China TopReach (CGSXF) 20-F 2011 FY Annual report (foreign)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20- F

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

OR

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

For the fiscal year ended December 31, 2011

OR

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

For the transition period from ________ to _________

OR

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

Date of event requiring this shell company report _________

COMMISSION FILE NUMBER: 000-52416

China TopReach Inc.

(Exact Name of Registrant as Specified in its Charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

6th Floor,  San Shan Tower

No. 59 Dongjie Street

Fuzhou City, China 350001

(Address of principal executive offices)

Zhi Chen

Chief Executive Officer

China TopReach Inc.

6th Floor,  San Shan Tower

No. 59 Dongjie Street

Fuzhou City, China 350001

Tel: +86-591-88310920

Facsimile: +86-591-88310920

(Name, Telephone and Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

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

Units, consisting of one Ordinary Share and one Warrant

Ordinary Shares, par value $0.001 per share

Warrants to purchase Ordinary Shares

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of the registrant’s ordinary shares outstanding as of April 30, 2012 was 14,876,940 ordinary shares.

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

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

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.x   Yes  ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):   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. GAAPx    International Financial Reporting Standards as issued by the International Accounting Standards Board¨  Other¨

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

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

Table of Contents

PART I		4
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS	4
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3.	KEY INFORMATION	4
ITEM 4.	INFORMATION ON THE COMPANY	19
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	33
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	43
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	48
ITEM 8.	FINANCIAL INFORMATION	50
ITEM 9.	THE OFFER AND LISTING	51
ITEM 10.	ADDITIONAL INFORMATION	52
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	61
PART II		61
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	61
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS	61
ITEM 15.	CONTROLS AND PROCEDURES	62
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	62
ITEM 16B.	CODE OF ETHICS	63
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	63
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	63
ITEM 16E.	PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	63
PART III		63
ITEM 17.	FINANCIAL STATEMENTS	63
ITEM 18.	FINANCIAL STATEMENTS	63
ITEM 19.	EXHIBIT	64

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INTRODUCTION

In this annual report, unless otherwise indicated,

· “we,” “us,” “the Company,” “our” and “China TopReach” refer to China TopReach Inc., its predecessor entities and subsidiaries;

· “ChinaGrowth” refers to ChinaGrowth South Acquisition Corporation, its predecessor entities and subsidiaries;

· “OMH” refers to Olympia Media Holdings Ltd., its predecessor entities and subsidiaries;

· “ShiFang” refers to ShiFang Holding Limited, a company incorporated in the Cayman Islands and our indirect subsidiary;

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

· “Hong Kong” refers to the Hong Kong Special Administrative Region of the PRC;

· “U.S. GAAP” refers to generally accepted accounting principles in the United States; and

· all references to “RMB” and “Renminbi” are to the legal currency of China, all references to “HK dollars” and “HK$” are to the legal currency of Hong Kong, and all references to “U.S. dollars,” “US$,” “dollars” and “$” are to the legal currency of the United States.

In this annual report, when we discuss our business, operations, financial results or similar matters, we are discussing the media and advertising operations that we conduct through our ownership in ShiFang and its subsidiaries.  We do not conduct any significant operations or business except through our ownership and control of ShiFang. Our consolidated financial information included in this annual report reflects primarily our consolidation of the result of operations of ShiFang.

Under the laws of the Cayman Islands and our Memorandum of Association, we are authorized to issue “ordinary shares” rather than “common stock” and the holders of our ordinary shares are referred to as “members” rather than “shareholders.” In this annual report, references that would otherwise be to ordinary shares and members are made to common stock and shareholders, which are terms more familiar to investors on the OTC Bulletin Board, or OTCBB, where our shares are listed.

Solely for your convenience and information, this annual report contains translation of certain HK dollar amounts into U.S. dollars at specified rates. Unless otherwise stated, HK dollar amounts have been translated into U.S. dollars at the rate of HK$7.7663 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board as of December 30, 2011. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements as defined in 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”). These forward-looking statements include information about our possible or assumed future results of operations or our performance. Words such as “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates,” and variations of such words and similar expressions are intended to identify the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements contained in this annual report, or the documents to which we refer you in this annual report, to reflect any change in our expectations with respect to such statements or any change in events, conditions or circumstances on which any statement is based.

When used in this annual report, the term “initial shareholders” shall mean the shareholders of the Company immediately prior to our initial public offering, unless the context otherwise requires. This annual report should be read in conjunction with our audited financial statements and the accompanying notes thereto, which are included in Item 18 to this annual report.

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PART I

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not required.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not required.

ITEM 3.KEY INFORMATION

A. Selected Financial Data

The selected consolidated financial data presented below as of and for the years ended December 31, 2011 and 2010 are derived from, and should be read in conjunction with, our audited consolidated financial statements, including the related notes, included elsewhere in this annual report. The selected consolidated financial data as of and for the years ended December 31, 2009, 2008 and 2007 are derived from our audited consolidated financial statements included in our annual reports from previous years. You should read the following selected financial data in conjunction with “Item 5. Operating and Financial Review and Prospects” included in this annual report.

Selected Statement of Operations Data

(Expressed in U.S. dollars)

	For the year Ended December 31, 2011		For the year Ended December 31, 2010		For the year Ended December 31, 2009		For the year ended December 31, 2008 (1)		For the year ended December 31, 2007 (1)
	(in thousands, except per share data)
Revenue	$	81,736	$	78,184	$	68,289	$	56,216	$	23,033
Cost of revenue		40,592		40,446		36,414		36,336		14,575
Gross profit		41,144		37,738		31,875		19,880		8,458
Operating income		9,930		23,775		20,498		13,057		5,233
Net income attributable to China TopReach Inc.	$	2,410	$	11,749	$	17,438	$	11,511	$	4,285
Net income per share – basic	$	0.16	$	0.77	$	1.07	$	0.77	$	0.29
Net income per share – diluted	$	0.16	$	0.77	$	0.98	$	0.71	$	0.27
Weighted average number of shares outstanding – basic		14,912,847		15,321,170		16,285,126		14,959,000		14,959,000
Weighted average number of shares outstanding – diluted		14,912,847		15,321,170		17,750,665		16,209,638		15,997,999

(1) Represents the consolidated statement of operations of OMH, the Accounting Acquirer.

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Selected Consolidated Balance Sheet Data

(Expressed in U.S. dollars)

	December 31, 2011		December 31, 2010		December 31, 2009		December 31, 2008 (1)		December 31, 2007 (1)
	(in thousands)
Current assets		124,520		158,500		49,218		23,788		10,372
Total assets		219,162		195,767		74,275		54,440		33,004
Current liabilities		32,776		39,140		32,217		30,920		22,228
Total liabilities		44,873		39,562		32,217		30,920		22,228
Shareholder's equity		174,289		156,205		42,058		23,520		10,776

(1) Represents the consolidated balance sheet of OMH, the Accounting Acquirer.

Exchange Rate Information

Our functional currency is the RMB, however, this report is in U.S. dollars. The financial statements of our foreign subsidiaries have been translated into U.S. dollars in accordance with ASC830 “Foreign Currency Matters”. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statements of operations amounts have been translated using the average exchange rate for the year.

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. For periods on or prior to December 31, 2008, the exchange rate refers to noon buying rate as reported by the Federal Reserve Bank of New York. For periods beginning on or after January 1, 2009, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

Period	Period End		Average (1)		High		Low
	(RMB per US$1.00)
2006		7.8041		7.9723		8.0702		7.8041
2007		7.2946		7.6072		7.8127		7.2946
2008		6.8225		6.9477		7.2946		6.7800
2009		6.8259		6.8307		6.8470		6.8176
2010		6.6000		6.7612		6.8305		6.6000
2011		6.2939		6.4475		6.6017		6.2939
December		6.2939		6.3482		6.3733		6.2939
2012
January		6.3080		6.3119		6.6330		6.2940
February		6.2935		6.2997		6.3120		6.2935
March		6.2975		6.3125		6.3315		6.2975
April (through April 13, 2012)		6.3022		6.3048		6.3123		6.2975

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

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B. Capitalization and Indebtedness

Not required.

C. Reasons for the Offer and Use of Proceeds

Not required.

D. Risk Factors

 An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this annual report on Form 20-F before making a decision to invest in our securities.

Risks Related to Our Business

Our operating history in the media business may not provide an adequate basis to judge our future prospects and results of operations and successful implementation of strategies.

We commenced our media business in 2001 and have expanded our operations substantially in recent years. Although we have been profitable in the past years, we frequently encounter risks and difficulties in the PRC’s new and rapidly evolving market. In addition, the successful implementation of our strategies, including plans to expand into more cities, enter into contracts with more newspapers, improve electronic newspapers and on-line advertising, depends on a number of factors including, among others, changes in the PRC media and advertising markets, the availability of funds, competition, government policies and our ability to retain and recruit employees with the relevant industry knowledge and expertise. Any failure or delay in the implementation of any or all of our strategies may have material adverse effect on our growth.

We may pursue additional financing for ShiFang, which may result in dilution of our ownership in ShiFang and may have adverse consequences.

In order to secure the financing necessary to achieve its strategic goals, ShiFang may in the future seek additional financing to develop its business.  Such financing may result in further dilution of our ownership interest in ShiFang.  This could possibly result in a loss of our control of ShiFang and may prevent us from consolidating the financial statements of ShiFang with our own. As a result, our financial condition and results of operations may be adversely affected. 

We rely on business agreements with newspapers.

We conduct the advertising business, providing content, printing and distribution consultative services, pursuant to exclusive contracts with state owned newspapers. If we lost our contractual relationship with any of these newspapers, we may not be able to find and develop alternative or comparable sources of revenue in a timely manner. Any such event may have a material adverse effect on our operations and financial results. Furthermore, all of our newspaper contracts have preferential renewal rights, the majority of which can only be exercised when we meet certain performance criteria. As a result, if we fail to meet these performance criteria, we may lose our contractual relationship with the newspapers. In addition, the continued expansion of our business operations is also dependent on our success in finding new newspaper partners, exclusive or otherwise, that are willing to enter into contracts with us for the sale of advertising spaces. If we are unable to maintain our business relationships with our newspaper partners and advertisers, or develop business relationships with new newspaper partners and advertisers, our business, financial condition and results of operations could be materially and adversely affected.

The exclusive contracts with our newspaper partners will require substantial initial capital commitments and may not generate the intended revenue and profits. 

Upon signing exclusive contracts with our newspaper partners, we are generally required to place a deposit, which is refundable upon termination of the contract, with our newspaper partners at an amount negotiated between us and them. We also typically prepay our newspaper partners a portion of the print media fee, which we negotiate with them based on the revenue we expect to generate by selling advertising spaces. There can be no assurance that we will be able to recover such initial capital commitments through our sale of advertising spaces in the relevant newspapers or from provision of our advertising services. Any such recovery is subject to market conditions, cooperation with our newspaper partners and other factors beyond our control, and may only happen after several years of operations, if at all. Further, the deposits and prepaid amounts may be forfeited in the event we are unable to fulfill our contractual obligations with respect to actual business volume generated. If we are unable to recover our initial capital commitments under existing or future contracts with our newspaper partners, our business, financial condition and results of operations could be materially and adversely affected.

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The media industry is highly regulated in the PRC, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us involve uncertainties, which could materially and adversely affect our business and results of operations. 

The administration, interpretation and enforcement of Chinese laws and regulations applicable to our business involve uncertainties that could materially and adversely affect our business and results of operations. The media industry in the PRC is subject to a number of regulations and restrictions, and the newspaper business is also highly regulated and closely monitored by various government agencies in the PRC. For example, there are limitations on foreign ownership of or involvement in newspapers' editorial rights. Due to such restrictions, we currently do not engage in newspaper editorial writing. Although we provide contents to newspapers and have the right of first refusal to acquire the publication rights as soon as permitted by law, we cannot control the final content published in the newspapers. Furthermore, some of our operating subsidiaries have long-term strategic cooperation relations with newspaper companies. There is a risk that our business or our strategic cooperation relations may be deemed to be involvement in aspects of the newspaper business which are restricted and could subject us to administrative penalties.  Also, as we have no control over our partners' editorial content, unattractive content resulting from such restrictions may adversely affect our prospects and results of operations.

We face increasing competition in the print media and from other forms of new media advertising. 

We face competition in the market from other newspapers and other types of media such as magazines, television and radio, as well as the internet and other forms of new media. We compete with these different media companies in China for readers and advertisement sales.

Increasing competition in the advertising and media industry may, among other things, create downward pressure on our pricing for our services and could therefore significantly and adversely affect our results of operations and financial condition. Some of the companies with whom we compete may be more experienced or have greater financial resources than we have. New entrants in the market may reduce the price for their advertising services to compete for business with more established companies and if they are successful in increasing their market share, such actions may result in a loss of our market share, and/or a decrease in our profit margins and adversely affect our results of operations.

Advertising spending on new media such as online advertising has grown rapidly in the past decade. If the growth rate of advertising spending on new media continues in the future, the market share of traditional media may be decreased.

While we believe our strengths and market position have enabled us to compete effectively so far, there is no assurance that we will be able to continue to do so in the future. If we are unable to compete effectively against our competitors, we may lose customers and our financial condition and results of operations may be adversely affected. 

We have a limited operating history in the newly developed components of our business model.

Compared with our experience in our core advertising operations, our operating history in the other components of our business, including (i) distribution consultation and management; (ii) newspaper printing, (iii) online services, and (iv) television advertising, is relatively short. We began our operations in these business components in 2008, 2005, 2008 and 2010, respectively, to supplement our core business and increase our revenue. However, due to our limited operating history in these business components , we may not be able to anticipate long-term trends in, or successfully maintain or develop, these areas. Any failure to maintain or fully develop our core business or any of these additional business components as new sources of profit for us may have a material and adverse effect on our business, financial condition, results of operations and prospects.

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

Mr. Zhi Chen, our Chief Executive Officer (“CEO”), and our other key executives have been critical to our success. Our operations significantly depend on their business vision, industry expertise, experience with business operations and management skills. If our CEO or other key executives become unable or unwilling to continue in their present positions, we may not be able to replace them in a timely manner, which would have a material adverse effect on our business and growth prospects. We also rely on the performance of a number of other key employees. In addition, we rely on our sales and marketing teams whose market knowledge, experience and established relations with our existing customers are essential to our success and future growth. Although we believe that our industry reputation, business growth and corporate culture will assist in attracting and retaining talented personnel, we are still vulnerable to adverse consequences from the loss of key employees due to competition for talented personnel among advertising service providers.

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Our results of operations may be adversely affected if we fail to retain and hire qualified personnel at acceptable cost.

As a service provider, our success depends on our capacity to maintain high-quality personnel. We rely on the continued service of our current skilled staff and our ability to recruit additional skilled staff in the future. If we fail to retain our existing employees or continue to recruit and retain high-quality personnel, we may experience difficulties in ensuring that our customers’ needs are fulfilled, improving our service offerings, or maintaining our service quality, which may in turn materially and adversely impact our business and our reputation. Due to the high level of technical expertise required in our media operations, it normally takes three months to train a new employee to acquire the necessary skills, and some skilled staff are not easily and quickly replaceable. As a result, if a significant portion of our staff terminates employment with us in a short period of time, we may encounter interruption of our operations, which could have a substantial negative impact on our business.

Any significant failure in our information technology systems could have a material adverse effect on our business and results of operations. 

Our business is highly dependent on the ability of our information technology systems, especially the Media Advertisement Information Tracking System (“MAITS system”), to timely process a significant amount of original data related to various industries and advertisers across diversified markets in different cities.  Our advertising transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. We have devoted substantial resources to developing, maintaining and updating our information technology systems. These systems enable us to provide consistent high-quality services and help us to maintain our competitive advantage. If we fail to identify, develop and incorporate new features or technologies in our information technology systems and operations in a timely and cost-effective manner, we may lose our competitiveness and demand for our services may decrease, which would have a material and adverse effect on our revenues and profitability.

We may not be able to sustain our business growth and high profit margins, or successfully implement our business strategies.

Our businesses and profitability expanded in the last three years, but there can be no assurance that we will continue to maintain our growth in the future or be able to sustain our recent profit margins. In order to sustain such growth in our revenues and profit and to maintain our profit margins, we need to implement our business strategies effectively, retain experienced marketing and service personnel, manage our costs effectively and maintain adequate control and reporting systems. The successful implementation of our strategies and plans depend on a number of factors including, among other things, changes in the PRC media and advertising markets, the availability of funds, competition, government policies and our ability to retain and recruit qualified employees with relevant industry knowledge and expertise. Many of these factors are beyond our control and by their nature, are subject to uncertainty. There can be no assurance that our strategies and future plans can be implemented successfully. Any failure or delay in the implementation of any or all of these strategies and plans may have a material adverse effect on our profitability and prospects. Accordingly, you should not place undue reliance on our past performance.

We are subject to fluctuations in the demand for our customers’ products and services and their advertising budgets.

Our advertising revenues are subject to fluctuations in the demand for our customers’ products and services and correspondingly, their advertising budgets. The demand for our customers’ products and services are affected by a number of factors beyond our control, including the PRC economic conditions, industry and market trends, shifts in consumer purchase patterns and changes in the retail environment. If any changes result in a decrease in the demand for our customers’ products and services, it may lead to the tightening of their advertising budgets. In the event this occurs, demand for our advertising services may decrease and our prospects, results of operations and financial condition may be materially and adversely affected.

We may need to rely on external financing for rapid expansion of our business and other corporate needs.

We may seek additional financing from various sources, such as bank borrowings, to provide the capital needed to expand our business if the cash flow from our operations is insufficient. In particular, we are required to make substantial capital commitments when expanding into new regions and markets and upon signing cooperative contracts with new newspaper partners. Additionally, it is our usual practice to grant our customers a credit period of three months, but we are required to settle the payment of print media fees with our newspaper partners on a monthly basis. Therefore, we may experience difficulties in meeting our cash flow needs and have to rely on bank borrowings and loans from our shareholders during the periods between our payment of print media fees and our receipt of related payments from our customers.

We cannot predict with certainty the timing or amount of our future needs for external financing. Our ability to obtain external financing in the future and the cost of such financing are subject to a variety of uncertainties, including our business performance and the condition of financial markets. If such financing is not available on a timely basis or on commercially reasonable terms, or at all, our business, results of operations and financial condition may be materially and adversely affected.

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We are subject to credit risk in respect of our accounts receivable.

Our trade receivables primarily relate to receivables from our advertising customers and our newspaper partners. We generally grant to our advertising customers with favorable credit ratings a credit period ranging from one month to one year after the publication of the relevant advertisements. The length of the credit period we grant to our customers varies by industry and is determined with reference to the credit periods granted by our competitors. We grant customers from industries such as the real estate, automotive and telecommunications, as well as those with national brand names and our long-term customers with large orders, longer credit periods. For short-term customers with small orders, out-of-province customers that do not have well-known brand names, classified advertising customers and secondary advertising agents (excluding 4A companies), we usually request that fees be paid in full prior to publication. For our online services customers, we also usually grant a longer credit period of six months to one year, which is in line with industry practice. In addition, we have extended longer credit periods to advertising customers who were affected by the global financial crisis that began in 2008 and experienced financial difficulties, causing delays in payments to us, which exposes us to credit risk in connection with trade and other receivables due from such customers. Should such customers or any of our other customers fail to settle relevant receivables in full or if there is a change in their payment policies resulting in a longer settlement period for the amount due, our business, financial condition, results of operations and profitability could be materially and adversely affected.

There can be no assurance that our credit control policies and measures implemented will be adequate to protect us against material credit risks and enable us to avoid losses. We make allowances for doubtful debts based on certain assumptions, estimates and assessments about the recoverability of our trade and other receivables, including the creditworthiness and past collection history of our customers. However, such collectability estimates may prove to be inaccurate or there may be a change in the underlying basis of such assumptions, estimates and assessments. In the event we are required to make future adjustments or our actual losses exceed our allowances, this could have a material and adverse effect on our results of operations and financial condition.

We rely on intellectual property rights protection.

In the course of conducting our business, we rely on the protection of our intellectual property rights as well as the protection of the intellectual property rights of our newspaper partners. We have developed trademarks, patents, know-how, processes, technologies and other intellectual property rights that are of significant value to us. There can be no assurance that any of our intellectual property rights will not be challenged, misappropriated or circumvented by third parties.  In addition, the legal regime governing intellectual property in the PRC is still evolving and the level of protection of intellectual property rights in the PRC may be weaker than in other jurisdictions. We also rely on various contractual agreements with our employees, customers, newspaper partners, business partners and others to protect our intellectual property rights. Despite precautions taken by us, it may be possible for third parties to infringe upon our intellectual property rights by copying or otherwise obtaining and using our intellectual property, including text, typographies, photographs and design layouts.  In the event that the steps we have taken and the protection provided by law do not adequately safeguard our intellectual property rights, our business, results of operations and reputation could be materially and adversely affected. 

In addition, our advertising business relies on the cooperation with and therefore the ability of our newspaper partners to protect certain of their intellectual property rights. There can be no assurance that our newspaper partners will be able to protect or assert any rights to their intellectual property. Any misappropriation or infringement of their intellectual property rights or difficult in enforcing such rights may have a material and adverse impact on their business, which may in turn materially and adversely affect our business and results of operation.

We may infringe on the intellectual property rights of third parties.

We cannot guarantee that we or our newspaper partners will not be found liable for having infringed upon the rights of third parties, including their intellectual property rights. In the event that we or our newspaper partners are found liable for having infringed upon the rights of third parties, we or our newspaper partners may be subject to liabilities which might include substantial monetary damages or sanctions. Possible sanctions could include the loss of our rights or the rights of our newspaper partners to all or some of the content that we provide, or the loss of our rights or the rights of our newspaper partners to engage in all or some part of our respective businesses on a temporary or a permanent basis. Given our reliance upon our newspaper partners, any such liabilities or sanctions levied against them could have a material and adverse effect on the revenues we derive from our contracts with our newspaper partners and, therefore, business and results of operations.

We may be involved in litigation, which could be expensive and divert the attention and resources of our management.

We currently do not maintain insurance that would cover us for any contingent liabilities arising out of litigation or claims against us. We are exposed to the risk of becoming involved in litigation, which could have a material adverse impact on our business. Civil claims may potentially be filed against us for fraud, defamation, negligence, copyright or trademark infringement or for claims relating to the nature and content of the information or articles contained in our customers’ advertisements. There can be no assurance that claims and actions will not be initiated against us or arise out of our business in the future. Litigation expenses and potential losses from lawsuits in respect of outstanding and possible future claims may have a material adverse effect on our results of operations and our financial condition in the future. In particular, as our success largely depends on the leadership and day-to-day management of our directors and senior management, involvement in any litigation could divert the time and attention of our directors and senior management away from the management of our business, which could materially and adversely affect our results of operation and financial condition.

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We may not maintain sufficient insurance coverage for the risks associated with our business operations.

Risks associated with our businesses include risk of damage to our offices, equipment and printing facilities, liability for environmental pollution, transportation accidents and the risks posed by natural disasters, any or all of which may affect our business operations. Notwithstanding that we maintain insurance addressing damage to and destruction to our facilities and equipment, we may experience difficulty in receiving compensation from the insurance companies, delays in receiving such compensation or inability to receive compensation in full or at all. Furthermore, we do not carry any business interruption insurance or insurance addressing damages arising out of natural disasters or other accidents at our production facilities. If we incur losses which are not covered by our insurance policies, or the amount of compensation we receive from our insurer is significantly less than our actual loss, our financial condition and results of operations could be materially and adversely affected. 

We may be subject to fines imposed by relevant PRC authorities for placement of inappropriate advertisements in the advertising spaces which we obtained from our newspaper partners.

Our advertising customers are derived from a broad spectrum of industries and, correspondingly, the advertisements they place in the advertising spaces which we have contracted from our newspaper partners vary widely in terms of type, content and presentation. Under applicable PRC laws and regulations, advertising operators and disseminators are required to verify the contents of the advertisements and ensure compliance with relevant legal restrictions and prohibitions in respect of specific types of advertisements. Any failure to do so may result in the advertisements being determined inappropriate for publication by the relevant PRC authorities and the responsible advertising operator or disseminator may face risk of fines, sanctions and confiscation of revenue.

There can be no assurance that the advertisements we place on behalf of our advertising customers will not be found to be inappropriate. Our media department examines and approves each advertisement before publication. In addition, our contracts with our advertising customers from industries which are more susceptible to having the contents of their advertisements found to be inappropriate, such as pharmaceuticals, healthcare and cosmetics and skincare, generally state that any fines or penalties imposed in the event the advertisement is determined to be inappropriate by the relevant PRC authorities will be fully borne by the advertising customers. Our PRC legal advisor has advised that, provided there is no wilful misconduct or gross negligence on our part in designing, producing or publishing the relevant advertisements, such contractual arrangements with our advertising customers are legal and valid under applicable PRC laws. If we conduct or have conducted any activities resulting in us being responsible for the inappropriate advertisements, such as providing design, production or publication services when we are aware of or deemed to be aware of the untrue nature of the contents of the advertisements, we will be liable for any fines or penalties imposed and cannot rely on our contractual arrangements with customers to recover amounts paid by us. In addition, there can be no assurance that the PRC authorities will not make such a determination and impose fines on us after a lengthy period from publication of the advertisements and completion of the order placed by our advertising customers, which may make recovery from our customers difficult. In the event we are required to pay any fines and not able to recover such amounts from our customers, our profitability and results of operations may be adversely affected. Further, our newspaper partners may be subject to fines and sanctions due to their dissemination of the inappropriate advertisements, and we may be required to reimburse them for such amounts.This may also affect our long-term relationships with our newspaper partners, which in turn may have a material and adverse effect on our business and prospects.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders. 

We may be deemed to be a passive foreign investment corporation (“PFIC”) within the meaning of the U.S. Internal Revenue Code. A PFIC is defined as a foreign corporation at least 75% of whose gross income in a taxable year (including its pro rata share of the gross income of any company in which it is considered to own, directly or indirectly, at least 25% of the shares by value) is passive income, or at least 50% of whose assets in a taxable year (ordinarily determined based on fair market value and averaged quarterly over the year) are held for the production of, or produce, passive income. If we are a PFIC for any taxable year during which we have shareholders that are subject to U.S. federal taxation, or “U.S. holders”, and if such U.S. holder did not make a timely qualified electing fund (“QEF”) election for the first taxable year of its holding period for our shares, such U.S. holder will be subject to special rules with respect to any gain that it recognizes on the redemption of its shares. Under these special rules, the U.S. holder’s gain will be allocated ratably over the U.S. holder’s holding period for the shares; the amount allocated to the taxable year in which the U.S. holder recognizes the gain will be taxed as ordinary income; the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year and applicable to the U.S. holder; and the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such prior year. Based on the composition of our assets prior to January 27, 2009 (which have largely consisted of cash and other investment assets), as well as the composition of our income prior to January 27, 2009 (which has largely consisted of interest), it is likely that we may have qualified as a PFIC in 2006, 2007 and 2008. Based on the composition of our assets and income after January 27, 2009, we should not be classified as a PFIC for taxable years 2009, 2010 or 2011. We urge U.S. holders to consult their own tax advisors regarding the possible application of the PFIC rules. For a more detailed explanation of the tax consequences of PFIC classification to U.S. holders, see the section of this report captioned “Taxation – United States Federal Income Taxation – Passive Foreign Investment Company Rules.”

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Our operating subsidiary completed its initial public offering on the Hong Kong Stock Exchange in 2010. Fulfilling our obligations as a public company will be expensive and time consuming. 

ShiFang, the holding company of our operating companies in PRC, completed an initial public offering on the Hong Kong Stock Exchange (the “HK Stock Exchange”) in December 2010. As a result, ShiFang is subject to the obligations and responsibilities of a public company under HK Stock Exchange rules. Compliance with these obligations will require significant management time, place significant additional demands on our finance and accounting staff, and increase our insurance, legal and financial compliance costs. Any deficiencies, weaknesses or lack of compliance could subject us to sanctions by the HK Stock Exchange and have a materially adverse effect on our business and reputation.

Being a foreign private issuer exempts us from certain Securities and Exchange Commission requirements that provide shareholders the protection of information that must be made available to shareholders of United States public companies.

We are a foreign private issuer within the meaning of the rules promulgated under the Exchange Act. As such, we are exempt from certain provisions applicable to United States public companies including:

●the rules requiring the filing with the Securities and Exchange Commission, or SEC, of quarterly reports on Form 10-Q or current reports on Form 8-K;

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

● provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material 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 (i.e., a purchase and sale, or a sale and purchase, of the issuer’s equity securities within less than six months).

Because of these 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.

Expansion of our business may put added pressure on our management, which may impede its ability to meet any increased demand for its services and adversely affect its results of operations.

Our business plan is to significantly grow our operations to meet anticipated growth in the demand for our services. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

● the continued acceptance of our services by the media markets;

● our ability to successfully and rapidly expand media services to potential customers in response to potentially increasing demand;

● the costs associated with such growth, which are difficult to quantify, but could be significant; and

● the highly competitive nature of the media facilities industry.

If we are successful in achieving rapid market growth of our services, we will be required to provide a larger volume of services to customers on a timely basis at a reasonable cost. Such demands may require more capital than we currently have available and without more capital, we may be unable to meet the needs of our customers, which could adversely affect our relationship with our customers and results of operations.

If we become directly subject to the recent scrutiny involving U.S.-listed Chinese companies, we may have to expend significant resources to address the concerns of our shareholders or other parties, and our business operations, stock price and reputation could be harmed.

Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result, the publicly traded stock of many U.S. listed China-based companies that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits and/or SEC enforcement actions, and are conducting internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, regardless of whether any allegations are true, we may have to expend significant resources to investigate such allegations and/or defend our company. Such investigations or allegations could be costly and time-consuming and distract our management from our business plan. If such allegations were proven to be true, our company and business operations would be severely damaged and your investment in our shares could become worthless.

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Risks Related to Our Industry

We are subject to PRC media industry regulations and policies.

As substantially all of our business operations are conducted in the PRC, we are subject to the PRC’s legal regime and a number of regulations and restrictions. There can be no assurance that we have complied with all applicable laws and regulations or will be able to do so in the future. Contravention of any laws or regulations may expose us to criminal and civil liabilities including penalties, fines, damages and other sanctions. Further, there can be no assurance that any of the PRC legal or regulatory restrictions applicable to us will be lifted soon or at all, that there will not be further restrictions and requirements imposed, or that we will be able to obtain special approvals or exemptions from any of such restrictions or requirements. These laws and regulations not only restrict our present operations, but may also restrict our proposed future development plans in the PRC. Accordingly, our business and results of operations could be adversely affected by these limitations. The PRC government is reportedly considering revising various regulations relating to the press and publication industry. If such reports are accurate, there may be changes in the policies and regulations governing the press and publication industries. There can be no assurance that our business or our arrangements with our newspaper partners will not be materially and adversely affected by any changes by the PRC government of the policies and regulations governing the press and publication industry.

The PRC advertising industry is still at an early stage of development, and further development of the different forms of media in the PRC advertising market may pose threats to our business.

