelled without consideration and pursuant to a settlement agreement with a certain predecessor shareholder.

Item 16FChange in Registrant’s Certifying Accountant

As a result of the joint venture agreement between Bernstein & Pinchuk (“B&P”) and Marcum LLP, B&P resigned to allow the Company to enter into a new engagement with the newly formed entity Marcum Bernstein & Pinchuk LLP (“MarcumBP”), which will replace B&P moving forward. The joint venture does not disrupt or alter the location of or the composition of the existing audit team working with SearchMedia. The Audit Committee engaged MarcumBP as its independent registered public accounting firm effective immediately.

B&P had been engaged by the Company to audit its financial statements since May 2010 and provided its audit report for the Company’s financial statements for the years ended December 31, 2009 and December 31, 2008. During these fiscal years and the subsequent interim period, B&P’s reports did not contain an adverse opinion or disclaimer of opinion, were not qualified or modified and contained no disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

Item 16GCorporate Governance
Item 16GCorporate Governance

Section 110 of the NYSE AMEX LLCMKT Company Guide permits foreign private issuers like us to follow “home country practice” with respect to certain corporate governance matters. We are not aware of any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under the NYSE AMEX LLCMKT Company Guide.

Item 16HMine Safety Disclosure

Not applicable.

PART III

Item 17Financial Statements
Item 17Financial Statements

We have elected to provide financial statements pursuant to Item 18.

79


Item 18Financial Statements

Item 18Financial Statements
The consolidated financial statements of SearchMedia Holdings Limited and its subsidiaries are included at the end of this annual report.

Item 19Exhibits

Item 19

Exhibit
Number

 Exhibits
Exhibit
Number

Description of Exhibits

1.1 Memorandum and Articles of Association of SearchMedia Holdings Limited upon completion of redomestication. (incorporated by reference to Exhibit 3.3 of the Registrant’s current report on Form 8-K dated November 5, 2009 (File
(File No. 333-158336)).
2.1 Form of Warrant of SearchMedia Holdings Limited (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
3.1 Form of Voting Agreement between SearchMedia International Limited, Qinying Liu, Le Yang, China Seed Ventures, L.P., Gentfull Investment Limited, Gavast Estates Limited, Linden Ventures II (BVI), Limited, Frost Gamma Investments Trust, Robert N. Fried, Subbarao Uppaluri, Steven D. Rubin and Jane Hsiao (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.1 Agreement and Plan of Merger, Conversion and Share Exchange by and among Ideation Acquisition Corp., the registrant, SearchMedia International Limited, the subsidiaries of SearchMedia International Limited, the subsidiaries of SearchMedia International Limited, Shanghai Jingli Advertising Co., Ltd. and certain shareholders and warrant holders of SearchMedia International Limited (incorporated by reference to Exhibit 2.1 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.2 First Amendment to Agreement and Plan of Merger, Conversion and Share Exchange, dated as of May 27, 2009, by and among the registrant, Earl Yen, Tommy Cheung and Stephen Lau and Qinying Liu (incorporated by reference to
Exhibit 2.2 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.3 Second Amendment to Agreement and Plan of Merger, Conversion and Share Exchange, dated as of September 8, 2009, by and among the registrant, Earl Yen, Tommy Cheung, Stephen Lau, Qinying Liu, Linden Ventures, Inc., Vervain Equity Investment Limited, Sun Hing Associates Limited and The Frost Group, LLC (incorporated by reference to Exhibit 2.3 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.4 Third Amendment to Agreement and Plan of Merger, Conversion and Share Exchange, dated as of September 22, 2009, by and among the registrant, Ideation Acquisition Corp., Earl Yen, Tommy Cheung, Terrance Hogan, Qinying Liu, and Linden Ventures II (BVI), Ltd. (incorporated by reference to Exhibit 2.4 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.5 Fourth Amendment to Agreement and Plan of Merger, Conversion and Share Exchange, dated as of October 30, 2009, by and among the registrant, Ideation Acquisition Corp., Earl Yen, Tommy Cheung, Stephen Lau and Qinying Liu. (incorporated by reference to Exhibit 2.5 of the Registrant’s current report on Form 8-K dated November 5, 2009 (File
(File No. 333-158336)).
4.6 Form of Registration Rights Agreement among SearchMedia International Limited, Deutsche Bank AG, Hong Kong Branch, Gentfull Investment Limited, Gavast Estates Limited, China Seed Ventures, L.P. and Linden Ventures II (BVI) (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.7 Form of Lock-Up between SearchMedia Holdings Limited and SearchMedia International Limited shareholders and warrant holders (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-4 (File
(File No. 333-158336)).
4.8 Form of Management Lock-Up between SearchMedia Holdings Limited and SearchMedia International Limited shareholders and warrant holders (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).*

80


+
Exhibit
NumberDescription of Exhibits
4.9 Form of Employment Agreement with the SearchMedia International Limited executive officers (incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).*+
4.10 English Translation of Exclusive Technology Consulting and Service Agreement between Jieli Consulting and Jingli Shanghai, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.11 English Translation of Exclusive Call Option Agreement among Jingli Shanghai, its shareholders and Jieli Consulting, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.12 English Translation of Equity Pledge Agreement among Jingli Shanghai, its shareholders and Jieli Consulting, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-4 (File
(File No. 333-158336)).
4.13 English Translation of Power of Attorney by the shareholders of Jieli Consulting dated as of September 10, 2007 (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.14 English Translation of Loan Agreement between the shareholders of Jingli Shanghai and Jieli Consulting, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).
4.15 Letter Agreement, dated as of September 8, 2009, by and among Ideation Acquisition Corp. and certain investors of Ideation Acquisition Corp. and SearchMedia International Limited (incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-4 (File No. 333-158336)).

4.16 SearchMedia Holdings Limited Amended and Restated 2008 Share Incentive Plan*Plan (incorporated by reference to
Exhibit 10.13 of the Registrant’s current report on Form 8-K dated November 5, 2009 (File No. 333-158336)).+
4.17 Executive Employment Agreement between SearchMedia Holdings Limited and Wilfred Chow dated December 30, 2009 (incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K dated January 6, 2010 (File
(File No. 333-158336)).*+
4.18 Executive Employment Agreement between SearchMedia Holdings Limited and Paul Conway dated January 29, 2010 (incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K dated February 3, 2010 (File
(File No. 333-158336)).+
  4.19English Translation of Ad-Icon Shanghai SAIC Business License.**
  4.20Fifth Amendment to Agreement and Plan of Merger, Conversion and Share Exchange, dated as of January 23, 2012, by and among the registrant, Earl Yen, Tommy Cheung, Stephen Lau, and Qinying Liu.**
  4.21Executive Employment Agreement between SearchMedia Holdings Limited and Peter Tan, effective February 13, 2012**+
8.1 Subsidiaries of SearchMedia Holdings Limited **
12.1 Certification of Chief Executive Officer filed pursuant to 17 CFR 240.13a-14(a). ****
12.2 Certification of Chief Financial Officer filed pursuant to 17 CFR 240.13a-14(a). ****
13.1 Certification of Chief Executive Officer furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C. Section 1350.***
13.2 Certification of Chief Financial Officer furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C. Section 1350.***

*23.1   Consent of Marcum Bernstein & Pinchuk LLP**
23.2  Consent of Bernstein & Pinchuk LLP**

+Management contract or compensatory plan or arrangement
**Filed herewith
***Furnished herewith

81

The Company and its consolidated subsidiaries are party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 2(b)(i) of the instructions to the exhibits to Form 20-F, the Company agrees to furnish a copy of such instruments to the SEC upon request.


The Company intends to submit and post the Interactive Data File for the financial statements included in this annual report within the 30 day grace period accorded to registrants complying with XBRL for the first time under the Commission’s rules and regulations.

SIGNATURES

SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

(Registrant)
By: 
(Registrant)
By:  

/s/ Wilfred Chow

 Name: Wilfred Chow
Title:   Chief Financial Officer

Date: May 15, 2012

SEARCHMEDIA HOLDINGS LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   Name:  Wilfred Chow Page 
Title:  Chief Financial Officer 
Date: June 30, 2011

82



LOGO

(Bernstein and Pinchuk LH)
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

SearchMedia Holdings Limited

We have audited the accompanying consolidated balance sheets of SearchMedia Holdings Limited, (the “Company”) as of December 31, 2009 and the related consolidated statements of operations, changes in shareholders’ equity (deficit) and comprehensive income (loss)/income,, and cash flows of SearchMedia Holdings Limited, (“the Company”) for each of the years in the two-year periodyear ended December 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionconsolidated results of the Company as of December 31, 2009 and the results of itsCompany’s operations and its cash flows for each of the years in the two-year periodyear ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Bernstein & Pinchuk LLP

New York, New York

October 29, 2010

(Bernstein and Pinchuk addy)

F-2


LOGO

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

SearchMedia Holdings Limited

We have audited the accompanying consolidated balance sheets of SearchMedia Holdings Limited, (the “Company”(“the Company’) as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in shareholders’ equity (deficit) and comprehensive income (loss)/income,, and cash flows for the yearyears then ended. The Company’s management is responsible for theseThese consolidated financial statements.statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010 and the consolidated results of itstheir operations and itstheir cash flows for the yearyears then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring net losses from operations and has a working capital deficiency of approximately $31,000,000 at December 31, 2011, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum Bernstein & Pinchuk LLP

New York, New York
June 30, 2011

F-3


May 15, 2012

LOGO

NEW YORK OFFICEŸ 7 Penn PlazaŸ Suite 830New York, New York 10001Ÿ Phone 646.442.4845Ÿ Fax 646.349.5200Ÿ

marcumbp.com

SEARCHMEDIA HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

         
  As of December 31, 
  2009  2010 
   
ASSETS
        
CURRENT ASSETS        
Cash and cash equivalents $29,398  $7,554 
Restricted cash  270   11 
Accounts receivable, net  12,996   18,065 
Amounts due from related parties  2,840   966 
Prepaid expenses and other current assets  4,656   8,340 
Deferred tax assets  480   891 
   
Total current assets  50,640   35,827 
NON-CURRENT ASSETS        
Property and equipment, net  1,405   1,133 
Deposits for property and equipment  553   2 
Intangible assets, net  1,276   3,954 
Goodwill  45,891   45,955 
   
Total assets
 $99,765  $86,871 
   
         
LIABILITIES & SHAREHOLDERS’ EQUITY
        
CURRENT LIABILITIES        
Accounts payable $9,013  $13,894 
Accrued expenses and other payables  15,898   17,931 
Short-term borrowings  654   729 
Acquisition consideration payable  16,381   29,033 
Amounts due to related parties  346   1,958 
Deferred revenue  1,902   2,481 
Income taxes payable  6,855   9,228 
   
Total current liabilities  51,049   75,254 
NON-CURRENT LIABILITIES        
Long-term acquisition consideration payable     10,162 
Long-term payables     3 
Deferred tax liabilities  316   989 
   
Total liabilities  51,365   86,408 
   
         
Commitments and contingency (Note 18)        
         
SHAREHOLDERS’ EQUITY        
Common Shares — $0.0001 par value, 1,000,000,000 shares authorized, 20,758,368 and 20,858,661 shares issued and outstanding on December 31, 2009 and 2010, respectively  2   2 
Additional paid-in capital  122,922   121,521 
Accumulated other comprehensive income  1,050   1,153 
Accumulated deficit  (75,574)  (122,213)
   
Total shareholders’ equity  48,400   463 
   
Total liabilities and shareholders’ equity
 $99,765  $86,871 
   

F-4


   As of December 31, 
   2010  2011 
ASSETS   

CURRENT ASSETS

   

Cash and cash equivalents

  $7,554   $4,630  

Restricted cash

   11    1  

Accounts receivable, net

   18,065    15,822  

Amounts due from related parties

   966    2,078  

Prepaid expenses and other current assets

   8,340    9,462  

Deferred tax assets

   891    866  
  

 

 

  

 

 

 

Total current assets

   35,827    32,859  

NON-CURRENT ASSETS

   

Property and equipment, net

   1,133    633  

Deposits for property and equipment

   2    31  

Intangible assets, net

   3,954    —    

Goodwill

   45,955    16,926  
  

 

 

  

 

 

 

Total assets

  $86,871   $50,449  
  

 

 

  

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY/ (DEFICIT)   

CURRENT LIABILITIES

   

Accounts payable

  $13,894   $14,167  

Accrued expenses and other payables

   17,931    13,952  

Short-term borrowings

   729    —    

Acquisition consideration payable

   29,033    23,238  

Amounts due to related parties

   1,958    379  

Deferred revenue

   2,481    2,642  

Income taxes payable

   9,228    9,524  
  

 

 

  

 

 

 

Total current liabilities

   75,254    63,902  

NON-CURRENT LIABILITIES

   

Long-term acquisition consideration payable

   10,162    —    

Long-term payables

   3    —    

Deferred tax liabilities

   989    —    
  

 

 

  

 

 

 

Total liabilities

   86,408    63,902  
  

 

 

  

 

 

 

Commitments and contingency (Note 20)

   

SHAREHOLDERS’ EQUITY/ (DEFICIT)

   

Common Shares — $0.0001 par value, 1,000,000,000 shares authorized, 20,858,661 and 21,687,497 shares issued and outstanding on December 31, 2010 and 2011, respectively

   2    2  

Additional paid-in capital

   121,521    123,288  

Accumulated other comprehensive income/ (loss)

   1,153    (1,071

Accumulated deficit

   (122,213  (135,672
  

 

 

  

 

 

 

Total shareholders’ equity/ (deficit)

   463    (13,453
  

 

 

  

 

 

 

Total liabilities and shareholders’ equity/ (deficit)

  $86,871   $50,449  
  

 

 

  

 

 

 

The following table includes assets to settle liabilities of the consolidated variable interest entities. These assets and liabilities are included in the consolidated balance sheets above.
         
  As of December 31, 
  2009  2010 
   
ASSETS
        
Cash and cash equivalents $5,167  $1,942 
Accounts receivable, net  12,564   3,586 
Property and equipment, net  562   359 
         
LIABILITIES
        
Accounts payable $8,863  $5,072 
Accrued expenses and other payables  12,925   8,098 
Short-term borrowings  654    
Deferred revenue  1,674   171 
(see note 5)

   As of December 31, 
   2010   2011 
ASSETS    

Cash and cash equivalents

  $1,942    $—    

Accounts receivable, net

   3,586     —    

Property and equipment, net

   359     —    

LIABILITIES

    

Accounts payable

  $5,072    $—    

Accrued expenses and other payables

   8,098     —    

Deferred revenue

   171     —    

See accompanying notes to consolidated financial statements

F-5


SEARCHMEDIA HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share data)

             
  For the Years Ended December 31, 
  2008  2009  2010 
 
Advertising services revenues $41,685  $37,741  $48,967 
Cost of revenues  (30,624)  (28,059)  (36,454)
          
Gross profit
  11,061   9,682   12,513 
          
Operating expenses            
Sales and marketing expenses  (6,117)  (3,384)  (4,462)
General and administrative expenses  (13,135)  (13,832)  (12,203)
          
Loss from operations
  (8,191)  (7,534)  (4,152)
Other income/(expense)            
Interest income  131   11   24 
Interest expense  (2,717)  (1,962)  (45)
Decrease in fair value of liability warrant     824    
Gain/(loss) on extinguishment of notes  (4,400)  6,669    
Loss on impairment of goodwill and intangible assets  (13,953)  (15,749)  (39,411)
Loss on abandonment of lease  (46)  (550)  (1,256)
Loss on impairment of fixed assets  (2,135)      
Loss on disposal of fixed assets  (2,121)  (15)  (4)
Other income/(expense), net        (368)
Foreign currency transaction loss, net  (167)  (24)  (7)
          
Total other expense  (25,408)  (10,796)  (41,067)
 
Loss before income taxes
  (33,599)  (18,330)  (45,219)
Provision for income taxes  (1,481)  (4,319)  (1,420)
          
Net loss
 $(35,080) $(22,649) $(46,639)
          
             
Loss per share
            
Basic and diluted $(0.0162) $(0.0044) $(0.0022)
          
Weighted average number of shares outstanding —            
Basic and diluted  2,169,269   5,100,465   20,796,789 
          

   For the Years Ended December 31, 
   2009  2010  2011 

Advertising services revenues

  $37,741   $48,967   $55,571  

Cost of revenues

   (28,059  (36,454  (45,788
  

 

 

  

 

 

  

 

 

 

Gross profit

   9,682    12,513    9,783  
  

 

 

  

 

 

  

 

 

 

Operating expenses

    

Loss on impairment of goodwill

   (15,749  (39,411  (27,927

Loss on impairment of intangible assets

   —      —      (2,723

Gain on termination of VIEs

   —      —      9,551  

Change of fair value of acquisition consideration payable

   —      —      10,681  

Gain from extinguishment of acquisition consideration payable

   —      —      4,340  

Loss on abandonment of lease

   (550  (1,256  —    

Loss on disposal of fixed assets

   (15  (4  —    

Sales and marketing expenses

   (3,384  (4,462  (6,722

General and administrative expenses

   (13,832  (12,203  (10,221
  

 

 

  

 

 

  

 

 

 

Loss from operations

   (23,848  (44,823  (13,238

Other income/(expense)

    

Interest income

   11    24    34  

Interest expense

   (1,962  (45  (89

Decrease in fair value of liability warrant

   824    —      —    

Gain on extinguishment of notes

   6,669    —      —    

Other income/(expense), net

   —      (368  (79

Foreign currency transaction loss, net

   (24  (7  (4
  

 

 

  

 

 

  

 

 

 

Total other income/(expense)

   5,518    (396  (138

Loss before income taxes

   (18,330  (45,219  (13,376

Provision for income taxes

   (4,319  (1,420  (83
  

 

 

  

 

 

  

 

 

 

Net loss

  $(22,649 $(46,639 $(13,459
  

 

 

  

 

 

  

 

 

 

Loss per share

    

Basic and diluted (In US$)

  $(4.44 $(2.24 $(0.64
  

 

 

  

 

 

  

 

 

 

Weighted average number of shares outstanding —

    

Basic and diluted

   5,100,465    20,796,789    20,994,015  
  

 

 

  

 

 

  

 

 

 

The following table includes operating results of the consolidated variable interest entities. These operating results are included in the consolidated statements of operations above.

