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EX-21 - EXHIBIT 21 - China Marketing Media Holdings, Inc.ex21.htm
EX-31.1 - EXHIBIT 31.1 - China Marketing Media Holdings, Inc.ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Marketing Media Holdings, Inc.ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - China Marketing Media Holdings, Inc.ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - China Marketing Media Holdings, Inc.ex32-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
x
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

o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to ____________
 
Commission File Number: 000-51806
 
CHINA MARKETING MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Texas
76-0641113
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification Number)
 
RMA 901
KunTai International Mansion
No. 12 Chaowai Street
Beijing, 100020, China
(Address of principal executive office and zip code)
 
(86)10-59251090
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None.
 
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
    Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
    Yes o No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
    Yes x No o
 
 
 

 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer  o   Accelerated Filer   o
Non-Accelerated Filer  o (Do not check if a smaller reporting company) Smaller reporting company  x
  
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x
 
As of June 30, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of such shares as reported on the Over-the-Counter Bulletin Board) was approximately $3.6 million.
 
There were a total of 28,686,002  shares of the registrant’s common stock outstanding as of March 31, 2012.
RDGPreambleEnd
DOCUMENTS INCORPORATED BY REFERENCE

None.

 
 

 

CHINA MARKETING MEDIA HOLDINGS, INC.
 
Annual Report on FORM 10-K
For the Fiscal Year Ended December 31, 2011
 
Number  
Page
  PART I  
Item 1.
Business.
     
Item 1A.  Risk Factors.   10
     
Item 2. 
Properties. 
16
     
Item 3. 
Legal Proceedings.  16
     
Item 4. 
Mine Safety Disclosures. 
16
     
 
PART II
 
     
Item 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  17
     
Item 6. 
Selected Financial Data. 
18
     
Item 7. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
18
     
Item 8. 
Financial Statements and Supplementary Financial Data.   25
     
Item 9. 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.  26
     
Item 9A. 
Controls and Procedures.
26
     
Item 9B.   Other Information.  27
     
 
 
 
     
Item 10.   Directors, Executive Officers and Corporate Governance.   28
     
Item 11.   Executive Compensation.  30
     
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   31
     
Item 13.   Certain Relationships and Related Party Transactions, and Director Independence.  32
     
Item 14.      Principal Accountant Fees and Services.   33
     
 
PART IV  
 
     
Item 15.   Exhibits, Financial Statements Schedules.  34
 
 
 

 
 
INTRODUCTORY NOTE

Except as otherwise indicated by the context, references to “we,” “us,” “our,” or “the Company” are to China Marketing Media Holdings, Inc. and its subsidiaries. References to “Media Challenge” are references to Media Challenge Holdings Limited, a British Virgin Islands company. Unless the context otherwise requires, all references to (i) “Shenzhen New Media” are to Shenzhen New Media Consulting Co., Ltd.; (ii) “Shenzhen Media” are to Shenzhen Media Investment Co., Ltd.; (iii) “BVI” are to the British Virgin Islands; (iv) “PRC” and “China” are to the People’s Republic of China; (v) “U.S. dollar,” “$” and “US$” are to United States dollars; (vi) “RMB” are to Renminbi, the legal currency of China; (vii) “Securities Act” are to the Securities Act of 1933, as amended; and (viii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

FORWARD-LOOKING STATEMENTS

Statements contained in this annual report include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements made in this Report generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks and uncertainties include, among other things, such factors as:
 
 
·
Chinese economy slows more than expected in 2012
 
 
·
strong competition in our industry;
 
 
·
our significant reliance on the operation and management right agreement between us and Sale and Marketing Publishing House, or CMO; and
 
 
·
significant deficiency in our internal controls over our financial reporting.
 
Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this annual report are discussed in Item 1A. “Risk Factors.” Readers are urged to carefully review and consider the various disclosures made by us in this annual report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this annual report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
 
 
1

 
 
PART I
ITEM 1.        BUSINESS

Overview

We were originally organized under the laws of the State of Texas on October 29, 1999 under the name Brazos Strategies, Inc. We changed our name to Infolife, Inc. on July 16, 2003 and finally to China Marketing Media Holdings, Inc. on February 7, 2006. We are a holding company and we have no operations other than administrative matters and the ownership of our direct and indirect operating subsidiaries. Through our indirect Chinese subsidiaries, we are engaged in the business of selling magazines and advertising space in our magazines, providing sales and marketing consulting services and online sales of various consumer products. All of our operations, assets, personnel, officers and directors are located in China. Currently, we publish China Marketing magazine in China. We publish four issues of China Marketing per month, including a sales edition, case edition, channel edition and career development edition. In June 2009, we began to publish eight special issues of China Marketing, which include cosmetic edition, food edition, gift edition, tobacco edition, home appliance edition, sporting goods edition, edition for agricultural resources and edition for entrepreneurs in Henan province. In October 2011, we discontinued the special issue of sporting goods edition. Therefore, we currently have 4 main issues and 7 special issues. Currently, the distribution network of our magazines consists of over 60 major distribution agencies and 30,000 bookstores and newsstands covering over 300 cities throughout China.

Our magazines are Chinese publications tailored to the sales and marketing industry. The magazines were originally published by Sale and Marketing Publishing House, or CMO, under the Light Industrial Ministry of the Henan Provincial Government. On October 22, 2003, the Henan Provincial Government, Shenzhen Niu Si Tai Asset Management Limited Corporation, and CMO incorporated Shenzhen Media under the laws of China. On October 23, 2003, Shenzhen Media entered into a ten year operation and management right agreement with CMO or Operation and Management Right Agreement, pursuant to which from November 1, 2003 to October 31, 2013, Shenzhen Media is obligated to market the magazines, sell the magazines and advertising space, provide strategic planning for the magazines, and train the professional staff of CMO. The agreement was amended on January 8, 2004. Under the terms of the agreement, as amended, Shenzhen Media agreed to pay a lump sum deposit of RMB 10,109,300 (approximately US$1,220,930) and bear all of the operating costs relating to the publishing of the magazines in exchange for the right to all revenues generated from selling the magazines and their advertising space.

On November 20, 2004, Shenzhen Media Investment and Shenzhen New Media entered into an Entrust Agreement, under which Shenzhen Media Investment transferred all of its rights under the Operation and Management Right Agreement to Shenzhen New Media. Shenzhen New Media agreed to pay Shenzhen Media Investment US$1.45 million in connection with this transfer of rights. Shenzhen New Media agreed to pay this amount over the 9-year term of the agreement, which is for the full remaining term of the assigned contract. Thereafter, on December 21, 2005, our indirect subsidiary, Shenzhen New Media acquired Shenzhen Media Investment.

We had to enter into the Operation and Management Right Agreement and the Entrust Agreement instead of acquiring CMO outright as a result of restrictions under Chinese law that prohibit foreign persons from engaging in certain publishing activities in China. CMO is an affiliate of the Administration of Press and Publication of Henan Provincial Government and was established under the laws of China. Because of its ownership of the national publishing codes of China Marketing, CMO is the owner of the magazine. Although our Chief Executive Officer, Yingsheng Li, and other members of our executive team are also executive officers and/or directors of CMO, it is only through these two above agreements that we have obtained a right to oversee the operation and strategic planning of advertising, publishing, and staff training for the magazines that are published by CMO. Under these agreements, we are also entitled to collect advertising revenues from clients already existing at the time of the agreements, in addition to any new clients that we can solicit and retain. As a result, we derive the economic benefits and incur the economic burdens that we would otherwise have as the owner of CMO or the owner of CMO’s assets while still complying with Chinese law.

The Entrust Agreement and the Operation and Management Right Agreement between Shenzhen New Media and Shenzhen Media and between Shenzhen Media and CMO, respectively, are both protected by the laws of China and these agreements cannot be amended or terminated without the written consent of all parties involved.
 