Our directors consider the PRC advertising industry to be highly fragmented and at an early stage of development compared to the more mature advertising markets of developed countries. According to the General Administration of Press and Publication of the PRC (“GAPP”), there were more than 1,900 newspapers publishing over 190 billion pages of print, and more than 9,500 periodicals publishing over three billion copies in China. As the PRC advertising industry undergoes further integration and development, advertising customers are likely to increasingly differentiate between different forms of media to select those that best meet their particular needs. As advertising customers become more selective, they may increasingly choose forms of media in which we are less established and experienced, which could affect our competitive position and adversely affect our business and results of operations.

The digital media industry is a relatively new market and our newly established Internet media platform may not be profitable in the future.

We commenced the operation of our Internet media platform in 2008 after our acquisition of the websitewww.duk.cn (“Duk.cn”),. The Internet has undergone tremendous development over the past decade and continues to evolve. However, we consider the digital media industry, especially in the PRC, to still be in a developmental stage. There exist risks and difficulties in the new and rapidly evolving digital media market including anticipation of new trends, understanding digital media customers’ needs and meeting technical requirements, and these problems may recur in future periods. Moreover, given the relatively short operating history of website Duk.cn , there can be no assurance that we will have sufficient experience, expertise or resources to successfully adapt to new trends and developments in the digital media industry or compete successfully as new platforms for internet publication emerge.

Risks Related to Our Corporate Structure

If the PRC government considers that the contractual arrangements among Fujian Shi Fang Culture Communication Co., Ltd., Beijing Hong Xin Tu Culture Communication Co., Ltd. and its shareholders do not comply with applicable PRC laws, we and our subsidiaries and affiliates could be subject to severe penalties. 

PRC  laws place certain restrictions on foreign investment in and ownership of media companies. We and our PRC subsidiary, Fujian ShiFang Culture Communication Co., Ltd., or SF, are considered foreign persons or enterprises with foreign investment, and are required to comply with Chinese law applicable to foreign investment in the media industry. Because of the restrictions, we do not have ownership interests in Beijing Hong Xin Tu Culture Communication Co., Ltd. or BJHXT, which holds the licenses and permits necessary to conduct our media business.  We therefore conduct our operations in the PRC principally through contractual arrangements among SF, BJHXT and its shareholders. 

Our contractual arrangements with BJHXT and its shareholders enable us to:

· exercise effective control over BJHXT;

· receive a substantial portion of the economic benefits of BJHXT in consideration for the services provided by SF; and

· have an exclusive option to purchase all or part of the equity interests in BJHXT when and to the extent permitted by PRC laws.

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Because of these contractual arrangements, BJHXT and its subsidiaries are treated as our consolidated affiliated entities. If our corporate and contractual structures are found to be in violation of any existing or future Chinese laws, we may have to modify such structures accordingly to comply with regulatory requirements. However, we cannot assure you that we can achieve this without material disruption to our business. Further, if the contractual arrangements are found to be in violation of any existing or future PRC laws, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

· revoking the business and operating licenses of SF and BJHXT;

· restricting or prohibiting any related-party transactions between SF and BJHXT;

· imposing fines or other requirements with which we, SF and BJHXT may not be able to comply;

· requiring us, SF or BJHXT to restructure the relevant ownership structure or operations; or

· restricting or prohibiting our use of the funds released from the Trust Account to finance our business and operations in PRC.

The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business. 

In addition to the possibility of administrative penalties or other requirements being imposed upon us due to our relationships with BJHXT and its shareholders, we may not be able to effectively enforce such contractual relationships in a cost-effective manner or at all. Under the current contractual arrangements, if BJHXT or any of its shareholders fails to perform their respective obligations under these contractual arrangements, or are required to incur substantial costs to do so, we may be forced to incur substantial costs and resources to enforce such arrangements or to rely on PRC law to obtain remedies, including specific performance or damages, and we may not be successful in obtaining such remedies or our obtaining such remedies might be cost prohibitive. In the event we are unable to enforce these contractual arrangements, our business, financial condition and results of operations may be materially and adversely affected.

We rely on contractual arrangements with BJHXT and its shareholders for our media operations, which may not be as effective in providing operational control as direct ownership. 

We have relied on, and expect to continue to rely on, contractual arrangements with BJHXT and its shareholders to operate our business in China. For a description of these contractual arrangements, see “Organizational Structure” under Item 4 in this annual report. These contractual arrangements may not be as effective in providing us with control over BJHXT as direct ownership. We have no direct or indirect equity interests in BJHXT. 

If we had direct ownership of BJHXT, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of BJHXT, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. But under the current contractual arrangements, as a legal matter, if BJHXT or any of its shareholders fails to perform their 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 laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of BJHXT were to refuse to transfer their equity interest in BJHXT to us or our designee when we exercise the call option pursuant to the contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual obligations. 

All of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some 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 that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over BJHXT, and our ability to conduct our business may be adversely affected. 

Contractual arrangements among us, our PRC subsidiary, BJHXT and other parties may be subject to scrutiny by PRC  tax authorities and a finding that we or our PRC affiliated entity owe additional taxes could substantially reduce our consolidated net income and the value of your investment. 

Under PRC laws, arrangements and transactions among related parties may be subject to audit or challenge by PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangement among SF and BJHXT does not represent an arm’s-length price and adjust BJHXT’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by BJHXT, which could in turn increase their respective tax liabilities. In addition, PRC tax authorities may impose late payment fees and other penalties on BJHXT for underpayment of taxes. Our consolidated net income may be materially and adversely affected if BJHXT’s tax liabilities increase or if it is found to be subject to late payment fees or other penalties. 

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PRC regulations on loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans to our PRC subsidiaries or affiliates or require us to make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business. 

We are an offshore holding company conducting our operations in the PRC through our subsidiaries and affiliated entities. In providing operational capital to our PRC subsidiaries and affiliates, we may make loans to our PRC subsidiaries and affiliates, or we may make additional capital contributions to our PRC subsidiaries. 

Loans we make to any of Fuzhou Han Ding Network Science and Technology Co., Ltd., Beijing Han Ding Advertising Co., Ltd. and Fuzhou Hong Xin Tu Printing Co., Ltd. (collectively, the “FIEs”), which are treated as foreign-invested enterprises under PRC laws, cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Under applicable PRC laws, the PRC regulators must approve the amount of a foreign-invested enterprise’s registered capital, which represents shareholders’ equity investments over a defined period of time, and the foreign-invested enterprise’s total investment, which represents the total of the C ompany’s registered capital plus permitted loans. The registered capital/total investment ratio cannot be lower than the minimum statutory requirement and the excess of the total investment over the registered capital represents the maximum amount of borrowings that a foreign invested enterprise is permitted to have under PRC laws. If we were to advance funds to the FIEs in the form of loans and such funds exceed the maximum amount of borrowings of the subsidiary, we would have to apply to the relevant government authorities for an increase in their permitted total investment amounts. Such applications could be time consuming and their outcomes would be uncertain. Concurrently with the loans, we might have to make capital contributions to the FIEs in order to maintain the statutory minimum registered capital/total investment ratio, and such capital contributions involve additional uncertainties. Furthermore, even if we make loans to the FIEs that do not exceed their current maximum amount of borrowings, we will have to register each loan with SAFE or its local counterpart within 15 days after the signing of the relevant loan agreement. Subject to the conditions stipulated by SAFE, SAFE or its local counterpart will issue a registration certificate of foreign debts within 20 days after reviewing and accepting its application. In practice, it may take longer to complete such SAFE registration process. 

Any loans we make to any subsidiary or affiliate which is a PRC domestic company rather than foreign-invested enterprise under PRC laws, such as BJHXT, are also subject to various PRC regulations and approvals. Under applicable PRC regulations, medium- and long-term international commercial loans to PRC domestic companies are subject to approval by the National Development and Reform Commission, and short-term international commercial loans to PRC domestic companies are subject to the balance control system administered by SAFE. Due to these restrictions, we are not likely to make loans to subsidiaries or affiliates which are PRC domestic companies. 

Any capital contributions we make to the FIEs must be approved by the Ministry of Commerce of the PRC or its local counterparts and registered with SAFE or its local counterparts. Such applications and registrations could be time consuming and their outcomes are uncertain. 

We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or affiliates or with respect to future capital contributions by us to our China subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use such future loans or capital contributions to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

Risks Related to Doing Business in the PRC

Adverse changes in economic and political policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and adversely affect our competitive position.

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. China’s economy differs from the economies of developed countries in many respects, including 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 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 government control over capital investments or changes in tax regulations that are applicable to us.

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The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. The PRC government has implemented a number of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks to make loans and raise interest rates, in order to slow down specific segments of China’s economy that it believed to be overheating. These actions, as well as future actions and policies of the PRC government, could materially affect our liquidity and access to capital and our ability to operate our business.

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

We conduct our business primarily through our subsidiaries and affiliates in China. Our operations in China are governed by PRC laws and regulations. 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 to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, 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 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 some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Governmental control of currency conversion may affect the value of your investment. 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. 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 SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC 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 shareholders, including holders of our common shares. 

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

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 17.5% appreciation of the RMB against the U.S. dollar between July 21, 2005 and November 30, 2008. The People's Bank of China announced on June 19, 2010 its intention to allow the RMB to move more freely against the basket of currencies, which increases the possibility of sharp fluctuations in the value of the RMB in the near future and thus the unpredictability associated with the RMB exchange rate. Despite this change in their exchange rate regime, the PRC government continues to manage the valuation of the RMB. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of its financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiaries and affiliate in the PRC. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars. For example, an appreciation of the RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of the RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as the RMB is our functional currency.

A slowdown in the Chinese economy may have a material and an adverse effect on our results of operations and financial condition.

All of our revenue is derived from sales in the PRC. We rely on domestic demand for advertising to achieve growth in our revenue. Domestic demand for advertising is materially affected by urban development, growth of private consumption and overall economic progress in China. The global financial crisis in 2008 caused a slowdown in the growth of the global economy. Although there are signs of recovery in the global and Chinese economies, there can be no assurance that any such recovery is sustainable. In addition, if the financial crisis continues, there can be no certainty as to its impact on the global economy or the Chinese economy. As a result of global economic cycles, there can be no assurance that the Chinese economy will continue to grow at the rates achieved in the past, or at all. Any slowdown or recession in the Chinese economy may have a material and adverse effect on our results of operations and financial condition.

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The treatment of our companies for PRC enterprise income tax purposes is unclear.

The PRC's new Enterprise Income Tax Law, as amended, supplemented or otherwise modified from time to time (“EIT Law”) and its relevant implementing rules became effective on January 1, 2008. Pursuant to the EIT Law, as amended, foreign enterprises withde facto management located in the PRC are considered resident enterprises, with their worldwide income normally being subject to enterprise income tax at an applicable tax rate of 25%. In April 2009, the State Administration of Taxation (“ SAT ”) further specified certain criteria for the determination of “de facto management” of foreign enterprises that are controlled by PRC enterprises. These criteria include: (i) the enterprise’s day-to-day operations management is primarily exercised in China, (ii) decisions relating to the enterprise’s financial and human resource matters are made or subject to approval by organizations or personnel in China, (iii) the enterprise’s primary assets, accounting books and records, company seals, board and shareholders’ meeting minutes are located or maintained in China, and (iv) 50% or more of voting board members or senior executives of the enterprise habitually reside in China. If all of these criteria are met, the relevant foreign enterprises that are controlled by PRC enterprises will be deemed to have its “de facto management” in China and therefore be deemed a PRC “resident enterprise”. There can be no assurance that we will not be considered a PRC “resident enterprise” by the PRC tax authorities and that we will not be subject to enterprise income tax at a tax rate of 25% on our worldwide income accordingly.

However, pursuant to the EIT Law and theNotice on Issues Regarding Tax Credit for Enterprises Foreign Income (Cai Shui [2009] No.25) , which was jointly issued by the Ministry of Finance and the SAT on December 25, 2009 and was made effective retrospectively to January 1, 2008, part of the enterprise income tax may be relieved if the “resident enterprise” has already paid similar tax offshore. In addition, enterprises entitled to lower tax rates under the old law will be given a five-year grace period before they are required to pay the statutory rate of 25% unless they are granted preferential tax rates. Other tax benefits, such as certain fixed periods of enterprise income tax exemption or reduction, will continue until the expiry of the prescribed period. For the preferential tax treatment which has not commenced due to lack of profit, such preferential treatment was deemed to have commenced on January 1, 2008. There can be no assurance that the new EIT Law will not further change and that the PRC government’s policies on preferential tax treatment will not be changed or cancelled. If such changes and cancellation occur, the resulting increase in our tax liability may have a material and adverse effect on our net profits and cash flow.

Dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to withholding taxes under PRC tax law.

Our company was incorporated under the laws of the Cayman Islands. However, we conduct our media operations in China through our PRC subsidiaries and our ability to pay dividends depends substantially on the payment of dividends to us by our PRC subsidiaries. Under the new EIT Law and the implementation regulations issued by the State Council, withholding tax at the rate of 10% is applicable to dividends payable by a PRC “resident enterprise” to an investor that is a “non-resident enterprise” that does not have an establishment or place of business in the PRC, or, even if the enterprise has such an establishment, the relevant income is not effectively connected with or derived from the PRC, to the extent such dividends have their source within the PRC, such as dividends paid by a PRC subsidiary to its overseas parent, unless the jurisdiction of such foreign enterprise has a tax treaty with China that provides a different withholding arrangement. Similarly, unless a preferential rate is provided by a tax treaty or arrangement entered into between the country or region where the enterprise is established and the PRC, any gain realized on the transfer of our shares by such investor is also subject to a 10% withholding tax if such gain is regarded as income derived from sources within the PRC. As described in the risk factor headed “The treatment of our companies for PRC enterprise income tax purposes is unclear” above, there is uncertainty in determining the “de facto management” and tax residency of our company and therefore we are uncertain as to whether we will be considered a PRC “resident enterprise”. The dividends we pay in respect of our shares derived from our dividend income from our PRC subsidiaries, or the gain you may realize from the transfer of our shares, may be treated as income derived from sources within the PRC and be subject to PRC tax. Our tax liability may depend, in part, on how the PRC tax authorities interpret, apply or enforce the new EIT Law and the implementation regulations. If we are required under the new EIT Law to withhold PRC tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of shares, the value of your investment in our shares may be materially and adversely affected.

The outbreak of any communicable diseases in the PRC, if uncontrolled, could affect our financial performance and prospects.

The outbreak of any communicable disease in the PRC could have a material and adverse effect on the overall business sentiment and economic environment in the PRC, which in turn may have a material and adverse impact on domestic consumption in, and possibly the overall GDP growth of, the PRC.

As all of our revenue is derived in the PRC, any contraction or slow down in the growth of domestic consumption and possible slowdown in the GDP growth of the PRC will adversely affect our prospects, future growth and overall financial condition. In addition, if any of our employees are affected by any communicable disease outbreaks, we may be required to temporarily shut down the affected offices and quarantine all staff working in those offices to prevent the spread of the disease. This could adversely affect and/or disrupt our business operations and the relevant facilities and impact our results of operations and financial condition.

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The outbreak of Influenza A (H1N1), commonly known as the “swine flu”, has caused an alarming number of deaths worldwide. The significant number of Influenza A (H1N1) cases in certain. Asian countries and territories such as the PRC could indicate that it is gradually developing into a pandemic disease, which could threaten human lives and hinder local and cross-border business activities and affect the prospects of economic recovery in those areas. It is unclear whether the epidemic will become more aggressive or will wane in the near future. Any prolonged outbreak of Influenza A (H1N1) or other communicable disease in the PRC or elsewhere could have a material adverse effect on our business, prospects, financial condition or results of operations.

Enforcement in the PRC of judgments obtained from non-PRC courts may be difficult.

Our company is incorporated in the Cayman Islands. However, substantially all of our assets and operations are located within the PRC. The PRC currently does not have effective treaties or arrangements which provide reciprocal recognition and enforcement of judgments of the courts of the United States, the United Kingdom or other countries, and therefore, it may not be possible for investors to effect service of process upon us or to enforce against us in the PRC any judgments obtained in such jurisdictions. The PRC is a signatory of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “ New York Convention ”) which permits enforcement in the PRC of awards of arbitral bodies located in other New York Convention signatory countries, subject to certain exceptions. Even in cases where enforcement is, in principle, provided for by the New York Convention, practical difficulties are sometimes encountered.

The PRC Labor Contract Law may cause our labor costs to increase and we may be liable for fines and penalties for any material breach of this law.

On June 29, 2007, the Standing Committee of the National People’s Congress of the PRC adopted the PRC Labor Contract Law, which became effective on January 1, 2008. The PRC Labor Contract Law imposes requirements relating to, among others, minimum wages, severance payments and non-fixed term employment contracts, and establishes time limits for probation periods as well as the circumstances in which an employee can be placed on a fixed-term employment contract. It also provides that social insurance is required to be paid on behalf of employees, and employees are entitled to unilaterally terminate the labor contract if this requirement is not being satisfied.

Pursuant to this new law, our PRC subsidiaries are required to enter into non-fixed term employment contracts with employees who have worked for them for more than 10 years or, unless otherwise provided under the new law, for whom a fixed-term employment contract has been concluded for two consecutive terms since January 1, 2008. Further, we may not be able to efficiently terminate non-fixed term employment contracts under the new law without demonstrating cause. In addition, we are also required to make severance payments to employees under fixed-term contracts upon the expiration of their employment contracts, unless the employee voluntarily terminates the contract or voluntarily rejects an offer to renew the contract in circumstances where the conditions offered by the employer are the same as or better than those stipulated in the current contract. The amount of severance payment is equal to the monthly wage of the employee multiplied by the number of full years that the employee was employed by the employer, unless the employee’s monthly wage is three times greater than the average monthly wage in the relevant district or locality, in which case the calculation of the severance payment will be based on a monthly wage equal to three times the average monthly wage multiplied by a maximum of twelve years.

Compliance with the relevant laws and regulations may substantially increase our operating costs and may have a material adverse effect on our results of operations. In particular, an increase in labor costs in the PRC will increase our service costs and we may not be able to pass these increases on to our customers due to competitive pricing pressures. There can be no assurance that any employment disputes or strikes will not arise in the future. Increases in our labor costs and any future disputes with our employees could materially and adversely affect our business, financial condition or results of operations.

Risks Relating to Our Securities 

If we do not pay dividends on our shares, our shareholders will only benefit from an investment in our shares if such shares appreciate in value. 

Our board of directors will determine whether to pay dividends in the future, depending upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. We can not be sure whether our board will decide to pay dividends in future periods.  Accordingly, realization of a gain on shareholders’ investments may depend on the appreciation of the price of our shares. There is no guarantee that our shares will appreciate in value or even maintain the price at which shareholders purchased their shares. 

Future issuance of shares may have an adverse effect on the market price of our shares and dilute your shareholding. 

As of December 31, 2011, we had 14,876,940 outstanding shares. Assuming the net income targets set forth in the Share Purchase Agreement (as defined below) are met, we will need to issue up to a total of 2,000,000 ordinary shares. For more information about the Share Purchase Agreement, please see “Item 4. Information on the Company—C. Organizational Structure—The Share Purchase Agreement and Earn Out Shares.” The issuance and sale, or even the possibility of sale, of the additional shares could have an adverse effect on the market price for our securities and on our ability to obtain future public financing. Moreover, you may experience dilution to your holdings upon the issuance of the additional shares.

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Our securities are quoted on the OTCBB, which may limit the liquidity and price of our securities compared to securities listed on the Nasdaq Global Market or the New York Stock Exchange,  and the trading price for our ordinary shares may fluctuate significantly. 

Our ordinary shares are quoted on the OTCBB. We believe that the quotation of our securities on the OTCBB will limit the liquidity and price of our securities more than if our securities were listed on the Nasdaq Global Market or the New York Stock Exchange.

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ITEM 4.INFORMATION ON THE COMPANY

A. History and Development of the Company

We were originally incorporated under the name ChinaGrowth South Acquisition Corporation, as an exempted company organized under the laws of the Cayman Islands on May 3, 2006. ChinaGrowth was incorporated for the purpose of affecting a share capital exchange, asset acquisition or other similar business combination with an operating business in any city or province south of the Yangtze River in the PRC.  We entered into a memorandum of understanding with OMH on July 22, 2008 and entered into a share purchase agreement to acquire OMH on December 16, 2008 (the “Share Purchase Agreement”). On January 27, 2009, we completed our merger with OMH and changed our name to China TopReach Inc.

Pursuant to a restructuring agreement dated January 14, 2010, three China TopReach shareholders, TopBig International Development Limited (“TopBig”), Blazing Sun Holdings Limited (“Blazing Sun”) and Keep Profit International Capital Limited (“Keep Profit”), agreed to exchange certain of their shares in China TopReach for shares in ShiFang and to provide guarantees and pledge their shares in China TopReach and ShiFang to secure performance of the obligations of China TopReach, OMH and ShiFang. On January 18, 2010, China TopReach transferred its entire shareholding interest in OMH to ShiFang, after which ShiFang became the holding company of OMH. On the same date and pursuant to the above arrangements, ShiFang allotted and issued 319,999,999 shares, 42,998,170 shares, 15,859,804 shares and 21,124,062 shares of its common stock to China TopReach, TopBig, Blazing Sun and Keep Profit, respectively.

In February 2010, ShiFang completed a US$35 million private placement of its common shares (the “Private Placement”).  Four institutional investors, CCB International Asset Management Limited, Sinochem Europe Capital Corporation Ltd., Templeton Strategic Emerging Markets Fund III, LDC and New World Strategic Investment Limited (together, the “Investors”), acquired an aggregate 27.16% equity interest in ShiFang in the Private Placement. On December 3, 2010, the shares of ShiFang became listed on the Main Board of Hong Kong Stock Exchange and raised gross proceeds of approximately US$71.6 million though the initial global public offering (the “Global Offering”). As of the date of this annual report, as the controlling shareholder, China TopReach holds a 44.45% equity interest in ShiFang.

Capital Expenditures

Our capital expenditures were US$1.6 million, US$ 17.4 millionand US$ 59.8 million, in 2009, 2010 and 2011, respectively, which related primarily to additions of fixed assets and leasehold improvement, prepayment for long term investment, deposits to marketing and promotion projects, equity investment, acquisition of a business and intangible assets. Based on the current market conditions, we expect to incur capital expenditures ranging from US$15 million to US$30 million in 2012 which will be used primarily for acquisitions and investment for business expansion. We plan to fund the balance of our capital expenditure requirements for 2012 with cash on hand, cash from operations, additional bank borrowings, equity offerings and other forms of financing, if necessary.

Corporate Information

Our principal executive offices are located at 6th Floor, San Shan Tower, No. 59, Dongjie Street, Fuzhou City, China 350001. Our telephone number is +86-591-8831-0920. Our registered office in the Cayman Islands is at c/o M&C Corporate Services Limited, P.O. Box 309GT, Ugland house, South Church Street, George Town, Grad Cayman, Cayman Islands.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.ChinaTopReach.com. The information contained on our website does not form part of this report.

B. Business Overview

We are a leading privately owned aggregator and operator of print media businesses and provide a wide range of integrated print media and digital media services to advertisers through a network of newspaper partners in China. Under our business model, we enter into cooperation contracts with our newspaper partners that provide us with exclusive rights to sell advertising spaces in these newspapers. In connection with sale of advertising spaces, we offer value-added advertising services such as design, layout, content planning and event organizing to form one-stop solution packages for our advertising customers.

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We began our cooperation model in 2005 with newspapers located in Fujian Province. These arrangements allow us, upon payment of deposits to newspapers, to engage in full or partial cooperation with newspapers through exclusive contracts, except final editorial rights which cannot be acquired by a foreign entity under current PRC laws. We have obtained a right of first refusal to acquire the editorial rights if and when it is permitted by law. To establish a nationwide print media network, we have entered into exclusive agreements with the second or third largest local newspapers, in terms of circulation, located in more economically developed urban areas, such as Fuzhou, Kunming and Shenyang. This geographic focus enables us to achieve steady growth in advertising revenues driven primarily by increasing personal wealth and urbanization.

The newspapers with which we have contracted focus on the daily life and general interests of local residents, who are attracted by the most up-to-date local news, events and related information. Other popular contents include international and domestic news, development of key events with in-depth commentary, sports and entertainment news and events and classified advertisements. Due to the wide variety of interests of readers of these newspapers, we have been able to provide advertising services to customers from a number of different industries.

During the year, we greatly strengthened our structural adjustment by streamlining the structure of each business, namely the print media segment, new media segment and the investment holding and asset management segment, thereby improving the coordination among the segments and the accountability. Externally , we not only strengthened our existing cooperation with the newspaper partners, but also made selective investment and disinvestment  

Our investments included cooperation with Wuhua Technology Park in Kunming, Yunnan, and partnerships with Xiamen Daily, Xiamen Evening News, City Lifestyle Weekly and TV Friends , which helped us further extend our presence in the Chinese market. In particular, the partnership with City Lifestyle Weekly marked our successful participation in the structural reform of City Lifestyle Weekly’s publications (excluding current and political affairs). In addition to investments, we have also made disinvestments in order to safeguard our and our shareholders’ interests . Given our internal resources and the prevailing operating environment, we voluntarily gave up the renewal of our real estate industry agency contracts with Dalian Daily and Dalian Television Station. We also initiated legal proceedings against Shenyang Media Corporation (“Shenyang Media”) in order to adopt an active stance after Shenyang Media’s unilateral termination of the cooperation arrangement with us.

Furthermore, we are fully aware of the fierce competition we face against other conventional media as well as the enormous technological and application potential of the new media. Therefore, in addition to maintaining the growth of our existing businesses, we have also established a new media segment that covers research and development, operations and liaison with advertisers with the aim of furthering our new media operation. We also continued to improve Duk, our digital publication platform, by adopting a clear business model that focused on expanding the variety of reading materials from original novels to both network and traditional literature. Moreover, we have also focused on the development of end-market wireless mobile reading platforms for Duk, and launched reader software compatible with mobile operating systems such as those for iPhone, iPad and Android. Meanwhile, we unremittingly sought the integration of conventional media content, new media and new technologies, which included the operation of various online platforms in Kunming, Yunnan in conjunction with Lifestyle Express , a major media group in that city. Our aim is to achieve comprehensive coverage by introducing the most relevant mobile phone applications in the coming year.

Our Strengths

Integrated print media service platform 

We have gained significant experience and know how in meeting the demands of advertisers, readers and newspapers, and achieved continued growth in advertising revenues. We provide integrated planning service for newspapers and advertisers to attract more readers. Such integrated service platform enables us to have competitive advantages over advertising agencies and to gain and maintain long-term cooperative relationships with local newspapers.

First mover as a private aggregator of newspaper operations 

We pioneered the business model to engage full or partial cooperation with newspapers through exclusive contracts and were the first private company to run operations for newspapers in Fujian Province. Furthermore, no other company has successfully executed this business model and established a network as we did with 11 newspapers across China. We have also obtained right of first refusal to acquire the editorial rights when such acquisition is permitted by law, which positions us strategically to become a full scale print media company. 

Proven track record in print media sector 

By successfully cooperating with newspapers, we have built a solid reputation in the print media sector. As we expand our business into new regions, we carefully select newspapers with thorough research and gradually increase the range of cooperation we contract. The newspapers in which we are interested are usually the second or third largest by circulation in more economically developed cities and regions. After gaining substantial understanding of attributes of the new markets, we will take a further step to engage comprehensive cooperation with the newspapers, including content provision, advertising, printing and distribution consultative service. Additionally, we assist newspapers in analyzing local competitive landscape and increasing newspaper circulation. Such proven track record helps us to expand into new geographic regions.

Considerable barriers to entry 

Our business model and solid reputation in the print media sector in the regions we operate present considerable barriers to entry for other competitors. First, significant amounts of capital must be deposited in advance to newspapers. In addition, a team with rich experience in content providing and planning, advertising, print and distribution consultative service must be in place to assume operations from the very beginning. Due to years of successful operating experience with newspapers, our management team has build up an impressive track record in the Chinese newspaper sector. A proven track record is critical for newspapers when they consider potential cooperation partners. It is hard for competitors to replicate this advantage within a short period. 

Unique, comprehensive database system 

We have created a proprietary database management system known as MAITS. The system is fully integrated with our full range of services, including content planning, advertising, printing and distribution consultative service. We believe that further improving the platform will facilitate centralized management control, timely execution of our corporate strategies and establishment of a standardized, transparent and seamless business process. Furthermore, using MAITS to collect and analyze comprehensive data such as advertising rates for newspaper spaces in each local market, we are able to attract advertisers by assuring effectiveness of their advertisements. 

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Complementary newspaper website

As a complementary means to growing our print media business, the newspaper website (Duk.cn) we operate allows us to reduce costs associated with printing and distribution, increase advertising revenues by selling online spaces and cross-sell its services in other media sectors. In combination with websites managed by newspapers with which we have contracted, the website also provides us the ability to report important news and related follow-ups in a timely fashion. 

Devoted, seasoned management team 

Our management team has extensive experience and industry knowledge in the Chinese print media sector. Most of our executive directors have more than ten years of experience in the print media industry. The management team has also demonstrated the ability to identify growth opportunities and expand into new business areas. We believe that the experience and knowledge of our management are essential for us to maintain our leading position and competitiveness.

Our Strategies

Our business objective is to become a leading media company in China with fast and profitable growth. We plan to enhance our industry reputation as a provider of integrated print media services and expand successfully into new media. Our specific strategies are as follows:

Enhance our current market position as an integrated print media service provider

We have entered into exclusive cooperative contracts with 11 newspapers across China, two of which are comprehensive agreements under which we are responsible for full management of the newspapers’ advertising operations as well as content provision, printing and distribution consultation. We seek to grow our market share in the cities in which these newspapers operate by increasing the degree of our cooperation as appropriate considering the relevant local market conditions and competitive landscape, including entering into comprehensive cooperative contracts in respect of the six newspapers with which we currently engage in partial cooperation. To increase our cooperation and related revenues, we plan to build on the long term and stable relationships that we have fostered with these newspapers to expand the services we provide to them. We also intend to make continuous efforts to improve our operations, such as implementing measures to ensure the quality of our advertisements, providing more valuable content relevant to each newspaper’s editorial focus, conducting more research to understand each newspaper’s circulation characteristics and targets, and refining our production processes to achieve higher efficiency.

Further, we seek to demonstrate the value of our integrated print media platform to our advertisers by enhancing our ability to design comprehensive and highly effective advertising packages. We plan to progressively implement MAITS in all cities where we operate as we believe complete coverage of MAITS will help us in providing in-depth analyses of advertising data to customers aiming to advertise in different locations throughout the PRC. Through these initiatives, we believe we will be able to enhance our reputation and leading position as a provider of integrated print media services with complementary new media service capabilities.

Expand into new geographic markets with our successful business model

Our nationwide print media network currently extends over 26 cities across the PRC. We plan to expand into other economically developed cities and regions in China where consumer spending, demographics or other metrics indicate that our business model is likely to be successful. Our geographical focus will remain on the Bohai Bay, Beibu Bay, Northeast regions as well as the Central and Southeast coastal regions, which enjoy substantial support by the PRC Government to develop into strong economic markets.