             
  For the Years Ended December 31, 
  2008  2009  2010 
 
Advertising services revenues $39,837  $36,289  $20,709 
Gross profit  10,897   9,924   5,556 
Net loss  (22,874)  (23,589)  (19,194)
above (see note 5).

   For the Years Ended December 31, 
   2009  2010  2011 

Advertising services revenues

  $36,289   $20,709   $530  

Gross profit

   9,924    5,556    (54

Loss from operations

   (20,213  (17,358  (618

Net loss

   (23,589  (19,194  (883

See accompanying notes to consolidated financial statements

F-6


SEARCHMEDIA HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
EQUITY/ (DEFICIT)

AND COMPREHENSIVE (LOSS)/INCOME

(Amounts in thousands, except share data)

                                     
          Series A convertible                 
  Common Stock  preferred shares                 
  Number      Number      Additional  Other      Total    
  of  Amount  of  Amounts  paid-in  comprehensive  Accumulated  shareholders’  Comprehensive 
  Shares  US$  shares  US$  capital  income  deficit  (deficit)/equity  Loss Amount 
 
Beginning as of January 1, 2008
  2,169,269  $   675,374  $722  $389  $201  $(4,937) $(3,625) $(9,426)
Net loss                    (35,080)  (35,080)  (35,080)
Foreign currency exchange translation adjustment                 898      898   898 
                                    
Comprehensive Loss
                                 $(34,182)
                                    
Convertible note beneficial conversion feature                            
Extinguishment of the notes                            
Accretion to Series B redeemable convertible preferred shares redemption value              (414)     (4,758)  (5,172)    
Accretion to Series C redeemable convertible preferred shares redemption value                    (1,949)  (1,949)    
Note warrant transferred to equity warrant              997         997     
Share-based compensation              311         311     
Statutory reserve              102      (102)       
Cumulative effective of reclassification of warrants under EITF 07-5                    520   520     
Note warrant transferred from equity to liability under EITF 07-5              (997)        (997)    
Warrant B transferred from equity to liability under EITF 07-5                  (388)          (388)    
       
Balance as of December 31, 2008
  2,169,269      675,374    722      1,099   (46,306)  (44,485)    
Net loss                     (22,649)  (22,649) $(22,649)
Foreign currency exchange translation adjustment                 (49)     (49)  (49)
                                    
Comprehensive Loss
                                 $(22,698)
                                    
Returned of shares to the company by certain shareholders  (100,338)                         
Repurchase from shareholders  (79,579)           (628)          (628)    
Extinguishment of the notes Accretion to Series B redeemable convertible preferred shares redemption value                    (3,525)  (3,525)    
Accretion to Series C redeemable convertible preferred shares redemption value                    (3,058)  (3,058)    
Statuary reserve              36       (36)       
Conversion of Series A to common shares  675,374      (675,374)  (722)  722              
Conversion of Series B to common shares  2,205,549            26,931         26,931     
Conversion of Series C to common shares  1,712,874            17,790         17,790     
Conversion of convertible note to common shares  1,712,874            6,830         6,830     
Reverse acquisition of Ideation  12,462,345   2         69,253         69,255     
IDI warrant transferred to APIC under EITF 07-5              1,577         1,577     
Share-based compensation              411         411     
       
Balance as of December 31, 2009
  20,758,368   2         122,922   1,050   (75,574)  48,400     
Net loss                    (46,639)  (46,639) $(46,639)
Foreign currency exchange translation adjustment                 103      103   103 
                                    
Comprehensive Loss
                                 $(46,536)
                                    
Repurchase of warrants              (3,809)        (3,809)    
Exercise of warrants  1,460            9         9     
Share issued  6,250                          
Issuance of common shares for share incentive plan  92,583            1         1     
Share-based compensation              2,398         2,398     
       
Balance as of December 31 2010
  20,858,661  $2     $   121,521  $1,153  $(122,213) $463     
       

  Common Stock  Series A convertible
preferred shares
     Accumulated    
  Number
of
Shares
  Amount
US$
  Number
of
shares
  Amount  Additional
paid-in
capital
  other
comprehensive
income
  Accumulated
deficit
  Total
shareholders’
(deficit)/equity
  Comprehensive
Loss Amount
 

Beginning as of January 1, 2009

  2,169,269    —      675,374   $722    —     $1,099   $(46,306 $(44,485 

Net loss

  —      —      —      —      —       (22,649  (22,649 $(22,649

Foreign currency exchange translation adjustment

  —      —      —      —      —      (49  —      (49  (49
         

 

 

 

Comprehensive Loss

         $(22,698
         

 

 

 

Returned of shares to the company by certain shareholders

  (100,338  —      —      —      —      —      —      —     

Repurchase from shareholders

  (79,579  —      —      —      (628    (628 

Extinguishment of the notes Accretion to Series B redeemable convertible preferred shares redemption value

  —      —      —      —      —      —      (3,525  (3,525 

Accretion to Series C redeemable convertible preferred shares redemption value

  —      —      —      —      —      —      (3,058  (3,058 

Statuary reserve

  —      —      —      —      36     (36  —     

Conversion of Series A to common shares

  675,374    —      (675,374  (722  722    —      —      —     

Conversion of Series B to common shares

  2,205,549    —      —      —      26,931    —      —      26,931   

Conversion of Series C to common shares

  1,712,874    —      —      —      17,790    —      —      17,790   

Conversion of convertible note to common shares

  1,712,874    —      —      —      6,830    —      —      6,830   

Reverse acquisition of Ideation

  12,462,345    2    —      —      69,253    —      —      69,255   

IDI warrant transferred to APIC under EITF 07-5

  —      —      —      —      1,577    —      —      1,577   

Share-based compensation

  —      —      —      —      411    —      —      411   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Balance as of December 31, 2009

  20,758,368    2    —      —      122,922    1,050    (75,574  48,400   

Net loss

                          (46,639)    (46,639  $ (46,639)  

Foreign currency exchange translation adjustment

  —      —      —      —      —      103    —      103    103  
         

 

 

 

Comprehensive Loss

         $(46,536
         

 

 

 

Repurchase of warrants

  —      —      —      —      (3,809  —      —      (3,809 

Exercise of warrants

  1,460    —      —      —      9    —      —      9   

Share issued

  6,250    —      —      —      —      —      —      —     

Issuance of common shares for share incentive plan

  92,583    —      —      —      1    —      —      1   

Share-based compensation

  —      —      —      —      2,398    —      —      2,398   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Balance as of December 31, 2010

  20,858,661    2    —      —      121,521    1,153    (122,213)    463   

Net loss

  —      —      —      —      —      —      (13,459  (13,459 $(13,459

Foreign currency exchange translation adjustment

  —      —      —      —      —      (2,224  —      (2,224  (2,224
         

 

 

 

Comprehensive Loss

         $(15,683
         

 

 

 

Share issued for earn-out

  750,380    —      —      —      871    —      —      871   

Issuance of common shares for share incentive plan

  78,456    —      —      —      2    —      —      2   

Share-based compensation

  —      —      —      —      894    —      —      894   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Balance as of December 31 2011

  21,687,497   $2    —     $—      123,288   $(1,071 $(135,672 $(13,453 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

See accompanying notes to consolidated financial statements

F-7


SEARCHMEDIA HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share data)

             
  For the Years Ended December 31, 
  2008  2009  2010 
   
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $(35,080) $(22,649) $(46,639)
Adjustments to reconcile net income to net cash used in operating activities:            
Depreciation and amortization of property and equipment  1,268   399   404 
Amortization of intangible assets  3,022   2,015   1,737 
Share-based compensation  311   411   2,398 
Amortization on discount on convertible notes  997       
Deferred tax expenses / (benefit)  (2,140)  825   (817)
Increase in fair value of note warrant liability     (824)   
Loss / (gain) on extinguishment of the notes  4,400   (6,669)   
Loss on impairment of goodwill and intangible assets  13,953   15,749   39,411 
Loss on impairment of fixed assets  2,135       
Loss on disposals of fixed assets  2,121   15   4 
Bad debt provision on prepaid expenses and other current assets        1,006 
Bad debt provision on accounts receivables  703   1,611   1,139 
Changes in operating assets and liabilities, net of effect of acquisitions for 2008 and 2010 respectively:            
(Increase) / decrease in assets:            
Accounts receivable  (9,613)  (4,434)  (6,004)
Prepaid expenses and other current assets  (4,588)  1,737   (4,331)
Amounts due to/from related parties  (2,175)  417   1,882 
Increase / (decrease) in liabilities:            
Accounts payable  6,310   1,603   4,882 
Accrued expenses and other payables  11,226   (1,462)  2,034 
Amounts due to/from related parties  597   (252)  1,612 
Deferred revenue  1,959   (293)  579 
Income taxes payable  3,143   3,026   2,373 
   
Net cash provided by/ (used in) operating activities  (1,451)  (8,775)  1,670 
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Purchase of property and equipment  (3,460)  (150)  (140)
Proceeds from disposals of property and equipment     244   3 
Cash acquired upon the consideration of a subsidiary        312 
Cash paid for acquisitions, net of cash acquired  (21,244)  (40,687)  (20,015)
   
Net cash used in investing activities  (24,704)  (40,593)  (20,152)
   
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Decrease in restricted bank deposit  3,643   87   259 
Proceeds from short-term borrowings  1,856   688   768 
Repayment of short-term borrowings  (2,084)  (1,855)  (693)
Proceeds from issuance of Series C redeemable convertible preferred shares and warrants, net of issuance costs  9,261       
Proceeds from issuance of convertible promissory notes and warrants  12,000   3,672    
Proceeds from exercise of options        9 
Issue of options        1 
Repayment of promissory note     (5,000)   
Repurchase of warrants          (3,809)
Cash from Ideation upon business combination     76,073    
   
Net cash provided by/ (used in) financing activities  24,676   73,665   (3,465)
Foreign currency translation adjustment  242   5   103 
   
Net increase / (decrease) in cash and cash equivalents
  (1,237)  24,302   (21,844)
Cash and cash equivalents at beginning of year  6,333   5,096   29,398 
   
Cash and cash equivalents at end of year
 $5,096  $29,398  $7,554 
   
SUPPLEMENTAL DISCLOSURE INFORMATION            
Cash paid for interest $33  $2,477  $45 
Cash paid for income taxes $251  $381  $465 
Non-cash investing transactions:            
Acquisition consideration payable $12,885  $16,381  $39,195 
Payable in connection with purchase of property and equipment $414  $  $3 
Non-cash financing transactions:            
Issuance costs payable in respect of Series C redeemable convertible preferred shares $98  $  $ 

   For the Years Ended December 31, 
   2009  2010  2011 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

  $(22,649  $(46,639  $(13,459

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization of property and equipment

   399    404    385  

Amortization of intangible assets

   2,015    1,737    1,329  

Share-based compensation

   411    2,398    894  

Increase in fair value of note warrant liability

   (824  —      —    

Deferred tax expenses / (benefit)

   825    (817  (1,087

Change of fair value of acquisition consideration payable

   —      —      (10,681

Gain on extinguishment of consideration payable

   —      —      (4,340

Gain on termination of VIEs

   —      —      (9,551

Loss / (gain) on extinguishment of the notes

   (6,669  —      —    

Loss on impairment of goodwill

   15,749    39,411    27,927  

Loss on impairment of intangible assets

   —      —      2,723  

Loss on disposals of fixed assets

   15    4    —    

Bad debt provision on prepaid expenses and other current assets

   —      1,006    832  

Bad debt provision on accounts receivables

   1,611    780    2,073  

Changes in operating assets and liabilities, net of effect of acquisitions for 2010 and termination of VIEs in 2011:

    

(Increase) / decrease in assets:

    

Accounts receivable

   (4,434  (5,645  (1,379

Prepaid expenses and other current assets

   1,737    (4,331  (3,941

Amounts due to/from related parties

   417    1,882    (2,106

Increase / (decrease) in liabilities:

    

Accounts payable

   1,603    4,882    5,114  

Accrued expenses and other payables

   (1,462  2,034    2,420  

Amounts due to/from related parties

   (252  1,612    (1,558

Deferred revenue

   (293  579    224  

Income taxes payable

   3,026    2,373    1,329  
  

 

 

  

 

 

  

 

 

 

Net cash provided by/ (used in) operating activities

   (8,775  1,670    (2,852
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of property and equipment

   (150  (140  (47

Proceeds from disposals of property and equipment

   244    3    3  

Cash disposed upon the termination of VIEs

   —      —      (120

Cash paid for acquisitions, net of cash acquired

   (40,687  (20,015  (738
  

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

   (40,593  (20,152  (902
  

 

 

  

 

 

  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Decrease in restricted bank deposit

   87    259    10  

Proceeds from short-term borrowings

   688    768    1,346  

Repayment of short-term borrowings

   (1,855  (693  (747

Proceeds from issuance of convertible promissory notes and warrants

   3,672    —      —    

Proceeds from exercise of options

   —      9    2  

Issue of options

   —      1    —    

Repayment of promissory note

   (5,000  —      —    

Repurchase of warrants

   —      (3,809  —    

Cash from Ideation upon business combination

   76,073    —      —    
  

 

 

  

 

 

  

 

 

 

Net cash provided by/ (used in) financing activities

   73,665    (3,465  611  

Foreign currency translation adjustment

   5    103    219  
  

 

 

  

 

 

  

 

 

 

Net increase / (decrease) in cash and cash equivalents

   24,302    (21,844   (2,924

Cash and cash equivalents at beginning of year

   5,096    29,398    7,554  
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

  $29,398   $7,554   $4,630  
  

 

 

  

 

 

  

 

 

 

SUPPLEMENTAL DISCLOSURE INFORMATION

    

Cash paid for interest

  $2,477   $45   $89  

Cash paid for income taxes

  $381   $465   $314  

Non-cash investing transactions:

    

Acquisition consideration payable

  $16,381   $39,195   $15,891  

Payable in connection with purchase of property and equipment

  $—     $3   $—    

See accompanying notes to consolidated financial statements

F-8


SEARCHMEDIA HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share data)

1. Principal activities organization and basis of presentation

organization

(a) Principal activities

SearchMedia Holdings Limited (the “Company” or “SearchMedia Holdings” or “IDI”) is a holding company and, through its consolidated subsidiaries and variable interest entities (“VIEs”) (collectively the “Group”), is principally engaged in the provision of advertising services in the out-of-home advertising industry. Out-of-home advertising typically refers to advertising media in public places, such as billboards, in-elevator displays, street furniture and transit area displays. The Group is one of the largest operators of integrated outdoor billboard and in-elevator advertising networks in China.

VIEs arrangements
A variable interest entity (“VIE)” is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
If the Company determines that it has operating power and the obligation to absorb losses or receive benefits, the Company consolidates the VIE as the primary beneficiary, and if not, does not consolidate. The Company’s involvement constitutes power that is most significant to the entity when it has unconstrained decision-making ability over key operational functions within the entity.
Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not claims against the Company’s general assets.
PRC regulations currently prohibit or restrict foreign ownership of media and advertising business. As a Cayman Islands corporation, the Company is deemed a foreign legal person under PRC laws. The Company therefore conducts substantially all of its activities through its subsidiaries and VIEs in the PRC. To provide the Company the ability to receive the majority of the expected residual returns of the VIEs and their subsidiaries, the Company entered into various contractual arrangements with VIEs to purchase the equity interest of affiliated entity. The paid-in capital of these VIEs was funded by the Company through a loan extended to the equity shareholders.
As a result of these contractual arrangements, the Company is the primary beneficiary of a VIE, Shanghai Jingli Advertising Co., Ltd., and the Company has consolidated the financial results of the VIE and its subsidiaries in the consolidated financial statements since the later of the date of inception or acquisition.
Our VIE is through contractual agreement with two shareholders. The shareholders have no beneficial rights. All profit, all assets and liabilities accrue to the Company. The sole source of funding other than operation is provided by the Company. The Company is the 100% beneficial owner of the VIE. There is no non- controlling interest.

(b) 2009 reorganization and accounting treatmentOrganization

On October 30, 2009, Ideation Acquisition Corp., a Delaware corporation (“Ideation”) completed a redomestication that resulted in holders of Ideation securities holding securities in a Cayman Islands exempted company, pursuant to a share exchange agreement. The redomestication of Ideation involved two steps. First, Ideation effected a merger pursuant to the laws of the states of Delaware and Arizona in which Ideation merged with and into ID Arizona Corporation, an Arizona corporation and wholly-owned subsidiary of Ideation (“ID Arizona”) with ID Arizona surviving the merger. Second, after the merger, ID Arizona became a Cayman Islands exempted company, pursuant to a conversion and continuation procedure under Arizona and Cayman Islands law. In connection with the conversion and continuation process, the entity was renamed SearchMedia Holdings Limited.

Immediately after the redomestication, the Company completed the acquisition of all the issued and outstanding shares and warrants of SearchMedia International Limited (“SearchMedia International”). SearchMedia International security holders, including certain note holders and warrant holders, received ordinary shares, or securities exercisable or exchangeable for ordinary shares, of the Company. The business combination was accounted for as a reverse recapitalization, whereby SearchMedia International is the continuing entity for financial reporting purposes and is deemed to be the accounting acquirer of SearchMedia Holdings Limited.