 
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To increase our revenue stream, our management began exploring the feasibility of engaging in new business lines in July 2007. Management considered the potential costs and benefits of launching another magazine or acquiring other publishing or advertising assets and determined that such actions require capital outlays that are greater than the company can currently afford and would take several months or years to implement. While cash is still the main form of payment in China, the use of credit cards is becoming a popular alternative to carrying banknotes. As a result of, or possible contributing to the increasing popularity of credit cards, many consumers in China are choosing to shop online and pay with credit cards. Consumers in China are realizing that online shopping allows consumers to browse through many items and categories without leaving their homes, to compare prices of multiple suppliers or stores, and to arrange for convenient shipping of products by the supplier. Our management decided that the company should enter into the online sales and marketing business to take advantage of this marketplace trend. Management believed at the time that engaging in online business is beneficial and suitable for small businesses like us as it requires significantly lower capital outlay compared with traditional business approaches.

In July 2008, we began our new business of online marketing and sales of consumer products by entering into various cooperation arrangements with Chinese banks. These banks’ existing consumer communication channel allows us to spend a limited amount of money as the startup cost for advertisement. We have been able to market and sell our products by sending marketing brochures with the banks' monthly statements to their credit card customers and receive payments through the banks' already developed online payment mechanism.

In June 2010, we launched a new business platform called “Easy Buy” that connects businesses, banks and customers on a single platform. With the innovative Invisible Printing Optical Identification Technology (IP-OIT), this sales and marketing platform helps the advertising clients to further promote their products and enhance their sales distribution channel.   At the same time, we will be able to market and sell our products by sending the special catalog to the gold and platinum card holders through various banks, thus, bringing in more advertising revenues for the Company.

The management decided to sell the online marketing and sales of consumer products division after more than three years of suffering losses. On December 21, 2011, our Board of Directors approved the sale of Shenzhen Media Investment Co. (“SMI”), also known as online consumer products division.

In December 2011, Shenzhen New Media Consulting Co, Ltd. (“SNMC”), an indirectly owned subsidiary of China Marketing Media Holdings, Inc. (the “Company”) and the sole shareholder of Shenzhen Media Investment Co. Ltd (“SMI”), completed a disposition of 100% equity interest in SMI to Bin Li, a former member of the Board and related party, and Feng Yu, an individual shareholder of the Company since August 2010 (each, a “Transferee”). Specifically, on December 26, 2011, SMI, on the one hand, and each Transferee, on the other hand, executed certain Equity Transfer Agreement under which Bin Li and Feng Yu acquired 90% and 10% equity interests in SMI, respectively, in exchange for a total consideration of RMB 38,915,724 (RMB 35,024,152 and 3,891,572 respectively (approximately, USD$5,500,326 and $611,147, respectively)), which was determined based on the net asset value of the transferred assets in accordance with the PRC GAAP and subject to adjustments. The transfer consideration of RMB38,915,723 payable by the Transferees under the agreement is due within one year of the date of the agreement and none of such consideration has been received to date.

The foregoing disposition included SMI's liabilities in the total amount of RMB 7,051,286 also estimated in accordance with the PRC GAAP and subject to adjustments. SMI's primary business includes, among other things, sales and marketing of magazines and advertising space in magazines and provision of strategic planning for magazines. The disposition included assets related to the Company's online sales of consumer products. Specifically, (i) the total assets disposed were in the amount of RMB in thousands 58,974 and included cash, accounts receivable, inventory (among others, electronic appliances, personal computers, and cosmetics), fixed assets (among others, furniture, fixtures and computers) and intangible assets (among ERP system and customer call center software), and (ii) the total liabilities disposed were in the amount of RMB in thousands (20,059) and included accounts payable, accrued expenses and others. The Company's Operations and Management Agreement with CMO, a state owned entity of the Administration of Press and Publication of Henan Provincial Government, was not included in the foregoing transaction and, therefore, did not require CMO's approval. The total amount of net assets disposed in connection with the foregoing transaction was RMB38,915,724. All amounts are in RMB and are subject to audit adjustments.
 