For our provision of integrated print media services to newspapers, we plan to evaluate potential newspaper partners that can enhance our current leading position in the PRC while providing an attractive return on investment. Some of the factors that we will consider include the newspaper’s market position, quality of the management, growth opportunities and earning prospects. We plan to continue with our strategy of targeting newspapers that are among the top three by circulation in each city or region as we believe targeting newspapers with a lower market shares than the first ranked newspaper provides us with more opportunity to apply our business model to generate growth, add value in terms of our services and develop a mutually beneficial relationship.

Retain and recruit talented personnel

 We plan to continue on focus on retaining and recruiting skilled and experienced personnel for our creative and service teams. We intend to improve incentive schemes that link with the performance reviews of our management and employees as well as provide better advancement opportunities for our key employees. We will continue to invest in education and training programs for our management personnel and operation staff, particularly our creative and service teams. We believe these measures will help us attract and retain talent for our businesses.

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Our active, open corporate culture and accelerated pace of growth have attracted international and domestic talent to join us and enrich our management and operation teams. We believe this advantage will continue to attract new talent and be significant for maintaining our service quality superiority, expanding our market position and increasing our profitability in the future.

Grow through forming joint ventures and making acquisitions

In addition to seeking organic growth, we intend to grow by making selective acquisitions and possibly entering into joint ventures with strategic partners. We believe that the industries and markets in which we operate are highly fragmented and offer acquisition opportunities. We plan to selectively acquire niche players whose businesses, products and sales networks are complementary to ours, thereby expanding our service portfolio. Acquisition targets may include local print media companies with quality service teams and strong customer resources. We further intend to target companies that would allow us to expand into related regions and markets that offer high growth potential. Leveraging our successful experience in cooperating with strategic partners, we are actively seeking other partners who can bring value to us by sharing their expertise and brand names. 

Business Model and Services

Our principal business is the sale of integrated print media service packages to advertisers from a wide spectrum of industries. These packages combine the sale of advertising spaces supplied by our newspaper partners and our value-added advertising services such as design, layout, content planning and event organizing. We also manage advertising spaces for our newspaper partners, consult with newspapers about distribution, engage in newspaper printing and provide content to newspapers. As we expand into new regions, we will continue to carefully select newspapers with thorough research and gradually increase the scope of cooperation with each newspaper. Additionally, we assist newspapers in analyzing the local competitive landscape and increasing newspaper circulation.  

As of April 30, 2012, we have entered into exclusive contracts with the following newspapers:

Newspaper	Services	Geographical Distribution	Population coverage
Southeast Express	Advertising, content provision, printing, and distribution consultation and management	Fuzhou and Xiamen, Fujian Province	9.3 million
Lifestyle Express	Advertising, content provision, printing, and distribution consultation and management	Kunming, Yunnan Province	6.2 million
Modern Life Daily	Advertising and production of special editions	Nanning, Beihai, Qinzhou and Guilin, Guangxi Province	16.7 million
Central Guizhou Morning Post	Advertising, content provision, printing, and distribution consultation and management	Anshun and Guiyang, Guizhou Province	6.5 million
Southeast Business	Education and block classified advertising	Ningbo, Zhejiang Province	5.7 million
Jinhua Daily and	Classified advertising	Jinhua, Zhejiang Province	4.6 million
Jinhua Evening
Xiamen Daily and Xiamen Evening	Real estate	Xiamen, Fujian Province	2.5 million
City Lifestyle Weekly and TV Friends	Advertising, content provision, printing, and distribution consultation and management	Shenyang, Liaoning Province	7.8 million

Provide select content

We provide select content to newspapers with which we have full cooperation. As of December 31, 2011, we had approximately 106 professionals engaged in planning and providing content to newspapers. These professionals are classified into several groups according to different newspaper categories, including local news, economics, culture and education, and special editions, such as real estate, information technology and automobiles.

We also publish the newspaper content through our online publishing website Duk.cn. As an important complementary media, the website publishes up-to-date news and follow-ups on a timely basis by cooperating with the websites of the contracted newspapers. The emphasis of each of the newspapers is the daily life of local citizens and their general interest, such as first hand local news and events.

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The newspapers with which we have exclusively contracts have final editorial decision rights which are currently restricted from foreign ownership under Chinese law. However, we have the option to acquire any or all of such newspapers editorial and publishing rights when such ownership is permitted by law. 

Advertising 

In addition to providing advertising services to advertisers, our unique advantage over advertising agents is to offer integrated planning for newspapers and advertisers through balancing newspaper content with numerous advertisements. Such know how enables us to attain synergy between advertisers and balanced content to our readers. As of December 31, 2011, we had total of 438 advertising employees. The advertising team has been further divided into several groups according to the industry classification of its advertisers, such as real estate, healthcare, automobile and consumer products. The content planning and advertising teams work closely to explore advertising opportunities and capture valuable news leads. 

To generate more advertising contracts, we organize a series of exhibitions and events one to two times a week with the local newspapers with which we have exclusive contracts. Such exhibitions and events have considerable influence in industries in which our advertising clients operate, such as real estate, automobiles, and supermarkets. The increasing degree of influence of the local newspapers in those industries drives up the demand for advertisement in the newspapers. We also expand the advertising business through partnership with 4A (American Association of Advertising Agencies) companies. We are invited to the company introduction meetings held by 4A companies every year. Attending such meetings provides us the opportunity to have direct contact with international corporations that plan to expand into cities where we operate. 

Furthermore, we support our subsidiaries and branches operating in other provinces by providing ideas and analytical reports. The MAITS system has been installed to monitor advertising performance of our major rivals’ advertisements. Results from the MAITS system enable us to better serve our advertisers with valuable and real-time information, and also to respond quickly to any competitor’s actions. Additionally, we perform sample survey of customers to evaluate the advertising effects of every kind of advertisement adopted by advertisers. Based on results of such sample survey, we will revise the advertising strategy to improve its effectiveness for advertisers.

We have established internal review procedures to ensure that the advertisements which we publish on behalf of our advertising customers are in compliance with the relevant PRC laws and regulations. Each advertisement is reviewed and examined in detail by our designated advertising personnel. The review process consists of two parts: (i) confirmation that the relevant advertisers has obtained all requisite license and approvals; and (ii) assessment of the contents of the advertisement based on our internal criteria and approval for publication. We classify advertisements into seven general categories: education, real estate, food and beverages, entertainment and food products, medical and pharmaceutical, personals, and referrals from advertising companies and agencies. There are documentary requirements for advertisements in each category, and advertisers have to submit to us the relevant permits, approvals or licenses as required by law.   

Distribution consultative service 

Besides our content provision and advertising operations, we also provide distribution consultative service to newspapers with which we have contracts. With the purpose of achieving effective circulation, we assist newspapers in distribution management and staff training. In order to reach more readers to maximize newspaper delivery coverage, we help newspapers design and adjust the distribution routes and the number of delivery persons whenever necessary. We operate substantially all aspects of the circulation of Southeast Express and Lifestyle Express through our provision of distribution consultation and management services as a part of our contractual partnership with them. Under our comprehensive cooperation contracts, the distribution staff of the newspapers is under our direct supervisions. Furthermore, we provide creative ideas to newspapers for the purpose of increasing circulation, such as pioneering the “rent” concept, which allows subscribers to pay only 1/3 of the annual subscription fee by returning old newspaper to us. We also offer free newspapers to select hotels, restaurants, banks and hospitals. In addition to participating in advising the distribution process, we also help newspapers to train the distribution staff. In return, the close relationship with distribution departments allows us to obtain first-hand personal information about readers through their subscriptions and to further improve the value of our consultative services.

Event organizing 

In addition to the print media services, we organize or assist our advertisers in organizing a series of events for readers. The principal purpose of such events is to attract a considerable amount of readers to participate, and subsequently bring benefits to the advertisers. Events successfully organized by us include personal finance consultations, wedding exhibitions, automobile exhibitions and real estate property visits. For instance, we have organized wedding exhibitions in several cities. Couples considering marriage sign up and leave contact information. Advertisers in the business of decoration, furniture and wedding photography contracted with us for advertising services. Furthermore, we dispatch our staff to focus on content providing and planning to obtain ideas and suggestions following the events. As a result of holding such events, we effectively assist advertisers in increasing sales, which in turn helps increase the advertising revenue of newspapers. 

In order to organize events successfully, we have set up numerous clubs aimed to collect and maintain our readers’ general information, such as 3C Customer Club and Southeast Cars Club. We also partner with other clubs to reach more readers. 

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Newspaper printing

We have two factories in Fuzhou and Kunming used for the printing of Southeast Express and Lifestyle Express, respectively. Our printing services are provided pursuant to our comprehensive cooperation contracts with these two newspapers and we charge them printing fees based on the actual number of copies printed.     

Newspaper website 

The newspaper website Duk.cn, is a website developed and maintained by us to publish electronic newspapers and magazines. In addition to our print media business, the creation of the website enables us to reduce costs related to printing and distribution, increase advertising revenues by selling online spaces to advertisers and cross-sell our services in other media sectors. In June 2007, Duk.cn was honored as one of the top ten creative websites by the Internet Society of China. In 2008, Duk.cn was ranked third among websites for electronic newspaper and magazines in China according to IResearch. As of December 31, 2011, Duk.cn has 13 million registered members. Newspapers from 17 cities, 860 magazine publishers (over 5,000 magazines), over 200 publishing houses and almost 100,000 pieces of original literature and 4 million application documents are available on Duk.cn with the help of Duk.cn’s digital publishing technology and network. In February 2012, the number of original novel, digital newspapers, periodicals, magazines, works of literature, books and documents published on Duk.cn exceeded 470 million. In addition to adding more value to our existing businesses, the website also provides online advertisement services, which are sold to advertisers in package form when they contracted with the publication.    

Moreover, we also operate the websites of Southeast Express and Lifestyle Express pursuant to our comprehensive cooperation contracts with them, and have teams dedicated to provide full technical support and maintenance services. Links to the websites of these newspapers are also provided on website Duk.cn to be accessed by the public to increase the traffic between sites, thereby allowing us to share our respective readership bases.

Media Advertisement Information Tracking System (“MAITS”) 

MAITS is a proprietary web-based system designed to track daily media content and advertisement information. MAITS enables us to collect advertising information on media targets, conduct data mining, research and provide analytical reports for management decision making. MAITS contains original data of each monitored media, such as the scale, pattern, space, price, content and layout for advertisement by industry and major advertiser on newspapers across China.

In addition to providing analytical reports, the MAITS staff supports all of our services. Their research activities include producing project feasibility studies for internal use or for its clients. They also collect, compile and analyze market and project data to update and verify information on the MAITS. They produce periodic and topical reports on a daily, monthly and annual basis for distribution on MAITS. 

We selectively distribute the reports generated by MAITS to our newspaper partners for free. These users appreciate the information generated by MAITS and are confident in our service quality. We intend to further develop MAITS technically and gather more information to strengthen marketing ability and service quality to further increase revenues. 

Sales and Marketing 

Our integrated service packages combining advertising spaces and advertising services are sold through direct sales to customers, including both end-advertisers and advertising agents. As of December 31, 2011, we had a sales and marketing team comprising 438 employees to serve approximately 4,900 corporate clients. Our sales force is organized according to industry of the customers.  The sales and marketing team closely works with the designing and content providing teams, who conduct initial analysis on advertisers’ specific needs and provide feedback. Sequentially, the sales and marketing staff can provide customized solutions to the advertisers. We strengthen relationships with advertisers by providing tailored advertising design directly and offering attractive and flexible packages to suit their needs. We leverage a number of factors, including the quality and quantity of the circulation of newspapers with which we exclusively contracts and analytical reports generated by the sales and marketing teams and MAITS, to demonstrate the ability to reach target audience effectively. 

We organize annual sales and marketing conferences in Beijing, Shanghai and Guangzhou, where we extend invitations to select target customers and advertising partners, such as 4A companies. The main purpose of such conferences is to assist participants in better understanding the media structure of the local market which they plan to enter, to introduce our position and operations, and to strengthen existing and build new relationships with advertisers. We also organize other sales and marketing events and promotional activities with respect to certain industries to discuss topics relating to that industry, such as development trends and advertising strategies.

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Advertisers 

We provide services to advertisers from a variety of industries in the PRC, such as real estate, healthcare, telecommunication, and education. The total numbers of corporate clients we have served as of December 31, 2011, 2010 and 2009, are listed in the following table:

	As of December 31,
	2011		2010		2009
Number of Corporate Clients		4,900		5,000		4,900

The majority of advertisers are direct advertisers, which constituted approximately 86% of total advertisers as of December 31, 2011. The chart below illustrates sources of our advertising customers as of December 31, 2011:

By Source of Customers

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Furthermore, our corporate advertisers come from diversified industries, including real estate, healthcare, telecommunication, decoration, education and consumable products. The chart below illustrates our corporate advertisers by industry as of December 31, 2011:

By Industry

We have established stable relationships with key advertisers. The top five advertisers contributed approximately 14.03% of our total revenues during fiscal year ended December 31, 2011.

Due to the diversified advertiser base, concentration risk is significantly reduced. The chart below illustrates advertisement space by industry of all newspapers with which we have exclusive contracts:

Advertisement Space By Industry

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Suppliers

Our suppliers are primarily our newspaper partners, other newspapers and other media providers that provide us with advertising spaces, which we sell to our advertising customers. For our printing business in Fuzhou and Kunming, we also source ink and consumables as well as newsprint paper from several suppliers. Pursuant to our comprehensive cooperation contracts with Southeast Express and Lifestyle Express, they are responsible for supplying the newsprint paper required for printing services we provide to them.

Seasonality

Our advertising revenues are subject to fluctuations for our customers' products and services and correspondingly, their advertising budgets. Advertising expenditures in the PRC have historically demonstrated mild seasonal fluctuations, with demand generally higher for advertisements in the second half of the year, mainly due to advertising customers tending to expand their advertising campaigns in the second half of the year in preparation for the year-end holidays as well as the upcoming major Chinese New Year holiday in January or February of the following year and as part of year-end efforts to boost their sales performance in order to meet annual sales targets. 

Competition 

We compete with other local newspapers where we operate for advertising spending. We compete for advertising clients primarily on the basis of newspaper circulation and coverage, location, price, the range of services offered and brand name. We also compete for overall advertising spending with traditional advertising media, such as magazines, television and radio, and with other alternative media companies, such as internet, billboard, frame and public transport advertising companies. 

We face certain barriers to entry in the newspaper industry as a result of competition. As most advertising agencies operate pursuant to exclusive agreements with local newspapers, we expect to encounter barriers as we attempt to expand our networks into these cities. Some state-owned print media companies, such as Shanghai Xinhua Media, Chengdu B-ray Media Co., Ltd., Huawen Media Investment Corporation and Beijing Media, with larger size, sufficient capital and significant support from local governments, may present considerable barriers for us to enter the markets where they compete. However, these state-owned companies primarily concentrate on the largest cities, such as Beijing, Shanghai and Shenzhen, which we do not target. Since the majority of approximately 2,000 newspapers in China are located in cities and regions other than those metropolitans, we rarely face direct competition with these state-owned companies. 

Employees and Training 

We had 1,070 employees as of December 31, 2011. The following table sets forth the number of employees by function as of December 31, 2011:

	Number of   employees		% of Total
Management staff		65		6.1	%
Sales and marketing staff		438		40.9	%
Content provision staff		106		9.9	%
Financial and internal audit staff		127		11.9	%
Information technology staff		103		9.6	%
Printing staff		96		9.0	%
Administrative and other staff		135		12.6	%
Total		1,070

We place a strong emphasis on training our full-time and part-time employees. We assist our employees in enhancing their professional abilities in various ways. The comprehensive training consists of self-developed training programs tailored for different departments, mentorships for inexperienced employees, and organizing brainstorm meetings for senior management. In addition to the internal training, we send senior management to short courses or lectures by external professional institutions to further develop their abilities in business operation and management. On average, each senior management member participates in such training opportunities three to four times every year. We also encourage all employees to participate in media related events. 

Intellectual Property 

Our brand, trade names, trademarks, trade secrets and other intellectual property rights distinguish our business platform and services from competitors and contribute to competitive advantages in the newspaper sector in advertising industry. To protect our intellectual property, we rely on a combination of trademark, copyright and trade secret laws, as well as confidentiality agreements with our employees, partners, contractors and others. We have registered our corporate logo and “ShiFang” as trademarks and we have one registered brand and six registered software copyrights associated with our electronic publishing software. We are also the registered holder of seven domain names, including www.ChinaTopReach.com,our main website, www.duk.cnand www.shifangholding.com

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Facilities 

Our headquarters is located in Fuzhou City, Fujian Province, China, where we lease approximately 3,920 square meters of office space. We have offices and facilities located in numerous cities, such as Beijing, Chongqing, Kunming, Xiamen, Dalian and Wuhan. Our subsidiaries and consolidated affiliates lease approximately 5,900 square meters of office space. For the year ended December 31, 2011, our total rental expenses were approximately US$ 733,000. 

Legal Proceedings

On July 26, 2011, Shenyang Media, one of our partners under a comprehensive cooperation contract, unilaterally terminated the contract with us.

Shenyang Media initiated a civil action against us on October 25, 2011 at the Shenyang Intermediate People’s Court in Liaoning Province (“Intermediate People’s Court”), seeking payment for a total sum of RMB17,329,000 (approximately US$2,722,000), the outstanding advertising fee payable by us as of July 26, 2011 under the comprehensive cooperation contract between us and Shenyang Media, and all legal costs in relation to the litigation.

On December 22, 2011, we filed a civil writ with the Higher People’s Court of Liaoning Province of the PRC (the “Higher People’s Court”) against Shenyang Daily Agency (“Shenyang Daily”) and Shenyang Media, under which we sought a total payment of RMB105,579,352 (approximately US$16,586,000) from Shenyang Daily and Shenyang Media for the outstanding advertising fees payable by them to us under their comprehensive cooperation contract with us, together with all the legal costs we incurred in relation to such litigation.

On March 8, 2012, we received a civil judgment issued by the Higher People’s Court in relation to the civil writ filed on December 22, 2011. The Higher People’s Court decided to refer the case to the Intermediate People’s Court. On March 13, 2012, we lodged an appeal to the Supreme People’s Court of the PRC (the “Supreme People’s Court”) to request the Supreme People’s Court to overrule the Higher People’s Court’s decision and order that the case shall remain to be heard in the Higher People’s Court pursuant to PRC laws.

We are currently not a party to any other material legal proceeding. From time to time, we may be involved in litigation or other legal proceedings incidental to our business. However, we do not believe that our business or operations would be materially and adversely affected by any pending litigation or other pending legal proceeding in which we may be involved.

Regulations

 Substantially all of our operations are based in the PRC.  Accordingly, our business is subject to the extensive regulations of the PRC Government.  These regulations govern a wide range of areas including, among others, advertising, publication, distribution and telecommunications.  In addition, our operations are subject to a number of general regulations in the PRC, such as regulations in relation to foreign investments, foreign exchange control and taxation.  This section summarizes the major aspects of the laws, rules and regulations of the PRC that are relevant to our operations.

Principal Laws and Regulations Governing the Advertising Business

The Advertising Law of the PRC ( 中華人民共和國廣告法 ) was adopted in the 10th meeting of the Standing Committee of the 8th NPC of the PRC on October 27, 1994 and took effect on February 1, 1995.  It classifies the participants in the PRC advertising industry as (1) advertiser, which means a legal person, an economic entity or an individual that designs, produces and publishes advertisements, either through own efforts or through an entrustment to others, in order to promote sales of goods or services; (2) advertising operator, which means a legal person, an economic entity or an individual that provides services in designing and producing advertisements or related agency services on a commissioned basis; and (3) disseminator, which means a legal person or an economic entity that publishes advertisements for advertisers or for advertising operators entrusted by advertisers.  The advertisers, advertising operators and disseminators are liable for the truthfulness of the content of the advertisements.  The advertisers who entrust advertising operators and disseminators to design, produce or publish advertisements must provide true, lawful and effective supporting documentary evidence in connection with the contents of the advertisements.  The advertising operators and disseminators must examine the relevant documents to verify the contents of the advertisements.  As to advertisements which contain untrue content or lack sufficient supporting documentary evidence, the advertising operators may not provide design, production or agency services and the disseminators may not publish such advertisements.

Pursuant to the Advertising Law of the PRC, advertisements may not contain falsity, misrepresentation or misguidance.  An advertisement should present distinct and clear specifications on the product’s function, place of origin, uses, quality, price, manufacturer, and expiration date of commodities, or the contents, forms, quality, price or promises of the services offered.

• The contents of advertisements for food, wine and cosmetics must comply with the requirements set by the local health departments and may not contain medical terms or terms that are confusingly similar to medications.

• The contents of advertisements for medications must be based on the instructions approved by the administrative department of public health at the provincial level or under the State Council.

• Advertisements that directly or indirectly introduce medical organizations or medical services must be submitted to the administrative department of public health at the provincial level and/or the administrative department for traditional Chinese medicine at the provincial level for content approval prior to publication.  These advertisements are also subject to supervision by the relevant Administration of Industry and Commerce.

• Advertisements for tobacco products through forms of media such as radio broadcast, films, television, newspapers or periodicals are prohibited.  Advertisements for tobacco products through forms of media other than those prohibited are subject to prior approval by the Administration of Industry and Commerce at the provincial level or the relevant authorized Administration of Industry and Commerce at the municipal level.

• Advertisements for special drugs such as anesthetics, psychotropic drugs, toxic drugs and radioactive drugs are banned.

• All advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals through radio broadcast, films, television, newspapers, magazines, and other forms of media, as well as any other advertisements which are subject to censorship review according to applicable laws and regulations, must obtain content approval from the relevant authorities prior to publication.

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In the case of promoting goods or services with untrue advertisements, the relevant advertising regulatory authorities may require an advertiser to stop publishing the advertisements and to make public corrections utilizing the same amount of advertising expenses, and impose a fine of an amount up to five times the advertiser’s advertising expenses.  The responsible advertising operator and disseminator may be subject to confiscation of their relevant income from providing the advertising services, as well as a fine of an amount up to five times the aforesaid income or an amount not exceeding RMB10,000 if the liable party did not receive income from the misconduct.  In cases of severe violations, liable parties may be subject to forced termination of their advertising businesses, revocation of their business licenses or even criminal proceedings if their acts constitute criminal offences.

Further, the advertiser may be subject to civil liabilities for publishing untrue, deceptive or misleading advertisements resulting in infringement upon the rights and interests of consumers who have bought the advertised goods or used the advertised services; and any advertising operator and disseminator who knew or should have known the misconduct but still designed, produced or published the advertisement will be jointly and severally liable for damages.  If the advertising operator or disseminator is unable to identify the advertiser and provide an accurate address of such advertiser, they will bear the entire civil liability.  We were fined an aggregate amount of RMB15,650 during the Track Record Period by the relevant local Administration of Industry and Commerce for publication of advertisements which were deemed inappropriate.  Except for the foregoing, as of the Latest Practicable Date, we have not been subject to any other fines imposed by the relevant authorities for publication of untrue, deceptive or misleading advertisements.

Pursuant to the Regulations on Administration of Advertising ( 廣告管理條例 ) promulgated by the State Council on October 26, 1987, advertising companies may only engage in the advertising business if they have obtained from SAIC or its local branches a business license which specifically includes in its business scope the operation of an advertising business.  A company conducting advertising activities without such a license may be subject to penalties including fines, confiscation of advertising income and orders to cease advertising operations.  Pursuant to the Measures on Administration of Advertising Operation Licenses ( 廣告經營許可證管理辦法 ) and the Detailed Rules for the Implementation of the Regulation on the Administration of Advertising ( 廣告管理條例施行細則 ), promulgated and revised by SAIC on November 30, 2004, and which took effect on January 1, 2005 (Order of SAIC No. 18), certain entities, including but not limited to radio and television stations and publishing institutions, must also obtain an advertising operating license from a branch of SAIC at the county level or above before they can engage in the advertising business. These licenses will set forth the permitted advertising activities.

In compliance with Detailed Rules for the Implementation of the Regulation on the Administration of Advertising, a foreign-invested enterprise must file an application to engage in the advertising business in the PRC in accordance with the Regulations on the Administration of Foreign-invested Advertising Enterprises ( 外商投資廣告企業管理規定 ) and other relevant regulations.

Principal Regulations Governing the Businesses of Publication, Distribution and Printing

The Regulations on Administration of Publication ( 出版管理條例 ), which were promulgated by the State Council on 25 December 2001 and took effect on February 1, 2002 (Order of the State Council [2001] No.  343) stipulates that, among other things, (1) publishing activities shall include publishing, printing or reproduction, import, and distribution of publications; (2) newspapers, periodicals and books must be published by publishing entities; and (3) to establish a publishing entity, the organizing unit must apply to the Administrative Department for Publication at the provincial level at its locality for its review and further submission of the application to the Administrative Department for Publication under the State Council for approval.  The organizing unit must subsequently complete the procedures for obtaining a publishing license after receiving the approval decision, and must obtain a business license from the Administration for Industry and Commerce in accordance with the relevant law.  Pursuant to the Regulations on Administration of publication, publications may not contain the following contents: (1) contents that contravene the basic principles established by the constitution of the PRC; (2) contents that endanger the unification, sovereignty and territorial integrity of the PRC; (3) contents that will be regarded as national secrets of the PRC, contents that may endanger national security or contents that may damage the honor or benefits of the PRC; (4) contents that incite hatred or discrimination, undermine solidarity of the nations, or infringe on national customs and habits; (5) contents that propagate evil cults or superstition; (6) contents that disturb public order or destroy public stability; (7) contents that propagate obscenity, gambling, violence or instigate crimes; (8) contents that insult or slander others, or infringe upon the lawful rights or interests of others;(9) contents that endanger public ethics or the fine national cultural traditions; and (10) contents prohibited by laws, administrative regulations and provisions of the PRC.

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Pursuant to the Regulations on Administration of Publication and Provisions for the Administration of the Publications Market ( 出版物市場管理規定 ), as amended by GAPP on June 16, 2004 and which took effect on July 1, 2004, (1) the PRC adopted a licensing system for the distribution of publications and without due license, no entity or individual may engage in the activity of distributing publications; (2) entities which engage in the general distribution of newspapers, periodicals and books must first obtain a publication operation permit ( 出版物經營許可證 ) from GAPP and a business license from the Administration for Industry and Commerce in accordance with the relevant law; (3) publishing entities which engage in the wholesaling of newspapers, periodicals and books must first obtain a publication operation permit from the Administrative Department for Publication at the provincial level and a business license from the Administration for Industry and Commerce in accordance with the relevant law; and (4) entities and individuals which engage in the retailing of newspapers, periodicals and books must first obtain a publication operation permit from the Administrative Department for Publication at the county level and a business license from the Administration for Industry and Commerce in accordance with the relevant law.  Provisions for the Administration of the Publications Market further provide that (1) “publication distribution” includes general distribution, wholesale, retail, and other activities, such as leasing and sales exhibitions; (2) “general distribution” means exclusive sale of publications by an entity engaging in general distribution of publications; (3) “wholesale” means sale of publications to other publication operators; and (4) “retail” means sale of publications directly to consumers.

Principal Regulations Governing the ICP Business

The Regulations on Telecommunications of the PRC ( 中華人民共和國電信條例 ) was promulgated on September 25, 2000 by the State Council.  It categorizes all telecommunication services in China as basic telecommunications services and value-added telecommunications services and sets forth extensive guidelines on various aspects of telecommunications operations in China.  According to the Regulations on Telecommunications of the PRC, a commercial telecommunication services provider in China must obtain an operating license from the Ministry of Industry and Information Technology, or MIIT, or its provincial-level counterparts.

In addition, Internet information services are regulated by the Administrative Measures on Internet Information Services ( 互聯網信息服務管理辦法 ) promulgated on September 25, 2000 by the State Council.  It defines “Internet information services” as services which provide information to online users through the Internet.  Internet information services are divided into commercial services and non-commercial services.  Internet information services providers which provide commercial services are required to obtain an operating license from the MIIT or the relevant provincial counterpart.  The Administrative Measures on Internet Information Services also provide that anyone who intends to provide Internet information services relating to news, publication, education, medical and health care, pharmaceuticals or medical equipment and certain other matters must first obtain approval from the competent governmental authorities of the relevant industry as required by relevant laws and regulations prior to applying for an operating license or making a filing with the MIIT or the relevant provincial counterpart.

The PRC Government has promulgated measures relating to Internet content through a number of ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of Culture (“MOC”), and GAPP.  In addition to various approval and license requirements, these measures specifically prohibit Internet activities that result in the dissemination of any content which is found to propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, harm state security, divulge state secrets or contain other content prohibited by the PRC laws and regulations.

Pursuant to the Interim Provisions for the Administration of Internet Publication ( 互聯網出版管理暫行規定 ), which was promulgated by the former Ministry of Information Industry and GAPP on June 27, 2002 and took effect on August 1, 2002, those who wish to engage in Internet publishing activities must obtain an Internet publication license from GAPP.  A company conducting internet publishing activities without such a license may be subject to penalties and sanctions, including confiscation of publication equipment and any illegal profits earned in violation of the interim provisions, order to cease operations and fines of an amount up to ten times of the illegal profits earned.  The term “Internet publishing” is defined as online dissemination through which Internet information providers select, edit and process the works created by themselves or others (including content from books, newspapers, periodicals, audio and video products, electronic publications, and other sources that have already been formally published or works that have been made public in other media, and contents in respect to literature, arts and natural science, social science, engineering technology, etc that have already been edited and processed), and subsequently post these contents on the Internet, or transmit these contents over the Internet for browsing, reading use or downloading by the public.

According to the Provisions for the Administration of Foreign-invested Telecommunications Enterprises ( 外商投資電信企業管理規定 ) issued by the State Council, which became effective on January 1, 2002 and was amended on September 10, 2008, foreign investors’ ultimate equity ownership in a PRC entity providing value-added telecommunication services may not exceed 50% and a foreign investor wishing to acquire any equity interest in a value-added telecommunication business in the PRC must demonstrate a good track record and experience in providing value-added telecommunication services overseas.  Pursuant to the Catalogue of Industries for Guiding Foreign Investment and the Several Opinions on Canvassing Foreign Investment into the Cultural Sector, foreign investors are prohibited from investing and engaging in Internet publishing activities, Internet cultural activities and Internet news information services, except that the Hong Kong service providers and Macao service providers are permitted to invest in joint venture companies engaging in Internet cultural activities, in which the Chinese party has majority ownership.

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C. Organizational Structure

China TopReach is a holding company incorporated under the laws of the Cayman Islands and conducts substantially all of its operations through its operating subsidiaries and affiliates in the PRC.

The following diagram illustrates the corporate structure and the place of formation of our subsidiaries and affiliates:

Notes:

(1) Other subsidiaries consist of various PRC subsidiaries operating advertising and related business in China.

(2) The equity interests in the subsidiaries held by us as at December 31, 2011 and 2010 are disclosed in Note 3 of our audited consolidated financial statements.