F-9


The transaction is accounted for as a reverse recapitalization because it failed to meet the criteria to be considered as a business combination described in Accounting Standards Codification (“ASC”) Section 805,“Business Combinations”). Pursuant to these accounting standards, SearchMedia International is considered to be the accounting acquirer because it obtained control of the Company as a result of the transaction. The determination was primarily based on (i) after the redomestication and business combination, SearchMedia International’s operations comprising the ongoing operations of the combined entity and the senior management of SearchMedia International continuing to serve as the senior management of the combined companies and (ii) SearchMedia Holdings Limited had no prior operations and was formed for the purpose of effecting a business combination such as the business combination with SearchMedia International. In a reverse recapitalization, initially SearchMedia International is deemed to have undergone a recapitalization, whereby it’s outstanding ordinary shares and warrants on October 30, 2009 were converted into 6,662,727 ordinary shares of SearchMedia Holdings and 1,519,186 SearchMedia Holdings warrants. Immediately thereafter, SearchMedia Holdings, as the legal parent company of SearchMedia International, which is the continuing accounting entity, was deemed to have acquired the assets and assumed the liabilities of SearchMedia International in exchange for the issuance of SearchMedia Holdings securities, which will be identical in number and terms and similar in rights to the outstanding securities of SearchMedia International.
Because SearchMedia Holdings Limited, the accounting acquiree, does not meet the definition of a business provided in ASC Topic 805,“Business Combinations”, the recognition and measurement provisions of these standards do not apply. The share exchange transaction utilized the capital structure of SearchMedia Holdings Limited. The assets and liabilities are recorded at historical cost. Although SearchMedia International is deemed to be the acquiring company for accounting and financial reporting purposes, the legal status of the Company as the surviving corporation does not change. SearchMedia Holding’s shares have been restated retroactively to reflect the share exchange ratio as at the date of the Share Exchange in a manner similar to a stock consolidation.
(c) Organization and basis of presentation
For financial reporting purposes, the operating results of the Group for the year ended December 31, 2008 was the historical financial information of SearchMedia International. The consolidated financial statements of the Group for the year ended December 31, 2009 includes the operating results and balance sheet of SearchMedia International for the year ended December 31, 2009 and the operating results and balance sheet of SearchMedia Holdings from October 31, 2009 through December 31, 2009.
Prior to January 1, 2008, SearchMedia International incorporated Jieli Investment Management Consulting (Shanghai) Co., Ltd. (“Jieli Consulting”), which in turn entered into contractual agreements (see “ VIEs Arrangements”) with the owners of Shanghai Jingli Advertising Co., Ltd. (“Jingli”). The arrangement was to facilitate foreign investors to invest in SearchMedia International as the then PRC laws did not allow direct foreign investment or ownership in advertising companies in the PRC. The terms of these agreements resulted in SearchMedia International, through its wholly-owned subsidiary, Jieli Consulting, bearing all the economic risks and receiving all the economic benefits from the businesses and controlling the financing and operating affairs with respect to Jingli’s businesses. In accordance with ASC Topic 810, “Consolidation”, the financial statements of Jingli were consolidated by SearchMedia International in its consolidated financial statements effective from the date SearchMedia International first became the primary beneficiary pursuant to this contractual arrangements.
On January 16, 2008, SearchMedia International incorporated Jieli Network Technology Development (Shanghai) Co., Ltd. (“Jieli Network”) as a wholly-owned subsidiary in the PRC. Jieli Network provides technical advisory services to the Group’s consolidated VIEs.
During the years ended December 31, 2008 and 2010, the Group expanded its advertising services and locations by acquiring 100% equity interest of the following advertising businesses.
Name of entityPlace of incorporation
Shanghai Jincheng Advertising Co., Ltd. (“Jincheng”)PRC
Shaanxi Xinshichuang Advertising Planning Co., Ltd. (“Xinshichuang”)PRC
Beijing Wanshuizhiyuan Advertising Co., Ltd. (“Wanshuizhiyuan”)PRC
Shenyang Jingli Advertising Co., Ltd. (“Shenyang Jingli”)PRC
Qingdao Kaixiang Advertising Co., Ltd. (“Kaixiang”)PRC
Shanghai Haiya Advertising Co., Ltd. (“Haiya”)PRC
Tianjin Shengshitongda Advertising Creativity Co., Ltd. (Shengshitongda”)PRC
Shanghai Botang Advertising Co., Ltd. (“Botang”)PRC
Ad-Icon Company Limited (“HK Ad-Icon”)HKSAR
Changsha Jingli Advertising Co., Ltd. (“Changsha Jingli”)PRC
Wenzhou Rigao Advertising Co., Ltd. (“Wenzhou Rigao”)PRC
Wuxi Ruizhong Advertising Co., Ltd. (“Wuxi Ruizhong”)PRC
Zhejiang Continental Advertising Co., Ltd. (“Zhejiang Continental”)PRC

F-10


Further details of the acquisitions are set out in Note 4.
In July 2008, the Company signed an acquisition agreement to acquire Changsha Jingli which was primarily engaged in the provision of advertising services using poster frames that are placed inside elevators in residential and commercial buildings in Changsha city of the PRC. During a financial review, an acquisition deposit of Changsha Jingli of $1,321, purportedly paid to a third party, could not be confirmed. The ex-owner of Changsha Jingli denied signing any contracts with the Company, bringing the acquisition of Changsha Jingli into doubt, as well as the legality and enforceability of the acquisition agreement. Accordingly, the consolidated financial statements for the years ended December 31, 2008, 2009 and 2010 do not consolidate Changsha Jingli’s financial statements.
In 2008, Jingli, the VIE, acquired 100% equity interests in Xinshichuang, Jincheng, Kaixiang, Wanshuizhiyuan, Shenyang Jingli, Haiya, Botang, Shengshitongda, Wenzhou Rigao and Wuxi Ruizhong.of the following subsidiaries. The Company has consolidated the financial results of the VIE and its subsidiaries in the consolidated financial statements since the later of the date of inception or acquisition.
acquisitions.

Name of entity

Place of incorporation

Shanghai Jincheng Advertising Co., Ltd. (“Jincheng”)

PRC

Shaanxi Xinshichuang Advertising Planning Co., Ltd. (“Xinshichuang”)

PRC

Beijing Wanshuizhiyuan Advertising Co., Ltd. (“Wanshuizhiyuan”)

PRC

Shenyang Jingli Advertising Co., Ltd. (“Shenyang Jingli”)

PRC

Qingdao Kaixiang Advertising Co., Ltd. (“Kaixiang”)

PRC

Shanghai Haiya Advertising Co., Ltd. (“Haiya”)

PRC

Tianjin Shengshitongda Advertising Creativity Co., Ltd. (“Shengshitongda”)

PRC

Shanghai Botang Advertising Co., Ltd. (“Botang”)

PRC

Ad-Icon Company Limited (“HK Ad-Icon”)

HKSAR

Changsha Jingli Advertising Co., Ltd. (“Changsha Jingli”)

PRC

Wenzhou Rigao Advertising Co., Ltd. (“Wenzhou Rigao”)

PRC

Wuxi Ruizhong Advertising Co., Ltd. (“Wuxi Ruizhong”)

PRC

On December 11, 2009, HK Ad-Icon established Ad-Icon Advertising (Shanghai) Co., Ltd. (“Ad-Icon Shanghai”), a wholly-owned subsidiary in China, which is permitted to operate advertising businesses in China. In 2010, Ad-Icon Shanghai, acquired 100% of the equity interests in Zhejiang Continental.Continental Advertising Co., Ltd. Furthermore, 100% of the equity interests in Botang, Haiya, Wanshuizhiyuan, Kaixiang, Wuxi Ruizhong and Shenyang Jingli acquired by Jingli have been transferred to Ad-Icon Shanghai. AsShanghai during 2010 and 2011.

Effective December 23, 2011, the VIE, Jingli, and its subsidiaries including Jincheng, Xinshichuang, Haiya, Shengshitongda, Changsha Jingli and Wenzhou Rigao have all ceased their respective advertisement business so that the VIE structure is no longer required or in place. The Company terminated the VIEs arrangements and ceased to consolidate the financial results of the VIE and its subsidiaries effective December 23, 2011.

VIEs arrangements (Terminated as of December 31, 2010, Jingli,23, 2011)

A variable interest entity (“VIE”) is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

If the Company determines that it has operating power and the obligation to absorb losses or receive benefits, the Company consolidates the VIE stillas the primary beneficiary, and if not, does not consolidate. The Company’s involvement constitutes power that is most significant to the entity when it has unconstrained decision-making ability over key operational functions within the entity.

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not claims against the Company’s general assets.

PRC regulations currently prohibit or restrict foreign ownership of media and advertising business with the exception that foreign entities that directly invest in the advertising industry in China are required to have at least three years of direct operations in the advertising industry outside of China pursuant to the Administrative Regulations on Foreign-invested Advertising Enterprises (2004, as amended in 2008). As a Cayman Islands corporation, the Company is deemed a foreign legal person under PRC laws. Prior to the incorporation of Ad-Icon Shanghai, a WOFE permitted to operate advertising businesses in China, and to comply with PRC laws and regulations, the Company conducts substantially all of its operations through its VIE. The VIE is wholly owned by certain ex-employees of the Company (“nominee shareholders”).

Upon the formation of the VIE, the Company entered into various agreements with the VIE, through which, the Company holds 100%all of the variable interests of the VIE. Details of key agreements with the VIE are as follows:

Loan Agreement.Pursuant to the loan agreement dated September 10, 2007 between Jieli Consulting and the shareholders of Jingli Shanghai, namely Ms. Qinying Liu and Ms. Le Yang, Jieli Consulting granted an interest-free loan to each shareholder. The principal amounts of the loans to Ms. Qinying Liu and Ms. Le Yang were $6.7 million and $4.5 million, respectively, in proportion with their respective original capital contributions to Jingli Shanghai. The term of the loan agreement is 10 years and may be extended for another ten years automatically unless Jieli Consulting terminates the agreement in a written form three months before the expiration date of the agreement. The loan can be repaid only with the proceeds from the transfer of the shareholder’s equity interest in Jingli Shanghai to Jieli Consulting or another person designated by Jieli Consulting at the minimum price permitted by then applicable PRC law. Jieli Consulting may accelerate the loan repayment upon certain events, including if a shareholder dies, loses capacity to act, no longer works for Jingli Shanghai or any affiliate of Jingli Shanghai, or commits a crime, or if Jieli Consulting so informs a shareholder as permitted by then applicable PRC law.

Equity Pledge Agreement. Pursuant to the equity pledge agreement dated September 10, 2007 among Jieli Consulting, Jingli Shanghai, and its shareholders, each shareholder has pledged all of her equity interest in Jingli Shanghai to Jieli Consulting to guarantee the performance of the shareholders’ and Jingli Shanghai’s obligations under the loan agreement, the exclusive call option agreement, and the exclusive technical consulting and service agreement. If Jingli Shanghai or any of its shareholders breaches its respective contractual obligations under these agreements, Jieli Consulting, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholders agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on their equity interest in Jingli Shanghai without the prior written consent of Jieli Consulting. The equity pledge agreement will expire after Jingli Shanghai and its shareholders fully perform their respective obligations under the loan agreement, the exclusive call option agreement and the exclusive technical consulting and service agreement, each briefly described in this note.

Exclusive Call Option Agreement.Under the exclusive call option agreement dated September 10, 2007 among Jingli Shanghai, its shareholders, and Jieli Consulting, Jingli Shanghai and its shareholders irrevocably granted Jieli Consulting or its designated person an exclusive option to purchase, when and to the extent permitted under then applicable PRC law, all or part of the equity interests in Jingli Shanghai. The exercise price for all of the equity interests of Jingli Shanghai is the other Chinese affiliates mentioned above.

minimum price permitted by then applicable PRC law or a higher price determined by Jieli Consulting. Unless this exclusive call option agreement is terminated on an earlier date as agreed upon by the parties to the agreement, the term of the agreement is ten years and may be extended for another ten years automatically unless Jieli Consulting terminates the agreement in writing three months before the expiration date of the agreement. Pursuant to this call option agreement.

The accompanying consolidatedshareholders of Jingli Shanghai may not change the articles of association, bylaws, registered capital or shareholding structure of Jingli Shanghai, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not acquire or merge with any third parties, or invest in any third parties, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not generate, delegate, guarantee for, or allow existing any indebtedness without the prior consent or confirmation of Jieli Consulting, except in the ordinary courses of business;

Jingli Shanghai may not enter into any material contracts with the contractual price exceeding RMB1.0 million without the prior written consent of Jieli Consulting, except in the ordinary courses of business;

Jingli Shanghai may not grant loans or guaranties to any third parties, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not transfer, pledge, have caused any encumbrances, or otherwise dispose of any shares of Jingli Shanghai, without the prior written consent of Jieli Consulting;

Jingli Shanghai may not declare or pay any dividends without the prior written consent of Jieli Consulting; upon the request of Jieli Consulting, Jingli Shanghai shall declare and pay all distributable dividends to its shareholders; and

The shareholders of Jingli Shanghai may only appoint the persons nominated by Jieli Consulting as directors of Jingli Shanghai, upon request of Jieli Consulting.

Power of Attorney. The shareholders of Jingli Shanghai have executed a power of attorney to Mr. Guojun Liang, which irrevocably authorizes Mr. Liang (who is the husband of Ms. Qinying Liu), to vote as such shareholders’ attorney-in-fact on all of the matters of Jingli Shanghai requiring shareholder approval.

Exclusive Technical Consulting and Service Agreement.Pursuant to the exclusive technical consulting and service agreement dated September 10, 2007 between Jingli Shanghai and Jieli Consulting, Jieli Consulting has the exclusive and irrevocable right to provide to Jingli Shanghai technical consulting services related to the business operations of Jingli Shanghai. Jingli Shanghai agrees to pay annual technical service fees to Jieli Consulting based on the actual services provided by Jieli Consulting. If Jingli Shanghai does not generate net profits in a fiscal year, Jieli Consulting agrees not to charge services for that year. The term of this agreement is 10 years commencing on September 10, 2007 and may be extended automatically for another 10 years unless Jieli Consulting terminates the agreement by a written notice three months before the expiration date.

The agreements above did not provide substantive kick-out right of the VIE to unilaterally terminate the contracts and the VIE could not force termination by paying a termination fee. The VIE also need to agree to an extension of fixed term. As a result of these agreements, Jieli Consulting exercised effective control over the VIE, received substantially all of the economic benefits and residual interest and absorbs all of the risks and expected losses from the VIE, and had an exclusive call option to purchase all the equity interest in the VIE at a minimal price. Therefore, Jieli Consulting was considered as the primary beneficiary of the VIE and accordingly the financial statements of the Company have been preparedthese VIE were consolidated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). This basis of accounting differs in certain material respects from that used for the preparation of the statutory books of the Company’s consolidated subsidiaries and VIEs, which are prepared in accordancefinancial statements.

The Company believes that Jieli Consulting’s contractual arrangements with the accounting principlesVIE were in compliance with PRC law and the relevant financial regulations applicablewere legally enforceable. However, uncertainties in the place of domicilePRC legal system could limit the Company’s ability to enforce these contractual arrangements and if the shareholders of the respective entitiesVIE were to reduce their interest in the Group. Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIE not to pay the service fees when required to do so.

The accompanying consolidated financial statements reflect necessary adjustments not recordedCompany’s ability to control the VIE also depended on the voting power obtained under the power of attorney, described above. Jieli Consulting had the power to vote on all matters requiring shareholder approval in the statutory booksVIE. As noted above, the Company believed the power of accountattorney is legally enforceable but may not be as effective as direct equity ownership.

In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC government could, among other things:

revoke the Company’s business and operating licenses;

require the Company to discontinue or restrict operations;

restrict the Company’s right to issue the invoice and collect revenues;

block the Company’s websites;

require the Company to restructure the operations in such a way as to compel the Company to establish a new enterprise, re-apply for the necessary licenses or relocate our businesses, staff and assets;

impose additional conditions or requirements with which the Company may not be able to comply; or

take other regulatory or enforcement actions against the Company that could be harmful to the Company’s business.

The imposition of any of these penalties may result in a material and adverse effect on the Company’s ability to conduct the Company’s business. In addition, if the imposition of any of these penalties causes the Company to lose the rights to direct the activities of the Company’s consolidatedVIE and its subsidiaries or the right to receive its economic benefits, the Company would no longer be able to consolidate the VIE. The Company does not believe that any penalties imposed or actions taken by the PRC government would result in the liquidation of the Company, Jieli Consulting, or the VIE.

Effective December 23, 2011, the VIE, Jingli, and VIEs to present themits subsidiaries have all ceased their respective advertisement business so that the VIE structure is no longer required or in conformity with U.S. GAAP.

place (see note 5).

(d)(c) Reclassification

Certain comparative figures have been reclassified to conform to current period’s presentation.

2. Summary of significant accounting policies

(a) Basis of preparation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Principles of consolidation

The accompanying consolidated financial statements include the financial statements of the Company, its consolidated subsidiaries and VIEs inits VIE subsidiary for which the Company is the primary beneficiary. Operating results of its VIE subsidiary were excluded from the consolidated financial statements since December 23, 2011 upon termination of the VIE contracts. All significant intercompany balancestransactions among the Company, its subsidiaries and transactionsits VIE subsidiary have been eliminated upon consolidation.

Accounting Standards Codification (“ASC”) 810 “Consolidation” provides guidance on the identification of and financial reporting for entities over which control is achieved through means other than voting interests, which requires

certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in consolidation.

the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support from other parties. Through the contractual arrangements, the Company held all the variable interests of the VIE and had been determined to be the primary beneficiary of the VIEs.

Pursuant to the contractual arrangements with the VIE, the Company had the power to direct activities of the VIE, and had assets transferred out of the VIE primarily in the form of the service fees paid by the VIE. Therefore, the Company believes it has control over the assets of a consolidated VIE to the extent permitted by the applicable PRC law and the contractual arrangements. As the consolidated VIE was incorporated as a limited liability company under the PRC Company Law, creditors of the VIE did not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIE. Currently there was no contractual arrangement that could require the Company to provide additional financial support to the consolidated VIE. As the Company was conducting certain business in the PRC mainly through the VIE, the Company might provide such support on a discretionary basis in the future, which could expose the Company to a loss.