 
3

 

To facilitate the foregoing disposition of SMI, on December 23, 2011, SNMC entered into certain intra-company equity transfer agreements with SMI, pursuant to which SMI transferred its 10% equity interest in Beijing Orient Converge Human Resources Management Center Co. Ltd., its 98% equity interest in Beijing Media Management Consultation Company (“BMMC”) and its 30% equity interest in Shenzhen Directory Marketing Management Co. Ltd., all of which, prior to the disposition were the Company's subsidiaries, in consideration for RMB 500,000 (approximately USD$78,522), RMB 980,000 (approximately USD$153,903) and RMB15,000,000 (approximately USD$2,355,657), respectively, to SNMC. In addition, Wengao Luo, a member of the Company's Board, agreed to transfer all of his 2% equity interest in BMMC to SNMC in consideration for RMB20,000 (approximately USD$3,141).

On March 31, 2011, the Company disposed of its wholly owned subsidiary, Shenzhen New Media Advertising Co., Ltd. (“SNMAC”) for a consideration of $154,703. There was no gain or loss on disposal of a subsidiary for the year ended December 31, 2011 for this transaction.

We do not maintain a corporate website, but we utilize http://www.cmmo.com.cn for the sale and promotion of the magazines we publish.
 
History and Corporate Structure

We were originally organized under the laws of the State of Texas on October 29, 1999 under the name Brazos Strategies, Inc. We changed our name to Infolife, Inc. on July 16, 2003 and finally to China Marketing Media Holdings, Inc. on February 7, 2006. When we operated under the name Brazos Strategies, Inc., we were an Internet service provider. Thereafter, when we changed our name to Infolife, Inc. we continued our business as an Internet service provider in Tomball, Texas. This business was later sold back to the original shareholders of Infolife, Inc.

On December 31, 2005, we entered into a share exchange agreement with Media Challenge, a BVI corporation, and the shareholders of Media Challenge. Pursuant to the share exchange agreement, we acquired 121,000 shares of Media Challenge, constituting all of the issued and outstanding capital stock of Media Challenge, in exchange for convertible promissory notes in the principal amount of $441,600. These convertible promissory notes were convertible into 22,808,002 shares of our common stock, but only after the completion of a 1-for-10 reverse split of our common stock that we became obligated to effect pursuant to the share exchange agreement. Thereafter, on January 25, 2006, we completed a 1-for-10 reverse split of our common stock as contemplated by the share exchange agreement. At that time, the convertible note issued to Media Challenge also converted into 22,808,002 shares of our common stock and the former shareholders of Media Challenge, Yingsheng Li, Xiaofeng Ding, and Dongsheng Ren became our controlling stockholders. Collectively, they became the owners of about 82% of our outstanding common stock. Media Challenge thereby became our wholly-owned subsidiary and the former shareholders of Media Challenge became our controlling stockholders. Immediately prior to the stock split, we had 47,780,000 shares of common stock outstanding, and immediately following the stock split and the issuance of our common stock pursuant to the share exchange agreement, there were 27,586,002 shares of common stock outstanding.

 
4

 


(1) Beijing Media Management Consultation Company was incorporated in China in October 2004 to carry on consultation, professional training and provide relevant sales and marketing services to business enterprises in China.

(2) Shenzhen Keungxi Technology Company Ltd., or SKTC, was incorporated in China in October 2005. Its business scope includes, among others, sales and development of computer software, computers, and communication systems. It also provides information system consulting services.

(3) Sale and Marketing Publishing House, or CMO, is the owner of the “China Marketing” magazine. It is currently responsible for providing and editing the contents of the magazine.

(4) Beijing Orient Converge Human Resources Management Center Co. Ltd., or Beijing Orient, was incorporated in China in November 2007. It is engaged in the business of vocational training, employment recommendation and services. It also conducts sales and marketing professional training. On August 2, 2008, Shenzhen Media sold 42% ownership of Beijing Orient to Shanghai Cheng Mei Biotechnology Co., Ltd. (“Shanghai Cheng Mei”) for a cash price of $141,831 (equivalent to RMB 987,461). After the sale, Shenzhen Media owns 10% of Beijing Orient.
 
 
5

 
 
(5) Shenzhen Directory Marketing Management Co. Ltd, or SDMM, was incorporated in China in June 2010 and is mainly engaged in providing advertising services, business enterprises marketing planning services, and information system consulting services. The Company, through Shenzhen Media, holds 30% of the equity interest of SDMM and one individual shareholder, Ge Zhihong, owns the remaining 70% equity interest of SDMM, respectively, and accounts for the investment using the equity method.
 