BJHXT currently holds a license for the general distribution of books, newspapers and periodicals. Under PRC laws, foreign-invested enterprises are prohibited from engaging in such business. Through the contractual arrangements described below, one of OMH’s wholly owned subsidiaries, SF, has entered into contractual arrangements with BJHXT and its shareholders, Zhi Chen, Jingui Zhang, Yibin Qiang and Yulin Lin, and such contractual arrangements enable SF to (1) receive a substantial portion of the economic benefits from BJHXT; (2) exercise effective control over BJHXT, and (3) have an exclusive option to purchase all or part of the equity interests in BJHXT when and to the extent permitted by the PRC laws. Accordingly, by virtue of the contractual arrangements, we consolidate BJHXT’s results, assets and liabilities in our financial statements.

(1)Services Agreement . SF has entered into a Services Agreement with BJHXT, pursuant to which, SF exclusively provides consulting services to BJHXT in exchange for service fees. This agreement enables the transfer of substantial portions of economic interests from BJHXT to SF.

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(2) Loan Agreement . SF and BJHXT’s shareholders have entered into a Loan Agreement, pursuant to which SF loaned RMB 12.0 million to Boling Zheng and RMB 9.0 million to Kaining XuZhi Chen and RMB 9.0 million to Yibin Qiang , to fund the payment by BJHXT’s shareholders of the acquisition price of all the equity interests in BJHXT.

(3) Equity Pledge Agreement .. SF, BJHXT and its shareholders have entered into an Equity Pledge Agreement, pursuant to which, each of the shareholders of BJHXT has pledged all of its equity interests in BJHXT to SF to guarantee the repayment of the loan under the Loan Agreement and the payment of service fees under the Services Agreement.

(4) Voting Rights Proxy Agreement. SF, BJHXT and its shareholders have entered into a Voting Rights Proxy Agreement, pursuant to which, each of the shareholders of BJHXT has granted to SF and the designee(s) of SF, the power to exercise all voting rights of such shareholder, including but not limited to the power to determine the sale or transfer of all or part of such shareholder’s equity interests in, and appoint and elect the directors and senior officers of BJHXT.

(5) Exclusive Purchase Option Agreement. SF, BJHXT and its shareholders have entered into an Exclusive Purchase Option Agreement, pursuant to which, each of the shareholders of BJHXT has irrevocably and unconditionally granted SF or its designee(s) an exclusive option to purchase, at any time if and when permitted under PRC laws, all or any portion of the equity interests in BJHXT for the lowest price permissible under PRC laws. 

The Share Purchase Agreement and Earn Out Shares

Under the terms of the Share Purchase Agreement, 2.0 million shares in China TopReach (“Escrowed Shares”) were put in escrow to be released to certain OMH shareholders upon the achievement of 2008 and 2009 net income targets by China TopReach, and an additional 9.5 million China TopReach shares (“Earn-out Shares”) were put into escrow to be released to certain OMH shareholders upon the achievement of net income targets for fiscal years 2009, 2010, 2011 and 2012 by China TopReach.  As a result of the additional risk assumed by TopBig, Blazing Sun and Keep Profit in providing guarantees and pledges of their equity interests to facilitate the Private Placement, the parties amended the Share Purchase Agreement and China TopReach released the Escrowed Shares and 5.5 million shares of the 9.5 million Earn-out Shares to TopBig (3,309,813 shares), Blazing Sun (1,530,712 shares) and Keep Profit (659,475 shares) in February 2010. In addition, the parties also agreed to adjust the calculation of net income used to determine whether the earn out targets are achieved by excluding certain items incurred in connection with the equity financing projects undertaken by China TopReach or any of its subsidiaries since the merger with OMH. Our Board of Directors passed a resolution on April 23, 2010 to issue 2.0 million Earn-out Shares for fiscal years 2009 and 2010 to the other OMH shareholders who did not provide additional collateral during the Private Placement. The issuance of the remaining 2.0 million Earn-out Shares to the other OMH Shareholders who did not provide additional collateral during the Private Placement is unaffected by the above arrangement and is still subject to the achievement of the net income targets for fiscal years 2011 and 2012 based as follows:

Fiscal year	Profit Target	Earn-out Shares
2011	RMB278.8 million (approximately US$ 43 million)	1,000,000
2012	RMB394.4 million (approximately US$ 62 million)	1,000,000

On June 23, 2010, we and other signing parties further amended the Share Purchase Agreement again to ratify and approve the above arrangements.

No Earn-out Shares were issued or allotted for the 2011 financial year as the profit target was not achieved by the Company.

D. Property, Plants and Equipment

See “Information on the Company—B. Business Overview—Facilities.”

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ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the section entitled “Selected Consolidated and Other Financial and Operating Data” and the financial statements and related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this annual report.

A. Operating Results 

Overview

We are the leading privately owned aggregator and operator of print media businesses in China. We have established a print media network consisting of 11 newspapers with a circulation of approximately 2.0 million across China, reaching 12 cities and covering an aggregate population of 59 million. Together with our on-line newspaper website Duk.cn, we provide advertising services to approximately 4,900 and 5,000 corporate clients respectively in 2011 and 2010. We usually enter into exclusive contracts for full or partial cooperation with newspapers. Under a fully cooperative contract, we manage advertising operation and printing of the newspapers, and provide select content and distribution consultative service to them. Under a partially cooperative contract, we manage part of advertising operations of the newspapers.

We initiated a cooperation model with newspapers located in Fujian Province in 2005, which allowed us, upon certain deposits to newspapers, to engage in full or partial cooperation with newspapers through exclusive contracts, except final editorial rights which cannot be acquired by a foreign entity under current PRC laws . Nonetheless, we obtained the right of first refusal to acquire the editorial rights when it is permitted by law. To establish a nationwide print media network, we only enter into exclusive agreements with either the second or third largest local newspapers, in terms of circulation, located in more economically developed urban areas, such as Fuzhou, Kunming and Shenyang. This geographic focus enables us to achieve steady growth in advertising revenues driven primarily by increasing personal wealth and urbanization.

The newspapers with which we have contracted focus on the daily life and general interests of local residents, who are attracted by the most up-to-date local news, events and related information. Other popular content include international and domestic news, development of key events with in-depth commentary, sports and entertainment news and events and classified advertisements. Due to the wide variety of interests of readers of these newspapers, we have been able to provide advertising services to customers from a number of different industries.  

The majority of our revenue is derived from advertising revenue from our contracted newspaper partners. We receive payments primarily from advertisers directly, as well as through advertising agents. We also generate revenues from providing publishing and distribution services to the newspapers. Our strategy is to contract with more newspapers in rapidly developing cities to reach more affluent readers and to create a national integrated print media platform for advertisers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepared our financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information and assumptions that believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

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Revenue recognition

We generate revenue primarily from advertising to end customers and printing service and publishing consulting services provided to newspapers. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured. Revenue from advertising contracts, net of rebates, is generally recognized over the period in which the advertisement is displayed. Revenue from printing, net of value-added tax, is recognized when the service is provided.

In addition, we received grants from the PRC government. A government subsidy is recognized when there is a reasonable assurance that we have complied with the conditions attached to the subsidy and that the grant will be received. The government grant is currently included in Other Income in the consolidated statement of operations.  We received US$784,529, US US$633,363 and US$284,319 for the years 2011, 2010 and 2009 respectively.

 Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts, and do not bear interest.  The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable.  Our management determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

Outstanding account balances are reviewed individually for collectability. 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 to our customers.

Inventories

Inventories mainly consist of newsprint paper and printing consumables. Inventories are stated at the lower of cost or market value.  Cost is determined using the weighted average cost method. Cost includes materials, transportation cost and labor related to the purchase of inventories.  We regularly review inventory quantities on hand and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis.

Property, plant, and equipment, net

Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to forty years. Building improvements, if any, are amortized on a straight-line basis over the estimated useful life.

Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.

Construction in progress represents the costs of property, plant and equipment under construction or installation. Depreciation commences when the asset is placed in service. The accumulated costs are reclassified as property, plant and equipment when installation or construction is completed.

The estimated useful lives of the assets as follows:

	Years
Leasehold improvement	5
Buildings	40
Machinery and equipment	5-10
Office equipments and furniture	5
Motor vehicles	5-10

Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred. 

Deposits to newspaper

Pursuant to the agreements between us and PRC local newspapers (“Newspapers”), we are required to make deposits to obtain advertising operational rights from these contracted Newspapers. Such deposits are interest free and refundable at termination of the contracts or on request under mutual consent. Deposits paid for contracts expiring in one year or less are classified as short term. Long term deposits over one year are classified as long term on the balance sheet.

Deposits for marketing and promotion projects

These deposits represent cash paid by us to the local commercial customers in relation to the exclusive marketing and promotion services between us and these customers. Deposits paid for contracts expiring in one year or less are classified as short term. Long term deposits over one year are classified as long term on the balance sheet.

Equity investment

Equity investment refers to the interest in the entity over which have significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.

We hold a 33.5% equity ownership interest in Yunnan HanDing Investment Co. Ltd, which we account for under the equity method of accounting as described in Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”) Topic 323, Investments – equity method and joint ventures (“ASC 323”). The equity method requires that us to recognize our share of the net receipt of earnings (losses) by adjusting the equity investment on our consolidated balance sheet and recognizing income (losses) from equity investment in our statement of operations.

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Goodwill and other intangible assets

In accordance with ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”) intangible assets with indefinite useful lives are not amortized but are reviewed periodically for impairment.

Goodwill and other intangible assets, including computer software, trademarks, licenses, website development, customer relationships and non-compete agreements, are tested on an annual basis as of December 31, and between annual tests if indicators of potential impairment exist. The fair value of our reporting unit was estimated using a combination of the market capitalization and the income approach. Under the income approach, the fair value of the reporting unit was calculated by estimating the fair value of the unit’s associated future cash flows. No impairment of goodwill and other intangible assets has been identified during the periods presented.

The significant estimates and assumptions used by management in assessing the recoverability of goodwill and other intangible assets are estimated future cash flows, present value discount rate, estimated growth of the overall craft beer segment, and other factors. If the Company’s estimate future cash flows were to significantly decline, an impairment charge could result. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgment.

(i) Goodwill

Goodwill arises on the acquisition of subsidiaries or businesses which represents the excess of the consideration transferred over our interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree.

(ii) Trademarks and licenses

Separately acquired trademarks and licenses are shown at historical cost. Trademarks and licenses acquired in a business combination are recognized at fair value at the acquisition date. Trademarks and licenses have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of trademarks and licenses over their estimated useful lives of seven to eight years.

(iii) Contractual customer relationships and non-compete agreements

Contractual customer relationships and non-compete agreements acquired in a business combination are recognized at fair value at the acquisition date. The contractual customer relationships and non-complete agreements have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of customer relationships and non-compete agreements over their expected lives of three to four years.

(iv) Computer software and website development costs

We capitalized certain internal use software and website development costs. Such costs are carried at cost less accumulated amortization. Intangible assets are amortized using the straight-line method over the estimate economic life of the intangible assets.

The intangible assets are subject to impairment test on an annual basis and are being amortized over three to ten years.

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Income taxes

We account for income taxes under FASB ASC Topic 740 "Income Taxes". Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  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 is recognized in the statements of operations in the period that includes the enactment date.

We adopted FASB ASC Topic 740, "Income Taxes", which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Foreign currency translation

We use U.S. dollars as the functional and recording currency. The functional currency of the subsidiaries and VIEs is RMB. Translation adjustments are reported as other comprehensive income in the statement of operations and accumulated as other comprehensive income in equity section of balance sheets.  Financial information is translated into U.S. dollars at prevailing or current rates respectively, except for revenues and expenses which are translated at average current rates during the reporting periods.

The accompanying consolidated financial statements are presented in U.S. dollars. Capital accounts of the financial statements are translated into U.S. dollars from RMB at their historical exchange rates when the capital transactions occurred.  Assets and liabilities are translated at the exchange rates as of balance sheet date.  Income and expenditures are translated at the average exchange rate of the reporting periods.

	2011		2010		2009
	(RMB per US$1.00)
Year as of December 31:		6.3654		6 .6120		6.8372
Average for the year:		6.4725		6.7781		6.8409

Stock-based compensation

We award stock options and other equity-based instruments to our employees, directors and consultants (collectively “share-based payments”). Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.  All of the Company’s stock-based compensation is based on grants of equity instruments and no liability awards have been granted.

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RESULTS OF OPERATIONS

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenue

Revenues increased by 4.5% from US$78.2 million for the year ended December 31, 2010 to US$81.7 million for the year ended December 31, 2011, primarily as a result of increased revenue of Southeast Express and other new business, but offset by the termination of business with Shenyang Evening News. Revenue from our comprehensive cooperation contracts accounted for approximately 80.9% of our total newspaper advertising revenue for the year ended December 31, 2011.

Cost of revenue

Our cost of revenue slightly increased by 0.5% from US$40.4 million for the year ended December 31, 2010 to US$40.6 million for the year ended December 31, 2011, primarily as a result of the increase in new media cost.

Gross profit and gross profit margin

Gross profit increased by approximately 9.0% from US$37.7 million for the year ended December 31, 2010 to US$41.1 million for the year ended December 31, 2011, in line with the increase in revenue. Our gross profit margin increased from 48.3% in 2010 to 50.3% in 2011. This was mainly due to the slight increase in the gross profit margins of the newspaper advertising, distribution management and consulting businesses and the higher gross profit margin of the marketing business, which were offset by the decreases in gross profit margins of the online services, printing services, and television and radio advertising businesses.

Sales and marketing expenses

Our sales and marketing expenses increased by 51.3% from US$3.9 million for the year ended December 31, 2010 to US$5.9 million for the year ended December 31, 2011, primarily due to increase in compensation paid to our sales team as a result of the expansion of our sales team and workforce and an increase in commission paid. We hired additional sales personnel during the year.

General and administrative expenses

Our general and administrative expenses increased by 198.8% from US$8.2 million for the year ended December 31, 2010 to US$24.5 million for the year ended December 31, 2011, mainly because of a specific impairment provision for trade receivables of US$10.7 million, of which US$4.8 million was related to trade receivables due from debtors in Shenyang, which may end their customer relationship with us after the termination of the cooperation contract between us and Shenyang Media, thereby making such trade receivables mostly irrecoverable. In addition, another major component of the impairment provision for receivables was that some customers were not able to pay their advertising fees on time amid the discouraging economic environment and the relatively tight monetary policies adopted in the market, in particular the continuous measure of the central government to curb the property industry. The increase in general and administrative expenses was also caused by the increases in foreign exchange loss of US$0.6 million, amortization of intangible assets of US$1.54 million and staff cost of US$2.0 million.

Share-based payment expenses

Our share-based payment expenses decreased by 55.6% from US$1.8 million for the year ended December 31, 2010 to US$0.8 million for the year ended December 31, 2011, primarily due to the decreased cost of share option granted by ShiFang.

Operating income

As a result of the foregoing factors, we recorded operating income of US$23.8 million in the year ended December 31, 2010 compared to US$9.9 million in the year ended December 31, 2011, representing an decrease of 58.24%.  

Interest income

Interest income increased by 1,056.2% from US$40,424 for the year ended December 31, 2010 to US$467,370 for the year ended December 31, 2011, primarily due to the increase of bank savings.

Interest expense

Interest expense increased by 50.0% from US$0.2 million for the year ended December 31, 2010 to US$0.3 million for the year ended December 31, 2011, primarily due to increase in bank charges.

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Other income

Other income increased by 10% from US$1.4 million for the year ended December 31, 2010 to US$1.6 million for the year ended December 31, 2011, primarily due to the increase of financial subsidies granted by government.

Income before income tax and non-controlling interests

As a result of the foregoing factors, our income before income tax and non-controlling interests decreased by 53.8% from US$25.0 million for the year ended December 31, 2010 to US$11.6 million for the year ended December 31, 2011.

Income tax

Income tax increased by 0.8% from US$3.60 million for the year ended December 31, 2010 to US$3.63 million for the year ended December 31, 2011, primarily due to the expired preferential tax treatments enjoyed by certain subsidiaries.

Selected balance sheet data as of December 31, 2011 and December 31, 2010

Cash decreased from US$82.6 million for the year ended December 31, 2010 to US$33.7 million primarily due to the increase in net cash used in investing activities as a result of the prepayment for long term investment of US$11.6 million, equity investment of US$6.4 million, deposit paid for exclusive marketing and promotion projects of US$31.4 million, acquisition of a cooperation partnership business of US$6.2 million, payments for the additions of plant and equipment such as printing equipment and office fixtures of US$2.9 million and payments for the additions of intangible assets of US$1.3 million. Total current assets decreased by 12.4% primarily as a result of the decrease in cash.

Accrued expenses and other payables decreased 39.5% from US$20.5 million for the year ended December 31, 2010 to US$12.4 million and total current liabilities decreased by 16.2% primarily due to the payment of professional services for public offering work of ShiFang.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenue

Revenues increased by 14.5% from US$68.3 million for the year ended December 31, 2009 to US$78.2 million for the year ended December 31, 2010, primarily as a result of the revenue from newspaper advertising of Southeast Express, Shenyang Evening News, Lifestyle Express, Modern Life Daily, Central Guizhou Morning Post etc. increased by 9.9% from US$54.9 million for the year ended December 31, 2009 to US$60.3 million for the year ended December 31, 2010. Our revenue from online services increased by 38.6% from US$7.0 million for the year ended December 31, 2009 to US$9.6 million for the year ended December 31, 2010. The substantial increase in our advertising revenue was attributable to an overall increase in the number of advertisements placed by advertisers and the unit price of each advertisement. Revenue from our comprehensive cooperation contracts accounted for approximately 83% of our total newspaper advertising revenue for the year ended December 31, 2010. As of December 31, 2010, the new television and radio advertising business recorded an income of RMB14.4 (or US$2.1) million in 2010.

Cost of revenue

Our cost of revenue increased by 11.1% from US$36.4 million for the year ended December 31, 2009 to US$40.4 million for the year ended December 31, 2010, primarily as a result of the increase in costs associated with the increase in the number of newspaper advertising projects and new television and radio advertising projects.

Gross profit and gross profit margin

Gross profit increased by approximately 18.4% from US$31.9 million for the year ended December 31, 2009 to US$37.7 million for the year ended December 31, 2010, in line with the increase in revenue. Our gross profit margin increased from 46.7% in 2009 to 48.3% in 2010. This change was mainly due to a rise in the gross profit margin of the newspaper advertising business.

Sales and marketing expenses

Our sales and marketing expenses increased by 19.7% from US$3.3 million for the year ended December 31, 2009 to US$3.9 million for the year ended December 31, 2010, primarily due to an increase in compensation paid to our sales team. This increase was in line with the increase in our revenue as we pay commissions to our sales personnel based on sales volume. In addition, we have hired additional sales personnel.

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General and administrative expenses

Our general and administrative expenses increased by 50.6% from US$5.4 million for the year ended December 31, 2009 to US$8.2 million for the year ended December 31, 2010, primarily due to the implementation of the share option schemes and the provision for bad debt. We have strictly controlled administrative expenses according to our budget, which has effectively restrained the increases in general and administrative expenses as our business expanded in 2010.

Share-based payment expenses

Our share-based payment expenses decreased by 30.5% from US$2.7 million for the year ended December 31, 2009 to US$1.8 million for the year ended December 31, 2010, primarily due to the share-based listing expenses of China TopReach in 2009 and the share option granted by ShiFang in 2010.

Operating income

As a result of the foregoing factors, we recorded operating income of US$20.5 million in the year ended December 31, 2009 compared to US$23.8 million in the year ended December 31, 2010, representing an increase of 16.0%.  

Interest income

Interest income decreased by 76.3% from US$170,541 for the year ended December 31, 2009 to US$40,424 for the year ended December 31, 2010, primarily due to the decrease of fixed bank savings.

Interest expense

Interest expense decreased by 66.5% from US$0.6 million for the year ended December 31, 2009 to US$0.2 million for the year ended December 31, 2010, primarily because the outstanding bank loans were repaid in early July 2010 and the new bank loan in the amount of US$7,562,000 was borrowed in December 2010.

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Other income

Other income increased by 37.5% from US$1.0 million for the year ended December 31, 2009 to US$1.4 million for the year ended December 31, 2010, primarily due to the increase of financial subsidies granted by government and an increase in the income from other operating activities.

Income before income tax and non-controlling interests

As a result of the foregoing factors, our income before income tax and non-controlling interests increased by 19.0% from US$21.0 million for the year ended December 31, 2009 to US$25.0 million for the year ended December 31, 2010.

Income tax

Income tax decreased by 0.2% from US$3.61 million for the year ended December 31, 2009 to US$3.60 million for the year ended December 31, 2010, primarily due to the preferential tax treatments enjoyed by certain subsidiaries.

Selected balance sheet data as of December 31, 2010 and December 31, 2009

Cash increased from US$6.2 million for the year ended December 31, 2009 to US$82.6 million primarily due to the cash received from private placement and public offering of ShiFang. Total current assets increased by 222.0% primarily as a result of the increase in cash.

Accrued expenses and other payables increased 135.9% from US$8.7 million for the year ended December 31, 2009 to US$20.5 million and total current liabilities increased by 21.5% primarily due to the unpaid professional services for public offering work of ShiFang.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

The information for the year ended December 31, 2008 represents the results of operations of OMH.

Revenue

Total revenues increased by 21.5% from US$56.2 million for the year ended December 31, 2008 to US$68.3 million for the year ended December 31, 2009, primarily as a result of increased advertising sales. In 2009, we significantly expanded our relationship with Modern Life Daily, our newspaper partner in Nanning, and our revenues from advertising sales in that newspaper increased substantially. The substantial increase in our advertising revenue was attributable to an increase in spending by existing clients in the fast-growing local consumer markets and an increase in new advertising customers. In addition, we benefited generally from China’s resumption of strong economic growth in 2009 after the 2008 financial crisis, which stimulated advertisers’ incentives to expand print media and internet advertising in order to promote their products and services in various local markets.

Cost of sales

Our cost of sales increased by 0.2% from US$36.3 million for the year ended December 31, 2008 to US$36.4 million for the year ended December 31, 2009. Overall, the rate of increase in our cost of sales was much lower than the rate of increase in our revenues, primarily because the print media fees we paid to our newspaper partners did not increase in proportion to the increase in revenues we generated from advertising sales. This is because we purchase advertising space in significant quantities and a large portion of the annual print media fees that we pay to our newspaper partners under the comprehensive cooperation contracts for advertising space is fixed on an annual basis and therefore not subject to fluctuations during the year. Further, as we do not pay any print media fees in connection with our sale of online advertising, the increase in our sales of online advertising did not significantly increase our cost of sales.

Gross profit and gross profit margin

Gross profit increased by approximately 60.3% from US$19.9 million for the year ended December 31, 2008 to US$31.9 million for the year ended December 31, 2009. Our gross profit margin increased from 35.4% in 2008 to 46.7% in 2009. These changes resulted from an increase in our advertising sales revenue without a corresponding increase in print media fees, as a large portion of the annual print media fees are fixed on an annual basis and therefore not subject to fluctuations during the year.

General and administrative expenses

Our general and administrative expenses increased by 22.6% from US$4.4 million for the year ended December 31, 2008 to US$5.4 million for the year ended December 31, 2009, mainly because of one-time listing expense of US$0.5 million and an increase in lease charges in relation to our newly leased office headquarters.

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Sales and marketing expenses

Our selling and marketing expenses increased by 37.5% from US$2.4 million for the year ended December 31, 2008 to US$3.3 million for the year ended December 31, 2009, mainly because of an increase in salaries paid to our sales team. The increase was in line with our increase in revenue, as we pay our sales personnel commissions based on sales volume. In addition, we hired additional sales personnel. Our selling and marketing expenses as a percentage of gross revenue increased slightly from 4.3% in 2008 to 4.8% in 2009.

Share-based payment to financial advisors

This one-time cost was related to acquisition of OMH when we issued 335,972 ordinary shares to financial advisors valued at $7.9 per share which was then prevailing share price.

Profit before income taxes

As a result of the foregoing factors, we recorded profit before income taxes of US$21.1 million in the year ended December 31, 2009 compared to US$13.1 million in the year ended December 31, 2008, representing an increase of 60.2%.

Income tax expense

Income tax expense increased by 111.5% from US$1.7 million for the year ended December 31, 2008 to US$3.61 million for the year ended December 31, 2009, as a result of the significant increase in our income before tax.

Net income

As a result of the foregoing factors, our profit for the year increased by 51.5% from US$11.5 million for the year ended December 31, 2008 to US$17.4 million for the year ended December 31, 2009.

Selected Balance Sheet Data at December 31, 2009 and December 31, 2008

Cash increased 295% during the period primarily due to US$9.7 million operating cash inflow (compared to US$3.5 million negative operating cash outflow for the year ended December 31, 2008). Accounts receivable increased 28% as a result of increase in revenue. Total current liabilities increased by 4% primarily as a result of the increase in advances from customers in line with the revenue increase.

B. Liquidity and Capital Resources

Our principal sources of liquidity have been cash generated from its operating activities and financing activities. As of December 31, 2009, 2010 and 2011, we had US$6.2 million, US$82.6 million and US$33.7 in cash, respectively. Our cash is mainly used to fund our daily operations and pay deposits to newspapers for exclusive rights to operate contracted newspapers, deposits to cooperative partners for marketing business development, and investment in media. As a result of the significant net cash used in operating and investing activities during the year, our working capital was decreased from US$119,360,292 as at December 31, 2010 to US$91,744,131 as at December 31, 2011. We expect that more cash is needed to fund its expansion of business, especially to fund deposits to newspapers and new business.

Operating activities

Net cash used in operating activities amounted to US$7.2 million in 2011, primarily attributable to net income of US$7.9 million offset by an increase in trade receivables of US$11.4 million and an increase of prepaid expenses of US$13.4 million.

Net cash generated from operating activities amounted to US$4.5 million in 2010, primarily attributable to net income of US$21.4 million offset by an increase of US$21.4 million in trade receivables and a decrease in prepaid expenses of US$7.3 million. Our trade receivables increased mainly because of the increase in the incomes from newspaper advertising, internet services and television and radio advertising businesses. Trade receivables turnover days increased from 106 days for the year ended December 31, 2009 to 141 days for the year ended December 31, 2010 primarily due to the increase in sales to our major customers and internet services customers who enjoy longer credit periods.

Net cash generated from operating activities amounted to US$9.7 million in the year ended December 31, 2009, primarily attributable to net income of US$17.4 million and US$2.7 million non-cash share-based payment to financial advisors, offset by increases in trade receivables of US$4.8 million as a result of an increase in advertising revenue, and increases in prepaid expense of US$9.9 million as a result of an increase in advances paid to our newspaper partners in line with the increase in our advertising revenue.

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Investing activities

Net cash used in investing activities in 2011 was US$59.8 million, resulting primarily from the prepayment of US$11.6 million for long term investment, deposits of US$31.4 million to marketing and promotion projects, acquisition of a business of US$6.2 million and equity investment of US$6.4 million.

Net cash used in investing activities in 2010 was US$17.4 million, resulting primarily from a prepayment for long term of investment of US$14.8 million to metropolitan newspaper publisher in China in relation to the potential establishment of a jointly controlled entity with the metropolitan newspaper publisher.

Net cash used in investing activities in the year ended December 31, 2009 was US$1.5 million primarily for US$1.1 million deposits paid in connection with leasehold improvement and US$0.3 million purchases of property, plant and equipment.

Financing activities

Net cash generated from financing activities was US$15.19 million in 2011, primarily attributable proceeds from bank borrowers of US$7.3 million, contributions from non-controlling interests of US$4.7 million and net proceeds from related parties of US$12.8 million, partially off set by repayment of bank borrowings of US$8.0 million and the repurchase of the shares of ShiFang ofUS$1.6 million.

Net cash generated from financing activities was US$88.2 million in 2010, primarily attributable to the offering proceeds of ShiFang shares of US$71.6 million and capital contributions from non-controlling interests of US$35 million, partially offset by the payment of listing and offering expenses of US$11.1 million.

Net cash used in financing activities amounted to US$3.5 million in the year ended December 31, 2009, primarily attributable to repayment to shareholders and related parties.

Capital expenditures

We incurred capital expenditures of US$1.6 million, US$17.4 million and US$59.8 million, in 2009, 2010 and 2011, respectively, which related primarily to additions of fixed assets, leasehold improvement, prepayment for long term investment, deposits to marketing and promotion projects, equity investment, acquisition of a business and intangible assets.

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

Research and development costs relating to the development of new processes, including significant improvements and refinements to existing software, are expensed when incurred.  The major components of these research and development costs include experimental materials, salaries and overhead costs.  In accordance with the FASB’s accounting standards for research and development costs, we expense the costs associated with the research and development activities when incurred.  The research and development costs amounted to US$32,445, US$76,953 and US$341,847 for the years 2011, 2010 and 2009 respectively, which were recorded in administrative expenses.

D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2011 that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-Balance Sheet Arrangements

We have not entered into any arrangement or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. In addition, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We believe that there are no off-balance sheet arrangements that have or are reasonably likely to have a material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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F. Tabular Disclosure of Contractual Obligations

The following states our contractual obligations as of December 31, 2010:

	Payment due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(US$ in thousands)
Operating lease commitments		2,878		590		876		689		723
Long-term borrowings		158		-		158		-		-

G. Safe Harbor

See “Forward-Looking Statements.”

Recent Accounting Pronouncements

We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.

In December 2011, the FASB amended its guidance related to disclosures about offsetting assets and liabilities in the financial statements. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of these amendments. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

In September 2011, the FASB amended its guidance on goodwill impairment testing to reduce the cost and complexity of testing goodwill for impairment by providing the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The result of this assessment will determine whether it is necessary to perform the two-step test. The provisions of this new guidance are effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted the new guidance early when we conducted our annual goodwill impairment test in the fourth quarter of 2011. The adoption of this guidance did not have a material impact on our financial statements.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

In May 2011, the FASB amended its guidance related to fair value measurements in order to align the definition of fair value measurements and the related disclosure requirements between accounting principles generally accepted in the United States of America and International Financial Reporting Standards. These amendments, which are effective for interim and annual periods beginning after December 15, 2011, also change certain existing fair value measurement principles and disclosure requirements. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Directors and Executive Officers

Our current directors and executive officers are as follows:

Name	Age	Position
Peifeng Hong	46	Director, Chairman of Board
Zhi Chen	47	Executive Director, Chief Executive Officer
Tiezhu Zhang	39	Director and Chief Financial Officer
Min Chen	43	Director
Toshihiro Nakamura	39	Director
Michael W. Zhang	44	Director
Jingfeng Wang	42	Director

Mr. Peifeng Hong is the Executive Chairman of the board.  Mr. Hong co-founded Beijing Hong Xin Tu Culture Communication Co., Ltd. and Olympia Media Holdings Ltd. in 2000, in which he has served as the Chairman of these two companies since then.  Since 1991, Mr. Hong founded and served as Chairman in several enterprises, including Xiamen Yuanhong Group, Xiamen Yuanhong Real Estate Development Ltd. and Xiamen Yuantong Group, across multiple industries such as mining and real estate development.  From 1985 to 1990, Mr. Hong worked in Normal College of Jimei University.  Mr. Hong graduated from Jimei University in 1985. Mr. Hong was elected twice as the Vice Chairman of China International Chamber of Commerce in Fujian Province.