On April 7, 2010, Crystal Liu, one of the equity holders of the VIE, initiated a lawsuit against the Company for an unpaid salary of approximately $150,000. Based on the advice from the Company’s PRC legal counsel, the lawsuit did not impact the validity and performance of any of the agreements entered into between Jieli Consulting and Ms. Liu as the nominee shareholder of Jingli Shanghai. Consequently, it did not impact the Company’s previous or current accounting conclusion on the consolidation of Jingli Shanghai. The labor dispute with Ms. Liu has been settled.

In the opinion of our PRC legal counsel, all current VIE contractual arrangements were valid, binding and enforceable, and would not result in any violation of PRC laws or regulations currently in effect. If any of these business partners or contracting counterparties fails to perform its obligations, the Company may not be able to enforce the relevant agreements if the agreements are ruled in violation of the PRC laws. If the PRC government finds that the agreements that establish the structure for operating our China businesses do not comply with PRC governmental restrictions on foreign investment in the media and market research industries, or if these regulations or the interpretation of existing regulations change in the future, the Company could be subject to severe penalties or be forced to relinquish our interests in those operations, even if the agreements are otherwise legal and valid. These conditions may also result in deconsolidation of the VIE.

Going concern

The Company incurred a net loss of $46,639$13,459 during the year ended December 31, 2010 and its net shareholders’ equity was $463.2011. As of December 31, 2010,2011, the Company’s net shareholders’ deficit was $13,453, and its current liabilities exceeded its current assets by $39,427.$31,043. The Company had cash and cash equivalents of $7,554$4,630 as of December 31, 2010.2011. The Company may not have sufficient cash to meet its payment obligations in the next 12 months in which case we may (i) seek additional financing, (ii) dispose of certain assets or (iii) seek to refinance some or all of our debts.

The Company’s ability to continue as a going concern is dependent on many events outside of its direct control, including, among other things, the amount of working capital that the Company has available and the financial performance of both the Company and the acquired companies entitled to receive an earn-out payment. The Company’s inability to generate cash flows to meet its obligations due to the uncertainty of achieving operating profitability on an annual basis and raising required proceeds on reasonable terms, among other factors, raises substantial doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The management of the Company is takinghas taken a number of actions and will continue to address this situation in order to restore the Company to a sound financial position with an appropriate business strategy going forward. These actions include:

1)1.Negotiation withIssued shares to ex-owners of the subsidiaries ex-owners to extendand reduced $5.2 million earn-out payment period by one or more than one year for required cash and stock payment;liabilities in October 2011;

2)2.The Company is seeking additional financing from existing shareholdersEliminated its VIE structure and external investors;the underlying liabilities in December 2011;
3) The Company is adopting various cost-saving strategies.

F-11

3.Entered into a $3 million convertible note with its major shareholders with a one-year maturity in February 2012;

4.In April, 2012, the Board of Directors approved and authorized a capped pool of 7 million common shares to be issued to certain ex-owners of the subsidiaries for the purpose of converting and eliminating the outstanding earn-out liabilities;


5.Divested Zhejiang Continental in May 2012 (see note 21);

6.Started the process of securing additional funds;

7.Adopted various cost-saving strategies

Based on the management’s plans, the consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.

(b) Use of estimates

The preparation of financial statements in accordance with U.S.US GAAP requires the Company’s management to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for doubtful receivables; useful lives and residual values of property and equipment and intangible assets; recoverability of the carrying amount of property and equipment, goodwill and intangible assets; fair values of financial instruments; the fair values of the assets acquired and liabilities assumed upon the consolidation of businesses acquired in 2008 and 2010 respectively; and the assessment of contingent obligations. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ from these estimates.

(c) Foreign currency transactions and translation

The Group’s reporting currency is the United States dollars (“US$”). The functional currency of the Company is the US$, whereas the functional currency of the Company’s consolidated subsidiaries and VIEs in the PRC is the Renminbi (“RMB”) and the functional currency of the Company’s subsidiaries in the HKSAR is the Hong Kong Dollars (“HK$”), as the PRC and HKSAR are the primary economic environments in which the respective entities operate. Since the RMB is not a fully convertible currency, all foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign currency. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.

Transactions denominated in currencies other than the functional currency are translated into the respective functional currency at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in a currency other than the functional currency are translated into the functional currency using the applicable exchange rate at each balance sheet date. The resulting exchange differences are recorded in “foreign currency exchangetransaction gain (loss)” in the consolidated statements of operations.

The assets and liabilities of the Company’s consolidated subsidiaries and VIEs are translated into the US$ reporting currency using the exchange rate at each balance sheet date. Revenue and expenses of these entities are translated into US$ at average rates prevailing during the year. Equity accounts are translated at historical exchange rates. Gains and losses resulting from translation of these entities’ financial statements into the US$ reporting currency are recorded as a separate component of “accumulated other comprehensive income” within shareholders’ equity.

(d) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use.

The Group’s cash and bank deposits were held in major financial institutions located in US and PRC, which management believes have high credit ratings. Cash and bank deposit held in PRC as of December 31, 20092010 and 20102011 were $7,495$4,340 and $4,340,$4,437, respectively. The remaining cash and bank deposits were held in US and HK denominated in USD, amounted to $21,903$3,214 and $3,214$193 as of December 31, 20092010 and 2010,2011, respectively.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments. The Company places its temporary cash instruments with well-known financial institutions within the United States and, at times, may maintain balances in excess of the $250 US FDIC Insurance limit. The Company monitors the credit ratings of the financial institutions to mitigate this risk. The Company maintains accounts with well established multi-national banks andunder a program where the funds are invested with various FDIC insured banks so as of December 31, 2009 and 2010 had approximately an aggregate of $20,911 and $3,130 abovenot to exceed the US federally insured limit, respectively.

insurance limit.

(e) Restricted cash

Restricted cash represents amounts held by a bank as to withdrawal for use under court orders to hold the accounts as escrow. The restriction on cash is expected to be released when the related litigation is closed.

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(f) Accounts receivable

Accounts receivable consist of amounts billed but not yet collected and unbilled receivables. Unbilled receivables relate to revenues earned and recognized, but which have not been billed by the Group in accordance with the terms of the advertising service contract. The payment terms of the Group’s service contracts with its customers vary and typically require an initial payment to be billed or paid at the commencement of the service period, progress payments to be billed during the service period, and a final payment to be billed after the completion of the service period. None of the Group’s accounts receivable bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. Management determines the allowance based on historical write-off experience and reviews of customer-specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group does not have any off-balance-sheet credit exposure related to its customers.

(g) Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, taking into consideration the assets’ salvage or residual value. The estimated useful lives of property and equipment are as follows:

Leasehold improvements

  1 to 3 years

Advertisement display equipment

  5 years

Furniture, fixtures and office equipment

  5 years

Motor vehicles

  5 years

When items of property and equipment are retired or otherwise disposed of, loss/income is charged or credited for the difference between the net book value and proceeds received thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.

(h) Intangible assets

The Group’s intangible assets are amortized on a straight line basis over their respective estimated useful lives, which are the periods over which the assets are expected to contribute directly or indirectly to the future cash flows of the Group. The Group’s intangible assets represent customer relationship, lease agreements and non-compete agreements which have estimated useful lives ranging from 0.5 to 4.4 years.

(i) Goodwill

Goodwill and other intangible assets are accounted for in accordance with the provisions of FASB ASC 350 “Intangibles — Goodwill and Other”. The Group accounts for business acquisitions using the acquisition method of accounting. Prior to 2009, goodwill consists of the cost of acquired businesses in excess of the fair value of the net assets acquired. Other intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of an intent to do so.

Beginning on January 1, 2009, goodwill is measured as the excess of a over b below:

a.

The aggregate of the following:

1.

The consideration transferred measured in accordance ASC 805, which generally requires acquisition-date fair value.

2.

The fair value of any noncontrolling interest in the acquiree.

3.

In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.

b.

The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with ASC 805.

Under FASB ASC 350, goodwill, including any goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have indefinite useful lives, are not amortized.

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(j) Impairment of long-lived assets

The Group tests goodwill for possible impairment in the fourth quarter of each year or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Circumstances that could trigger an impairment test between annual tests include, but are not limited to:

a significant adverse change in the business climate or legal factors;

a significant adverse change in the business climate or legal factors;
an adverse action or assessment by a regulator;
unanticipated competition;
loss of key personnel;
the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;
a change in reportable segments; and/or results of testing for recoverability of a significant asset group within a reporting unit.

an adverse action or assessment by a regulator;

unanticipated competition;

loss of key personnel;

the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;

a change in reportable segments; and/or results of testing for recoverability of a significant asset group within a reporting unit.

The Group utilizes a two-step method to perform a goodwill impairment review. In the first step, we determine the fair value of the reporting unit using expected future discounted cash flows and estimated terminal values. If the net book value of the reporting unit exceeds the fair value, we would then perform the second step of the impairment test which requires allocation of the reporting unit’s fair value of all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. The implied fair value of the goodwill is then compared to the carrying value to determine impairment, if any.

Application of goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit which could trigger impairment.

In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates. We may incur additional goodwill impairment charges in the future although we cannot predict whether this will occur.

Indefinite-lived intangible assets are assessed for impairment at least annually based on comparisons of their respective fair values to their carrying values. Finite-lived intangible assets are amortized over their respective useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in accordance with FASB ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets”.

In evaluating long-lived assets for recoverability, including finite-lived intangibles and property and equipment, the Group uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell.

Asset recoverability is an area involving management judgment, requiring assessment as to whether the carrying value of assets can be supported by the undiscounted future cash flows. In calculating the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters such as revenue growth rates, gross margin percentages and terminal growth rates.

No impairment loss once recognized is subsequently reversed even if facts and circumstances indicate recovery.

F-14


(k) Fair Value of Financial Instruments

FASB ASC 820 “Fair Value Measurements and Disclosures” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

These tiers include:

Level 1 — defined as observable inputs such as quoted prices in active markets;

Level 1 — defined as observable inputs such as quoted prices in active markets;
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The fair value of the Group’s financial assets and liabilities approximate their carrying amount because of the short-term maturity of these instruments.

The Group’s options and acquisition consideration payable fall into Level 3 and there were no transfers in or out of Level 3 during the years presented.

(l) Revenue recognition

The Group recognizes advertising service revenue on a straight-line basis over the period in which the customer advertisement is to be displayed, which typically ranges from 1 month to 2 years, starting from the date the Group first displays the advertisement. Written contracts are entered into between the Group and its customers to specify the price, the period and the location at which the advertisement is to be displayed. Revenue is only recognized if the collectability of the advertising service fee is probable.

The Group generates advertising service revenues from the sales of frame space on the poster frame network and advertising time slots on traditional billboard networks and the sale of advertising services through our subway leases.networks. In the majority of advertising arrangements, the Group acts as a principal in the transaction and records advertising revenues on a gross basis. The associated expenses are recorded as cost of revenues. In some instances the Group is considered an agent and recognizes revenue on a net basis.

Customer payments received in excess of the amount of revenue recognized are recorded as deferred revenue in the consolidated balance sheet, and are recognized as revenue when the advertising services are rendered.

(m) Cost of revenues

Cost of revenues consists primarily of operating lease cost of advertising space for displaying advertisements, depreciation of advertising display equipment, amortization of intangible assets relating to lease agreements and direct staff and material costs associated with production and installation of advertising content.

(n) Operating leases

The Group leases advertising space, including billboards and poster frames, and office premises under non-cancellable operating leases. Minimum lease payments are expensed on a straight-line basis over the lease term. Under the terms of the lease agreements, the Group has no legal or contractual asset retirement obligation at the end of the lease.

(o) Advertising and promotion costs

Advertising and promotion costs are expensed as incurred. Advertising and promotion costs, mainly sales commission, included in sales and marketing expenses amounted to $2,189, $1,135, $1,834 and $1,834$3,852 for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively.

(p) Retirement and other post-retirement benefits

Pursuant to relevant PRC regulations, the Company’s consolidated subsidiaries and VIEs in the PRC are required to make contributions to various defined contribution retirement plans organized by the PRC government. The contributions are made for each qualifying PRC employee at rates ranging from 18% to 20% on a standard salary base as determined by the PRC governmental authority. Contributions to the defined contribution plans are charged to the consolidated statements of income as the related employee service is provided.

The Company’s subsidiaries in the HKSAR operate a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF scheme, the employer is required to make contributions to the scheme at 5% of the employees’ relevant income, subject to an upper limit. Contributions to the scheme vest immediately.

F-15


The Group has no other obligation for the payment of employee benefits associated with these retirement plans beyond the contributions described above.

(q) Share-based payments

The Group accounts for share-based payments in accordance with ASC Topic 718,Compensation— “Compensation—Stock Compensation”. Under ASC 718, the Group measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the costs over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. For awards with performance conditions, the compensation expense is based on the grant-date fair value of the award, the number of shares ultimately expected to vest and the vesting period.

(r) Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in income in the period that the change in tax rates or laws is enacted. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

The Group applies ASC Topic 740 “Income Taxes”. ASC 740 clarifies the accounting for uncertain tax positions. This interpretation requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group’s accounting policy is to accrue interest and penalties related to uncertain tax positions, if and when required, as interest expense and a component of general and administrative expenses, respectively, in the consolidated statements of operations.

(s) Earnings/(loss) per share

For the purpose of calculating earnings/(loss) per share for the periods presented, SearchMedia International’s shares have been restated retroactively for the year ended December 31, 2008 to reflect the share exchange ratio as at the date of the Share Exchange in a manner similar to a stock reorganization. The number of ordinary shares outstanding is determined on the basis of SearchMedia International’s historical number of ordinary shares outstanding multiplied by the share exchange ratio established in the Share Exchange Agreement.

Basic earnings/(loss) per share is computed by dividing income/(loss) attributable to common shares shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings (loss) per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares and is calculated using the treasury stock method for stock options and unvested shares. Common equivalent shares for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on incomeloss per share and, accordingly, are excluded from the calculation. Common equivalent shares are also excluded from the calculation in loss periods as their effects would be anti-dilutive. The Group incurred net loss for the three years ended December 2008, 2009, 2010 and 2010,2011, no diluted earnings (loss) is presented.

(t) Segment reporting

The Group has one operating segment as defined by ASC Topic 280, “Segment Reporting”. For the three years ended December 31, 2008, 2009, 2010 and 2010,2011, the Group’s advertising service revenues generated from customers outside the PRC is less than 10% of the Group’s total consolidated revenues and the Group’s total long-lived tangible assets located outside the PRC is less than 10% of the Group’s total consolidated long-lived tangible assets. Consequently no geographic information is presented.

(u) Significant concentrations and risks

No single group or customer contributed more than 10% of the Company’s revenue for the years ended December 31, 2009, 2010 and 2011.

No single group or supplier contributed more than 10% of the Company’s cost of revenue for the years ended December 31, 2009, 2010 and 2011.

An advertising agency customer accounted for 11% of the Company’s accounts receivable as of December 31, 2011. No advertising agency customer or individual customer accounted for more than 10% of accounts receivable as of December 31, 2010. Except for an advertising agency customer which accounted for 12% of the Group’s accounts receivable, no individual customer accounted for more than 10% of accounts receivable as of December 2009.

F-16


(v) Recently issued accounting standards

In January 2010,May 2011, the FASBFinancial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-05, “Compensation — Stock Compensation (Topic 718)”2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This standard codifies EITF Topic D-110 Escrowed Share Arrangements and the Presumption of Compensation and is effective immediately. The provisions of ASU 2010-05 did not have a material effect on the financial position, results of operations or cash flows of the Group and is effective immediately.

In January 2010,2011-04 amended the FASB issued ASU 2010-06, “Fair Accounting Standards Codification (“ASC”) 820,Fair

Value Measurements and Disclosures (Topic 820)”: Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures aboutconverge the fair value measurements onmeasurement guidance in US GAAP and International Financial Reporting Standards (“IFRSs”). Some of the basisamendments clarify the application of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3existing fair value measurements. Those disclosures aremeasurement requirements, while other amendments change particular principles in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures. ASU 2011-04 is effective for fiscal years beginning after December 15, 2010,2011 and for interim periods within those fiscal years. Early adoption is permitted.should be applied prospectively. The provisions ofGroup does not expect that ASU 2010-06 did not2011-04 will have a material effectsignificant impact on the financial position,its consolidated results of operations or cash flows offinancial position.

In June 2011, the Group.

In February 2010, FASB issued ASU No. 2010-092011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASC Topic 855”ASU 2011-05”), which removes. ASU 2011-05 eliminates the requirement foroption to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires an SEC filerentity to disclosepresent items of net income, other comprehensive income and total comprehensive income either in a datesingle continuous statement of comprehensive income or in both issued and revised financialtwo separate but consecutive statements. This amendment shall be applied prospectively for interim or annual financial periods ending after June 15, 2010. We do not believe the adoption will have a material effect on our consolidated financial statements.
In February 2010,December 2011, the FASB issued ASU 2010-10, “Consolidation2011-12,Comprehensive Income (Topic 810)”. The amendments220): Deferral of the Effective Date for Amendments to the consolidation requirementsPresentation of Topic 810 resulting from the issuanceReclassifications of Statement 167 are deferred for a reporting entity’s interestItems Out of Accumulated Other Comprehensive Income in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The deferral is primarily the result of differing consolidation conclusions reached by the International Accounting Standards BoardUpdate No. 2011-05 (“IASB”ASU 2011-12”) for certain investment funds when compared with the conclusions reached under Statement 167. The deferral is effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with. ASU 2011-12 defers the effective date of Statement 167. Early application is not permitted. The provisions of ASU 2010-10 are effective for the Company beginningchanges in 2010. The adoption of ASU 2010-10 did not have a material impact on the financial position, results of operations or cash flows of the Group.
In March 2010, the FASB issued ASU 2010-11, “Derivative and Hedging (Topic 815)”. All entitiesASI 2011-05 that enter into contracts containing an embedded credit derivative feature relatedrelate to the transferpresentation of credit risk that is not onlyreclassification adjustments for each component of other comprehensive income in the form of subordination of one financial instrument to another will be affected by the amendments in this Update because the amendments clarify that the embedded credit derivative scope exception in paragraph 815-15-15-8 through 15-9 does not apply to such contracts. ASU 2010-11 is effective at the beginning of the reporting entity’s first fiscal quarter beginning after June 15, 2010. The provisions of ASU 2010-11 are not expected to have a material effect on the financial position, results of operations or cash flows of the Group.
In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718)”. This Update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.both net income and other comprehensive income. The amendments in the ASU’s do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2010-132011-05 and ASU 2011-12 are both effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.2011 and must be applied retrospectively. The provision ofGroup will be required to adopt ASU 2010-13 are not expected2011-05 and ASU 2011-12 no later than the quarter beginning January 1, 2012. As the ASUs require additional presentation only, there will be no impact to have a material effect on the financial position,Group’s consolidated results of operations or cash flows of the Group.
financial position.