Our Products

China Marketing was first published by CMO in April 1994 as a monthly magazine. Thereafter, in September 2001, CMO began publishing two issues of this magazine per month. In May 2004, after the establishment of the operation and management rights agreement, we started to publish three issues of this magazine per month. In June 2003, the first issue of China Business & Trade was published. In January 2007, we decided to stop publishing China Business & Trade by combining the content of China Business & Trade into the Case edition of China Marketing. In October 2010, we published a new issue of Career Development edition. In June 2009, we began to publish eight special issues of China Marketing, which include cosmetic edition, food edition, gift edition, tobacco edition, home appliance edition, sporting goods edition, edition for agricultural resources and edition for entrepreneur in Henan. In October 2011, we discontinued the special issue of sporting goods edition. The special editions are published from time to time based upon market conditions.

The dimension of China Marketing is 210mm x 285mm.  The magazine is published in color.  We use double-side offset paper within the magazine and 157g double-side halftone paper for the covers of Sales edition and Channel edition of the magazine and 200g double-side halftone paper for the covers of Case edition. All editions of the magazine are published in Chinese and circulated within the greater China area, which includes mainland China and Hong Kong.

Each issue of China Marketing focuses on specific topics. The first monthly issue of the magazine, the Sales edition, is a blend of overall discussion on sales and marketing for executives who need to keep track of the latest developments in their industries. This issue also introduces creative and successful marketing strategies and analyzes market trends of different industries and new business opportunities. It offers the readers a macro view of the developments and trends in various industries across China. Competitive and sales strategies are proposed to readers who need advice on formulating an appropriate strategy for their products. Practical methodologies are also presented to facilitate the readers in managing their business operations. The second issue of the magazine, the Case edition, features sales and marketing case studies. This edition includes detailed reports by industry experts that explain different sales and marketing techniques and theories underlying the featured case study. These cases focus mainly on business sales and marketing events that have occurred in China. These case studies offer our Chinese readers some insight into particular sales and marketing approaches used by the companies who are the subject of the case study. The third issue, the Channel edition, is tailored to supply chain management executives. This edition provides information on the supply chain management process including, manufacturers, distributors, and logistics management. The fourth issue, the Career Development edition, assists recent graduates and individuals to start and manage a career in the sales and marketing field.

Each of the seven special editions we published in 2011 focuses on different sales and marketing strategies for a specific industry.

CMO’s editorial department is solely responsible for providing the editorial content of the magazines. The content of our magazines can be broken down into three categories consisting of topics of interest, case studies and management practice. Topics of interest are identified by CMO’s editors and articles are prepared by CMO editors based upon publicly available information about the particular topic. Case studies on actual sales and marketing events are identified by CMO’s editors, who also provide commentary and analysis on these case studies. Freelance writers are retained to write articles on management practices in the sales and marketing industry. These management practice articles are designed to utilize real life experiences to provide readers with solutions to their sales and marketing problems and general sales and marketing guidance.

The physical printing, assembling and production of our magazines have been outsourced to independent third party printers. The printers are responsible for typesetting the articles, proof reading, plate-making, paper supplying, binding and packaging. Specifically, the printing works of the publication of Sales edition and Case edition were contracted to Henan Xinhua Printing Factory. The printing works of the publication of Channel edition were contracted to Henan Ruiguang Printing Co., Ltd.

 
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Under these outsourcing agreements, the paper cost accounts for a large proportion of the quoted price. The printing price is equal to the quantity of units multiplied by the unit price, which is a fixed price under the agreement. This fixed price remains constant during the term of the agreement. Therefore, the printer assumes the risk of increasing paper costs.

We outsource the production of our magazines to independent third party printers because we are not in the printing business. We believe it is commercially beneficial for us to hire the independent printers who have more professional knowledge of printing than we do.

Advertising

In addition to generating revenues through sales of our magazines, we also generate revenues through the sale of advertising that is placed in our magazines.

Based on the market position of each edition of the magazines, our marketing team identifies the sort of potential clients that would be interested in advertising in our magazines and offers them an advertising package within the magazines. Also, our magazines have built up a base of clients that regularly advertise in the magazines.