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Mr. Zhi Chen has acted as director and Chief Executive Officer since 2002. In the past years, he led us to become the leading privately owned print media and adverting operation in China. Mr. Chen is one of the pioneers in providing content to print media and take advertising operation of state-owned newspapers in Fujian province. From 1982 to 2001, he served in various foreign investment tax and domestic collection and administration, and human resource positions, finally as the human resource director in tax authorities in Fujian province. Mr. Chen graduated in finance from Central Broadcast and Television University in 1988, and received his MBA course education in management from Xiamen University in 2001. Mr. Chen is a qualified accountant and registered tax consultant.

Mr. Tiezhu Zhang has acted as director and Chief Financial Officer since October 2009. He is experienced in auditing, private investment and financial management.  He was Principal at Chum Capital since February 2006 to September 2009 where he is responsible for principal investment and corporate advisory transactions. From February 2002 to January 2006, he was a Senior Manager with PricewaterhouseCoopers, responsible for and specializing in the Telecommunication, Information, Media and Entertainment industries. Prior to joining PricewaterhouseCoopers, he was an Investment Director at TechFoster Technology Ventures, a venture capital firm focusing on Technology industry in Greater China. From July 1994 to August 2000, he took various positions, such as manager and associate, with Deloitte Touché Tohmatsu. Mr. Zhang received a bachelor degree from Shanghai University of Science and Technology.  Mr. Zhang speaks Mandarin and English. Mr. Zhang holds a Chinese Certified Public Accountant qualification and a Chinese Attorney qualification.

Ms. Min Chen serves as an independent director since May 2009. Currently she is an associate professor at The Central Academy of Drama in China. From 1993 to 2007, she was an associate professor in Fujian Normal University. Ms. Chen received her doctor degree of literature from the Central Academy of Drama in 2006, and received her Master’s degree in 2002 and Bachelor’s degree in 1993 from Fujian Normal University.

Mr. Toshihiro Nakamura has been with Index Corporation, one of China TopReach’s shareholders and a media holding company listed on the Japan Stock Market, since October 2007. He has served in various key management positions with Index Corporation, such as President of Index Asia Pacific Limited, Operation Director and General Manager of Tokyo area. Mr. Nakamura received education from Matsumoto Dental University. He speaks Japanese and English.

Mr. Michael W. Zhang was the Chief Executive Officer, Secretary and a director of the board of ChinaGrowth South Acquisition Corporation from May 2006 to January 2009 before it acquired Olympia Media Holdings Ltd. He remains as a director on the board of China TopReach Inc. Mr. Zhang was also the Chief Financial Officer, Secretary and a director of the board of ChinaGrowth North Acquisition Corporation from May 2006 to January 2009 before ChinaGrowth North Acquisition Corporation acquired UIB Group Limited. Mr. Zhang has been a principal of Chum Capital Group since February 2007, a merchant banking firm that invests in emerging growth Chinese companies and advises state-owned and privately owned Chinese companies in issuing equity and debt securities in international capital markets, and a principal of Global Vestor Capital Partners since November 2005. Prior to joining Global Vestor Capital Partners, Mr. Zhang was an Investment Professional with Avera Global Partners from July 2004 to March 2005, where he screened and analyzed public equity in global markets. From June 2001 to June 2002, Mr. Zhang was an investment manager for a wealthy family affiliated with Pacific Investment Corporation where he sourced and evaluated target businesses in China. Between September 1999 and March 2001, Mr. Zhang was co-founder and CEO of IQBay Technology Inc., an e-commerce service provider based in Shanghai. From July 1996 to August 1999, Mr. Zhang was an investment banker with Deutsche Bank Securities. Prior to joining Deutsche Bank, Mr. Zhang was a foreign trade manager with United Textile Corporation in Shanghai from July 1990 to July 1991. Mr. Zhang received a Masters degree in Business Administration from Yale University, a Bachelor of Science in Finance from Indiana University in Bloomington and an Associate degree from the College of International Business, Shanghai University.

Mr. Jingfeng Wang has been vice president of Zhong Ke Zhao Shang Investment Management and investment committee member of Zhong Ke Jing Ying Venture Capital since 2007. From 2006 to 2007, he was Chief Auditor of Fujian Xingye Technology Co., Ltd. From 2001 to 2005, he was executive vice president and financial director of Tomorrow Holding Co., Ltd. From 1991 and 2001, he took various financial management positions in China Aluminum Corp. Mr. Wang graduate from Shangdong University in 1994 and received his MBA degree from Newport University in 2005. He is a qualified accountant.

Appointment of Director

Not applicable.

B. Compensation

The aggregate cash compensation that we paid to our directors and executive officers included in the list under the heading “—Directors and Executive Officers” for the year ended December 31, 2011 and 2010 was US$0.8 million and US$0.8 million.  We have not set aside or accrued any amount of cash to provide pension, retirement or other similar benefits to our officers and directors. Our PRC subsidiaries and consolidated affiliated entities as well as their subsidiaries are required by law to make contributions equal to certain percentages of each employee’s salary for his or her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory benefits.

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Share Option Scheme

(a) Share Options Issued by China TopReach

A resolution has been passed by our Board of Directors on June 23, 2010 that China TopReach would award 300,000 ordinary shares to a senior executive effective immediately and have another 900,000 ordinary shares incentive pool to the management staff as future compensation in 2011.

(b) Pre-IPO Share Option Scheme by ShiFang

Pursuant to a resolution in writing passed by all the shareholders of ShiFang on February 26, 2010, ShiFang conditionally approved and adopted a Pre-IPO Option Scheme (the “Pre-IPO Option Scheme”). By the same resolution, ShiFang granted 27,456,156 share options to tits directors and employees which are exercisable under the following terms:

(i) The exercise price of the option should not be less than 100% of the fair market value of the shares of the shares as at the grant date as determined by valuer appointed by ShiFang.

(ii) 40% of total options granted become exercisable a year after grant date, another 30% also become exercisable 2 years after grant date and remaining 30% become exercisable 3 years after grant date.

The fair value of the employee services received in exchange for the grant of the share options is recognized as an expense, with a corresponding adjustment to equity-based compensation reserves, over the vesting period. At the end of each reporting period, ShiFang revises its estimates of the number of options that are expected to vest. It recognizes the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity. For the year ended December 31, 2011, the equity-based compensation expenses amounted to $842,106 (2010: $795,977; 2009: nil).

(c) Share Option Scheme of ShiFang

Pursuant to the resolutions in writing passed by the shareholders of ShiFang on November 8, 2010, ShiFang adopted a share option scheme on November 8, 2010 (“Share Option Scheme”). The purpose of the Share Option Scheme is to provide incentive or reward to (i) any full-time or part-time employees, executives or officers of ShiFang or any of its subsidiaries; (ii) any Directors (whether executive or non-executive, including any independent non-executive Director) of ShiFang or any of its subsidiaries; or (iii) any advisors, consultants suppliers, customers and agents to ShiFang or any subsidiaries (each “Eligible Person”).

The Board of Directors of ShiFang may, at any time within 10 years after the date of approval of the Share Option Scheme, make an offer to grant options to any Eligible Person. The subscription price for shares granted pursuant to the Share Option Scheme shall be determined by the Board of Directors in its absolute discretion and shall be at least the highest of:

(i) the closing price of the ShiFang shares as stated in the Stock Exchange of Hong Kong Limited’s (the “Stock Exchange”) daily quotations sheet on the date of offer;

(ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date on which such offer is made; and

the nominal value of shares of ShiFang. The total number of Shifang shares in respect of which options may be granted under the Share Option Scheme is not permitted to exceed 10% of the total number of shares in issue as at the Listing Date, or 73,216,512 Shares, without prior approval from the shareholders of ShiFang. The maximum number of shares which may be issued upon exercise of all outstanding options granted, and yet to be exercised, under the Share Option Scheme and any other share option schemes of ShiFang must not exceed 30% of the issued share capital of ShiFang from time to time. The total number of shares issued and to be issued upon exercise of all options granted under the Share Option Scheme to each Eligible Person (including both exercised, cancelled and outstanding options) in any 12-month period shall not exceed 1% of the total number of issued shares of ShiFang. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting. Share options granted to a director, chief executive or substantial shareholder of ShiFang, or to any of their associates, are subject to approval in advance by the independent non-executive directors of ShiFang. In addition, if shares issued and to be issued upon exercise of all options granted under the Share Option Scheme (including options exercised, cancelled and outstanding) to a participant who is a substantial shareholder or an independent nonexecutive director of ShiFang, or any of their associates, in any 12-month period (i) represent in aggregate more than 0.1% of the total number of shares in issue, and (ii) have an aggregate value, based on the closing price of the shares of ShiFang at the date of each grant, in excess of HK$5,000,000 (approximately $645,000), the proposed grant of option must be approved by the shareholders of ShiFang in a general meeting. The amount payable on acceptance of an option is RMB1.00. The exercise period of any option granted under the Share Option Scheme shall not be longer than 10 years from the date of grant of the relevant option. There is no minimum period for which an option must be held before the exercise of the option except otherwise imposed by the board of Directors. As at 31 December 2011, no share option had been granted under the Share Option Scheme.

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C. Board Practices

The board of directors currently includes three independent directors and four non-independent directors. The three independent directors are Min Chen, Michael W. Zhang and Jingfeng Wang. The four non-independent directors are Peifeng Hong, Zhi Chen, Zhang Tiezhu and Toshihiro Nakamura.  None of our directors has a service contract with us that provides for benefits upon termination of employment.

Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by our board of directors, in which case such director holds office until the following annual meeting of shareholders, at which time such director is eligible for reelection. All current directors have been appointed pursuant to shareholder resolutions. Accordingly, none of the existing directors require reelection at an annual meeting of shareholders.

Audit Committee Pre-approval Policies and Procedures

In accordance with Section 10A(i) of the Securities Exchange Act of 1934, before we engage our independent registered  public accounting firm to render audit or permitted non-audit services, the engagement will be approved by the Board.

Code of Conduct

We have adopted a formal code of ethics statement.

Director Compensation

We intend to pay our non-employee directors a yearly retainer of US$25,000 as well as reimburse their expenses incurred in attending meetings.

Conflicts of Interest

Under Cayman Islands law, our directors have a duty of loyalty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. In certain limited circumstances, a shareholder has the right to seek damages if a duty owed by our directors is breached.

Each of our directors has, or may come to have, conflicting fiduciary obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. Our officers and directors have fiduciary obligations to those companies on whose board of directors they sit. To the extent that they identify business opportunities that may be suitable for the entities or other companies on whose board of directors they may sit, our officers and directors will honor those fiduciary obligations. Accordingly, they may not present opportunities to us that come to their attention in the performance of their duties as directors of such other entities unless any other entity to which they owe such a fiduciary obligation and any successors to such entities have declined to accept such opportunities. Additionally, certain of our directors and officers are directors of companies, both public and private, that may perform business activities in the PRC similar to those that we may perform after consummating a business combination.

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Limitation of Director and Officer Liability

Pursuant to our amended and restated memorandum and articles of association, every director, agent or officer of the Company shall be indemnified out of the assets of the Company against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own fraud or willful default. No such director, agent or officer shall be liable to the Company for any loss or damage in carrying out his functions unless that liability arises through the fraud or willful default of such director, agent or officer.

D. Employees

See the section “Item 4. Information on the Company—B. Business Overview—Employees and Training”

E. Share Ownership

The following table sets forth information with respect to the beneficial ownership of our ordinary shares, as of April 30, 2012, by:

• each of our directors and executive officers; and

• each person known to us to own beneficially more than 5% of our ordinary shares.

The calculations in the shareholder table below are based on 14,912,847 ordinary shares issued and outstanding as of April 30, 2012. Beneficial ownership is determined in accordance with the rules and regulations of the SEC.

	Ordinary Shares Beneficially Owned
Name(1)	Number		Percent
Directors and Executive Officers
Peifeng Hong(2)		1,540,395		10.3	%
Zhi Chen(3)		3,885,266		26.1	%
Tiezhu Zhang		*		*
Toshihiro Nakamura		*		*
Michael W. Zhang(4)		*		*
Jingfeng Wang		*		*
Min Chen		*		*
All directors and executive officers as a group		5,425,661		36.4	%
Principal Shareholders		*		*
Index Corporation		2,801,241		18.8	%
Keep Profit International Capital Limited(5)		809,713		5.4	%
China Science & Kingwing (HK) Investment Management Limited		1,431,004		9.6	%

* Less than 3%

(1)	The business address of each of the individuals is 6th Floor,  San Shan Tower, No. 59, Dongjie Street, Fuzhou City, China
(2)	Includes 1,540,395 common shares owned by Blazing Sun Holdings Ltd., a British Virgin Islands company. Mr. Hong is the sole director and sole owner of Blazing Sun Holdings Ltd.
(3)	Includes 3,885,266 common shares owned by Topbig International Development Ltd., a British Virgin Islands company. Mr. Chen is the sole director and sole owner of Topbig International Development Ltd.
(4)	Mr. Zhang was the chief executive officer, secretary and a director of our Company before its business combination with OMH.
(5)	Keep Profit International Capital Limited is owned by Yu Shiquan, Li Gang and Xu Kaining, the management members of us.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Please refer to Item 6.E, “Directors, Senior Management and Employees—Share Ownership.”

B. Related Party Transactions

Amounts Due from Related Parties

Due from related parties consists of the following:

	December 31,		December 31,		December 31,
	2011		2010		2009
Chen Zhi	US$	-	US$	-	US$	59,360
Chen Ziquan		-		-		16,934
Xu Kaining		-		1,058		1,023
Xiamen Yuan Liu Culture Communication Co., Ltd.		-		-		15,266
Xiamen Zhishang Trading Co., Ltd.		-		1,814,882		1,904,791
Fujian Jinyi Asia Paper Co., Ltd.		27,806		17,393		-
Fuzhou YaQi Art Creative Co., Ltd.		-		-		82,358
Toshihiro Nakamura		-		3,514		3,399
Qiang Peiying		1,573,235		1,514,560		-
Lianing Baixin Media Co., Ltd.		78,550
Zheng Shouling				-		31,522
Key management of the Company		315,279		301,000		-
	US$	1,994,870	US$	3,652,407	US$	2,114,653

Note: Please refer to Note 8 of our audited consolidated financial statements included elsewhere in this annual report for information on the relationship of these related parties to us.

Amounts Due to Related Parties

Due to related parties consists of the following:

	December 31,		December 31,		December 31,
	2011		2010		2009
Chen Zhi	US$	712,615	US$	393,384	US$	-
Chen Min		78,140		50,081		-
Hong Peifeng		205,748		600,583		-
Wang Jingfeng		78,140		50,081		-
Zhang Tiezhu		418,578		204,446		-
Michael W. Zhang		78,140		50,081		-
Shenzhen Zhongke Hongyi Venture Investment Management Co., Ltd.		2,070,807		2,123,703		-
Topbig International Development Ltd.		24,772		23,848		-
Fujian ShiFang Digital Technology Co., Ltd.		821		8,957		-
Fuzhou Development Zone Xuanye Industry & Trade Co., Ltd.		48,893		47,069		-
Fujian ShiFang Digital Technology Co., Ltd.		-		-		765
Fujian JinDi Mining Co., Ltd.		1,526		1,469		5,314,843
Fujian Lanting Network Technology Holding Co., Ltd.
Key management of the Company		212,981		12,148		-
	US$	212,981	US$	3,565,850	US$	5,315,608
		14,708,174

Note: Please refer to Note 19 of our audited consolidated financial statements included elsewhere in this annual report for information on the relationship of these related parties to us.

The advance from Fujian Lanting Network Technology Holding Co., Ltd is unsecured, interest-free, without fixed repayment term and repayable upon mutual agreement between us and the non-controlling shareholder.

Except for the advance from Fujian Lanting Network Technology Holding Co., Ltd which is classified as non-current liabilities, the amounts due to other related parties are unsecured, interest free and repayable on demand.

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Amounts Due to Shareholders

We incurred the following borrowings from our shareholders:

	December 31,		December 31,		December 31,
	2011		2010		2009
China Science & Kingwin International Investment Ltd.	US$	-	US$	-	US$	2,925,174
Topbig International Development Ltd.		-		-		75,716
	US$	-	US$	-	US$	3,000,890

The borrowings were used to finance daily operations.  All of the above balances were unsecured, non-interests bearing and repayable on demand.  These borrowings were repaid as of December 31, 2011.

Revenue Gnerated from Related Companies

We generated revenue from certain related companies as details below:

	For The Year Ended
	December 31, 2011	December 31, 2010		December 31, 2009
Revenue from related companies:
Companies controlled by a close family member of a director	US$	US$	-	US$	232,426
Company controlled by a member of our key management			150,927		428,452
Company controlled by the Chief Executive Officer of the Company			436,553		305,077
	US$	US$	587,480	US$	965,955

Except for the above sales to related companies, we had no other significant related party transactions.

Share Options

See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Option Scheme.”

CInterests of Experts and Counsel

Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Please see “Item 18. Financial Statements” for a list of the financial statements filed as part of this annual report.

Legal Proceedings and Contingent Liabilities

On July 26, 2011, Shenyang Media , one of our partners under a comprehensive cooperation contract, unilaterally terminated the contract with us.

Shenyang Media initiated a civil action against us on October 25, 2011 at the Intermediate People’s Court , seeking payment for a total sum of RMB 17,329,000 (approximately US$2,722,000), the outstanding advertising fee payable by us as of July 26, 2011 under the comprehensive cooperation contract between us and Shenyang Media, and all legal costs in relation to the litigation.

On December 22, 2011, we filed a civil writ with the Higher People’s Court against Shenyang Daily and Shenyang Media , under which we sought a total payment of RMB105,579,352 (approximately US$16,586,000) from Shenyang Daily and Shenyang Media for the outstanding advertising fees payable by them to us under their comprehensive cooperation contract with us, together with all the legal costs we incurred in relation to such litigation.

On March 8, 2012, we received a civil judgment issued by the Higher People’s Court in relation to the civil writ filed on December 22, 2011. The Higher People’s Court decided to refer the case to the Intermediate People’s Court. On March 13, 2012, we lodged an appeal to the Supreme People’s Court to request the Supreme People’s Court to overrule the Higher People’s Court’s decision and order that the case shall remain to be heard in the Higher People’s Court pursuant to PRC laws.

No provision for loss has been made in respect of the litigation between us, Shenyang Daily and Shenyang Media , as at December 31, 2011, as management, having considered all available facts and circumstances and legal advice from our external legal counsel, has determined that these claims would not result in an outflow of economic benefits from the Company.

Dividend Policy

We have never declared or paid any cash dividends on our common stock, nor do we have any present plan to pay any cash dividends on our common stock in the foreseeable future. We currently intend to retain most of our available funds and any future earnings to develop and expand our business. Any payment of dividends in the future will be at the discretion of our board of directors.

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.

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ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

The following table sets forth the high and low closing prices of the our units, ordinary shares and warrants on the over-the-counter bulletin board for the periods indicated since such securities commenced public trading.  The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions:

	Price Per				Price Per				Price Per
	Ordinary Share				Warrant				Unit
	High		Low		High		Low		High		Low
	(US$)		(US$)		(US$)		(US$)		(US$)		(US$)
Most recent fiscal years
2009		8.00		2.50		0.55		0.03		7.50		1.00
2010		6.50		1.85		0.78		0.03		4.00		2.80
2011		4.25		0.30		4.25		-		3.15		0.25
Most recent quarters
First Quarter 2010		4.90		1.85		0.35		0.30		4.00		4.00
Second Quarter 2010		5.50		2.15		0.78		0.24		4.00		2.80
Third Quarter 2010		3.89		2.50		0.13		0.06		2.80		2.80
Fourth Quarter 2010		6.50		2.90		0.25		0.03		2.80		2.80
First Quarter 2011		4.25		2.10		4.25		2.10		3.15		2.80
Second Quarter 2011		2.30		1.01		-		-		3.15		3.15
Third Quarter 2011		1.12		0.48		-		-		3.15		3.15
Fourth Quarter 2011		0.51		0.30		-		-		0.50		0.25
First quarter 2012		0.36		0.35		-		-		0.25		0.25
Most recent six months
October 2011		0.51		0.48		-		-		3.15		3.15
November 2011		0.51		0.51		-		-		0.50		0.25
December 2011		0.51		0.30		-		-		0.25		0.25
January 2012		0.35		0.35		-		-		0.25		0.25
February 2012		0.35		0.35		-		-		0.25		0.25
March 2012		0.35		0.35		-		-		0.25		0.25
April 2012 (through April 23)		0.36		0.35		-		-		0.25		0.25

B.Plan of Distribution

Not applicable.

C.Markets

Our ordinary shares, warrants and units have traded under the symbol “CGSXF.OB”, “CGSQF.OB” and “CGSUF.OB” respectively on the over-the-counter bulletin board since January 29, 2007. Our warrants were expired and delisted in January 2011.

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D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

ITEM 10.  ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Incorporation

The following represents a summary of certain key provisions of our amended and restated memorandum and articles of association. The summary does not purport to be a summary of all of the provisions of our memorandum and articles of all relevant provisions of Cayman Islands law governing the management and regulation of Cayman Islands exempted companies.

Register

We are a company incorporated in the Cayman Islands on May 3, 2006 under the Companies Law (2004 Revision) of the Cayman Islands (the “Companies Law”) with company registration number 166857. We are authorized to issue up to 60,000,000 ordinary shares, par value $.001 per share, and 3,000,000 shares of preferred shares, par value $.001 per share.

Objects and Purposes

Our memorandum and articles grants us full power and authority to carry out the any objectives not prohibited by the Companies Law or any other law of the Cayman Islands.

Directors

Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Directors may engage in transactions with the Company and vote on such transactions, provided the nature of the interest is disclosed. Directors also may exercise their powers to borrow money, issue debt securities and to mortgage or charge any of the undertaking or property of our company.

Rights and Obligations of Shareholders

Dividends

Directors may declare dividends and distributions on our ordinary shares and authorize the dividends or distributions out of lawfully available funds. No Dividend or distribution maybe paid except out of the realized or unrealized profits of the Company, or out of the share premium account.

Voting Rights

Votes may be cast at a general meeting by a show of hands or by a poll. On a vote by a show of hands, each shareholder or shareholder represented by proxy has one vote. On a vote by a poll, each shareholder or shareholder represented by proxy has one vote for each share owned. Directors are elected by ordinary resolution by the shareholders at general meetings or by a board resolution of the directors. Shareholders are not entitled to vote at a general meeting unless calls or other amounts payable on their shares have been paid. In lieu of voting on a matter at a general meeting, the shareholders entitled to vote on that matter may adopt the matter by signing a written resolution.

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Change to Rights of Shareholders

Shareholders may change the rights of their class of shares by:

· getting the written consent of two-thirds of the shareholders of that class; or

· passing a special resolution at a meeting of the shareholders of that class.

There are no general limitations on the rights to own shares specified by the articles.

General Meetings

A general meeting may be convened:

· by a majority of directors at any time;

· our chief executive officer; or

· our chairman of the board.

Notice of a general meeting is given to all shareholders. All business carried out at a general meeting is considered special business except:

· sanctioning a dividend;

· consideration of the accounts, balance sheets, and ordinary report of the directors and auditors;

· election of directors;

· appointment of auditors;

· fixing of remuneration of the auditors;

· disposing of the unissued shares in the capital of the Company representing not more than 20% of outstanding shares; and

· repurchasing the securities of the Company.

A quorum of shareholders is required to be present at any meeting in order to carry out business. Any two shareholders or one shareholder holding a majority of the shares who are present in person or represented by proxy is a quorum. There is no requirement under Cayman Islands law to convene an annual meeting or to convene any general meeting of the shareholders. The directors are permitted to designate any general meeting of shareholders as an annual general meeting.

Changes in Capital

We may increase our share capital by ordinary resolution. The new shares will be subject to all of the provisions to which the original shares are subject. We may also by ordinary resolution:

· consolidate and divide all or any of our share capital into shares o f a larger amount;

· sub-divide existing shares into shares of a smaller amount; and

· cancel any shares which, at the date of the resolution, are not held or agreed to be held by any person.

We may reduce our share capital and any capital redemption reserve by special resolution in accordance with relevant provisions of Cayman Islands law.

Indemnity

Pursuant to our amended and restated memorandum and articles of association, every director, agent or officer of the Company shall be indemnified out of the assets of the Company against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own fraud or willful default. No such director, agent or officer shall be liable to the Company for any loss or damage in carrying out his functions unless that liability arises through the fraud or willful default of such director, agent or officer.

Certain Requirements and Restrictions

C. Material Contracts

We have not entered into any material contracts other than in the ordinary course of business for the two years immediately preceding the date of this annual report and other than those described in Item 4, “Information on the Company,” Item 7.B., “Major Shareholders and Related Party Transactions—Related Party Transactions,” or elsewhere in this annual report on Form 20-F.

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D. Exchange Controls and Other Limitations Affecting Security Holders

Under Cayman Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.

E. Taxation

The following summary of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this Form 20-F, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws.

Cayman Islands Taxation

The Government of the Cayman Islands, will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the Company or its shareholders. The Cayman Islands are not party to any double taxation treaties.

We have applied for and can expect to receive an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on the shares, debentures or other obligations of the Company or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by the Company to its members or a payment of principal or interest or other sums due under a debenture or other obligation of the Company.

PRC Taxation

Under the Enterprise Income Tax Law of 2007 and its Implementation Regulations, both of which became effective on January 1, 2008, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise. The “de facto management body” is defined as an organization that exercises material and full management and control over matters including the enterprise’s production and operations, personnel, finance and property.

At present, the PRC tax authorities have not issued any guidance on the application of the new EIT Law and its Implementation Regulations on non-Chinese enterprises or non-Chinese group enterprises and their controlled entities. As a result, it is unclear what factors will be used by the PRC tax authorities to determine whether we are a “de facto management body” in China. However, a substantial number of our management members reside in the PRC, and almost all of our revenues derive from our operations in the PRC. We may therefore be treated as a resident enterprise for PRC tax purposes and be subject to an enterprise income tax rate of 25% on our worldwide income. Dividends received directly from another PRC tax resident enterprise may be exempted from the taxable income.

Moreover, the Enterprise Income Tax and its Implementation Regulations provide that an income tax rate of 10% will be applicable to dividends payable to non-PRC shareholders that are derived from sources within the PRC, unless a tax treaty exists between the PRC and the relevant jurisdictions where such non-PRC shareholders reside and such treaty provides for a reduction or exemption of the relevant tax. If we are considered a non-resident enterprise, dividends we received from our PRC resident subsidiaries will be subject to the 10% PRC income tax. Cayman Islands, where our company was incorporated, has not concluded any tax treaty with the PRC. Furthermore, if we are treated as a resident enterprise for PRC tax purposes, it is unclear whether dividends you receive on our ordinary shares or ADSs, or the gain you may realize from the disposition of our ordinary shares, ADSs or warrants, would be treated as income derived from sources within the PRC and would be subject to PRC tax. It is also unclear whether, if we would be treated as a resident enterprise for PRC tax purposes, holders of our ordinary shares, ADSs or warrants might be able to enjoy the benefit of income tax treaties entered into between the PRC and other countries.

On February 20, 2009, the State Administration of Taxation promulgated the Notice on Relevant Issues of Implementing Dividend Clauses under Tax Treaties, or the Notice. According to the 2009 Notice, no enterprise is entitled to enjoy preferential treatment on dividend withholding tax rates pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose for which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines that any tax payer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. Since the 2009 Notice is newly issued, it remains unclear how the PRC tax authorities will implement it in practice and to what extent it will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in the PRC to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary was set up for the purpose of taking advantage of the preferential tax rates on dividends, the higher 10% withholding tax rate may apply to such dividend, which will reduce the funds ultimately available to pay dividends to our shareholders.

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On August 24, 2009, the State Administration of Taxation promulgated the Administrative Measures for Enjoyment of Tax Treaty Treatments by Non-residents (Trial), or the Administrative Measures, with the effective date on October 1, 2009. Pursuant to the Administrative Measures, the treatment under tax treaties refers to the tax liabilities that should be paid according to the PRC tax laws but can be reduced or exempted under tax treaties. Where non-residents, including non-resident enterprises and non-resident individuals, enjoy special treatment under tax treaties in terms of dividends, interest, royalties or property gains, such non-residents shall apply to the competent tax authorities for examination and approval in accordance with the Administrative Measures; otherwise, they will not be able to enjoy the treatment under the tax treaties.

We expect to receive approval of our preferential dividend withholding rate. However if the preferential rate were for any reason not approved, it would reduce the funds ultimately available to pay dividends to our shareholders.

United States Federal Income Taxation

This section describes the material United States federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares and warrants. This section does not address any aspect of United States federal gift or estate tax, or the state, local or foreign tax consequences of an investment in our ordinary shares and warrants. This section only applies to you if you hold your ordinary shares and warrants as capital assets for tax purposes. This discussion does not discuss all the tax consequences that may be relevant to particular investors in light of their circumstances or to investors that are subject to special rules, including:

· a bank;

· a dealer in securities or currencies;

· a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

· a tax-exempt organization;

· an insurance company;

· a person liable for alternative minimum tax;

· a person that actually or constructively owns 10% or more of the vote or value of our shares;

· a person that holds ordinary shares that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction; or

· a U.S. holder (as defined below) whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date hereof and all of which are subject to changes, possibly retroactively.

For purposes of the United States federal income tax discussion below, you are a U.S. holder if you are a beneficial owner of ordinary shares or warrants and you are:

· a citizen or resident of the United States;

· a domestic corporation;

· an estate whose income is subject to United States federal income tax regardless of its source;

· or a trust if (A) a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust, or (B) the trust was in existence on August 20, 1996, and validly elected to continue to be treated as a United States domestic trust.

In general, the tax consequences for shares owned by a partnership depends on the tax status of the parties.

A non-U.S. holder is a beneficial owner of ordinary shares or warrants that is not a United States Holder for United States federal income tax purposes.

You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of the ordinary shares or warrants in your particular circumstances.

This discussion addresses only United States federal income taxation.

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Allocation of Purchase Price Between Shares and Warrants

For U.S. federal income tax purposes, a U.S. holder must allocate the purchase price of a Unit between the Share and the Warrants that comprise the Unit based on the relative fair market value of each and must compute its basis in the Share and Warrants in accordance with that allocation. We may be required to allocate a portion of the purchase price of the Unit to each component comprising part of the Unit. While uncertain, it is possible that the IRS could apply, by analogy, rules pursuant to which our allocation of the purchase price will be binding on a U.S. holder of a Unit, unless the U.S. holder explicitly discloses in a statement attached to the U.S. holder’s timely filed U.S. federal income tax return for the taxable year that includes the acquisition date of the Unit that the U.S. holder’s allocation of the purchase price between the Share and the Warrants that comprise the Unit is different from our allocation. Our allocation is not, however, binding on the IRS.