In December 2010,September 2011, the FASB issued ASU 2010-28, “When to Perform Step 2 of theNo. 2011-08,Intangibles-Goodwill and Other (Topic 350): Testing Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)”Impairment (“ASU 2011-08”). This ASU amends guidance for Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units,2011-08 gives an entity is requiredthe option to perform Step 2 of the goodwill impairment test iffirst assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment exists.test described in Topic 350. Previous guidance required an entity to test goodwill for impairment by first comparing the fair value of a reporting unit with its carrying amount. ASU 2010-282011-08 is effective for fiscal yearsannual and interim periodsgoodwill impairment tests performed for fiscal years beginning after December 15, 2010, with early adoption not permitted.2011. The Group will be required to adopt ASU 2011-08 as of January 1, 2012 and does not expect that the adoption of ASU 2010-282011-08 will have a materialsignificant impact on its financial position,consolidated results of operations or cash flows.

F-17

financial position.


In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. This ASU specifies that if a public company presents comparative financial statements, the entity should only disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company is in the process of evaluating the effect of adoption of this pronouncement.
3. Loss per share

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the three years ended December 31, 2008, 2009, 2010 and 2010.2011. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock or conversion of notes into shares of the Company’s common stock that could increase the number of shares outstanding and lower the earnings per share of the Company’s common stock. This calculation is not done for periodsyears in which a net loss was incurred as this would be antidilutive. The information related to basic and diluted earnings per share is as follows:

             
  2008  2009  2010 
Numerator:
            
Net Loss $(35,080) $(22,649) $(46,639)
             
Denominator:
            
Weighted average shares outstanding — Basic and diluted  2,169,269   5,100,465   20,796,789 
Loss per share — Basic and diluted $(0.0162) $(0.0044) $(0.0022)

   2009  2010  2011 

Numerator:

    

Net Loss

  $(22,649 $(46,639 $(13,459

Denominator:

    

Weighted average shares outstanding — Basic and diluted

   5,100,465    20,796,789   ��20,994,015  

Loss per share — Basic and diluted (In US$)

  $(4.44 $(2.24 $(0.64

As of December 31, 2010,2011, there were a total of 1,004,8611,019,333 stock options and 13,607,441 warrants that would have been included in the computation of diluted earnings per share that could potentially dilute basic earnings per share in the future.

4. Acquisitions

I. 2010 acquisition

a.Initial recognition of contingent acquisition consideration

On May 31, 2010, the Group acquired 100% of the equity interest in Zhejiang Continental initially valued at $19,698, including an initial cash consideration of $73 and $19,625 of contingent consideration, which represents the lesser of the maximum amount of contingent consideration and the amount of goodwill, was recognized as of the date of acquisition.

The following table summarizes the fair values of the assets acquired and liabilities assumed on the date of acquisition of Zhejiang Continental by the Group.

     
Assets acquired:    
Cash $302 
Accounts receivable  1,706 
Prepaid expenses and other current assets  453 
Property and equipment  21 
Intangible assets $4,282 
    
Total $6,764 
    
Liabilities assumed:    
Accounts payable  (143)
Accrued expenses and other payables  (823)
Amounts due to related parties  (2,412)
Income taxes payable  (423)
Deferred tax liability (1,070)
    
Total $(4,871)
    
Goodwill $17,805 
Total consideration $19,698 
    

F-18


Assets acquired:

  

Cash

  $302  

Accounts receivable

   1,706  

Prepaid expenses and other current assets

   453  

Property and equipment

   21  

Intangible assets

  $4,282  
  

 

 

 

Total

  $6,764  
  

 

 

 

Liabilities assumed:

  

Accounts payable

   (143

Accrued expenses and other payables

   (823

Amounts due to related parties

   (2,412

Income taxes payable

   (423

Deferred tax liability

   (1,070
  

 

 

 

Total

  $(4,871
  

 

 

 

Goodwill

  $17,805  

Total consideration

  $19,698  
  

 

 

 

       Amortization
Period
 
       (Years) 

Intangible assets comprised of:

    

Customer relationship

  $1,067     3.4  

Lease agreements

   2,749     4.4  

Non-compete agreement

   462     3.4  

Assembled workforce

   4     N/A  
  

 

 

   

Total

  $4,282    
  

 

 

   

         
      Amortization 
      Period 
      (Years) 
Intangible assets comprised of:        
Customer relationship $1,067   3.4 
Lease agreements  2,749   4.4 
Non-compete agreement  462   3.4 
Assembled workforce  4   N/A 
        
Total $4,282     
        
In addition to the initial consideration, the equity owners of Zhejiang Continental are entitled to subsequent consideration, including cash and IDI’s Class A commonordinary shares basedof the Company on a predetermined earn-out formula applied to audited operating results through December 31, 2010 (“2010 earn-out”) and through December 31, 2011 (“2011 earn-out”). The 2010 earn-out is payable in cash based on a multiple of 3.5 of the full year audited operating results from 2010. The 2011 earn-out is payable in ordinary shares of the Company based on a multiple of 3.3 of the full year audited operating results for 2011.
The multiples of 2010 and 2011 earn-out can be reduced to 3.0 if the audited operating results were less than certain amounts. Both 2010 and 2011 earn-out are subject to a maximum amount of $10,665 and $10,681, respectively.

The contingent purchase price consideration is payable when each individual 12-month period during the earn-out period is completed and the operational results were agreed to and confirmed. The 2010 earn-out is payable in cash and the 2011 earn-out is payable in ordinary shares of the Company at market price. At the acquisition date, the contingent consideration was recognized at fair value based on best estimatehistorical and forecast operational results agreed to and confirmed by the Group and goodwill was recognized in accordance with ASC Topic 805-20.

The accompanying consolidated financial statements include the assets and liabilities of Zhejiang Continental as of December 31, 2010 and 2011 and the operating results for the period from May 31, 2010 (date of acquisition by the Group) to December 31, 2010.

II. 2008 acquisitions
During2010 and for the year ended December 31, 2008,2011.

b.Change of fair value of contingent acquisition payable

As at December 31, 2011, the contingent consideration of Zhejiang Continental was resolved and there was a reduction of total consideration compared to the initial estimated contingent purchase price. An adjustment to contingent consideration of $10,681 was recognized to the income statements in accordance with ASC Topic 805-30-35.

c.Subsequent disposal of Zhejiang Continental

On May 2, 2012, the Company divested 100% equity interests in Zhejiang Continental back to its original selling shareholders (see note 21). As a result of the decline in performance of Zhejiang Continental, goodwill and intangible assets of Zhejiang Continental, amounting to $18,816 and $2,723 respectively were fully impaired at December 31, 2011 (see note 9).

Below is the reconciliation of acquisition consideration payable and goodwill from date of acquisition to December 31, 2011:

Acquisition consideration payable:

  

Balance as at date of acquisition

   19,698  

Consideration paid in 2010

   (2,340

Translation adjustment

   610  
  

 

 

 

Balance as at December 31, 2010

   17,968  

Change of fair value of contingent consideration payable

   (10,681

Translation adjustment

   918  
  

 

 

 

Balance as at December 31, 2011

  $8,205  
  

 

 

 

Goodwill:

  

Balance as at date of acquisition

  $17,805  

Translation adjustment

   553  
  

 

 

 

Balance as at December 31, 2010

   18,358  

Impairment of goodwill

   (18,816

Translation adjustment

   458  
  

 

 

 

Balance as at December 31, 2011

  $—    
  

 

 

 

5. Termination of the VIE contractual agreements

On December 23, 2011, the Company terminated the contractual arrangement with the VIE, Jingli, so that the VIE structure was no longer in place. The Company ceased to consolidate the financial results of the VIE and its subsidiaries including Jincheng, Xinshichuang, Haiya, Shengshitongda, Changsha Jingli and Wenzhou Rigao upon termination of the contractual agreements. A gain of $9,551 on such termination was recognized to income statement in accordance with ASC 845-10-30-1.

The carrying amounts of the major classes of assets and liabilities of the VIE and its subsidiaries at December 23, 2011 were as follows:

Assets:

  

Cash

  $120  

Accounts receivable

   1,319  

Prepaid expenses and other current assets

   890  

Property and equipment

   204  

Deferred tax assets

  $147  
  

 

 

 

Total

  $2,680  
  

 

 

 

Liabilities:

  

Accounts payable

   4,841  

Accrued expenses and other payables

   7,351  

Amounts due to related parties

   336  

Income taxes payable

   1,032  

Short-term bank loans

   1,381  
  

 

 

 

Total

  $14,941  
  

 

 

 

Goodwill

  $2,710  

Net liabilities

  $9,551  

Revenue and net income of the VIE and its subsidiaries from January 1, 2011 through December 23, 2011 were:

Advertising service revenue

  $530  
  

 

 

 

Loss from operations

   (618
  

 

 

 

Net loss

   (883
  

 

 

 

The Company did not classify the termination of the VIE as discontinued operations because the Group acquiredexpects to continue to generate revenues from the respective advertising businessessales of Jincheng, Xinshichuang, Kaixiang, Wanshuizhiyuan, Shenyang Jingli, Haiya, Botang, HK Ad-icon, Shengshitongda, Wenzhou Rigao, and Wuxi Ruizhong (“acquired entities”). These acquisitions were unrelatedsimilar services to each other.

Pursuant to a serial of acquisition agreements signed with eachspecific customers of the acquired entities’ ex-owners in 2008 (“original acquisition agreements”),disposed component. As a result of the purchase consideration for each acquisition is contingent based on the operational results agreed and confirmedmigration of customers, continuing cash flows are being generated by the Group and eachfrom transactions with customers of the acquired entities’ ex-owners in a 2-year earn-out period following respective acquisition dates (“earn-out period”).
During second and third quarters of 2010, the Company amended the earnout agreements with Kaixiang, Wanshuizhiyuan, Haiya, Botang, Wenzhou Rigao, Wuxi Ruiuzhong and Shenyang Jingli. The amended earnout agreements provided for the extension of the time period of one to more than two years for required cash and stock payments. The amended earnout agreements also provided for the extension of the employment agreements of certain key members of management of these subsidiaries.
In addition, the Company reached agreements with Haiya, Wanshuizhiyuan, Shenyang Jingli, Wenzhou Rigao and Botang to use the stock of the Company for the partial payment of the cash consideration and provide guarantee on the realizable price of these stocks based on the financial performance of these companies at the maturity of restriction period. As of December 31, 2010, the Company did not recognize the put options under these agreements as the subsidiaries did not meet the required financial performance.

F-19disposed component.


The following summarized the details of acquisitions made in 2008 and 2010 respectively and the initial allocation of purchase price, which was based on valuations performed by independent valuation firms using the multiple period excess earnings method:
                                         
                  Acquired Intangible      Goodwill recognized 
      Consideration paid up  Fair value  Assets  Deferred  during the year ended 
      to December 31,  of net asset  Customer  Lease  Non-compete  tax liability  December 31, 
Acquired Entity Date Acquired Business 2009  2010  acquired  relationship  agreements  agreements  recognized  2009  2010 
Xinshichuang January 1, 2008 Poster frame $952  $981  $10  $7  $157  $  $41  $  $ 
Jincheng January 1, 2008 Poster frame  923   997   (117)  2   94      24       
Kaixiang January 1, 2008 Billboard  6,760   7,423   88   134   264      99   6,628   2,309 
Wanshuizhiyuan January 1, 2008 Billboard  8,725   8,996   70   199   220      105   2,207   225 
Shenyang Jingli January 1, 2008 Billboard  13,322   15,853   229   686   812      374   2,482   3,205 
Haiya February 1, 2008 Transit  5,345   5,662   (186)  29   1,037      267   5,988   1,755 
Botang April 1, 2008 Billboard  20,851   32,302   145   1,070   1,968      759   23,699   6,442 
HK Ad-icon April 1, 2008 Billboard  1,557   1,545   9   148   105      42   1,294   897 
Shengshitongda April 1, 2008 Poster frame  117   121   7   2   18      5   116   (21)
Wenzhou Rigao July 1, 2008 Poster frame  3,219   4,527   (95)  102   149      63   4,904   2,806 
Wuxi Ruizhong July 1, 2008 Poster frame  1,087   2,593   33   32   173      51   1,354   2,958 
Zhejiang Continental June 1, 2010 Billboard     2,340   1,319   1,100   2,834   480   1,104      18,358 
       
Total     $62,858  $83,340  $1,512  $3,511  $7,831  $480  $2,934  $48,672  $38,934 
       
Further details of goodwill impairment are set out in Note 8.

F-20


Unaudited pro forma financial information
The following unaudited pro forma financial information presentssummarizes the results of operationseffect of the Grouptermination, as if the acquisitionstermination of all the above entitiesVIE had occurred as of January 1, 2008 and 2010, respectively. These results include the impact of preliminary fair value adjustments on intangible assets and the related adjustments on deferred taxes. The unaudited2009. This pro forma financial information is presented for information purposes only. It is based on historical information and does not necessarily indicative of whatpurport to represent the Group’s consolidatedactual results of operations would actuallythat may have beenoccurred had it completed the acquisitionsCompany terminated the VIE on January 1, 2008 and 2010, respectively. In addition, the unaudited pro forma financial information does not attempt to project the2009, nor is it necessarily indicative of future results of operations of the combined entity.
         
  Year ended December 31, 2008 Year ended December 31, 2010
Advertising service revenues $47,794  $51,388 
Income/(loss) from operations  14,275   (3,344)
Net loss $(39,729) $(45,232)
5.consolidated enterprises:

   2009  2010  2011 
   (Unaudited)  (Unaudited)  (Unaudited) 

Advertising service revenues

  $30,165   $44,318   $55,041  

Loss from operations

   (11,127  (39,234  (12,620

Net loss

   (8,728  (40,620  (12,576

6. Accounts receivable, net

Accounts receivable consist of the following:

         
  As of December 31, 
  2009  2010 
   
Accounts receivable $15,321  $21,259 
Less allowance for doubtful accounts  (2,325)  (3,194)
   
         
Accounts receivable, net $12,996  $18,065 
   

   As of December 31, 
   2010  2011 

Accounts receivable

  $21,259   $20,366  

Less allowance for doubtful accounts

   (3,194  (4,544
  

 

 

  

 

 

 

Accounts receivable, net

  $18,065   $15,822  
  

 

 

  

 

 

 

As of December 31, 20092010 and 2010,2011, the Group’s accounts receivable includes amounts earned and recognized as revenues of $2,371$6,105 and $6,105,$2,133, respectively but not yet billed (unbilled receivables). Management expects all unbilled receivables to be billed and collected within 12 months of the balance sheet date.

The following table presents the movement of the allowance for doubtful accounts:

         
  As of December 31, 
  2009  2010 
   
Beginning allowance for doubtful accounts $712  $2,325 
Effect of foreign currency translation  2   89 
Additions charged to bad debt expense  1,611   1,171 
Write-back of bad debt expense     (391)
   
 
Ending allowance for doubtful accounts $2,325  $3,194 
   
6.

   As of December 31, 
   2010  2011 

Beginning allowance for doubtful accounts

  $2,325   $3,194  

Effect of foreign currency translation

   89    216  

Additions charged to bad debt expense

   1,171    2,073  

Recoveries

   (391  —    

Termination of the VIEs

   —      (939
  

 

 

  

 

 

 

Ending allowance for doubtful accounts

  $3,194   $4,544  
  

 

 

  

 

 

 

7. Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

         
  As of December 31, 
  2009  2010 
   
Prepaid rent $1,939  $5,651 
Other prepaid expenses  1,060   82 
Rental deposits and other receivables  1,657   2,607 
   
 
Total prepaid expenses and other current assets $4,656  $8,340 
   

   As of December 31, 
   2010   2011 

Prepaid rent

  $5,651    $5,001  

Other prepaid expenses

   82     8  

Rental deposits and other receivables

   2,607     4,453  
  

 

 

   

 

 

 

Total prepaid expenses and other current assets

  $8,340    $9,462  
  

 

 

   

 

 

 

Bad debt expense was $1,006 and $832 for the year ended December 31, 2010. No bad debt expense recoginsed for the year ended December 31, 2009.

7.2010 and 2011.

8. Property and equipment, net

Property and equipment, net consist of the following:


         
  As of December 31, 
  2009  2010 
   
Leasehold improvements $94  $114 
Advertising display equipment  1,410   1,378 
Furniture, fixtures and office equipment  597   793 
Motor vehicles  54   30 
   
Total cost of property and equipment  2,155   2,315 
Less: accumulated depreciation and amortization  (750)  (1,182)
   
 
Property and equipment, net $1,405  $1,133 
   

F-21


   As of December 31, 
   2010  2011 

Leasehold improvements

  $114   $25  

Advertising display equipment

   1,378    1,156  

Furniture, fixtures and office equipment

   793    510  

Motor vehicles

   30    32  
  

 

 

  

 

 

 

Total cost of property and equipment

   2,315    1,723  

Less: accumulated depreciation and amortization

   (1,182  (1,090
  

 

 

  

 

 

 

Property and equipment, net

  $1,133   $633  
  

 

 

  

 

 

 

Depreciation of property and equipment were allocated to the following categories of cost and expenses:
             
  Years Ended December 31, 
  2008  2009  2010 
   
Cost of revenues $950  $233  $232 
Selling and marketing expenses        33 
General and administrative expenses  318   166   139 
   
Total depreciation and amortization $1,268  $399  $404 
   
8.