Advertising Consulting Services

We also provide advertising consulting services to our customers through our subsidiary, Shenzhen Caina Brand Consultant Company. The services that we currently offer mainly focus on assisting our customers on the promotion of brand awareness.

Online Sales

In July 2008, we began our new business of online marketing and sales of consumer products. The business was sold on December 26, 2011.

Our Distribution Channels of Our Magazines

Currently, the distribution network of our magazines consists of over sixty major distribution agencies and 30,000 bookstores and newsstands covering over 300 cities throughout China. We plan to develop a more comprehensive distribution network for our magazines that we hope will eventually reach all major cities in China.

There are three main distribution channels for our magazines in China:

(1)
postal subscription based distribution;
(2)
direct order distribution; and
(3)
agency based distribution.

Our first distribution channel, postal subscription based distribution, involves the distribution of our magazines by Chinese post offices. Unlike the United States, subscribers of our magazines and other magazines published in China can request a subscription directly from the post offices in China who arrange delivery of the magazines to the address requested by the subscriber. Direct order based distribution involves a direct request from a subscriber to us for a single issue or multiple issues of our magazines that do not involve an ongoing subscription. Upon receipt of this request, we deliver the ordered issues to the address requested by the subscriber. Finally, agency based distribution, involves the delivery by us of our magazines to distribution agents who then distribute the magazines to retail sales agents who sell the magazines from various locations throughout China.

As of December 31, 2011, the annual circulation of our magazines during the 2011 fiscal year was 2,261,626 units, among which 43.31% of sales were made through retail agents such as newsstands, airports, subways and bookstores throughout China.  These retail agents obtained our magazines from our distribution agents who operate throughout China.  The remaining sales were through postal subscriptions 43.75% and direct orders 12.94%.  As of December 31, 2010, the annual circulation of our magazines during the 2010 fiscal year was 2,474,338 units, among which 54.98% of sales were made through retail agents such as newsstands, airports, subways and bookstores throughout China. These retail agents obtained our magazines from our distribution agents who operate throughout China. The remaining 45.02% of our sales were through postal subscriptions 32.68% and direct orders 12.34%.
 
 
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The following table lists the annual circulation of our magazines during the fiscal year ended December 31, 2011:

 
 
China Marketing (Sales edition)
 
 
China Marketing
(Case edition)
 
China Marketing (Channel edition)
 
 
China Marketing
(Career Development edition)
 
 
Special Editions
 
Total
Distribution agents
248,982
211,307
265,521
  91,334
162,374
  979,518
Subscriptions through post offices
275,440
275,440
429,514
    9,066
          0
  989,460
Direct subscriptions
  18,342
  18,612
  23,930
    5,999
225,765
  292,648
Total
542,764
505,359
718,965
106,399
388,139
2,261,626

The following table lists our principal distribution agents and their distribution areas:

Names of Distribution Agents
Distribution Area
   
Beijing Luopan Zhengzhang Books Co., Ltd
Beijing
   
Nanjing Raotian Cultural Development Co., Ltd.
Jiangsu Province
   
Guangzhou Rutu Culture Development Co., Ltd
Guangdong Province
   
Wuhan Dagong Books Co., Ltd
Hubei Province
   
Hengyang Post Office Books Retail Co., Ltd
Hunan Province

We have entered into a distribution agreement with each of these principal distributors. The distribution agreement has a one year term that is automatically renewed for an additional year unless either party provides the other with notice of termination one month prior to the end of the term. Pursuant to the agreement, the distributor has the obligation, at its own expense, to sell and deliver our magazines to retail agents and readers within the distributor’s authorized distribution territory. Our distributors receive sales commissions on the distribution of our magazines ranging from 40-45% of total proceeds generated by their sales.

Prices of Our Products

The fixed retail price of the Sales edition, the Case edition and the Channel edition of China Marketing is RMB 10 per issue (approximately $1.57); the fixed retail price of the Career Development edition of China Marketing is RMB 5 per issue (approximately $0.78); the fixed retail price of the seven special issues is RMB 20 per issue (approximately $3.14). Subscribers who subscribe to our magazines directly pay this same fixed retail price per issue on an issue by issue basis.