Each U.S. holder is advised to consult such holder’s own tax advisor with respect to the risks associated with an allocation of the purchase price between the Shares and the Warrants that comprise a Unit that is inconsistent with our allocation of the purchase price.

Taxation of Dividends

U.S. Holders. Under the United States federal income tax laws, and subject to the personal foreign investment company rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold our ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to our ordinary shares generally will be qualified dividend income provided that, our ordinary shares are readily tradable on an established securities market in the United States in the year that you receive the dividend and we are not a passive foreign investment company in the year in which the dividend is paid or in the preceding taxable year. (described below).

The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in our ordinary shares and thereafter as capital gain. If the dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot foreign currency/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Therefore, since the value of the foreign currency may decrease before you actually convert the currency into U.S. dollars, you may actually be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will ultimately receive. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.

Dividends will be income from sources outside the United States, but generally will be passive income or financial services income, which is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

Non-U.S. Holders. If you are a non-U.S. holder, dividends paid to you in respect of our ordinary shares will not be subject to United States federal income tax unless the dividends are effectively connected with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis. In such cases you will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, effectively connected dividends may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

Taxation of Capital Gains

U.S. Holders. Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your ordinary shares or warrants, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ordinary shares or warrants. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations.

Non-U.S. Holders. If you are a non-U.S. holder, you will not be subject to United States federal income tax on gain recognized on the sale or other disposition of your ordinary shares or warrants unless:

· the gain is effectively connected with your conduct of a trade or business in the United States or the gain is attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis; or

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· you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist.

If you are a corporate non-U.S. holder, effectively connected gains that you recognize, under certain circumstances, may also be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

Exercise, Disposition or Lapse of Warrants

Subject to the discussion of the PFIC rules below, a U.S. holder generally will not recognize gain or loss upon the exercise of a Warrant. Shares acquired pursuant to the exercise of a Warrant will have a tax basis equal to the U.S. holder’s tax basis in the Warrant (that is, an amount equal to the portion of the purchase price of each Unit allocated to the Warrant as described above in “Allocation of Purchase Price Between Shares and Warrants”), increased by the amount paid to exercise the Warrant. The holding period of such Share would begin on the day following the date of exercise of the Warrant and will not include the period during which the U.S. holder held the Warrant.

Subject to the discussion of the PFIC rules below, upon the sale or other disposition of a Warrant (other than by exercise), a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the Warrant (that is, as discussed above, the portion of the purchase price of a Unit allocated to such Warrant). Such gain or loss will be long-term capital gain or loss if the U.S. holder has held the Warrant for more than one year. Under certain circumstances, we have the right to redeem the Warrants. A redemption of warrants will be treated as a sale or exchange of the Warrants.

The terms of the Warrant provide for certain adjustments to the number of shares for which the Warrant may be exercised or to the exercise price of the Warrants. Such adjustment may, under certain circumstances, result in constructive distributions that could be taxable as a dividend to the U.S. holder of the Warrants. Conversely, the absence of an appropriate adjustment may result in a constructive distribution that could be taxable as a dividend to a U.S. holder of the Shares. See “Taxation of Dividends.”

If a Warrant is allowed to lapse unexercised, a U.S. holder will recognize a capital loss in an amount equal to such holder’s tax basis in the Warrant. Such loss will be long-term if the Warrant has been held for more than one year. The ability to deduct any such loss may be subject to certain limitations, and holders should consult their own tax advisors as to the potential applicability to them of such limitations.

As discussed above in “Allocation of Purchase Price Between Shares and Warrants”, the allocation of price of a Unit between the Share and the Warrants comprising such Unit is not binding on the IRS. If the IRS were successfully to challenge your allocation, the amount of gain recognized upon disposition of a Share or Warrant could be increased, and the amount of loss recognized upon disposition of a Share or Warrant or upon lapse of a Warrant could be reduced.

Passive Foreign Investment Company Rules

Special United States tax rules apply to a company that is considered a passive foreign investment company, or PFIC. Under these rules, we will be classified as a PFIC for United States federal income tax purposes in any taxable year in which either:

· At least 75% of our gross income for the taxable year is passive income; or

· at least 50% of the gross value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (not including certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

If we are treated as a PFIC, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:

· any gain you realize on the sale or other disposition of your ordinary shares or warrants; and

· any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the ordinary shares during the three preceding taxable years or, if shorter, your holding period for the ordinary shares or ordinary shares).Under these rules:

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

· the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;

· the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and

· the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

Additionally, if we are a PFIC, a U.S. holder who acquires Shares or Warrants from a deceased person who dies before January 1, 2010 and who was a U.S. holder would not receive the step-up of the income tax basis to fair market value for such Shares or Warrants. Instead, such U.S. holder would have a tax basis equal to the deceased’s tax basis, if lower.

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

If a U.S. holder has made a qualifying electing fund (“QEF”) election covering all taxable years during which the holder holds Shares and in which we are a PFIC, distributions and gains will not be taxed as described above, nor will denial of a basis step-up at death described above apply. Instead, a U.S. holder that makes a QEF election is required for each taxable year to include in income the holder’s pro rata share of the ordinary earnings of the QEF as ordinary income and a pro rata share of the net capital gain of the QEF as long-term capital gain, regardless of whether such earnings or gain have in fact been distributed. Undistributed income is subject to a separate election to defer payment of taxes. If deferred, the taxes will be subject to an interest charge. U.S. holders may not make a QEF election with respect to Warrants. As a result, if a U.S. holder sells Warrants, any gain will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above, if the Company is a PFIC at any time during the period the U.S. holder holds the Warrants. If a U.S. holder that exercises Warrants properly makes a QEF election with respect to the newly acquired Shares, the adverse tax consequences relating to PFIC Shares will continue to apply with respect to the pre-QEF election period, unless the holder makes a purging election. The purging election creates a deemed sale of the Shares acquired on exercising the Warrants. The gain recognized as result of the purging election would be subject to the special tax and interest charge rules, treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. holder would have a new basis and holding period in the Shares acquired on the exercise of the Warrants for purposes of the PFIC rules.

The application of the PFIC and QEF rules to Warrants and to Shares acquired upon exercise of Warrants is subject to significant uncertainties. Accordingly, each U.S. holder should consult such holder’s tax advisor concerning the PFIC consequences of holding Warrants or of holding Shares acquired through the exercise of such Warrants.

In order to comply with the requirements of a QEF election, a U.S. holder must receive certain information from us. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the information provided in the PFIC annual information statement, to a timely filed U.S. federal income tax return and by filing a copy of the form with the IRS. We intend to provide such information as the IRS may require in order to enable U.S. holders to make the QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future. Even if a shareholder in a PFIC does not make a QEF election, if such shareholder is a U.S. holder, such shareholder must annually file a completed Form 8621 with the shareholder’s tax return and with the IRS.

Where a U.S. investor has elected the application of the QEF rules to its PFIC Shares, and the excess distribution rules do not apply to such Shares (because of timely election or a purge of the PFIC taint as described above in connection with the exercise of Warrants), any gain realized on the appreciation of the PFIC Shares is taxable as capital gain (if the Shares are a capital asset in the hands of the investor) and no interest charge is imposed. U.S. shareholders of a QEF are currently taxed on their pro rata shares of the fund’s earnings and profits. Where earnings and profits that were included in income under this rule are later distributed, the distribution is not taxed as a dividend. The basis of a U.S. shareholder’s Shares in a QEF is increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules.

Although a determination as to a corporation’s PFIC status is made annually, an initial determination that a corporation is a PFIC will generally apply for subsequent years, whether or not it meets the tests for PFIC status in those years. A U.S. holder who makes the QEF election discussed above for the first year the U.S. holder holds or is deemed to hold Shares or Warrants and for which we are determined to be a PFIC, however, is not subject to the PFIC rules or the QEF regime for the years in which we are not a PFIC.

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If we are a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. holders of shares generally would be deemed to own, and also would be subject to the PFIC rules with respect to, their indirect ownership interests in that lower-tier PFIC. If we are a PFIC and a U.S. holder of Shares does not make a QEF election in respect of a lower-tier PFIC, the U.S. holder could incur liability for the deferred tax and interest charge described above if either (1) we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or (2) the U.S. holder disposes of all or part of its Shares. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. holder no later than ninety days after the request the information that may be required to make a QEF election with respect to the lower-tier PFIC. A mark-to-market election (discussed below) under the PFIC rules with respect to Shares would not apply to a lower-tier PFIC, and a U.S. holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, U.S. holders of Shares could be subject to the PFIC rules with respect to income of the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. Similarly, if a U.S. holder made a mark-to-market election under the PFIC rules in respect of our Shares and made a QEF election in respect of a lower-tier PFIC, that U.S. holder could be subject to current taxation in respect of income from the lower-tier PFIC the value of which already had been taken into account indirectly via mark-to-market adjustments. U.S. holders are urged to consult their own tax advisors regarding the issues raised by lower-tier PFICs.

If you own ordinary shares in a PFIC that are treated as marketable shares, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your ordinary shares or warrants at the end of the taxable year over your adjusted basis in your ordinary shares or warrants. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the ordinary shares or warrants will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your ordinary shares or warrants will be taxed as ordinary income. As with the QEF election, a U.S. holder who makes a mark-to-market election would not be subject to the general PFIC regime and the denial of basis step-up at death described above. However, it is unclear whether our Shares will qualify for the mark-to-market election and prospective investors should not assume that our Shares will qualify for the mark-to-market election. Whether the shares will so qualify will depend on the volume and regularity of the trading of such shares and hence cannot be predicted at this time.

In addition, notwithstanding any election you make with regard to the ordinary shares, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.

If you own ordinary shares during any year that we are a PFIC, you must file Internal Revenue Service Form 8621.

You should consult your own tax advisor regarding the application of the PFIC rules to our ordinary shares or warrants in your particular circumstances, including the availability of making an election to avoid adverse United States federal income tax consequences under the PFIC rules in the case we are determined to be a PFIC in a future year.

Backup Withholding and Information Reporting

If you are a noncorporate U.S. holder, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to:

· dividend payments or other taxable distributions made to you within the United States, and

· the payment of proceeds to you from the sale of ordinary shares effected at a United States office of a broker. Additionally, backup withholding may apply to such payments if you are a noncorporate U.S. holder that:

· fails to provide an accurate taxpayer identification number, is notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns, or

· in certain circumstances, fails to comply with applicable certification requirements.

If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to:

· dividend payments made to you outside the United States by us or another non-United States payor and

· other dividend payments and the payment of the proceeds from the sale of ordinary shares and warrants effected at a United States office of a broker, as long as the income associated with such payments is otherwise exempt from United States federal income tax, and the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished the payor or broker:

· dividend payments if you have provided us with an Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-United States person, or

· other documentation upon which it may rely to treat the payments as made to a non-United States person in accordance with U.S. Treasury regulations, or

· you otherwise establish an exemption.

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Payment of the proceeds from the sale of ordinary shares or warrants effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of ordinary shares or warrants that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if:

· the proceeds are transferred to an account maintained by you in the United States,

· the payment of proceeds or the confirmation of the sale is mailed to you at a United States address, or

· the sale has some other specified connection with the United States as provided in U.S. Treasury regulations,

unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption.

In addition, a sale of ordinary shares or warrants effected at a foreign office of a broker will be subject to information reporting if the broker is:

· a United States person,

· a controlled foreign corporation for United States tax purposes,

· a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, or

· a foreign partnership, if at any time during its tax year:

· one or more of its partners are “U.S. persons”, as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or

· such foreign partnership is engaged in the conduct of a United States trade or business,

unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person.

You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We file annual reports and other information with the SEC. You may read and copy any report or document we file, including the exhibits, at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Such materials can also be obtained on the SEC’s site on the internet athttp://www.sec.gov ..

We will also provide without charge to each person, including any beneficial owner, upon written or oral request of that person, a copy of any and all of the information that has been incorporated by reference in this annual report. Please direct such requests to Zhi Chen, Chief Executive Officer, China TopReach Inc., 6th Floor,  San Shan Tower, No. 59 Dongjie Street, Fuzhou City, China.

I. Subsidiary Information

Not applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk. We are exposed to interest rate risk due primarily to our short-term bank loans. Although the interest rates are fixed for the terms of the loans, the terms are typically twelve months and interest rates are subject to change upon renewal.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of December 31, 2011, would decrease net income before provision for income taxes by approximately US$77,000 for the fiscal year ended December 31, 2011. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk. The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that, in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Because substantially all of our earnings and cash assets are denominated in RMB, but our reporting currency is the U.S. dollar, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $8.3 million based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB as of December 31, 2011.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it may not be able to successfully hedge its exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Inflation Risk. Inflationary factors, such as increases in our overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and sales, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs. According to the National Bureau of Statistics of China, the year-over-year change of consumer price index in China was 1.5%, 4.8%, 5.9%, (0.7%),3.3% and 5.4% in 2006, 2007, 2008, 2009, 2010 and 2011, respectively.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

There has been no default of any indebtedness nor is there any arrearage in the payment of dividends.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

There have been no changes to the instruments defining the rights of the holders of any class of registered securities, and the rights of holders of the registered securities have not been altered by the issuance or modification of any other class of securities. There are no restrictions on working capital and no removal or substitution of assets securing any class of our registered securities.

-61-

ITEM 15.  CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures .

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2011, the end of the period covered by the annual report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2011 at a reasonable assurance level and, accordingly, provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Management’s Annual Report on Internal Control over Financial Reporting .

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the Company;

● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management believes that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.

(c) Attestation Report of the Registered Public Accounting Firm .

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

(d) Changes in Internal Control over Financial Reporting .

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Not applicable

-62-

ITEM 16B. CODE OF ETHICS

We have adopted a Code of Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. Copies of the code of ethics are available free of charge upon request. Requests for copies of the code of ethics should be sent in writing to China TopReach Inc, 6th Floor, San Shan Tower, No. 59, Dongjie Street, Fuzhou City, China 350001.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The firm of UHY Vocation HK CPA Limited (“UHY”) has acted since year 2008 as our principal independent registered public accounting firm. UHY is a registered firm with the Public Company Accounting Oversight Board and is a member of the UHY International.

The aggregate fees billed for the last two fiscal years for professional services rendered by auditors are as follows:

	For the Year Ended December 31
	2011		2010
Audit Fees – UHY	US$	85,000	US$	100,000
Audit – Related Fee – UHY	US$	-	US$	-
Tax fees	US$	-	US$	-
All other fees	US$	-	US$	-

Our board of directors pre-approves all audit, audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees prior to the engagement of the independent auditor with respect to such services.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE S

Not applicable.

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

The following financial statements for China TopReach are filed as part of this annual report.

	Page
	Number
Reports of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations	F-3
Consolidated Statements of Comprehensive Income	F-4
Consolidated Statement of Changes in Shareholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7 - F-39

-63-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

CHINA TOPREACH INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of China TopReach Inc. (the “Company”) and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for the years ended December 31, 2011, 2010 and 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China TopReach Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years ended December 31, 2011, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.

UHY VOCATION HK CPA Limited

Certified Public Accountants

HONG KONG,  May 12, 2012

(THE PEOPLE'S REPUBLIC OF CHINA)

F-1

CHINA TOPREACH INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

	December 31, 2011		December 31, 2010
ASSETS
Current assets
Cash and cash equivalents	$	33,678,522	$	82,577,185
Trade receivables, net		45,402,557		43,024,316
Other receivables		4,303,070		6,668,958
Prepaid expenses		32,962,062		18,847,343
Due from related parties		1,994,870		3,652,407
Inventories		1,295,213		799,503
Deposits to newspapers		2,134,613		2,930,550
Deposits for marketing and promotion projects		2,749,238		-
Total current assets		124,520,145		158,500,262
Non-current assets
Property, plant and equipment, net		9,776,757		7,896,583
Equity investment		6,345,706		-
Deposits to newspapers		14,453,137		13,914,080
Deposits for marketing and promotion projects		28,670,626		-
Prepayment for long term investment		27,178,183		14,821,520
Goodwill		1,975,131		-
Intangible assets, net		6,242,297		634,922
Total non-current assets		94,641,837		37,267,105
Total assets	$	219,161,982	$	195,767,367
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings		7,622,702		7,836,930
Trade payables		651,457		629,700
Income tax payable		6,435,928		5,244,752
Advances from customers		1,762,183		1,400,483
Accrued expenses and other payables		12,372,583		20,462,255
Due to related parties		3,931,161		3,565,850
Total current liabilities		32,776,014		39,139,970
Non-current liabilities
Long-term borrowings		158,127		421,763
Due to a related party		10,777,013		-
Deferred income tax liabilities		1,161,974		-
Total non-current liabilities		12,097,114		421,763
Total liabilities		44,873,128		39,561,733
Commitments and contingencies
Shareholders’ equity
Preferred shares - $0.001 par value, 3,000,000 shares authorized; no shares issued and outstanding at December 31, 2011 and 2010		-		-
Ordinary shares - $0.001 par value, 60,000,000 shares authorized; 14,912,847 shares issued and outstanding at December 31, 2011 and 2010		14,913		14,913
Additional paid-in capital		49,433,214		48,542,261
Statutory reserve		1,997,176		1,558,282
Retained earnings		15,160,143		13,189,252
Accumulated other comprehensive income		4,292,577		1,714,247
Total China TopReach Inc.’s equity		70,898,023		65,018,955
Non-controlling interests		103,390,831		91,186,679
Total shareholders' equity		174,288,854		156,205,634
Total liabilities and shareholders' equity	$	219,161,982	$	195,767,367

See notes to consolidated financial statements.

F-2

CHINA TOPREACH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Stated in US Dollars)

	For The Year Ended
	December 31, 2011			December 31, 2010			December 31, 2009
Revenue	$	81,735,682		$	78,184,101		$	68,289,488
Cost of revenue		(40,591,545	)		(40,445,567	)		(36,413,753	)
Gross Profit		41,144,137			37,738,534			31,875,735
Operating Expenses
Sales and marketing expenses		(5,878,551	)		(3,949,385	)		(3,298,462	)
General and administrative expenses		(24,493,387	)		(8,167,759	)		(5,424,957	)
Share-based payment expenses		(842,106	)		(1,845,977	)		(2,654,179	)
Total operating expenses		(31,214,044	)		(13,963,121	)		(11,377,598	)
Operating Income		9,930,093			23,775,413			20,498,137
Interest income		467,370			40,424			170,541
Interest expense		(346,002	)		(215,731	)		(644,421	)
Other income		1,556,854			1,414,990			1,028,932
Share of loss of equity investment		(47,438	)		-			-
Income before income tax		11,560,877			25,015,096			21,053,189
Income tax		(3,630,459	)		(3,593,249	)		(3,611,619	)
Net Income		7,930,418			21,421,847			17,441,570
Less: Net income attributable to non-controlling interests		(5,520,633	)		(9,672,681	)		(3,587	)
Net Income attributable to China TopReach Inc.	$	2,409,785		$	11,749,166		$	17,437,983
Weighted average number of shares outstanding - basic		14,912,847			15,321,170			16,285,126
- diluted		14,912,847			15,321,170			17,750,665
Net income per share - basic	$	0.16		$	0.77		$	1.07
- diluted	$	0.16		$	0.77		$	0.98

See notes to consolidated financial statements.

F-3

CHINA TOPREACH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Stated in US Dollars)

	For The Year Ended
	December 31, 2011		December 31, 2010		December 31, 2009
Net Income	$	7,930,418	$	21,421,847	$	17,441,570
Other comprehensive income
Foreign currency translation adjustment		6,222,697		2,502,465		196,810
Comprehensive income	$	14,153,115	$	23,924,312	$	17,638,380
Less:  Comprehensive income attributable to non-controlling interests		9,165,000		11,081,419		14,954
Comprehensive income attributable to China TopReach Inc.	$	4,988,115	$	12,842,893	$	17,623,426

See notes to consolidated financial statements.

F-4

CHINA TOPREACH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 and 2009

(Stated in US Dollars)

																			Accumulated
	Ordinary shares															Non-			Other
	Number of						Additional			Statutory						controlling			Comprehensive
	Shares			Amount			Paid-in Capital			reserve			Retained Earnings			interests			Income			Total
Balance at January 1, 2009 (A)		14,959,000		$	7,459		$	8,142,919		$	1,295,773		$	12,771,704		$	67,613		$	1,234,317		$	23,519,785
							��
Shares effectively issued to former shareholders of TopReach as part of the recapitalization		1,096,087			1,097			(1,755,096	)		-			-			-			-			(1,753,999	)
Issuance of ordinary shares to financial advisor at closing, fair value $7.9 per share		335,972			336			2,653,843			-						-			-			2,654,179
Appropriation to statutory reserve		-			-			-			1,427,444			(1,427,444	)		-			-			-
Foreign currency translation adjustment		-			-			-			-			-			11,367			185,443			196,810
Net income for the year ended December 31, 2009		-			-			-			-			17,437,983			3,587			-			17,441,570
Balance at January 1, 2010		16,391,059		$	8,892		$	9,041,666		$	2,723,217		$	28,782,243		$	82,567		$	1,419,760		$	42,058,345
Issuance of shares to a senior executive as compensation		300,000			300			1,049,700			-			-			-			-			1,050,000
Issuance of earnout shares		-			7,500			26,492,500			-			(26,500,000	)		-			-			-
Shares forfeited and cancelled		(1,778,212	)		(1,779	)		-			-			-			-			-			(1,779	)
Share based compensation		-			-			347,890			-			-			448,087			-			795,977
Changes in ownership interest from private placement of ShiFang shares		-			-			2,999,060			(1,136,270	)		-			33,729,609			(592,399	)		35,000,000
Changes in ownership interest from initial public offering of ShiFang shares		-			-			17,798,412			(396,738	)		(474,084	)		54,842,768			(206,841	)		71,563,517
Costs associated with initial public offering		-			-			(9,186,967	)		-			-			(8,997,771	)		-			(18,184,738	)
Appropriation to statutory reserve		-			-			-			368,073			(368,073	)		-			-			-
Foreign currency translation adjustment		-			-			-			-			-			1,408,738			1,093,727			2,502,465
Net income for the year ended December 31, 2010		-			-			-			-			11,749,166			9,672,681			-			21,421,847
Balance at December 31, 2010		14,912,847		$	14,913		$	48,542,261		$	1,558,282		$	13,189,252		$	91,186,679		$	1,714,247		$	156,205,634
Deemed acquisition of additional equity interests in ShiFang		-			-			1,237,927			-			-			(1,237,927	)		-			-
Non-controlling interests arising from formation of subsidiaries		-			-			-			-			-			4,710,699			-			4,710,699
Share based compensation		-			-			374,316			-			-			467,790			-			842,106
Appropriation to statutory reserve		-			-			-			438,894			(438,894	)		-			-			-
Foreign currency translation adjustment		-			-			-			-			-			3,644,367			2,578,330			6,222,697
Repurchase and cancellation of ShiFang shares		-			-			(721,290	)		-			-			(901,410	)		-			(1,622,700	)
Net income for the year ended December 31, 2011		-			-			-			-			2,409,785			5,520,633			-			7,930,418
Balance at December 31, 2011		14,912,847		$	14,913		$	49,433,214		$	1,997,176		$	15,160,143		$	103,390,831		$	4,292,577		$	174,288,854

(A) Represents the consolidated statement of changes in shareholders’ equity of Olympia Media Holdings Limited, the Accounting Acquirer. See notes to consolidated financial statements.

F-5

CHINA TOPREACH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in US Dollars)

	For The Year Ended
	December 31, 2011			December 31, 2010			December 31, 2009
Cash flows from operating activities:
Net income	$	7,930,418		$	21,421,847		$	17,441,570
Adjustments to reconcile net income to net cash provided by /(used in) operating activities:
Depreciation		1,335,805			897,154			840,636
Amortization		1,484,623			88,668			134,384
Share-based payment expenses		842,106			1,845,977			2,654,179
Allowance for doubtful debts		10,698,576			802,290			125,422
(Gain)/loss on disposal of property, plant and equipment		(5,871	)		8,852			-
Equity loss on investment		47,431			-			-
Deferred income tax		(269,757	)		-			-
Changes in assets and liabilities:
Trade receivables		(11,410,026	)		(21,450,628	)		(4,838,031	)
Other receivables		2,624,248			2,041,267			1,226,342
Prepaid expenses		(13,384,560	)		(7,258,626	)		(9,872,952	)
Inventories		(464,737	)		(201,470	)		(289,710	)
Deposits to newspapers		909,468			6,942,102			1,153,026
Trade payables		(2,638	)		(201,441	)		(3,039,512	)
Income tax payable		987,991			940,945			2,490,473
Advances from customers		307,444			(1,954,822	)		2,267,458
Accrued expenses and other payables		(8,882,392	)		570,313			(564,647	)
Net cash (used in)/provided by operating activities		(7,251,871	)		4,492,428			9,728,638
Cash flows from investing activities
Purchase of property, plant and equipment		(2,905,523	)		(2,391,979	)		(326,512	)
Cash paid for long term investment		(11,587,503	)		(14,821,520	)		-
Proceeds from disposal of property, plant and equipment		23,793			-			-
Deposits paid in connection with leasehold improvement		-			-			(1,104,576	)
Deposits to marketing and promotion projects		(31,408,022	)		-			-
Cash paid for equity investment		(6,393,137	)		-			-
Acquisition of a business		(6,187,162	)		-			-
Expenditures for intangible assets		(1,324,836	)		(155,777	)		(115,999	)
Net cash used in investing activities		(59,782,390	)		(17,369,276	)		(1,547,087	)
Cash flows from financing activities:
Proceeds from private placement		-			35,000,000			-
Offering proceeds of ShiFang shares		-			71,563,517			-
Payment of listing and offering expenses incurred		-			(11,103,251	)		(1,910,953	)
Proceeds from reverse merger		-			-			491,234
Proceeds from borrowings		7,261,491			8,258,693			9,436,611
Repurchase and cancellation of ShiFang shares		(1,622,700	)		-			-
Capital contributions from non-controlling interests		4,710,699			-			-
Repayment of short-term borrowings		(8,046,195	)		(6,511,437	)		(8,263,617	)
Proceeds from/(repayment) to related parties		12,803,214			(5,366,201	)		(429,710	)
Repayment to shareholders		-			(3,103,098	)		(2,703,701	)
Repayment to non-controlling interests		-			(521,779	)		(87,755	)
Net cash provided by/(used in) financing activities		15,106,509			88,216,444			(3,467,891	)
Effect of foreign currency conversion on cash		3,029,089			1,013,652			(65,591	)
Net (decrease)/increase in cash and cash equivalents		(48,898,663	)		76,353,248			4,648,069
Cash and equivalents, beginning		82,577,185			6,223,937			1,575,868
Cash and equivalents, ending	$	33,678,522		$	82,577,185		$	6,223,937
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid	$	260,641		$	215,694		$	645,208
Income tax paid	$	2,928,544		$	2,617,548		$	1,179,083

See notes to consolidated financial statements.

F-6

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

1. ORGANIZATION AND BUSINESS OPERATIONS

The consolidated financial statements include the financial statements of China TopReach Inc. (the “Company” or “China TopReach”), its subsidiaries and variable interest entities (“VIE”). The Company, its subsidiaries and VIE are collectively referred to as the “Group”. The Group is engaged in publishing and advertising activities in the People’s Republic of China ("PRC" or “China”).

Reverse acquisition in 2009

The Company was incorporated in the Cayman Islands on May 3, 2006 as a blank check company for the purpose of effecting a recapitalization, stock exchange, asset acquisition, reorganization or other similar business combination or contractual arrangements with one or more operating businesses.

The Company entered into a Share Purchase Agreement (the “SPA”) dated December 16, 2008 to acquire Olympia Media Holdings Limited, a British Virgin Islands company (“OMH”). OMH was a leading privately owned aggregator and operator of print media businesses in China. OMH has direct ownership in 2 wholly-owned subsidiaries. Through ownership of these two subsidiaries, OMH also consolidates 100% of other indirectly-owned entities and a VIE. Following the completion of the transaction described below, OMH became a wholly owned subsidiary of the Company.

On January 27, 2009, the Company acquired all of the issued and outstanding common stock of OMH. For accounting purposes, the acquisition has been treated as a recapitalization. The consolidated financial statements prepared in previous years following the recapitalization were thus issued under the name of the Company (the accounting acquiree), which is also known as the legal parent, but as a continuation of the financial statements they are those of OMH (the accounting acquirer), with one required adjustment to retroactively adjust OMH’s legal capital to reflect that of the Company. The historical financial statements presented herein prior to the recapitalization are those of OMH as if the acquisition had occurred at the beginning of the earliest period presented.

Pursuant to the terms of the SPA and its amendment dated on January 13, 2009, the Company acquired all of OMH’s shares of common stock issued and outstanding for a consideration of US$6 million in cash and by the issuance of 6,259,000 ordinary shares. Subsequent to the board meeting held on October 10, 2009, the Company issued 1,200,000 ordinary shares to the former shareholders of OMH as settlement for consideration of US$6 million in cash. Such shares (aggregating 7,459,000 shares) have been retroactively accounted for as part of the reverse acquisition and have been reflected as issued at the beginning of the earliest period presented.

Original and revisedearn-out share arrangement

Under the terms of an original SPA, on an all-or-none basis, if, on a consolidated basis, the Group achieves or exceeds the specified net income for the fiscal years ending December 31, 2009, 2010, 2011 and 2012, additional ordinary shares of 2,000,000, 2,500,000, 2,500,000 and 2,500,000 respectively, i.e. 9,500,000 shares in total, shall be issued by the Company.

However, due to the additional risk assumed by the OMH shareholders including Topbig International Development Limited (“Topbig International”), Blazing Sun Holdings Limited (“Blazing Sun”) and Keep Profit International Capital Limited (“Keep Profit”) in providing collaterals to facilitate the consummation of the Private Placement, the earn-out arrangement was revised to waive the net income target requirement and the Company released 5,500,000 shares out of the 9,500,000 Earn-out Shares to Topbig International (3,309,813 shares), Blazing Sun (1,530,712 shares) and Keep Profit (659,475 shares) on February 12, 2010.

Considering the impact of the global financial crisis and the fact that certain OMH shareholders did not participate in the Share Subscription Agreement, the relevant parties agreed to further amend the SPA on June 23, 2010 and pursuant to the amended SPA, the Company agreed to allocate and issue an aggregate of 2,000,000 of the remaining 4,000,000 Earn-out shares to the OMH shareholders on April 24, 2010, regardless of whether any profit targets in any year had been achieved by the Company. Following such issuance, there will still be 2,000,000 Earn-out shares remaining for potential issuance and allotment. 1,000,000 shares will be allotted and issued by the Company to the OMH shareholders for each of the 2011 and 2012 financial year conditionally upon the achievement of profit targets by the Company of RMB 278.8 million (approximately $43 million) in 2011 and RMB 394.4 million (approximately $62 million) in 2012. No earnout shares were issued and allotted for the 2011 financial year as the profit target is not achieved by the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

1. ORGANIZATION AND BUSINESS OPERATIONS - CONTINUED

In addition, to eliminate any statement of operations effect upon the profit targets resulted from the Private Placement (defined below), the Company agreed to grant a special concession in the calculation of net income used to determine whether the profit targets are achieved, by excluding all expenses resulting from any fund-raising activities carried out by the Group since the effective date of the recapitalization.