   Years Ended December 31, 
   2009   2010   2011 

Cost of revenues

  $233    $232    $244  

Selling and marketing expenses

   —       33     27  

General and administrative expenses

   166     139     114  
  

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

  $399    $404    $385  
  

 

 

   

 

 

   

 

 

 

9. Goodwill and other intangible assets

The changes in carrying amount of goodwill for the years ended December 31, 20092010 and 20102011 are as follows:

                                                         
          Xinshi      Wanshui  Shenyang      Shengshi      Wenzhou  Wuxi  HK  Zhejiang    
  Sige(1)  Jincheng  chuang  Kaixiang  zhiyuan  Jingli  Haiya  tongda  Botang  Rigao  Ruizhong  Ad-Icon  Continental  Total 
   
 
Balance as of January 1, 2009
 $  $  $  $5,682  $5,803  $1,470  $  $  $  $  $  $  $  $12,955 
Goodwill acquired during the year           6,628   2,207   2,482   5,988   116   23,699   4,904   1,354   1,294      48,672 
Impairment of goodwill              (2,397)  (1,640)  (2,130)     (9,582)              (15,749)
Translation adjustment           6   6   1                        13 
   
Balance as of December 31, 2009
           12,316   5,619   2,313   3,858    116   14,117   4,904   1,354   1,294      45,891 
   
Goodwill acquired during the year                                      18,358   18,358 
Goodwill recorded as a result of contingent consideration resolved under ASC Topic 805-20           2,309   225   3,205   1,755   (21)  6,442   2,806   2,958   897      20,576 
Impairment of goodwill           (10,230)  (2,674)  (3,832)  (5,608)  (97)  (8,864)  (5,169)  (1,286)  (1,651)     (39,411)
Translation adjustment           154   114   (14)  (5)  2   241   38   14   (3)     541 
   
Balance as of December 31, 2010
 $  $  $  $4,549  $3,284  $1,672  $  $  $11,936  $2,579  $3,040  $537  $18,358  $45,955 
   
(1)Shanghai Sige Advertising and Media Company Limited

     Wanshui  Shenyang     Shengshi     Wenzhou  Wuxi  HK  Zhejiang    
  Kaixiang  zhiyuan  Jingli  Haiya  tongda  Botang  Rigao  Ruizhong  Ad-Icon  Continental  Total 

Balance as of January 1, 2010

 $12,316   $5,619   $2,313   $3,858   $116   $14,117   $4,904   $1,354   $1,294   $—     $45,891  

Goodwill acquired during the year

  —      —      —      —      —      —      —      —      —      17,805    17,805  

Goodwill recorded as a result of contingent consideration resolved under ASC
Topic 805-20

  2,309    225    3,205    1,755    (21  6,442    2,806    2,958    897    —      20,576  

Impairment of goodwill

  (10,230  (2,674  (3,832  (5,608  (97  (8,864  (5,169  (1,286  (1,651  —      (39,411

Translation adjustment

  154    114    (14  (5  2    241    38    14    (3  553    1,094  

Balance as of December 31, 2010

 $4,549   $3,284   $1,672   $—     $—     $11,936   $2,579   $3,040   $537   $18,358   $45,955  

Goodwill acquired during the year

  —      —      —      —      —      —      —      —      —      —      —    

Deconsolidation of VIE

  —      —      —      —      —      —      (2,710  —      —      —      (2,710

Impairment of goodwill

  (1,460  (1,044  (1,714  —      —      (4,798  —      (95  —      (18,816  (27,927

Translation adjustment

  195    142    42    —      —      487    131    152    1    458    1,608  

Balance as of December 31, 2011

 $3,284   $2,382   $—     $—     $—     $7,625   $—     $3,097   $538   $—     $16,926  

The gross amount and accumulated impairment losses of goodwill as of December 31, 20092010 and 20102011 are as follows:

                                                         
          Xinshi      Wanshui  Shenyang      Shengshi      Wenzhou  Wuxi  HK  Zhejiang    
  Sige  Jincheng  chuang  Kaixiang  zhiyuan  Jingli  Haiya  tongda  Botang  Rigao  Ruizhong  Ad-Icon  Continental  Total 
   
 
Goodwill, gross $1,117  $1,072  $969  $12,316  $9,644  $12,276  $5,988  $116  $23,699  $4,904  $1,354  $1,294  $  $74,749 
Accumulated impairment losses  (1,117)  (1,072)  (969)     (4,025)  (9,963)  (2,130)     (9,582)              (28,858)
   
Balance as of December 31, 2009
 $  $  $  $12,316  $5,619  $2,313  $3,858  $116  $14,117  $4,904  $1,354  $1,294  $  $45,891 
                                                         
Goodwill, gross $1,151  $1,106  $999  $15,007  $10,168  $15,862  $7,929  $99  $30,877  $7,862  $4,354  $2,187  $18,358  $115,959 
Accumulated impairment losses  (1,151)  (1,106)  (999)  (10,458)  (6,884)  (14,190)  (7,929)  (99)  (18,941)  (5,283)  (1,314)  (1,650)     (70,004)
   
Balance as of December 31, 2010
 $  $  $  $4,549  $3,284  $1,672  $  $  $11,936  $2,579  $3,040  $537  $18,358  $45,955 
   

      Wanshui  Shenyang     Shengshi     Wenzhou  Wuxi  HK  Zhejiang    
   Kaixiang  zhiyuan  Jingli  Haiya  tongda  Botang  Rigao  Ruizhong  Ad-Icon  Continental  Total 

Goodwill, gross

  $15,007   $10,168   $15,862   $7,929   $99   $30,877   $7,862   $4,354   $2,187   $18,358   $112,703  

Accumulated impairment losses

   (10,458  (6,884  (14,190  (7,929  (99  (18,941  (5,283  (1,314  (1,650  —      (66,748

Balance as of December 31, 2010

  $4,549   $3,284   $1,672   $—     $—     $11,936   $2,579   $3,040   $537   $18,358   $45,955  

Goodwill, gross

  $15,774   $10,688   $16,672   $8,334   $104   $32,454   $8,264   $4,576   $2,190   $19,295   $118,351  

Accumulated impairment losses

   (12,490  (8,306  (16,672  (8,334  (104  (24,829  (8,264  (1,479  (1,652  (19,295  (101,425

Balance as of December 31, 2011

  $3,284   $2,382   $—     $—     $—     $7,625   $—     $3,097   $538   $—     $16,926  

Accumulated impairment losses include current year impairment loss charged to Statement of Operations and translation differences of Goodwill at different years end closing rate.

Goodwill impairment

Management performs a goodwill impairment test for each of its reporting units as of December 31 of each year or when circumstances change that would more likely than not that the carrying amount of goodwill may be impaired. As a result of impairment tests, the Group recorded a goodwill impairment loss of $15,749, $39,411 and $39,411$27,927 for the years ended December 31, 2009, 2010 and 2010,2011, respectively.

F-22


Goodwill impairment in 2009
During 2009, the Group settled contingent purchase consideration of $48,672 and these amounts were recorded as additional goodwill. The Group performed its annual impairment test at the end of the year, which indicated that the carrying amount exceeded the fair value by a significant margin. The impairment test resulted in an additional goodwill impairment loss of $2,397 for Wanshui Zhiyuan, $1,640 for Shenyang Jingli, $9,582 for Botang and $2,130 for Haiya, as the valuation analysis indicated that the fair values of the reporting units were less than the carrying value.
Goodwill impairment in 2010
Our goodwill primarily arises from the initial consideration paid and subsequent settlement of contingent consideration of our business acquisitions in 2008. During 2010, the Group settled contingent purchase consideration of $20,576 under ASC Topic 805-20 which were recorded as additional goodwill and the Group recognised goodwill of $18,358 for the acquisition of Zhejiang Continental. The Group performed its annual impairment test at the end of the year, which indicated that the carrying amount exceeded the fair value by a significant margin. The impairment test resulted in an additional goodwill impairment loss of $10,230 for Kaixiang, $2,674 for Wanshui, $3,832 for Shenyang Jingli, $5,169 for Wenzhou Rigao, $1,286 for Wuxi Ruizhong, $1,651 for HK Ad-Icon, $8,864 for Botang, $5,608 for Haiya and $97 for Shengshitongda, as the valuation analysis indicated that the fair values of the reporting units were less than the carrying value.
The Group applied the income approach to estimate the fair value of its reporting units for goodwill impairment tests. The key assumptions used in this approach, which requires significant management judgment, include business assumptions, growth rate, terminal value, discount rate, and tax amortization benefit. Under this approach, the free cash flow to the Company was first estimated and then the after tax weighted average cost of capital (“WACC”) was used to discount the cash flow to calculate the estimated value. To select the appropriate discount rate, the Company used both the CAPM model and the build up method and then using the weighted average by capital amount weighting. The Company then selected the average of both methods to estimate the WACC to arrive at the concluded discount rate of 20.0%, 21.5% and 18.0% as of December 31, 2009, 2010 and 2011 respectively.

Our goodwill primarily arises from the initial consideration paid and subsequent settlement of contingent consideration of our business acquisitions. Before the issuance of ASC Topic 805-20, the contingent purchase price consideration for each entity is payable when each individual 12-month period during the earn-out period is completed and the operational results were agreed and confirmed. As such, the purchase price allocation cannot be completed until the contingencies are resolved in accordance with SFAS No. 141. Therefore, the contingent consideration was not determinable beyond a reasonable doubt for the 2008 acquisitions, and no goodwill was recognized due to the contingent nature of the consideration. Based on the Group’s audited operating results through December 31, 2009 and the amended acquisition agreements during December 31, 2010, the Company recorded additional consideration payable which resulted in additional goodwill in 2010.

In April 2009, the FASB issued Staff Position No. FSP FAS 141(R)-1,”Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“ASC Topic 805-20”). This updated guidance amended the accounting treatment for assets and liabilities arising from contingencies in a business combination and requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined. If fair value cannot be reasonably determined, measurement should be based on the best estimate in accordance with SFAS No. 5, “Accounting for Contingencies” (“ASC Topic 450”).

The Group performed its annual impairment test at the end of the year, which indicated that the carrying amount exceeded the fair value by a significant margin. The impairment test resulted in an additional goodwill impairment loss in 2010 and 2011, as the valuation analysis indicated that the fair values of the reporting units were less than the carrying value. The Group recognized significant goodwill impairment on the acquired companies right after the Company recorded additional contingent consideration due to:

1.Decline in performance of Zhejiang Continental, which results in goodwill impairment of $18,816 for the year ended December 31, 2011;

2.The implied fair value of the goodwill was lower than the carrying value when the Company considered cash flow stream in the goodwill impairment test;

3.The discount rate used in the valuation model during the impairment test is higher than the discount rate used in the purchase price allocation due to higher risk associates with advertising industry in recent years;

4.For the acquisitions occurred in 2008, the Company accounted for the acquisition under FAS 141 and record goodwill when the contingent consideration is realized. As a result, the Company recorded the 2009 earn-out payment only when the contingency was realized in 2010. As at the year ended December 31, 2010 and 2011, the Company performed the goodwill impairment test based on the actual net income which is significantly lower than the 2008 and 2009 net income. Accordingly, the Company revised the future projection of its subsidiaries due to:

the acquisitions took place before the financial crisis in 2008. The overall business dropped significantly due to the economic downturn;

the ex-owners had less incentive to expand the business after the earn-out period;

the synergy of consolidating and integrating multiple acquired businesses is lower than what we expected.

Intangible assets other than goodwill consist of the following:

           
  Weighted average As of December 31, 
  amortization period 2009  2010 
Gross amount          
Customer relationship 0.5-3.4 years $2,343  $3,511 
Lease agreements 1-4.4 years  4,849   7,831 
Non-compete agreements 3.4 years     480 
     
     7,192   11,822 
     
           
Accumulated amortization          
Customer relationship    (2,135)  (2,584)
Lease agreements    (2,854)  (4,242)
Non-compete agreements       (86)
     
     (4,989)  (6,912)
     
           
Accumulated impairment          
Customer relationship    (15)  (16)
Lease agreements    (912)  (940)
Non-compete agreements        
     
     (927)  (956)
     
           
Net intangible assets          
Customer relationship    193   911 
Lease agreements    1,083   2,649 
Non-compete agreements       394 
     
    $1,276  $3,954 
     

    Weighted average
amortization  period
  As of December 31, 
      2010  2011 

Gross amount

     

Customer relationship

  0.5-3.4 years  $3,511   $3,533  

Lease agreements

  1-4.4 years   7,831    6,696  

Non-compete agreements

  3.4 years   480    505  
    

 

 

  

 

 

 
     11,822    10,734  
    

 

 

  

 

 

 

Accumulated amortization

     

Customer relationship

     (2,584  (2,915

Lease agreements

     (4,242  (4,789

Non-compete agreements

     (86  (237
    

 

 

  

 

 

 
     (6,912  (7,941
    

 

 

  

 

 

 

Accumulated impairment

     

Customer relationship

     (16  (618

Lease agreements

     (940  (1,907

Non-compete agreements

     —      (268
    

 

 

  

 

 

 
     (956  (2,793
    

 

 

  

 

 

 

Net intangible assets

     

Customer relationship

     911    —    

Lease agreements

     2,649    —    

Non-compete agreements

     394    —    
    

 

 

  

 

 

 
    $3,954   $—    
    

 

 

  

 

 

 

For year ended December 31, 2011, the Group recorded an impairment loss on its intangible assets in the amount of $2,723 associated with Zhejiang Continental mainly due to the decline in business performance. There was no impairment loss for the years ended December 31, 2009 and 2010.

F-23


Amortization of intangible assets was allocated to the following categories of cost and expenses:
             
  Years Ended December 31, 
   2008  2009  2010 
   
Cost of revenues $1,542  $1,379  $1,273 
Sales and marketing expenses  1,480   636   462 
   
Total amortization expenses $3,022  $2,015  $1,735 
   
Future

   Years Ended December 31, 
   2009   2010   2011 

Cost of revenues

  $1,379    $1,273    $854  

Sales and marketing expenses

   636     464     475  
  

 

 

   

 

 

   

 

 

 

Total amortization expenses

  $2,015    $1,737    $1,329  
  

 

 

   

 

 

   

 

 

 

There is no future expected amortization of intangible assets as of December 31, 2011, since all of the intangible assets were fully amortized or impaired.

10. Acquisition consideration payable

During the year ended December 31, 2008 and 2010, the Group acquired the respective advertising businesses of Jincheng, Xinshichuang, Kaixiang, Wanshuizhiyuan, Shenyang Jingli, Botang, HK Ad-icon, Shengshitongda, Wenzhou Rigao, Wuxi Ruizhong and Zhejiang Continental (“acquired entities”). These acquisitions were unrelated to each other.

Pursuant to a series of acquisition agreements signed with each of the acquired entities’ former equity owners, which we refer to as the “ex-owners”, in 2008 and 2010 (“original acquisition agreements”), the purchase consideration for each acquisition is as follows:

     
2011 $1,297 
2012  1,108 
2013  1,023 
2014  526 
Thereafter   
    
Total $3,954 
    
9.contingent based on the operational results agreed and confirmed by the Group and each of the acquired entities’ ex-owners in a 2-year earn-out period following respective acquisition dates (“earn-out period”).

The table below summarizes the contingent consideration associated with the Company’s 2008 and 2010 acquisitions:

   Total contingent consideration and paid up to December 31, 2010
and consideration payable as of December 31, 2010
 

Acquired Entity

  Contingent
consideration
   Consideration
paid in cash
   Consideration
paid in stock
   Consideration
payable
   Payable
in cash
   Payable
in stock
 

Xinshichuang

  $1,132    $981    $—      $151    $151    $—    

Jincheng

   1,058     997     —       61     61     —    

Kaixiang

   15,396     7,423     —       7,973     3,953     4,020  

Wanshuizhiyuan

   10,554     8,996     —       1,558     —       1,558  

Shenyang Jingli

   17,222     15,853     —       1,369     —       1,369  

Haiya

   8,537     5,662     —       2,875     1,120     1,755  

Botang

   33,304     32,302     —       1,002     —       1,002  

HK Ad-icon

   2,407     1,545     —       862     593     269  

Shengshitongda

   121     121     —       —       —       —    

Wenzhou Rigao

   7,953     4,527     —       3,426     2,014     1,412  

Wuxi Ruizhong

   4,542     2,593     —       1,949     1,268     681  

Zhejiang Continental

   20,309     2,340     —       17,969     7,807     10,162  

Total

  $122,535    $83,340    $—      $39,195    $16,967    $22,228  

   Total contingent consideration and paid up to December 31, 2011
and consideration payable as of December 31, 2011
 

Acquired Entity

  Contingent
consideration
   Consideration
paid in cash
   Consideration
paid in stock
   Consideration
payable
   Payable
in cash
   Payable
in stock
 

Kaixiang

  $16,183    $7,802    $4,225    $4,156    $4,156    $—    

Wanshuizhiyuan

   11,093     9,890     —       1,203     —       1,203  

Shenyang Jingli

   18,101     16,663     —       1,438     —       1,438  

Haiya

   8,973     5,951     —       3,022     1,178     1,844  

Botang

   35,005     34,556     —       449     —       449  

HK Ad-icon

   2,410     1,547     269     594     594     —    

Wenzhou Rigao

   8,359     4,759     —       3,600     2,116     1,484  

Wuxi Ruizhong

   4,774     3,487     716     571     571     —    

Zhejiang Continental

   10,665     2,460     —       8,205     8,205     —    

Total

  $115,563    $87,115    $5,210    $23,238    $16,820    $6,418  

During 2011, 750,380 shares of the Company were issued to ex-owner of Kaixiang, Wuxi Ruizhong and HK Ad-icon to settle consideration payable in stock of $5,210. A gain of $4,340 was recognized to the income statement due to issuance of the Company’s shares at the market price lower than the price initially agreed at acquisition.

For subsequent changes to consideration payable, please refer to note 21.

11. Accrued expenses and other payables

Accrued expenses and other payables consist of the following:

         
  As of December 31, 
  2009  2010 
   
Accrued payroll and staff benefits $2,559  $1,926 
Accrued professional fee  2,852   1,044 
Business tax and surcharges payable  7,074   9,076 
Contingent liabilities (Note 18(c))  844   2,602 
Accrued liabilities for abandonment of lease  597   1,900 
Other accrued liabilities  1,972   1,383 
   
Total accrued expenses and other payables $15,898  $17,931 
   
10.

   As of December 31, 
   2010   2011 

Accrued payroll and staff benefits

  $1,926    $666  

Accrued professional fee

   1,044     1,638  

Business tax and surcharges payable

   9,076     9,253  

Contingent liabilities (Note 20(c))

   2,602     360  

Accrued liabilities for abandonment of lease

   1,900     —    

Other accrued liabilities

   1,383     2,035  
  

 

 

   

 

 

 

Total accrued expenses and other payables

  $17,931    $13,952  
  

 

 

   

 

 

 

12. Short-term borrowings

Balances as of December 31, 2009
The Group’s short term borrowing of $654 as of December 31, 2009 represents two short-term bank loans of $542 and $112. The short-term loan of $542 bears interest at 5.841% per annum and matured on April 15, 2010. The loan of $112 is guaranteed by a building of the Group, bears interest at 14.2308% per annum and matured on September 21, 2010. Total interest expense for the two short-term bank loans is $27 for the year ended December 31, 2009. On October 30, 2009, the Group repaid the principal and interests of $1,856 for the prior year balances.

Balances as of December 31, 2010

The Group’s short term borrowing of $729 as of December 31, 2010 represents two short-term bank loans of $559 and $170. The short-term loan of $559 bears interest at 6% per annum and maturesmatured on April 13, 2011. The loan of $170 bears interest at 14.2308%14.23% per annum and maturesmatured on September 21, 2011. Total interest expense for the two short-term bank loans is $45 for the year ended December 31, 2010. On September 21, 2010, the Group repaid the principal and interests

Balances as of $675 for the prior year balances.

F-24


The weighted average interest rates on short-term obligations outstanding are 12.0% and 7.92% for the years ended December 31, 2009 and 2010, respectively.
11.2011

The balance is zero as of December 31, 2011 due to deconsolidation of the VIE. Interest expenses for 2011 is $89.

13. Common shares and warrants

Common shares

As of December 31, 2010 and 2011, the number of issued and outstanding common shares was 20,858,661 including 12,462,345 commonand 21,687,497, respectively. During 2011, 750,380 shares resulting fromwere issued to ex-owner of the reverse acquisitionacquired subsidiaries to offset earn-out liabilities of SearchMedia Holdings.

$5.2 million. The Company also issued 78,456 shares to employee upon exercise of their options and received $2.

Warrants

SearchMedia International has a total of 13,400,000 warrants outstanding prior to the business reverse acquisition. Each warrant entitles the registered holder to purchase one share of the Company’s common stock at a price of $6.00 to $8.00 per share at any time commencing on the completion of a business combination. The warrants have a four years term and willwas supposed to expire in November 2011. On April 13, 2011, the Board of Directors of the Company approved an extension of the expiration date of its publicly held warrants with an exercise price of $6.00 from November 19, 2011 to November 19, 2012.

All other provisions of the warrants remain the same.

Upon completion of the business reverse acquisition, which was October 30, 2009, the Company has 15,347,401 warrants outstanding, which includes 1,519,182 warrants issued to the SearchMedia International shareholders or warrantholders in the business reverse acquisition and 428,219 warrants issued to the note holder.

Each warrant issued to a SearchMedia International shareholder or warrant holder in the business reverse acquisition and note holder entitles the registered holder to purchase one share of SearchMedia Holding’s common stock at a price ranging from $0.0001 to $8.14 per share, subject to adjustment, at any time. The exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their respective exercise prices. The warrants will expire three years from the date of issuance of such warrant.

In January 2010, the Company repurchased in aggregate 1,738,500 warrants in the open market for a total consideration of $3,809 under a Board authorized plan. During 2010, 1,460 warrants were exercised and the Company received net proceeds of $9. There were no warrants exercised during 2011. As of December 31, 2010 and 2011, there were 13,607,441 warrants for the common stock outstanding.

12.

14. Share-based payments

Effective on January 1, 2008, the board of directors and shareholders of the SearchMedia International approved and adopted the 2008 Share Inventive Plan (the “Share Incentive Plan”) which provides for the granting of up to 1,796,492 share options and restricted share units to the eligible employees to subscribe for ordinary shares of SearchMedia International. The granted stock options and restricted share units were subsequently converted into SearchMedia Holdings’ stock options and restricted shares on October 30, 2009 pursuant to the Share Exchange Agreements.

In August 2010, the Board approved an increase of the number of authorized shares to be awarded under the Share Incentive Plan from 1,796,492 to 3,000,000 shares which may be granted to designated employees, directors and consultants of the Company.

F-25


(a) Share options

Details of stock options activity during the years ended December 31, 2009, 2010 and 20102011 was as follows:

               
      Weighted  Weighted   
      average  average   
      exercise  remaining   
  Number of  price per  contractual Aggregate 
  options  share  term fair value 
Balance as of January 1, 2009  8,840,000  $0.79    $432 
Granted  1,650,000   0.53     33 
Forfeited  (4,215,000)  0.69     (149)
              
Balance as of October 30, 2009  6,275,000           
Converted into IDI options  423,797   3.19     1,253 
              
Balance as of December 31, 2009  423,797   3.19       
              
Granted  770,000   5.47     1,924 
Exercised  (86,673)  0.01     (345)
Forfeited  (102,263)  2.69     (316)
              
Balance as of December 31, 2010  1,004,861   2.13  8.6 years    
              
Options exercisable at December 31, 2010  191,497   3.91  8.8 years    

   Number of
options
  Weighted
average
exercise
price per
share
   Weighted
average
remaining
contractual
term
   Aggregate
fair value
 

Balance as of January 1, 2009

   8,840,000   $0.79      $432  

Granted

   1,650,000    0.53       33  

Forfeited

   (4,215,000  0.69       (149
  

 

 

      

Balance as of October 30, 2009

   6,275,000       

Converted into IDI options

   423,797    3.19       1,253  
  

 

 

      

Balance as of December 31, 2009

   423,797    3.19       1,253  
  

 

 

      

Granted

   770,000    5.47       1,924  

Exercised

   (86,673  0.01       (345

Forfeited

   (102,263   2.69       (316
  

 

 

      

Balance as of December 31, 2010

   1,004,861    2.13       1,253  
  

 

 

      

Granted

   120,000    1.74       123  

Exercised

   (77,387  0.01       (307

Forfeited

   (28,141  3.81       (78
  

 

 

      

Balance as of December 31, 2011

   1,019,333    5.32     8.0 years     1,880  
  

 

 

      

Options exercisable at December 31, 2011

   530,077    5.56     7.6 years    
  

 

 

      

The Company determined the estimated grant-date fair value of share options based on the Binomial Tree option-pricing model using the following assumptions:

         
Options granted to employee: 2009  2010 
   
Risk-free rate of return  3.43%  2.744%-4.142%
Weighted average expected option life 10 years 10 years
Expected volatility rate  40.30%  64.00%
Dividend yield  0%  0%

   2009 2010 2011

Risk-free rate of return

  3.43% 2.744%-4.142% 2.35%

Weighted average expected option life

  10 years 10 years 10 years

Expected volatility rate

  40.30% 64.00 % 102.20%

Dividend yield

  0% 0 % 0 %

The expected volatility in the table above was based on the weighted average volatility of several comparable U.S. listed companies in the advertising industry with operations in the PRC. Since the Company was a private company at the time the options were issued, the Company estimated the potential volatility of its ordinary share price by referring to the weighted average volatility of these comparable companies because management believes that the weighted average volatility of such companies is a reasonable benchmark to use in estimating the expectedactual volatility of the Company’s ordinary shares.

Because the Company’s share options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation model may not provide an accurate measure of the fair value of the Company’s share options. Although the fair value of share options is determined in accordance with ASC Topic 718, “Compensation—Stock Compensation”, using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The Company has accounted for these options in accordance with ASC Topic 718,“Compensation—Stock Compensation”, by measuring compensation cost based on the grant-date fair value and recognizing the cost over the period during which an employee is required to provide service in exchange for the award.

During first quarter of 2010, 545,000 options, at exercise prices ranging from $6.05 to $7.4, to purchase common shares of the Company were granted to senior executives of the Company with the options vesting one-third annually over a three year period. A total of 225,000 options, at exercise price of $7.14, were also granted to Board members with vesting one year from the date of grant. The fair value of these options at grant date was $1,923,900.

F-26

$1,924.


On August 20, 2010, one of the senior executives of the Company agreed to cancel 225,000 options granted in the first quarter of 2010 and, upon cancellation, the senior executive was issued an option to purchase 225,000 shares of common stock at exercise price of $2.62, which vest one-third annually on the anniversary of the date of grant. The fair value of these options at grant date was $216,000.
$216.

On September 1, 2011, 120,000 options, at exercise prices at $1.74, to purchase common shares of the Company were granted to a senior executive of the Company with the options vesting half annually over a two year period. The fair value of these options at grant date was $123.

The amount of compensation cost recognized for these share options was $724 for the year ended December 31, 2009, of which $83 and $641 was allocated to sales and marketing expenses and general and administrative expenses, respectively. As of December 31, 2009, unrecognized share-based compensation cost in respect of granted share options amounted to US$388.

The amount of compensation cost recognized for these share options was $1,680 for the year ended December 31, 2010, of which $291 and $1,389 was allocated to sales and marketing expenses and general and administrative expenses, respectively. As of December 31, 2010, unrecognized share-based compensation cost in respect of granted share options amounted to $906.

The amount of compensation cost recognized for these share options was $662 for the year ended December 31, 2011, of which $123 and $539 was allocated to sales and marketing expenses and general and administrative expenses, respectively. As of December 31, 2011, unrecognized share-based compensation cost in respect of granted share options amounted to $308.

(b) Restricted share units

Details of restricted share unit activity during the years ended December 31, 2009, 2010 and 20102011 were as follows:

             
          Weighted 
          average 
  Number of      remaining 
  restricted share  Grant-date  contractual 
  units granted  fair value  term 
Balance as of January 1, 2009  3,867,000         
Granted  3,000,000   297     
Forfeitures           
            
Balance as of October 30, 2009  6,867,000         
            
Converted into IDI restricted shares  463,779   1,572     
            
Balance as of December 31, 2009  463,779         
            
Granted  100,000    605     
Exercised  (5,910)        
Forfeitures  (204,604)        
            
Balance as of December 31, 2010  353,265      8.6 years
            
Units vested as of December 31, 2010  81,045      7.5 years
            
In January 2010, 100,000 restricted shares were granted to a senior executive of the Company with the shares of restricted stock vesting on the third year anniversary of the date of grant.

   Number of
restricted share
Granted
  Grant-date
fair value
   Weighted
average
remaining
contractual
term
 

Balance as of January 1, 2009

   3,867,000     

Granted

   3,000,000   $297    

Forfeitures

   —       
  

 

 

    

Balance as of October 30, 2009

   6,867,000     
  

 

 

    

Converted into IDI restricted shares

   463,779    1,572    
  

 

 

    

Balance as of December 31, 2009

   463,779     
  

 

 

    

Granted

   100,000    605    

Exercised

   (5,910   

Forfeitures

   (204,604   
  

 

 

    

Balance as of December 31, 2010

   353,265     
  

 

 

    

Granted

   —      —      

Exercised

   (1,069   

Forfeitures

   (4,334   
  

 

 

    

Balance as of December 31, 2011

   347,862      7.6 years  
  

 

 

    

Units vested as of December 31, 2011

   214,469      7.4 years  
  

 

 

    

The fair value of the restricted share unites was estimated using the closing quoted market price at the date of grant.

Since management believes achievement of the performance goals is probable, the Group recognized compensation cost (included in general and administrative expenses in the consolidated statements of operations) for these restricted share units of $360, $719 and $232 for the yearyears ended December 31, 2009, 2010 and $719 for the year ended December 31, 2010.2011, respectively. The fair value of the restricted share units was estimated using the Binomial Tree option-pricing model and assumes that the performance goals will be achieved. If the performance goals are not met, no compensation cost is recognized and any recognized compensation cost will be reversed.model. The assumptions used in estimating the fair value of the restricted share units are the same as those related to valuation of share options set out in note 12(a)14(a).

F-27


As of December 31, 2010,2011, unrecognized share-based compensation cost in respect of granted restricted share units amounted to $517,$143, which is expected to be recognized over a weighted average period of 13.44 months.
13.

15. Statutory reserve

The Group’s PRC consolidated subsidiaries and VIEs are required under PRC laws to transfer at least 10% of their after tax profits as reported in their PRC statutory financial statements to a statutory surplus reserve. These entities are permitted to discontinue allocations to this reserve if the balance of such reserve has reached 50% of their respective registered capital. The transfer to this reserve must be made before distribution of dividends to equity shareholders. The statutory reserve is not available for distribution to the owners (except in liquidation) and may not be transferred in the form of loans, advances or cash dividends. For the years ended December 31, 20092010 and 2010,2011, the Group’s PRC consolidated subsidiaries and VIEs made appropriations to the statutory reserve funds of $36$0 and US$0,$0, respectively. The accumulated balance of the statutory reserve funds maintained at these PRC consolidated subsidiaries and VIEs as of December 31, 20092010 and 20102011 was $162 and $162, respectively.

14.

16. Related party transactions and balances

(a) Related party transactions

In the ordinary course of business, the Group enters into certain transactions with its related parties. Management believes that these related party transactions were conducted at normal commercial terms. For the periods presented, material related party transactions are summarized as follows for the years ended December 31, 2009, 2010 and 2010:

               
    Years Ended December 31, 
  Note 2008  2009  2010 
     
 
Revenue from provision of advertising services (i) $3,242  $2,910  $55 
 
Expenses for leases of advertising space (ii) $540  $1,515  $643 
Notes:
(i) Represents amounts received / receivable from affiliated entities of senior management personnel of certain companies acquired by Jingli, for provision of advertising services to these entities. The transactions are conducted on terms comparable to the terms of similar transactions with third parties.
(ii) Represents amounts paid / payable to affiliated entities of senior management personnel of certain companies acquired by Jingli, for leases of advertising spaces from these entities. The transactions are conducted on terms comparable to the terms of similar transactions with third parties.

F-28

2011:


     Years Ended December 31, 
   Note 2009   2010   2011 

Revenue from provision of advertising services

  (i) $2,910    $55    $45  

Expenses for leases of advertising space

  (ii) $1,515    $643    $—    

Notes:

(i)Represents amounts received / receivable from affiliated entities of senior management personnel of the Company, for provision of advertising services to these entities. The transactions are conducted on terms comparable to the terms of similar transactions with third parties.
(ii)Represents amounts paid / payable to affiliated entities of senior management personnel of the Company, for leases of advertising spaces from these entities. The transactions are conducted on terms comparable to the terms of similar transactions with third parties.

(b) Amounts due from / to related parties are analyzed as follows:

           
    As of December 31, 
  Note 2009  2010 
     
Customer payments collected on behalf of the Group (i) $2,018  $ 
Receivables for provision of advertising services (ii)  453    
Advances to ex-owners of acquired companies (iii)  369   966 
     
Due from related parties   $2,840  $966 
     
Operating expenses paid on behalf of the Group (iv) $195  $1,905 
Payables for the lease of advertising space (v)  151   53 
     
Due to related parties   $346  $1,958 
     
Note:
(i) Represents customer payments collected by the Company’s shareholders and senior management personnel of Jingli’s acquired subsidiaries on behalf of the Group companies which had not been remitted to the Group companies as of the balance sheet date. During the year ended December 31, 2009 and 2010, certain customers remitted cash to affiliated companies controlled by shareholders of the Company and senior management personnel of certain subsidiaries of the Company to settle the amounts they owed to the Group. The amounts received by the shareholders and the senior management personnel are repaid back to the Group on a periodic basis. The balance is expected to be repaid to the Group within 12 months.
(ii) Represents amount receivable from affiliated companies of certain companies acquired by Jingli for advertising services provided by the Group to these entities as described in the note (i) above. These amounts are repayable in accordance with normal payment terms with other unrelated customers.
(iii) Represents the advances made by the Group to ex-owners of certain companies acquired by Jingli. The amounts are interest free and are expected to be settled within 12 months from the balance sheet date and are secured by the contingent purchase price payable of certain companies acquired by Jingli to the previous owners of the acquired companies.
(iv) Represents operating expenses paid by the senior management personnel of certain companies acquired by Jingli on behalf of the Group. The amounts are interest free, unsecured and have no fixed terms of repayment.
(v) Represents operating lease payments payable to affiliated companies of certain companies acquired by Jingli for leases of advertising space as described in note (ii) above. The amounts are repayable in accordance with normal payment terms with other unrelated advertising space suppliers.

F-29


     As of December 31, 
   Note 2010   2011 

Advances to ex-owners of acquired companies

  (i) $966    $2,078  
   

 

 

   

 

 

 

Due from related parties

   $966    $2,078  
   

 

 

   

 

 

 

Operating expenses paid on behalf of the Group

  (ii) $1,905    $379  

Payables for the lease of advertising space

  (iii)  53     —    
   

 

 

   

 

 

 

Due to related parties

   $1,958    $379  
   

 

 

   

 

 

 

Note:

(i)Represents the advances made by the Group to certain ex-owners of acquired subsidiaries. The amounts are interest free and are expected to be settled within 12 months from the balance sheet date and are secured by the contingent purchase price payable to the ex-owners of the acquired companies.
(ii)Represents operating expenses paid by certain senior management personnel of the Company. The amounts are interest free, unsecured and have no fixed terms of repayment.
(iii)Represents operating lease payments payable to affiliated companies of senior management personnel of the Company for leases of advertising space as described in note (ii) above. The amounts are repayable in accordance with normal payment terms with other unrelated advertising space suppliers.