Spin-off of ShiFang Holding Limited in 2010

ShiFang Holding Limited (“ShiFang”) was incorporated in the Cayman Islands on December 9, 2009 as a wholly owned subsidiary of China TopReach to serve as the holding company of OMH and its subsidiaries.  ShiFang plans to use the proceeds from the Private Placement to continue to develop relationships with additional metro newspapers in the PRC and to fund its working capital needs.

In 2010, for the purposes of the spin-off and separate listing (the “Spin-off”) of ShiFang, ShiFang and its subsidiaries (collectively, the “ShiFang Group”) underwent and completed a reorganization (the “ShiFang Reorganization”). In preparation for the listing of ShiFang’s shares on the Hong Kong Stock Exchange, the publishing and advertising businesses underwent a group reorganization, pursuant to which the companies engaged in the publishing and advertising businesses of the Group were transferred to ShiFang. The Reorganization involved the followings:

- On December 9, 2009, ShiFang was incorporated with one issued share capital of HK$0.1 allotted and issued to the Company.

- Pursuant to an agreement on January 14, 2010, certain shareholders of the Company, namely: TopBig International, Blazing Sun and Keep Profit transferred its equity interest in the Company to ShiFang in exchange for 80,000,000 new ShiFang shares.42,998,170 shares 15,859,804 shares and 21,142,026 shares to TopBig International, Blazing Sun and Keep Profit, respectively.

- On the same date, 319,999,999 shares are issued and allotted to the Company and they are credited as fully paid pursuant to the capitalization issue immediately following the issue of new shares to TopBig International, Blazing Sun and Keep Profit.

- Pursuant to an agreement dated January 18, 2010, the Company transferred its entire equity interests in OMH in exchange for US$ 50,000. Therefore, ShiFang became the holding company of OMH.

- On February 12, 2010, ShiFang has completed a US$35 million equity private placement (the “Private Placement”) by issuing 149,123,121 shares to four institutional investors (the “Investors”). The Investors namely, CCB International Asset Management Limited, Sinochem Europe Capital Corporation Ltd, Templeton Strategic Emerging Markets Fund III, LDC and New World Strategic Investment Limited, acquired an aggregate 27.16% equity interest in ShiFang in the Private Placement.

- As a result of the above issue of shares and private placement, the Company’s interest in ShiFang was diluted to 58.27%.

On December 3, 2010, ShiFang was listed (the “ShiFang Listing”) on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), pursuant to which 183,042,000 new shares of HK$0.1 each were issued by ShiFang in the global offering. The Group has raised gross proceeds of approximately US$ 71.6 million from the global offering and the costs associated with the offering amounted to approximately US$ 18.2 million. Upon listing of ShiFang, the Group’s interest in ShiFang was further diluted to 43.71%. In the opinion of the Company’s Board of Directors, ShiFang shall continue be a subsidiary of the Group as the Company can exercise control on ShiFang’s operation and Board of Directors. There are more than half of the directors in ShiFang’s Board assigned by the Company and who will represent the Company to make unanimous decision in ShiFang. Therefore, the Company has the power to cast majority votes in ShiFang’s Board of Directors and the power to govern ShiFang’s financial and operating policies.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

1. ORGANIZATION AND BUSINESS OPERATIONS - CONTINUED

As the above change in the Company’s ownership interest in ShiFang did not result in a loss of control and is thus accounted for as an equity transaction. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company.

Deemed acquisition of additional equity interests in ShiFang in 2011

As at December 31, 2011, the Group’s interest in ShiFang was increased from 43.71% to 44.45% as a result of repurchase and cancellation of 12,223,000 shares by ShiFang during the year ended December 31, 2011.In the opinion of the Company’s Board of Directors, ShiFang shall continue be a subsidiary of the Group as the Company can still exercise control on ShiFang’s operation and Board of Directors during the year.

2. VARIABLE INTEREST ENTITIES

Fujian ShiFang Culture Communication Co. Ltd. ("SF"), a subsidiary of OMH, entered into contractual agreements with Beijing HongXinTu Culture Communication Company Limited (“BJHXT”).

Based on the contractual arrangements, SF agreed to provide consulting services to BJHXT, including (i) market research; (ii) business development and market consultation; (iii) consulting services in respect of labor matters; (iv) construction and maintenance of information networks and network security; (v) technical support for the software and technology required by BJHXT and (vi) such other services as may be required by BJHXT and agreed to be performed by SF for BJHXT exclusively in relation to its business operations in exchange for service fees according to the nature of the service content and time spent based on market price. The service agreement has been renewed on July 1, 2011 with ten years term and the agreement automatically renews for successive periods of five years provided SF does not issue any notice of termination 30 days before the relevant termination date.

This contractual agreement was entered into to establish a situation under which SF obtains effective management of the operational and economic control over BJHXT and has an exclusive option to purchase all or part of the equity interest in BJHXT when and to the extent permitted by the PRC laws. The contractual agreement, taken as a whole, has established a contractual position which allows the economic benefits of BJHXT’s business to flow to SF. In addition, under the agreement, all the directors in BJHXT are to be nominated by SF. Through its control over the directors of BJHXT, the management of the Company believe that SF is able to monitor, supervise and effectively control the business, operations and financial policies of BJHXT. The agreement also enables SF to exercise control over and to acquire equity interests in BJHXT at an agreed sum or, in the event that such agreed price is lower than the lowest price permissible under PRC laws, at such price as is permitted by the relevant PRC laws and regulations.

Accordingly, by virtue of the contractual arrangements, SF is the primary beneficiary of BJHXT as defined by ASC 810 “Consolidation of Variable Interest Entities (“VIE”)”. Therefore, the Company consolidates BJHXT and its subsidiaries as VIE.

As of December 31, 2011, BJHXT has 5 wholly owned subsidiaries and a 51%-owned subsidiary.

The liabilities recognized as a result of consolidating the VIE do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIE. Conversely, assets recognized as a result of consolidating the VIE do not represent additional assets that could be used to satisfy claims against our general assets. Reflected in the December 31, 2011 and 2010 balance sheets are consolidated VIE assets of approximately $57,000,000 and $21,000,000, respectively, which are comprised mainly of cash, receivables, inventory, property and equipment. VIE liabilities of approximately $13,000,000 and $18,000,000, respectively, mainly consist of borrowings and payables for working capital.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

3. SUBSIDIARIES OF THE COMPANY

As of December 31, 2011, the consolidating subsidiaries and VIEs are as follows:

Name of Company	Principal activities	Place of Incorporation	Attributable equity interest %
Directly owned			2011		2010
ShiFang Holding Limited (“ShiFang”)	Investment holding	Cayman Islands	44.45	%	43.71	%
Indirectly owned
Beijing BaiChuan DuKe Science and Technology Co., Ltd,	Provision of technology promotion and consultancy services	Beijing, People’s Republic of China	100	%	100	%
Beijing HanDing Advertisement Co., Ltd.	Provision of full-line advertising services	Beijing, People’s Republic of China	100	%	100	%
Beijing HongXinTu Culture Communication Co., Ltd.	Provision of publishing services	Beijing, People’s Republic of China	100	%	100	%
Beijing ShiFang YiZhi Culture Communication Co., Ltd	Provision of full-line advertising services	Beijing, People’s Republic of China	100	%	-
Chongqing ShiFang Culture Communication Co., Ltd.	Provision of full-line advertising services	Chongqing, People’s Republic of China	100	%	100	%
Dalian ShiFang Media Co., Ltd.	Provision of advertising services	Dalian, People’s Republic of China	100	%	100	%
Dongkuai (Fuzhou) Investment Consultancy Services Co., Ltd.	Provision of investment consultancy services	Fuzhou, People’s Republic of China	100	%	100	%
Fujian ShiFang Culture Communication Co., Ltd.	Provision of full-line advertising agency services	Fuzhou, People’s Republic of China	100	%	100	%
Fujian ZhiYuan Media Co., Ltd.	Provision of technology consultancy services	Fuzhou, People’s Republic of China	100	%	100	%
Fuzhou AoHai Advertisement Co., Ltd.	Provision of advertising, investment and internet services	Fuzhou, People’s Republic of China	100	%	100	%
Fuzhou DongKuai Media Co., Ltd.	Provision of full-line advertising agency services	Fuzhou, People’s Republic of China	100	%	100	%
Fuzhou HanDing Network Science & Technology Co., Ltd.	Provision of technology consultancy services	Fuzhou, People’s Republic of China	100	%	100	%
Fuzhou HongXinTu Printing Co., Ltd.	Provision of printing services	Fuzhou, People’s Republic of China	100	%	100	%
Fujian Fangke Network Technology Corporation Limited	Provision of full-line advertising services and property marketing	Fuzhou, People’s Republic of China	51	%	-

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

3. SUBSIDIARIES OF THE COMPANY - CONTINUED

Fujian Haobang Real Estate Consulting and Agency Co., Ltd.	Provision of property marketing and agency services	Fuzhou, People’s Republic of China	51	%	-
Fujian ShiFang JianKang Technology Co., Ltd.	Provision of health care products development and full-line advertising agency services	Fuzhou, People’s Republic of China	65	%	-
Guangxi ShiFang Culture  Communication Co., Ltd.	Provision of full-line advertising agency services	Nanning, People’s Republic of China	100	%	-
Gloria Fair Limited	Provision of advertising, investment and internet services	Hong Kong	100	%	100	%
Guizhou Qianzhong newspaper Industry Printing Co., Ltd.	Provision of publishing and printing services	Guizhou, People’s Republic of China	100	%	100	%
Guizhou ShiFang HanDing Media Co., Ltd.	Provision of full-line advertising services	Guizhou, People’s Republic of China	100	%	100	%
Hung Hing To Publishing Limited	Provision of publishing and advertising services	British Virgin Islands	100	%	100	%
Kunming AoHai Advertising Co., Ltd.	Provision of full-line advertising services	Kunming, People’s Republic of China	100	%	100	%
Kunming HongLianXin Printing   Co., Ltd.	Provision of publishing and printing services	Kunming, People’s Republic of China	100	%	100	%
Liaoning AoHai TianYi Media Advertisement Co., Ltd.	Provision of full-line advertising services	Shenyang, People’s Republic of China	100	%	100	%
Liaoning Shifang Xinda Culture Communication Co., Ltd.	Provision of full-line advertising agency services	Shenyang, People’s Republic of China	60	%	-
Olympia Media Holdings Limited (“OMH”)	Investment holding	British Virgin Islands	100	%	100	%
Shenyang ZhuQin ShiFang Media Development Co., Ltd.	Provision of full-line advertising services	Shenyang, People’s Republic of China	51	%	51	%
ShiFang YaQi Culture   Communication (Xiamen) Co., Ltd.	Provision of full-line advertising services	Xiamen, People’s Republic of China	100	%	100	%
Sichuan ShiFang FuRui   Investment Co., Ltd.	Provision of property development and management services.	Sichuan, People’s Republic of China	51	%	-
Shenyang JinXiYuan Advertising Co., Ltd.	Provision of full-line advertising agency services	Shenyang, People’s Republic of China	100	%	-
Tianjin ShiFang Advertisement Media Co., Ltd.	Provision of full-line advertising services	Tianjin, People’s Republic of China	100	%	100	%

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

3. SUBSIDIARIES OF THE COMPANY - CONTINUED

Xiamen DuKe Information  Science & Technology Co., Ltd.	Provision of technology promotion and consultancy services	Xiamen, People’s Republic of China	100	%	100	%
Yunnan HanDing Technology Co., Ltd.	Provision of technology consultancy services	Kunming, People’s Republic of China	100	%	-
ZhiYuan Fuzhou Culture  Communication Co., Ltd.	Provision of full-line advertising services	Fuzhou, People’s Republic of China	100	%	100	%
ZhiYuan (Xiamen) Culture   Communication Co., Ltd.	Provision of full-line advertising services	Xiamen, People’s Republic of China	100	%	100	%

4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

The accompanying audited consolidated financial statements and related notes have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) and pursuant tothe rules and regulations of the Securities and Exchange Commission (the “SEC”).

Recapitalization

Prior to shares exchanged on January 27, 2009, OMH, was a non-reporting privately held company. The post-recapitalization is accounted for by using accounting principles applicable to recapitalization with OMH being treated as the accounting acquirer and the Company, the legal parent, being treated as the accounting acquiree.

In a recapitalization, all accounting history becomes that of the accounting acquirer (OMH), therefore all historical information prior to the acquisition is that of OMH. The shares issued to the shareholders of the Company have been stated retroactively. The recapitalization adjustment reflects all the shares held by OMH prior to the acquisition.

The consolidated financial statements after the recapitalization includes all accounts of the Company, its subsidiaries and VIE. All material inter-company balances and transactions have been eliminated.

Net income is reduced by the portion attributable to non-controlling interests. The non-controlling interests are disclosed separately in the consolidated statements of operations, consolidated statements of comprehensive income and in the consolidated balance sheets.

(b) Use of estimates

The preparation of the consolidated financial statements in accordance with US GAAP requires management of the Group to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses  during  the  reporting year. Significant items that are subject to such estimates and assumptions include the valuation of the allowances for trade and other receivables, the recoverability of the carrying amount and the estimated useful lives of long-lived assets and intangible assets, inventories, deposits to newspapers and other contingencies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(c) Foreign currency translation

The Company uses USD as the functional and recording currency. The functional currency of the subsidiaries and VIEs is RMB. Translation adjustments are reported as other comprehensive income in the statement of operations and accumulated as other comprehensive income in equity section of balance sheets. Financial information is translated into U.S. Dollars at prevailing or current rates respectively, except for revenues and expenses which are translated at average current rates during the reporting periods.

The accompanying consolidated financial statements are presented in USD. Capital accounts of the financial statements are translated into USD from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the reporting periods.

	2011		2010		2009
Year ended December 31:
USD exchange rate to RMB		6.3654		6.6120		6.8372
Average period:
USD exchange rate to RMB		6.4725		6.7781		6.8409

(d) Cash and cash equivalents

Cash and cash equivalents represents cash at bank and on hand and demand deposits with banks and other financial institutions.

The Group considers all highly liquid investments with original maturities of three months or less to be cash. As of December 31, 2011 and 2010, respectively, the Group’s cash was with banks in the PRC where there is currently no rule or regulation mandated obligatory insurance of bank accounts.

(e) Accounts receivable

Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts, and do not bear interest.  The allowance for doubtful accounts is the Group’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, customer specific facts and economic conditions.

Outstanding account balances are reviewed individually for collectability. 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 to its customers.

(f) Inventories

Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average cost method. The cost of finished goods comprises newsprint papers and printing consumables.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(g) Property, plant, and equipment, net

Property, plant and equipment are recorded at cost less accumulated depreciation.  Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to general and administrative expenses as incurred. Depreciation of property, plant and equipment is computed by the straight-line method over the assets’ estimated useful lives ranging from five to forty years. Building improvements, if any, are amortized on a straight-line basis over the estimated useful life.

Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.

Construction in progress represents the costs of property, plant and equipment under construction or installation. Depreciation commences when the asset is placed in service. The accumulated costs are reclassified as property, plant and equipment when installation or construction is completed.

The estimated useful lives of the assets as follows:

	Years
Leasehold improvement	5
Buildings	40
Machinery and equipment	5-10
Office equipment and furniture	5
Motor vehicles	5-10

Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.

(h) Impairment of long-lived assets

In accordance with FASB ASC Topic 360, Property Plant and Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. If long-lived assets are to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their carrying amounts or fair values less costs to sell.

Based on the Group’s assessment, no impairment was recognized as of December 31, 2011 and 2010.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(i) Equity investment

Equity investment refers to the interest in the entity over which the Group has significant influence but not control, generally an ownership between 20% and 50% of the voting rights.

The Company holds a 33.5% equity ownership interest in Yunnan HanDing Investment Co. Ltd, which the Company accounts for under the equity method of accounting as described in Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”) Topic 323, Investments – equity method and joint ventures (“ASC 323”). The equity method requires that the Company recognize its share of the net income or loss by adjusting its equity investment in the Company’s consolidated balance sheet and recognizing income (losses) from equity investment in the Company’s statement of operations.

(j) Deposits to Newspapers

Pursuant to the agreements between the Group and PRC local newspapers (“Newspapers”), the Group is required to make deposits to obtain advertising operational rights from these contracted Newspapers. Such deposits are interest free and refundable at termination of the contracts or on request under mutual consent. Deposits paid for contracts expiring in one year or less are classified as short term. Long term deposits over one year are classified as long term on the balance sheet.

(k) Deposits for marketing and promotion projects

The deposits represent cash paid by the Group to the local commercial customers in relation to the exclusive marketing and promotion services between the Group and these customers. Deposits paid for contracts expiring in one year or less are classified as short term. Long term deposits over one year are classified as long term on the balance sheet.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(l) Goodwill and other intangible assets

In accordance with ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”) intangible assets with indefinite useful lives are not amortized but are reviewed periodically for impairment.

Goodwill and other intangible assets, including computer software, trademarks, licenses, website development, customer relationships and non-compete agreements, are tested on an annual basis as of December 31, and between annual tests if indicators of potential impairment exist. The fair value of the Company’s reporting unit was estimated using a combination of the market capitalization and the income approach. Under the income approach, the fair value of the reporting unit was calculated by estimating the fair value of the unit’s associated future cash flows. No impairment of goodwill and other intangible assets has been identified during the periods presented.

The significant estimates and assumptions used by management in assessing the recoverability of goodwill and other intangible assets are estimated future cash flows, present value discount rate, estimated growth of the overall craft beer segment, and other factors. If the Company’s estimate future cash flows were to significantly decline, an impairment charge could result. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgement.

(i) Goodwill

Goodwill arises on the acquisition of subsidiaries or businesses which represents the excess of the consideration transferred over the Group’s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree.

(ii) Trademarks and licences

Separately acquired trademarks and licences are shown at historical cost. Trademarks and licences acquired in a business combination are recognised at fair value at the acquisition date. Trademarks and licences have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives of seven to eight years.

(iii) Contractual customer relationships and non-compete agreements

Contractual customer relationships and non-compete agreements acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relationships and non-complete agreements have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method to allocate the cost of customer relationships and non-compete agreements over their expected lives of three to four years.

(iv) Computer software and website development costs

The Group capitalized certain internal use software and website development costs. Such costs are carried at cost less accumulated amortization. Intangible assets are amortized using the straight-line method over the estimate economic life of the intangible assets.

The intangible assets are subject to impairment test on an annual basis and are being amortised over three to ten years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(m) Fair value measurements

FASB ASC Topic 820, “Fair Value Measurement and Disclosures” defines fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the buyer and the seller at the measurement date.  In determining fair value, the valuation techniques consistent with the market approach, income approach and cost approach shall be used to measure fair value. FASB ASC Topic 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller in pricing the asset or liability.  These inputs are further defined as observable and unobservable inputs.  Observable inputs are those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use in pricing the asset or liability developed based on the best information available in the circumstances.

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 -	Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Valuation adjustments and block discounts are not being applied.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 -	Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
Level 3 -	Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

For certain of the Company’s financial instruments, none of which are held for trading purposes, including cash, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate their fair values due to their short maturities.

(n) Revenue recognition

The Group generates revenue primarily from advertising to end customers and printing service and publishing consulting services provided to the Newspapers. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured. Revenue from advertising contracts, net of rebates, is generally recognized over the period in which the advertisement is displayed. Revenue from printing, net of value-added tax, is recognized when the service is provided.

In addition, the Group received grants from PRC government. A government subsidy is recognized when there is a reasonable assurance that the Group has complied with the conditions attached to it and that the grant will be received. The government grant is currently included in Other Income in the consolidated statements of operations. The Group received $784,529, $633,363 and $284,319 for the years ended 31 December 2011, 2010 and 2009, respectively.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(o) Statutory Reserves

Pursuant to the applicable laws in the PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity's registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Beginning from January 1, 2006, enterprise has no further requirements to make the appropriation to the statutory public welfare fund. The Group does not make appropriations to the discretionary surplus reserve fund.

(p) Income taxes

The Group accounts for income taxes under FASB ASC Topic 740 "Income Taxes". Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  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 is recognized in the statements of operations in the period that includes the enactment date.

The Group adopted FASB ASC Topic 740, "Income Taxes", which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

(q) Pension and employee benefits

Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries. Management believes full time employees who have passed the probation period are entitled to such benefits.

The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due and are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(r) Stock-Based Compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants (collectively “share-based payments”).  Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.  All of the Company’s stock-based compensation is based on grants of equity instruments and no liability awards have been granted.

(s) Commitments and Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Group, but which will only be resolved when one or more future events occur or fail to occur. The Group’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Group, or unasserted claims that may result in such proceedings, the Group’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Group’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they arise from guarantees, in which case the guarantees would be disclosed.

(t) Non-controlling interest in consolidated financial statements

ASC 810 requires us to classify non-controlling interests in a subsidiary as part of consolidated net income and to include the accumulated amount of non-controlling interests as part of total equity. The net profit amounts we have previously reported are now presented as “Net income attributable to shareholders”. The calculation of earnings per share continues to be based on income amounts attributable only to shareholders. Similarly, in our presentation of total equity, we distinguish between equity amounts attributable to shareholders and amounts attributable to the non-controlling interests.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(u) Research and Development Costs

Research and development costs relating to the development of new processes, including significant improvements and refinements to existing software, are expensed when incurred. The major components of these research and development costs include experimental materials, salaries and overhead costs.  In accordance with the FASB’s accounting standards for research and development costs, the Group expenses the costs associated with the research and development activities when incurred. The research and development costs amounted to $32,445, $76,953, and $341,847 for the years 2011, 2010 and 2009 respectively, which were recorded in administrative expenses.

(v) Advertising Costs

The Group expenses advertising costs as incurred. There were no material advertising expenses during the periods presented.

(w) Comprehensive income

Comprehensive income is defined as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income (loss), as presented on the accompanying consolidated statements of changes in equity, consisted of cumulative foreign currency translation adjustment in each of the years ended December 31, 2011, 2010 and 2009.

(x) Segment information

FASB ASC Topic 280 "Segment reporting" establishes standards for reporting information on operating segments in interim and annual financial statements.  The Group has only one segment, all of the Group's operations and customers are in the PRC and all income are derived from the publishing and advertising business. Accordingly, no segment information is presented.

(y) Economic and political risks

The Group's operations are conducted in the PRC. Accordingly, the Group's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances aboard, and rates and methods of taxation, among other things.

(z) Recently issued accounting standards not yet adopted

We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

4 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(z) Recently issued accounting standards not yet adopted

In December 2011, the FASB amended its guidance related to disclosures about offsetting assets and liabilities in the financial statements. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of these amendments. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

In September 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance on goodwill impairment testing to reduce the cost and complexity of testing goodwill for impairment by providing the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The result of this assessment will determine whether it is necessary to perform the two-step test. The provisions of this new guidance are effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted the new guidance early when we conducted our annual goodwill impairment test in the fourth quarter of 2011. The adoption of this guidance did not have a material impact on our financial statements.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

In May 2011, the FASB amended its guidance related to fair value measurements in order to align the definition of fair value measurements and the related disclosure requirements between accounting principles generally accepted in the United States of America and International Financial Reporting Standards. These amendments, which are effective for interim and annual periods beginning after December 15, 2011, also change certain existing fair value measurement principles and disclosure requirements. We do not anticipate the adoption of this guidance will have a material impact on our financial statements.

5 TRADE RECEIVABLES, NET

Trade receivables consist of the following:

	December 31, 2011		December 31, 2010
Trade receivables	$	57,198,073	$	44,108,708
Less: Allowance for doubtful debts		11,795,516		1,084,392
Trade receivables, net	$	45,402,557	$	43,024,316

Bad debt expense of $10,698,576, $802,290 and $125,422 has been made for the years ended December 31, 2011, 2010 and 2009, respectively.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

6 OTHER RECEIVABLES

Other receivables consist of the following:

	December 31, 2011		December 31, 2010
Utility and rental deposits	$	137,359	$	78,368
IPO proceeds receivable (a)		-		4,033,848
Advances to employees (b)		1,716,539		589,373
Government grant receivables		555,805		617,527
Others (c)		1,893,367		1,349,842
	$	4,303,070	$	6,668,958

(a) The amount represented the global IPO proceeds retained by CCB International Asset Management Limited.

(b) Advances to employees are unsecured, interest free and repayable on demand.

(c) The amount represented mainly the advances and deposits to third parties with business relationships which are unsecured, interest free and repayable on demand.

7 PREPAID EXPENSES

	December 31, 2011		December 31, 2010
Prepayments for print media advertising	$	32,962,062	$	18,847,343

Under the terms of certain exclusive and non-exclusive advertising agreements with metropolitan newspaper’s contract, the Group has to make prepayments for print media advertising to the newspaper publishers, the amounts prepaid to newspaper publishers can be used to offset the fees payable where the amount of prepayment available. The prepayments may be forfeited in the event that the Group is unable to fulfill the contractual obligations in respect of actual business volume generated.

As at December 31, 2011, the Group has made prepayment of RMB33,780,000 (approximately $5,307,000) to Shenyang Evening News under the terms of the exclusive advertising agreement. The exclusive advertising agreement between the Group and Shenyang Evening News was terminated unilaterally by Shenyang Evening News on July 26, 2011. The Directors have reviewed the recoverability of such prepayment and deposit, including consideration of the probable outcome of the litigation between the Group and Shenyang Evening News and its ability to enforce court decision to collect the amount, and has determined these amounts are recoverable as at December 31, 2011. Details of the litigation with Shenyang Evening News are disclosed in Note 32.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

8 DUE FROM RELATED PARTIES

	December 31,		December 31,
	2011		2010
Xu Kaining (a)	$	-	$	1,058
Xiamen Zhishang Trading Co., Ltd. (b)		-		1,814,882
Fujian Jinyi Asia Paper Co., Ltd. (b)		27,806		17,393
Toshihiro Nakamura (c)		-		3,514
Qiang Peiying (d)		1,573,235		1,514,560
Liaoning Baixin Media Co., Ltd. (e)		78,550		-
Key management of the Group		315,279		301,000
	$	1,994,870	$	3,652,407

The amounts due from related parties are unsecured, interest free and repayable on demand.

(a) Xu Kaining is the beneficial owner of Keep Profit International Capital Limited, a shareholder of the Company.

(b) The company is controlled by a close family member of a director of the Company.

(c) Toshihiro Nakamura is a director of the Company.

(d) Qiang Peiying is the spouse of a director of the Company.

(e) A significant shareholder of a subsidiary of the Group.

9 INVENTORIES

Inventories consist of the following:

	December 31, 2011		December 31, 2010
Ink	$	140,747	$	74,749
Newsprint		1,030,287		637,985
Other consumables		124,179		86,769
	$	1,295,213	$	799,503

F-23

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

10 PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

	December 31, 2011			December 31, 2010
Leasehold improvement	$	1,813,611		$	1,641,107
Buildings		420,231			408,197
Machinery and equipment		7,713,421			6,459,014
Office equipment and furniture		1,740,532			1,194,797
Motor vehicles		3,055,123			1,686,177
Total		14,742,918			11,389,292
Less: Accumulated depreciation and amortization		(4,966,161	)		(3,492,709	)
	$	9,776,757		$	7,896,583

Management determined that there were no impairment provisions necessary at December 31, 2011 and 2010. Depreciation and amortization expenses for the years ended December 31, 2011, 2010 and 2009 amounted to $1,335,805, $897,154 and $840,636, respectively.

As of December 31, 2011 and 2010, buildings, machinery and equipment with an aggregate net book value of $147,878 and $1,423,624, respectively were pledged as collateral for short term borrowings from banks.

11 EQUITY INVESTMENT

	December 31, 2011			December 31, 2010
Original cost of equity investment	$	6,393,137		$	-
Equity loss on investment		(47,431	)		-
Equity investment balance	$	6,345,706		$	-

The Group’s equity investment represents its 33.5% equity interest in Yunnan Handing Investment Co. Limited (“Yunnan Handing”). Yunnan Handing is a limited liability company established in the PRC that is principally engaged in the project investment and management. As at December 31, 2011, its paid up capital was RMB100,000,000 (approximately $15,710,000). Since the Group has the ability to exercise significant influence over the operating and financial policies of Yunnan Handing, the Group uses the equity method of accounting to record its investment.

The summarised financial information in respect of the Group’s equity investment is set out below:

	December 31, 2011			December 31, 2010
Assets
Current assets	$	50,003,927		$	-
Non-current assets		150,972			-
		50,154,899			-
Liabilities
Current liabilities		(34,588,871	)		-
Net assets		15,566,028			-
Income		76,632			-
Expense		(218,154	)		-
Loss for the year	$	(141,522	)	$	-

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

12 DEPOSITS TO NEWSPAPERS

	December 31, 2011		December 31, 2010
Deposits to newspaper publishers
-     Non-current	$	14,453,137	$	13,914,080
-     Current		2,134,613		2,930,550
	$	16,587,750	$	16,844,630

As at December 31, 2011, deposits to newspaper publishers represent cash paid by the Group to three (2010: three) metropolitan newspaper publishers in the PRC pursuant to exclusive agreements between the Group and newspaper publishers. Under the terms of the agreements, the Group has obtained the exclusive rights to sell advertising space of the respective newspapers for a fixed term of 7 to 30 years and it has to place specified amount of cash to the newspaper publishers. The cash held by the newspaper publishers will be repayable to the Group upon the expiry of the agreements. The Group assesses the recoverable amount of the deposits on each balance sheet date and the carrying values of these amounts are written down immediately to their recoverable amounts if recoverable amounts are less than the carrying values.

There can be no assurance that the Group will be able to recover the deposits through the sale of the advertising spaces in the relevant newspapers or from provision of the advertising services. Any such recovery is subject to market conditions, cooperation with the newspaper partners and other factors beyond the Group’s control and may only happen after several years of operations if at all.

As at December 31, 2011, included in current portion of deposits to newspaper publishers were deposits made to Shenyang Evening News pursuant to the exclusive advertising agreement between the Group and Shenyang Evening News of RMB10,000,000 (approximately $1,571,000). The exclusive advertising agreement between the Group and Shenyang Evening News was terminated unilaterally by Shenyang Evening News on July 26, 2011. The directors have reviewed the recoverability of such deposit, including consideration of the probable outcome of the litigation between the Group and Shenyang Evening News and its ability to enforce court decision to collect the amount, and has determined these amounts are recoverable as at December 31, 2011. Details of the litigation with Shenyang Evening News are disclosed in Note 32.