15.17. Interest expense
             
  Years Ended December 31, 
  2008  2009  2010 
   
Bank loan interest $34  $27  $45 
Convertible promissory notes interest  720   962    
Interest on New Note, First Interim Notes and short-term loan from a third party lender  617   973    
Amortization of convertible promissory notes issuance costs  349       
Amortization of convertible promissory notes discount  997       
   
Total interest expense $2,717  $1,962  $45 
   
16.

   Years Ended December 31, 
   2009   2010   2011 

Bank loan interest

  $27    $45    $89  

Convertible promissory notes interest

   962     —       —    

Interest on New Note, First Interim Notes and short-term loan from a third party lender

   973     —       —    
  

 

 

   

 

 

   

 

 

 

Total interest expense

  $1,962    $45    $89  
  

 

 

   

 

 

   

 

 

 

18. Income taxes

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, upon any payment of dividends by the Company, no withholding tax is imposed.

Peoples’ Republic of China

The Company’s consolidated subsidiaries and VIEs in the PRC are governed by the income tax law of the PRC and file separate income tax returns. The entities acquired by Jingli in 2008They are subject to PRC enterprise income tax at 25% on their assessable profits.

Under the new tax law and related implementation rules, a withholding tax is applied on the gross amount of dividends received by the Company from its PRC consolidated subsidiaries and VIEs after January 1, 2008; however undistributed earnings prior to January 1, 2008 are exempted from withholding tax. The implementation rules provide that the withholding tax rate is 10% or the applicable rate specified in a tax treaty. The Company has not provided for income taxes on accumulated earnings of its PRC subsidiaries as of December 31, 2008 since these earnings are intended to be reinvested indefinitely in the PRC. It is not practicable to estimate the amount of additional taxes that might be payable on such undistributed earnings.

Hong Kong

Ad-Icon and Great Talent

Subsidiaries reside in Hong Kong are subject to Hong Kong profits tax at a tax rate of 16.5% on their assessable profits.

F-30


For the years ended December 31, 2008, 2009, 2010 and 2010,2011, substantially all of the Group’s income before income taxes is derived from the PRC. Income tax expense consists of the following:
             
  Years Ended December 31, 
  2008  2009  2010 
   
Current tax            
- PRC $3,549  $3,460  $2,212 
- HK  72   34   25 
Deferred tax            
- PRC  (2,123)  808   (813)
- HK  (17)  17   (4)
   
Total income tax expense $1,481  $4,319  $1,420 
   

   Years Ended December 31, 
   2009   2010  2011 

Current tax

     

- PRC

  $3,460    $2,212   $1,170  

- HK

   34     25    —    

Deferred tax

     

- PRC

   808     (813  (1,087

- HK

   17     (4  —    
  

 

 

   

 

 

  

 

 

 

Total income tax expense

  $4,319    $1,420   $83  
  

 

 

   

 

 

  

 

 

 

The actual income tax expense reported in the consolidated statements of income differs from the expected income tax expense computed by applying the PRC statutory tax rate of 25% for the years ended December 31, 2008, 2009, 2010 and 20102011 respectively to income before income taxes as a result of the following:

             
  Years Ended December 31, 
  2008  2009  2010 
   
Computed expected tax expense $(8,399) $(4,582) $(11,305)
Effect of differential tax rate on income of Ad-Icon  (29)  (26)  (13)
Effect of non-PRC entities not subject to income tax  2,616   1,748   1,279 
Non-deductible expenses  4,429   5,267   9,778 
Tax loss which no deferred tax asset was recognized  2,864   3,278   1,369 
Tax loss that is expired     509    
Income not subject to tax     (1,875)  (40)
Change in valuation allowance        352 
   
Actual income tax expense $1,481  $4,319  $1,420 
   

   Years Ended December 31, 
   2009  2010  2011 

Computed expected tax expense

  $(4,582 $(11,305 $(3,345

Effect of differential tax rate on income of Hong Kong subsidiaries

   (26  (13  (22

Effect of non-PRC entities not subject to income tax

   1,748    1,279    1,006  

Non-deductible expenses

   5,267    9,778    7,263  

Tax loss which no deferred tax asset was recognized

   3,278    1,369    775  

Tax loss that is expired

   509    —      —    

Income not subject to tax

   (1,875  (40  (6,184

Change in valuation allowance

   —      352    590  
  

 

 

  

 

 

  

 

 

 

Actual income tax expense

  $4,319   $1,420   $83  
  

 

 

  

 

 

  

 

 

 

Non-deductible expenses primarily represent goodwill impairment which is not deductible for tax purpose and entertainment expenses in excess of statutory limits for tax purpose.

Income not subject to tax primarily represents gain on termination of VIEs, change of fair value of acquisition consideration payable and gain from extinguishment of acquisition consideration payable.

The tax effects of the Group’s temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:

             
  Years Ended December 31, 
  2008  2009  2010 
   
Deferred tax assets-current:            
- Property and equipment $1,069  $  $ 
- Tax loss carried forwards of a subsidiary  46   23   89 
- Allowance for doubtful accounts  157   430   802 
- Accrued expenses  16   27    
   
   1,288   480   891 
   
             
Deferred tax liabilities — non-current:            
Intangible assets  (808)  (316)  (989)
 
   
Net deferred tax assets $480  $164  $(98)
   

F-31


   Years Ended December 31, 
   2009  2010  2011 

Deferred tax assets-current:

    

- Tax loss carried forwards of a subsidiary

  $23   $89   $—    

- Allowance for doubtful accounts

   430    802    866  

- Accrued expenses

   27    —      —    
  

 

 

  

 

 

  

 

 

 
   480    891    866  
  

 

 

  

 

 

  

 

 

 

Deferred tax liabilities — non-current:

    

- Intangible assets

   (316  (989  —    
  

 

 

  

 

 

  

 

 

 

Net deferred tax assets

  $164   $(98 $866  
  

 

 

  

 

 

  

 

 

 

As of December 31, 2010, tax losses carryforwards of Haiya and Ad-Icon Shanghai amounted to US$53 and US$36 which will expire in the year ending December 31, 2015.
The realization of the future tax benefits of a deferred tax asset is dependent on future taxable income against which such tax benefits can be applied or utilized and the consideration of the scheduled reversal of deferred tax liabilities and any available tax planning strategies. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence must be considered in the determination of whether sufficient future taxable income will exist since the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carryforwards are utilized. Such evidence includes, but is not limited to, the financial performance of the entities, the market environment in which these entities operate and the length of relevant carryover periods. Sufficient negative evidence, such as cumulative net losses during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established against the deferred tax assets.

For the year ended December 31, 2009, 2010 and 2010,2011, the Group did not have unrecognized tax benefits, and it does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months. No interest and penalties related to unrecognized tax benefits were accrued at the date of initial adoption of FIN 48 and as of December 31, 20092010 and 2010.

2011.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances, where the underpayment of taxes is more than US$15 (RMB 100). In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The tax returns of the Company’s consolidated subsidiaries and VIEs in the PRC for the tax years beginning in 20042006 are subject to examination by the relevant tax authorities. The tax returns of the Company’s operating subsidiary in the HKSAR for the tax years beginning in 2002 are subject to examination by the relevant tax authorities.

17.

19. Employee benefit plans

Employees of the Company and its subsidiaries located in Hong Kong are covered by the Mandatory Provident Fund Scheme (“MPF Scheme”) established on December 1, 2000 under the Mandatory Provident Fund Scheme Ordinance of Hong Kong. The calculation of contributions for these eligible employees is based on 5% of the applicable payroll costs, and contributions are matched by the employees. The amounts paid by the Company to the MPF Scheme were $5,$6, $6 and $6$6; for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively.

Employees of the Company and its subsidiaries located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentially defined contribution schemes. The contributed amounts are determined based on 20%22% of the applicable payroll costs. The amounts paid by the Company to these defined contribution schemes were $188, $177, $194 and $194$196 for years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively.

In addition, the Company is required by law to contribute medical insurance benefits, housing funds, unemployment, and other statutory benefits ranging from 1% to 10% of applicable salaries. The PRC government is directly responsible for the payment of the benefits to these employees. The amounts contributed for medical insurance benefits were $102, $97, $106 and $106 for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively. The amounts contributed for housing funds was $60, $56, $62 and $62 for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively. The amounts contributed for other benefits were $26 and $24 and $26 and $27 for the years ended December 31, 2008, 2009, 2010 and 2010,2011, respectively.

18.

20. Commitments and contingencies

(a) Operating lease commitments

The Group leases space primarily inside elevators, light boxes and billboards to display the content of its customers’ advertisements, and office premises under operating lease arrangements. These operating leases do not contain provisions for contingent rentals.

F-32


Rental expenses under operating leases were allocated to the following categories of cost and expenses:
         
  Years Ended December 31, 
  2009  2010 
   
 
Cost of revenues $24,386  $33,301 
Selling and marketing expenses     8 
General and administrative expenses  1,595   484 
   
Total rental expenses $25,981  $33,793 
   

   Years Ended December 31, 
   2009   2010   2011 

Cost of revenues

  $24,386    $33,301    $43,710  

Selling and marketing expenses

   —       8     247  

General and administrative expenses

   1,595     484     485  
  

 

 

   

 

 

   

 

 

 

Total rental expenses

  $25,981    $33,793    $44,442  
  

 

 

   

 

 

   

 

 

 

As of December 31, 2010,2011, future minimum rental payments under non-cancellable operating leases having initial or remaining lease terms of more than one year are as follows:

     
Year    
2011 $15,898 
2012  3,947 
2013  1,032 
2014  219 
2015  12 
Thereafter   
    
  $21,108 
    

Year

    

2012

  $11,600  

2013

   1,427  

2014

   307  

2015

   —    

2016

   —    

Thereafter

   —    
  

 

 

 
  $13,334  
  

 

 

 

(b) Capital commitment

The Group has no material capital commitment as of December 31, 2010.

2011.

(c) Contingency

The Group is periodically involved in legal proceedings and has made provision for operational claims of $844$2,078 and $2,078$360 as of December 31, 20092010 and 2010,2011, respectively.

19.

In December 2011, one of the Ad-Icon Shanghai’s outsourcing companies filed a civil lawsuit against Ad-Icon Shanghai for a defaulted fee of $255. The Group has not made provision for this lawsuit as the Company considered the probability for an unfavorable verdict was not probable, but only reasonably possible.

21. Subsequent events

The Company evaluated all events and transactions after December 31, 20102011 through the date these financial statements were issued and the material subsequent events were as follows:

In January 2012 and May 2012, the Company reached settlement agreements for the arbitration between the Company and certain of its predecessor shareholders related to matters from the Share Exchange Agreement signed October 30, 2009. Pursuant

to the settlement agreement (i) 2,471,968 shares will be repurchased by the Company at an average price per share of $0.25 and such shares will be retired, (ii) 2,029,700 shares will be surrendered and cancelled without consideration, and (iii) 1,624,993 warrants will be surrendered and cancelled without consideration. As of the date of this report, 742,959 shares were returned for no consideration, 2,471,968 shares were purchased for an average price of $0.25 share and 1,624,993 warrants were surrendered and canceled without consideration.

In February 2012, the Company entered into an agreement for a new $3,000 Convertible Note (the “Note”) with its existing major shareholder and several other investors including an affiliate of the Company’s Chief Executive Officer. The Note has a one year term and borrowings bear interest at a rate of 10% per annum. In addition, the Note is convertible into the Company’s common shares at $1.25 per share.

In February 2012, the Company scaled down its elevator poster frame businesses and abandoned certain concessions signed with property management companies. The remaining obligation of concessions abandoned was approximately $1,205 and the amount was charged to income statement at the time of the abandonment.

In May 2012, the Company obtained wavier from Haiya to eliminate the consideration payable of $3,022.

On April 13, 2011,May 2, 2012, the BoardCompany divested 100% equity interests in Zhejiang Continental back to its original selling shareholders and eliminated the related acquisition contingent payable of Directors$8,205 in exchange for the issuance of 1 million common shares of the Company approved an extensionat a price of $2.00 per share. The gain on elimination on acquisition contingent payable was recognized by the Company to income statement in accordance with ASC Topic 805-30-35 and will be reflected in the Company’s 2012 financial statements.

The following unaudited pro forma financial information presents the results of operations of the expiration dateGroup as if the disposition of its publicly held warrants with an exercise priceZhejiang Continental had occurred as of $6.00 from November 19,January 1, 2011, to November 19, 2012. All other provisions of the warrants remain the same.

Subsequent to December 31, 2010, the Group has been involved in various legal proceedings for operational claims. The Group is still evaluatingrespectively. These results include the impact of these cases since most are still in processpreliminary fair value adjustments on intangible assets and the outcomerelated adjustments on deferred taxes. The unaudited pro forma financial information is not necessarily indicative of these claims cannot be determined. Included in these proceedings arewhat the following:
Group’s consolidated results of operations would actually have been had it completed the acquisitions on January 1, 2011, respectively. In June 2010,addition, the original shareholders (the “Plaintiffs”)unaudited pro forma financial information does not attempt to project the future results of Shaanxi Xinshichuang Advertisement Marketing Co., Ltd. (“Shaanxi Co”), filed a civil lawsuit (“Lawsuit”) with the Shanghai Chongming County People’s Court (“Chongming Court”) against Jingli. In 2008, Jingli acquired 100% equity interest in Shaanxi Co from the Plaintiffs. In the Lawsuit, the Plaintiffs claimed that Jingli owed them approximately US$2.2 million (“total claim”) relating to the unpaid consideration for equity interest in Shaanxi Co, interest, reimbursement of certain operating expenses, liquidated damages and court fees.
In March 2011, the Chongming Court issued a judgment (“Judgment”) ordering Jingli to pay the Plaintiffs an aggregate of approximately US$1.2 million plus accrued interests and a percentageoperations of the court fees. The Group has made full provision for the Judgment as of December 31, 2010.
In late March 2011, Jingli appealed the Judgment to the Shanghai Second Intermediate People’s Court (“Appellate Court”). Jingli has based its appeal on various legal arguments including, among others, that the Chongming Court: (i) applied incorrect laws and regulations; (ii) accepted incorrect facts; and (iii) did not duly follow all legal procedures.
At the time of this filing, the Appellate Court has yet to render a ruling.
A shareholder complaint was filed on September 13, 2010 by Sid Murdeshwar against SearchMedia Holdings, the former Ideation officers and directors and certain of the SearchMedia Holdings’ officers and directors (the “Individual Defendants”) as a purported class action on behalf of the shareholders of SearchMedia Holdings in the United States District Court for the Central District of California. The case was filed under the captionSid Murdeshwar, Individually and on Behalf of All Others Similarly Situated, Plaintiff v. SearchMedia Holdings Limited f/k/a Ideation Acquisition Corp., Robert N. Fried, Phillip Frost, Rao Uppaluri, Steven D. Rubin, Glenn Halpryn, Thomas E. Beier, David H. Moskowitz, Shawn Gold, Garbo Lee, Paul Conway, Qinying Liu, Earl Yen, and Jennifer Huang, Defendants.
A separate shareholder complaint was filed on December 23, 2010 by Hymie Akst against SearchMedia Holdings, the former Ideation officers and directors and certain of the SearchMedia Holdings’ officers and directors (the “Individual Defendants”) as a purported class action on behalf of the shareholders of SearchMedia Holdings in the United States District Court for the Southern District of Florida. The case was filed under the captionHymie Akst, Individually and on Behalf of All Others Similarly Situated, Plaintiff v. SearchMedia Holdings Limited f/k/a Ideation Acquisition Corp., Robert N. Fried, Phillip Frost, Rao Uppaluri, Steven D. Rubin, Glenn Halpryn, Thomas E. Beier, David H.
Moskowitz, Shawn Gold, Garbo Lee, Paul Conway, Qinying Liu, Earl Yen, and Jennifer Huang, Defendants.
On February 17, 2011, theMurdeshwaraction was transferred to the United States District Court for the Southern District of Florida. TheAkstplaintiffs voluntarily dismissed their action on February 23, 2011. On April 11, 2011, theMurdeshwarplaintiffs amended their complaint.
The amended complaint alleges, among other things, that the directors of SearchMedia Holdings violated the federal securities laws by making false and misleading statements regarding Ideation’s acquisition of the target company, SearchMedia International and by overstating SearchMedia International’s financial results. The amended complaint further alleges that the Individual Defendants are liable for the alleged misrepresentations as controlling persons. The complaint seeks certification of a class of SearchMedia Holdings’ shareholders who purchased or otherwise acquired SearchMedia Holdings securities between April 1, 2009 and August 20, 2010, and all persons who were holders of
SearchMedia Holdings on October 2, 2009, an award of compensatory damages, an award of reasonable fees and costs incurred in this action, and such other relief as the Court deems just and proper.
The Court has ordered that any defendant in the Murdeshwar action who is not served with the amended complaint by July 29, 2011 will be dismissed without prejudice. On May 2, 2011, the Company and the Individual Defendants who have been served filed a motion to dismiss the claims asserted against them. The Court has not yet ruled on the motion to dismiss. A mediation is scheduled for July 26, 2011.
combined entity.

F-33

   December 31, 2011 
   (Unaudited) 

Cash

  $4,573  

Other current assets

   24,551  

Other non-current assets

   17,577  
  

 

 

 

Total assets

   46,701  

Acquisition consideration payable

   15,033  

Other current liabilities

   38,224  

Other non-current liabilities

   —    
  

 

 

 

Total liabilities

   53,257  

Net liabilities

   (6,556

Total shareholders’ deficit

   (6,556

2011
(Unaudited)

Advertising service revenues

$52,959

Loss from operations

(4,450

Net loss

$(4,930

F-40