13 DEPOSITS FOR MARKETING AND PROMOTION PROJECTS

	December 31, 2011		December 31, 2010
Deposits for marketing and promotion projects
-     Non-current	$	28,670,626	$	-
-     Current		2,749,238		-
	$	31,419,864	$	-

As at December 31, 2011, deposits for marketing and promotion projects represent cash paid by the Group to three (2010: Nil) commercial customers in the PRC in relation to exclusive marketing and promotion services agreements between the Group and the customers. Pursuant to these agreements, the Group has obtained rights as the sole marketing and promotion services provider for certain real estate development projects owned by these customers for terms that ranged within 3 years or throughout the selling period of the real estate development projects. In return, the Group has to place specific amount of upfront deposits to the customers for the exclusive rights. These deposits will, amongst other terms and conditions, be repayable to the Group in equal instalments throughout the term of the respective contracts or upon the expiry of the agreements. The Group assesses the recoverable amount of the deposits at each balance sheet date and the carrying values of these amounts are written down immediately to their recoverable amounts if recoverable amounts are less than the carrying values.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

14 PREPAYMENT FOR LONG-TERM INVESTMENT

As at 31 December 2011, prepayment for long term investments represents cash paid by the Group to two (2010: one) metropolitan newspaper publishers in the PRC in relation to the potential establishment of jointly controlled entities with these metropolitan newspaper publishers. Mutual agreements were reached between the Group and the metropolitan newspaper publishers such that the prepayments will become refundable upon the earlier of the termination of the plan to establish the jointly controlled entities and December 31, 2012 which is the target date to complete the potential investments.

15 GOODWILL

Addition to goodwill during the year ended December 31, 2011 was related to the acquisition of business from Fuzhou H-Band Estate Marketing and Planning Company Limited (“Fuzhou H-Band”) on July 10, 2011. Please refer to Note 31 for details of the acquisition.

As at December 31, 2011, management of the Group determined that the goodwill had not impaired.

16 INTANGIBLE ASSETS, NET

Intangible assets consist of the following:

	December 31, 2011					December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Computer software	$	543,864	$	(229,871	)	$	391,258	$	(132,033	)
Customer relationships		2,529,299		(719,554	)		-		-
Non-compete agreements		1,806,642		(401,476	)		-		-
Trademarks and licenses		1,633,833		(160,585	)		-		-
Website development  cost		1,473,252		(233,107	)		469,752		(94,055	)
Total intangible assets	$	7,986,890	$	(1,744,593	)	$	861,010	$	(226,088	)

Intangible assets of approximately $5,657,000 were acquired by the Group on acquisition of business from Fuzhou H-Band on July 10, 2011. These include computer software, customer relationships, non-compete agreements, trademarks and licenses and website development cost of $119,000, $2,243,000, $1,454,000, $1,779,000 and $62,000 respectively.

Amortization for the years ended December 31, 2011, 2010 and 2009 amounted to $1,484,623, $88,668 and $134,384 respectively. Management determined that there was no impairment charge for the years ended December 31, 2011, 2010 and 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

16 INTANIGBLE ASSETS, NET - CONTINUED

Estimated amortization expense at December 31, 2011 for each of the five succeeding years is as follows:

Year ending December 31,
2012	$	2,054,233
2013		1,903,240
2014		587,405
2015		362,332
2016		362,332
	$	5,269,542

17 BORROWINGS

Borrowings consist of the following:

	December 31, 2011		December 31, 2010
China Merchants Bank (a)	$	7,383,668	$	7,562,000
Other loans (b)		397,161		696,693
	$	7,780,829	$	8,258,693

Reported as:	December 31, 2011		December 31, 2010
Short-term borrowings	$	7,622,702	$	7,836,930
Long-term borrowings		158,127		421,763
	$	7,780,829	$	8,258,693

(a) The loan was due within one year and was used to finance daily operations. The weighted average effective interest rate applicable to the loan interest was approximately 6% per annum (2010: 5.6% per annum). The loans are secured by a property of the Group.

(b) The amount represented a loan financing arrangement raised by a subsidiary for acquiring a printing machinery with an interest rate of 5.85%. Included in the loan was $158,127 to be repaid after one year.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

18 ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables consist of the following:

	December 31, 2011		December 31, 2010
Accrued utility expenses and other liabilities	$	195,266	$	358,824
Accrued salaries and welfare		1,167,962		676,800
Value added tax and other taxes payable		4,409,132		4,434,815
Other payables
- IPO commission payable (a)		-		4,033,848
- Professional and consultancy fees (b)		390,620		5,080,282
- Deposits received (c)		650,973		650,181
- Advances from third parties (d)		4,227,083		4,069,431
- Others		1,331,547		1,158,074
	$	12,372,583	$	20,462,255

(a) The amount represented the offering commission due to CCB International Asset Management Limited.

(b) Included the unpaid professional and consultancy fees in course of ShiFang’s initial public offering.

(c) Deposits from customers to guarantee advertising volume. Such deposits are interest free and refundable upon termination of the advertising contracts. Deposits will be retained only if the desired volume is not reached at the termination of the contract. Contract period is usually one year or less.

(d) Advances from unrelated third parties were used to fund daily operations and were due within one year.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

19 DUE TO RELATED PARTIES

Due to related parties consists of the following:

	December 31,		December 31,
	2011		2010
Chen Zhi (a)	$	712,615	$	393,384
Chen Min (a)		78,140		50,081
Hong Peifeng (a)		205,748		600,583
Wang Jingfeng (a)		78,140		50,081
Zhang Tiezhu (a)		418,578		204,446
Michael W. Zhang (a)		78,140		50,081
Shenzhen Zhongke Hongyi Venture Investment		2,070,807		2,123,703
Management Co., Ltd. (b)
Topbig International Development Ltd. (c)		24,772		23,848
Fujian ShiFang Digital Technology Co., Ltd. (c)		821		8,957
Fuzhou Development Zone Xuanye Industry & Trade Co., Ltd. (d)		48,893		47,069
Fujian JinDi Mining Co., Ltd. (c)		1,526		1,469
Fujian Lanting Network Technology Holding Co., Ltd. (e)		10,777,013		-
Key management of the Group		212,981		12,148
	$	14,708,174	$	3,565,850

(a) All are directors of the Company.

(b) The company is controlled by a director of the Company.

(c) Chen Zhi is the beneficial owner of these companies.

(d) The company is controlled by a close family member of a director of the Company.

(e) The advance from a non-controlling shareholder of a subsidiary which is unsecured, interest-free, without fixed repayment term and repayable upon mutual agreement between the Group and the non-controlling shareholder.

Except for (e) which is classified as non-current liabilities, the amounts due to other related parties are unsecured, interest free and repayable on demand.

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CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

20 EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of shares of common stocks outstanding during the period. Diluted earnings per share is computed on the basis of weighted average number of shares of common stocks plus the effect of dilutive potential common shares outstanding during the period. The components of basic and diluted earnings per share are as follows:

	For The Year Ended
	December 31, 2011		December 31, 2010		December 31, 2009
Net income attributable to common shareholders	$	2,409,785	$	11,749,166	$	17,437,983
Basic weighted average outstanding shares of common shares		14,912,847		15,321,170		16,285,126
Dilutive effect of warrants		-		-		1,465,539
Dilutive weighted average outstanding shares		14,912,847		15,321,170		17,750,665
Earnings per share
Basic	$	0.16	$	0.77		1.07
Diluted	$	0.16	$	0.77		0.98

During the reporting period, the purchase options granted to the underwriters were not included in the computation of diluted earnings per shares because they were anti-dilutive.

A total of 7,500,000 Earn-out shares issued to OMH’s shareholders in 2010 have been included in the computation of the basic and diluted earnings per share to retroactively reflect the effect of the recapitalization.

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CHINA TOPREACH INC. AND SUBSIDIARIES

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(Stated in US Dollars)

21 SIGNIFICANT CONCENTRATIONS

Financial instruments which potentially expose the Group to concentrations of credit risk, is cash, accounts receivable and other receivable as of December 31, 2011 and 2010. The Group performs ongoing evaluations of its cash position and credit evaluations of customers to ensure sound collections and minimize credit losses exposure.

Sales and vendor concentrations

For the years ended December 31, 2011, 2010 and 2009, respectively, all of the Group’s sales were generated within the PRC. In addition, all accounts receivable as of December 31, 2011 and 2010 are from entities within the PRC.

For the years ended December 31, 2011, 2010 and 2009, there were no customers that accounted for 10% or more of the Group’s revenue.

For the years ended December 31, 2011, 2010 and 2009, there were three vendors that accounted for 10% or more of the Group’s cost of revenue, which is summarized in the following:

	For the Year Ended December 31,
	2011					2010					2009
Major Vendors	Purchase		Percentage of Total Cost of Revenue			Purchase		Percentage of Total Cost of Revenue			Purchase		Percentage of Total Cost of Revenue
Lifestyle Express		8,210,960		20.23	%		6,332,534		15.66	%		6,018,610		16.53	%
South East Express		7,847,104		19.33	%		8,759,036		21.66	%		6,565,947		18.03	%
Shenyang Evening News		6,025,492		14.84	%	$	10,063,307		24.88	%	$	10,119,951		27.79	%
Total	$	22,083,556		54.40	%	$	25,154,877		62.20	%	$	22,704,508		62.35	%

22 RELATED PARTY TRANSACTIONS

	For The Year Ended
	December 31, 2011		December 31, 2010		December 31, 2009
Revenue from related companies:
Companies controlled by a close family member of a director	$	-	$	-	$	232,426
Company controlled by a member of key management of the Group		-		150,927		428,452
Company controlled by the Chief Executive Officer of the Company		-		436,553		305,077
	$	-	$	587,480	$	965,955

Except for the above sales to related companies, the Group had no other significant related party transactions.

F-31

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

23 SHAREHOLDERS’ EQUITY

Preferred shares

As of December 31, 2011 and 2010, no shares are issued and outstanding.

Ordinary shares

As of December 31, 2011 and 2010, 14,912,847 shares were issued and outstanding.

During the year of 2010, the Company undertook the following transactions:

(i) On June 23, 2010, the Company awarded 300,000 ordinary shares to a senior executive as compensation. The shares were valued at $3.5 each totalling $1,050,000.

Pursuant to the restructuring agreement dated January 14, 2010 and prior to the consummation of the Private Placement, Topbig International, Blazing Sun and Keep Profit transferred 955,748, 352,526 and 469,938 ordinary shares (totalling 1,778,212 ordinary shares) to Dragon Soar Limited (“Dragon Soar”, a wholly-owned subsidiary of the Company) in return for 20% shareholding in ShiFang. The terms of this share exchange were determined and agreed among the company, Topbig, Blazing Sun and Keep Profit taking into account, among other things, the additional risk assumed by these three shareholders in providing collaterals to facilitate the consummation of the Private Placement and the reduced liquidity of unlisted ShiFang shares as compared to listed Company’s shares. The 1,778,212 shares of the Company held by Dragon Soar were forfeitted and cancelled on April 24, 2010.

(ii) As detailed in Note 1, the Company issued 5,500,000 shares out of the 9,500,000 Earn-out Shares to OMH shareholders on February 12, 2010. The Company has also issued the year 2009 and 2010 Earn-out Shares of 2,000,000 to the other OMH shareholders who did not provide additional collateral during the Private Placement on April 24, 2010. These 7,500,000 shares issued have been included in the computation of basic and diluted EPS to retroactively reflect the effect of the change in capital structure. The 5,500,000 and 2,000,000 shares were valued at $3 and $5 each respectively at the date of issue and a total of $26,500,000 was accounted for in the equity as stock dividends.

Warrants

On January 29, 2007, the Company completed the Public Offering with a sale of 5,013,500 units (including 513,500 units that were subject to the underwriters’ over-allotment option which were exercised on February 9, 2007) at a price of $8 per unit. Each unit consists of one ordinary share of the Company, at $0.001 par value, and one warrant. Each warrant entitles the shareholder to purchase from the Company one ordinary share at an exercise price of $6 commencing on the later of (a) the completion of a Business Combination with a target business, or (b) January 23, 2008. The Company may redeem the warrants (including any warrants issued upon exercise of the unit purchase option) at a price of $0.01 per warrant at any time after the warrants become exercisable to the extent the last sales price of the Company’s ordinary shares equals or exceeds $11.50 per share for any 20 trading days within a 30 trading day period.

The Company’s directors and officers, or their designees, have also purchased a total of 900,000 warrants prior to the closing of the Offering at $1.20 per warrant for an aggregate purchase price of $1,080,000 (the “Founding Director Warrants”). Each of the Company’s Initial Shareholders or their designees cannot sell these warrants until the consummation of a business combination. These warrants will be non-callable as long as they are held by the Company’s Initial Shareholders or their designees. The Founding Director Warrants were purchased separately and not in conjunction with ordinary shares in the form of units.

F-32

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

23 SHAREHOLDERS’ EQUITY - CONTINUED

Warrants - Continued

Number of warrants balance outstanding is as follows:

	Number of warrants
Series of warrants	December 31, 2011		December 31, 2010		Exercise price		Contractual term		Expiration Date
Warrants		-		5,013,500	$	6		4 years		January 23, 2011
Founding Director Warrants		-		900,000	$	6		4 years		January 23, 2011
		-		5,913,500

The warrants were expired and unexercised on January 23, 2011.

Purchase options

On January 29, 2007, the Company sold to the underwriters for $100, an option to purchase up to a total of 315,000 units as compensation for their services. The units issuable upon exercise of the unit purchase option are identical to those offered in the Public Offering. In lieu of paying the exercise price of $10 per unit, the option may be converted into units (i.e., a cashless basis) to the extent that the market value of the units at the time of the conversion exceeds the exercise price of the option. The option may only be exercised or converted by the option holder. The unit purchase option expires on January 23, 2011 and is exercisable at $10 per unit commencing on the later of (a) the completion of a Business Combination with a target business, or (b) January 23, 2011.

The Company valued the stock options by the Black Scholes model with the following assumptions:

Number of Options Issued		Expected Term		Expected Volatility			Dividend Yield			Risk Free Interest Rate			Grant Date Fair Value
	315,000		5		48.3	%		0	%		5.093	%	$	958,671

The options were expired and unexercised on January 23, 2011.

24 PENSION AND EMPLOYEE BENEFITS

Full time employees of the Company’s PRC subsidiary participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees.  PRC labor regulations require the Company to accrue for these benefits based on certain percentages of the employees' salaries. Costs for pension and employee benefits for the years ended December 31, 2011, 2010 and 2009 were$1,081,179, $521,739 and $608,222, respectively.

F-33

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

25 OTHER INCOME

	For The Year Ended
	December 31, 2011		December 31, 2010		December 31, 2009
The amount represented the following:
Sales of newsprint papers	$	73,074	$	214,072	$	252,014
Sale of scrap materials		439,656		398,637		253,475
Government grants		784,529		633,363		284,319
Sundries		259,595		168,918		239,124
	$	1,556,854	$	1,414,990	$	1,028,932

26 SEGMENT REPORTING

Management considers the Group to have one business segment, consisting of the Publishing and Advertising Business. The information presented in the consolidated statements of operations reflects the revenues and costs associated with this business segment that management uses to make operating decisions and assess performance. Also, it reviewed by the executive directors that are used to make strategic decisions.

The Board assesses the performance of the Publishing and Advertising Businesses from both geographic and product perspectives. Geographically, management considers the Group’s Publishing and Advertising Businesses are primarily operated in the PRC. The Businesses derive their revenue, which are subject to common risk and returns, all the Businesses activities are included in a single reportable segment in accordance with ASC 280 “Segment Reporting”. As such, no segment information is presented.

27 INCOME TAXES

Cayman Islands

China TopReach and ShiFang, being incorporated in the Cayman Islands as an exempted company, are not subject to any income tax in the Cayman Islands.

Hong Kong

Hong Kong profits tax has been provided at the rate of 16.5% on the estimated assessable profit for the years ended 31 December 2011, 2010 and 2009. Taxation on overseas profits has been calculated on the estimated assessable profit for the year at the rates of taxation prevailing in the countries in which the Group company operates.

People’s Republic of China

Effective from 1 January 2008, the companies now comprising the Group are subject to the corporate income tax in accordance with the new China Income Tax (“CIT”) Law as approved by the National People’s Congress on March 16, 2007. According to the new CIT Law and the relevant regulations, the new enterprise income tax rate applicable to the subsidiaries now comprising of the Group is 25% unless preferential rates are applicable in the cities where the subsidiaries are located.

F-34

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

27 INCOME TAXES – CONTINUED

People’s Republic of China – Continued

Fuzhou HongXinTu Printing Co., Ltd. (“Fuzhou HongXinTu”) was qualified as a manufacturing foreign enterprise, and was entitled to Foreign Enterprise Income Tax (“FEIT”) holiday of two year exemption plus three year half reduction since 2007 provided that it would operate for more than 10 years. In addition, as Fuzhou HongXinTu located in Fuzhou Economic Development Zone, the tax rate would gradually be increased from 18% to 25% over a period of 5 years. The applicable tax rate of Fuzhou HongXinTu for the year ended 31 December 2011 was 12% (2010: 11%). Shifang YaQi Culture Communication (Xiamen) Co., Ltd. (“ShiFang YaQi”) was entitled to the grandfathering treatment where the applicable CIT rate phased-in from 18% to 25% over a period of 5 years through 2012. The applicable tax rate of Shifang YaQi for year ended 31 December 2011 was 24% (2010: 22%). Based on the certificate dated 30 December 2008, Xiamen Duke Information Science & Technology Co., Ltd. (“Xiamen Duke”) was granted the qualification as a software production enterprise, and was entitled to FEIT holiday of two year exemption plus three year half reduction since 2008. In addition, Xiamen Duke was located in the High technology Development Zone, the tax rate would gradually be increased from 18% to 25% over a period of 5 years. The applicable tax rate of Xiamen Duke for year ended 31 December 2011 was 12% (2010: 15%).

All of the Group’s income is generated in the PRC. The Group’s income tax provision in respect of operations in PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof.

The income tax expenses recognized are as follows:

	For The Year Ended
	December 31, 2011			December 31, 2010		December 31, 2009
Current Income tax		3,900,216			3,593,249		3,611,619
Deferred income tax		(269,757	)		-		-
Income tax expense	$	3,630,459		$	3,593,249	$	3,611,619

A reconciliation of the income tax expense is as follows:-

	For The Year Ended
	December 31, 2011			December 31, 2010			December 31, 2009
Income before tax	$	11,560,877		$	25,015,096		$	21,053,189
Expected tax (25%)		2,890,219			6,253,774			5,263,297
Tax effect of expenses not deductible for tax purposes		1,592,291			82,176			112,082
Tax effect of revenue not taxable for tax purposes		(164,119	)		(56,801	)		(3,395	)
Tax effect of tax losses not recognized		994,270			215,695			(120,551	)
Tax exempted entities		(1,449,954	)		(2,952,052	)		(1,645,089	)
(Over)/under provision in previous year		(232,248	)		50,457			5,275
Income tax expense	$	3,630,459		$	3,593,249		$	3,611,619

Effective at the beginning of the year 2007, the Group adopted the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740 “Income Taxes”. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including 50% likely of being realized upon ultimate settlement. Management does not anticipate any potential future adjustments would result in a material change to its financial tax position. As a result, there is no unrecognized tax benefit.

The tax effect of temporary differences that give rise to the deferred income tax liabilities as of December 31, 2011 is presented below:

	December 31,		December 31,
	2011		2010
Deferred income tax liabilities:
Intangible assets through acquisition of business (Note 31)	$	1,161,974	$	-

F-35

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

28 CHANGES IN OWNERSHIP INTEREST OF SHIFANG

As a result of the reorganization and spin-off and separate listing of ShiFang in 2010 as mentioned in Note 1, the Company’s equity interests in ShiFang were diluted. The Company’s interest was firstly reduced from 100% to 58.27% after the Private Placement of ShiFang shares in February 2010, and the interest was further reduced to 43.71% when ShiFang was listed on the Main Board of The Stock Exchange of Hong Kong Limited in December 2010. The Group raised proceeds of approximately $35,000,000 and $71,564,000 from the Private Placement and global offering of ShiFang shares, respectively. This change in the Company’s ownership interest in ShiFang did not result in a loss of control and accounted for as an equity transaction in accordance with Accounting Standards Update (ASU) 2010-02, Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification.

Net income attributable to China TopReach Inc. and Transfers to the non-controlling interests

	December 31, 2010
Net income attributable to China TopReach Inc.	$	11,749,166
Transfer from the non-controlling interests after the private placement		2,999,060
Transfer from the non-controlling interests after the initial public offering of ShiFang shares		17,798,412
Net transfers from non-controlling interests		20,797,472
Change from net income attributable to China TopReach Inc. and transfers from non-controlling interests	$	32,546,638

During the year ended December 31, 2011, Shifang repurchased 12,223,000 of its own shares on the Hong Kong Stock Exchange. The total amount paid to repurchase the shares was HK$12,764,000, equivalent to $1,622,700 and the repurchased shares were subsequently cancelled. As a result of the share repurchases, the Company’s interests in Shifang was increased from 43.71% to 44.45%. The transfer from the non-controlling interests to shareholders of the Company after the share repurchases amounted to $1,237,927.

29 OPERATING LEASE COMMITMENT

Total future minimum lease payments under non-cancelable operating leases are as follows:

	December 31, 2011
Year ended December 31
2012	$	589,663
2013		456,569
2014		420,043
2015		380,589
2016		308,189
Over 5 years		723,120
	$	2,878,173

The Group has entered into certain leasing arrangements relating to the lease of office premises. The offices and facilities are located in numerous cities in China and the headquarter is located in Fuzhou City, Fujian Province.

F-36

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

30 SHARE BASED PAYMENT

(a) Share options issued by the Company

A resolution has been passed by the board of the directors on June 23, 2010 that the Company would award 300,000 ordinary shares to a senior executive effective immediately.

(b) Pre-IPO Share Option Scheme by ShiFang

Pursuant to a resolution in writing passed by all the shareholders of ShiFang on February 26, 2010, ShiFang conditionally approved and adopted a Pre-IPO Option Scheme (the “Pre-IPO Option Scheme”). By the same resolution, ShiFang granted 27,456,156 share options to its directors and employees which are exercisable under the following terms:

(i) The exercise price of the option should not be less than 100% of the fair market value of the shares of the shares as at the grant date as determined by valuer appointed by ShiFang.

(ii) 40% of total options granted become exercisable a year after grant date, another 30% also become exercisable 2 years after grant date and remaining 30% become exercisable 3 years after grant date.

The fair value of the employee services received in exchange for the grant of the share options is recognized as an expense, with a corresponding adjustment to equity-based compensation reserves, over the vesting period. At the end of each reporting period, ShiFang revises its estimates of the number of options that are expected to vest. It recognizes the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity. For the year ended December 31, 2011, the equity-based compensation expenses amounted to $842,106 (2010: $795,977; 2009: nil).

(c) Share Option Scheme of ShiFang

Pursuant to the resolutions in writing passed by the shareholders of ShiFang on November 8, 2010, ShiFang adopted a share option scheme on November 8, 2010 (“Share Option Scheme”). The purpose of the Share Option Scheme is to provide incentive or reward to (i) any full-time or part-time employees, executives or officers of ShiFang or any of its subsidiaries; (ii) any Directors (whether executive or non-executive, including any independent non-executive Director) of ShiFang or any of its subsidiaries; or (iii) any advisors, consultants suppliers, customers and agents to ShiFang or any subsidiaries (each “Eligible Person”).

F-37

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

30 SHARE BASED PAYMENT – CONTINUED

(c) Share Option Scheme of ShiFang (Continued)

The Board of Directors may, at any time within 10 years after the date of approval of the Share Option Scheme, make an offer to grant options to any Eligible Person. The subscription price for shares granted pursuant to the Share Option Scheme shall be determined by the Board of Directors in its absolute discretion and shall be at least the highest of:

(i) the closing price of the ShiFang shares as stated in the Stock Exchange of Hong Kong Limited’s (the “Stock Exchange”) daily quotations sheet on the date of offer;

(ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date on which such offer is made; and

the nominal value of shares of ShiFang. The total number of Shifang shares in respect of which options may be granted under the Share Option Scheme is not permitted to exceed 10% of the total number of shares in issue as at the Listing Date, 73,216,512 Shares, without prior approval from the shareholders of ShiFang. The maximum number of shares which may be issued upon exercise of all outstanding options granted, and yet to be exercised, under the Share Option Scheme and any other share option schemes of ShiFang must not exceed 30% of the issued share capital of ShiFang from time to time. The total number of shares issued and to be issued upon exercise of all options granted under the Share Option Scheme to each Eligible Person (including both exercised, cancelled and outstanding options) in any 12-month period shall not exceed 1% of the total number of issued shares of ShiFang. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting. Share options granted to a director, chief executive or substantial shareholder of ShiFang, or to any of their associates, are subject to approval in advance by the independent non-executive directors of ShiFang. In addition, if shares issued and to be issued upon exercise of all options granted under the Share Option Scheme (including options exercised, cancelled and outstanding) to a participant who is a substantial shareholder or an independent nonexecutive director of ShiFang, or any of their associates, in any 12-month period (i) represent in aggregate more than 0.1% of the total number of shares in issue, and (ii) have an aggregate value, based on the closing price of the shares of ShiFang at the date of each grant, in excess of HK$5,000,000 (approximately $645,000), the proposed grant of option must be approved by the shareholders of ShiFang in a general meeting. The amount payable on acceptance of an option is RMB1.00. The exercise period of any option granted under the Share Option Scheme shall not be longer than 10 years from the date of grant of the relevant option. There is no minimum period for which an option must be held before the exercise of the option except otherwise imposed by the board of Directors. As at 31 December 2011, no share option had been granted under the Share Option Scheme. 

F-38

CHINA TOPREACH INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

31 BUSINESS COMBINATION

On July 10, 2011, the Group acquired the real estate marketing and planning business from Fuzhou Haobang Real Estate Marketing and Consulting Co., Ltd. at a consideration of RMB 40,000,000 (approximately $6,188,000).

The transaction was accounted for as accounted for as a business combination using the purchase method of accounting and the results of the business operations have been included in the Group’s consolidated financial statements from the acquisition date of July 10, 2011. The purchase price allocation of the transaction were determined by the Group with the assistance of an independent valuation firm in the PRC, and the purchase price allocation to assets acquired and liabilities assumed as of the date of acquisition is as follows:

	December 31, 2011
Intangible assets acquired:
-Computer software	$	119,000
-Customer relationships		2,243,000
-Non-compete agreements		1,454,000
-Trademarks and licenses		1,779,000
-Website development cost		62,000
Goodwill		1,945,000
Deferred tax liabilities		(1,414,000	)
Total consideration	$	6,188,000

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and comprise the assembled work force and the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.

The revenue and profit included in the consolidated statement of operations since July 10, 2011 contributed by acquired business was $2,758,000 and $1,508,000 respectively. Had the above acquisition taken place on January 1, 2011, the consolidated statement of operations would show revenue of $84,440,000 and profit of $10,598,000.

32 CONTINGENT LIABILITIES

On July 26, 2011, Shenyang Media Corporation, one of the Group’s partners under a comprehensive cooperation contract, unilaterally terminated the contract with the Group.

Shenyang Media Corporation initiated civil action against the Group on October 25, 2011 through the Shenyang Intermediate People’s Court in Liaoning Province (“Intermediate People’s Court”), where Shenyang Media Corporation claimed the Group for a total sum of RMB 17,329,000 (approximately $2,722,000), being the outstanding advertising fee payable by the Group as at July 26, 2011 under the comprehensive cooperation contract between the Group and Shenyang Media Corporation and all legal costs in relation to the litigation.

On December 22, 2011, the Group issued a civil writ to the Higher People’s Court of Liaoning Province (the “Higher People’s Court”) in the PRC against Shenyang Daily Agency and Shenyang Media Corporation, pursuant to which the Group claimed Shenyang Daily Agency and Shenyang Media Corporation for a total sum of RMB105,579,352 (approximately $16,586,000), being the outstanding advertising fees payable by the Shenyang Daily Agency and Shenyang Media Corporation to the Group under their comprehensive cooperation contract with the Group together with all the legal costs the Group incurred in relation to such litigation.

On March 8, 2012, the Group has received a civil judgment issued by the Higher People’s Court in relation to the civil writ issued on December 22, 2011, pursuant to which the Higher People’s Court decided to refer the case to the Intermediate People’s Court. On March 13, 2012, the Group has lodged an appeal to the Supreme People’s Court of the PRC (the “Supreme People’s Court”) to request the Supreme People’s Court to overrule the Higher People’s Court’s decision and order that the case shall remain to be heard in the Higher People’s Court pursuant to the PRC law.

No provision for loss has been made in respect of the litigation between the Group, Shenyang Daily Agency and Shenyang Media Corporation, as at December 31, 2011, as management, having considered all available facts and circumstances and legal advice from the Group’s external legal counsel, has determined that these claims would not result in an outflow of economic benefits from the Group.

33 SUBSEQUENT EVENTS

On January 9, 2012, the Group has paid a total amount of RMB100,000,000 (approximately $15,710,000) as additional investment cost toYunnan HanDing Investment Co., Ltd.

F-39

ITEM 19.  EXHIBITS

1.1	Amended and Restated Memorandum and Articles of Association. **
4.1	Underwriting Agreement. *
4.2	Unit Purchase Agreement to be granted to Morgan Joseph & Co., Inc. *
4.3	Warrant Agreement between American Stock Transfer & Trust Company and the Registrant. *
4.4	Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant. *
4.5	Securities Escrow Agreement among the Registrant, American Stock Transfer & Trust Company and the Initial Shareholders.*
4.6	Registration Rights Agreement among the Registrant and the Initial Shareholders. *
4.7	Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Michael W. Zhang. *
4.8	Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Jin Shi.*
4.9	Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Xuechu He.*
4.10	Letter Agreement among the Registrant, Morgan Joseph & Co., Inc. and Teng Zhou.*
4.11	Letter Agreement  among the Registrant, Morgan Joseph & Co., Inc. and Xuesong Song.*
4.12	Office Services Agreement between the Registrant and Global Vestor Capital Partners LLC.*
4.13	Warrant Purchase Agreement between the Company and the Initial Shareholders.*
4 .14	Promissory Note, dated May 18, 2006, issued to Global Vestor Capital Partners, LLC in the amount of $63,000.*
4.15	Promissory Note, dated May 18, 2006, issued to Venture Link Assets Limited in the amount of $33,600.*
4.16	Promissory Note, da ted May 18, 2006, issued to Chum Capital Group Limited in the amount of $63,000.*
4.17	Promissory Note, dated May 18, 2006, issued to Guorun Group Limited in the amount of $50,400.*
4.18	Amended Share Purchase Agreement dated June 23, 2010.***
12.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1	Certification by Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification by Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*	Incorporated by reference to the Registrant's Form F-1/A (Commission File  No. 333-134459) filed on January 19, 2007
**	Incorporated by reference to the Registrant's Form F-1/A (Commission File No. 333-134459) filed on December 8, 2006
***	Incorporated by reference to the Registrant's Form 20-F (Commission File No. 000-52416) filed on June 30, 2010

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.

CHINA TOPREACH INC.
By:	/s/ Zhi Chen
	Name:	Zhi Chen
	Title:	Chief Executive Officer

Dated: April 30, 2012

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