Subscribers who subscribe through post offices in China are charged through an annual payment arrangement where they pay for the annual subscription fees at the beginning of each year based upon the number of issues that will be published during the year.
 
 
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Competition

Both local and overseas publishers issue business related magazines in China. Business Week, Harvard Business Review, Forbes, and Fortune are some of the well-known international business magazine titles that have Chinese versions published in China. These magazines publish translated articles from the English version and develop some local stories with the editorial staff hired by the local publishing houses.

Our local competition consists of three sub-titles, namely New Selling, Successful Selling, and Contemporary Selling. We compete with our competitors based upon the price of our magazines, the quality of the articles and information that we publish, and the design features of our magazines. We believe that prices of our magazines are lower than the prices of our international competitors such as Business Week, Harvard Business Review, Forbes and Fortune and our local competitors, such as New Selling, Successful Selling and Contemporary Selling. We also believe that the quality and design features of our magazines are superior to the quality and design features of New Selling, Successful Selling and Contemporary Selling but not as good as our international competitors.

Our Intellectual Property

We believe that our business is dependent in part on our ability to establish and maintain the copyright of the content and titles of our magazines.

Our magazines have been registered with the General Administration of Press & Publication of China and CMO has obtained the national publishing code CN41-1210/F for China Marketing. In addition, CMO has obtained international standard code for China Marketing, which is ISSN1005-3530. These codes, respectively, are printed on the last page of each publication.

We have registered our magazine’s title “China Marketing” as trademark with the Trademark Office of the State Administration for Industry and Commerce of China. We use our trademark for the sales and marketing of our magazines.

We have registered our www.cmmo.com.cn Internet domain name. The articles and other contents of our magazines are protected under copyright laws of China.

Our Employees

We currently have 364 full-time employees and we do not expect any significant changes in the number of our employees during the next 12 months.

We believe that our relationship with our employees is good. The remuneration payable to employees includes basic salaries and allowances.

We have not experienced any significant problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in recruitment and retention of experienced staff.

Our employees in China participate in a state pension plan organized by Chinese municipal and provincial governments.  Currently, each month we are required to contribute to the plan with approximately $94 for each of our employees and approximately $169 for each of our executive officers and directors.  The compensation expenses related to this plan were approximately $281,899 and $231,590 for the fiscal years 2011 and 2010, respectively.

In addition, we are required by Chinese law to cover employees in China with various types of social insurance.  We have purchased social insurances for all of our employees.

Government Regulation

General

The media and advertising industry in China is governed by the State Council, which is the highest authority in the executive branch of China’s central government, and several ministries and agencies under its authority, including the State Administration for Industry and Commerce, the State Administration of Radio, Film and Television, the General Administration of Press and Publication , the Ministry of Culture and the State Council News Office.
 
 
9

 

Regulations Regarding Foreign Investment in the Chinese Media Sector

On July 6, 2005, the Chinese government promulgated Certain Opinions on the Introduction of Foreign Investment in Cultural Fields, which provide an overall framework with respect to foreign investments in Chinese media and other cultural sectors.  This document specifies the areas in which foreign investments are permitted or prohibited in accordance with China’s commitments regarding its entry into the World Trade Organization or WTO. Under the document, foreign investment in the media sector is permitted in the areas of printing of packaging and decorating materials, redistributing books, newspapers, periodicals, producing of recordable disks, duplication of read only disks, and engaging in works of art and the construction and operation of performance sites, cinema, event brokerage agencies and movie technology. In addition, pursuant to the Administrative Measures on Foreign-Invested Enterprises in Redistribution of Books, Newspapers and Periodicals issued by the General Administration of Press and Publication and the Ministry of Commerce, effective May 2003, foreign investors are permitted to establish wholly foreign owned redistribution companies that redistribute and sell, on the wholesale or retail level, books, newspapers or periodicals that have already been published by a licensed content-oriented company in China.

Censorship of Advertising Content by the Chinese Government

The advertising industry in China is governed by the Advertising Law which came into effect in February 1995.  In addition, principal regulations governing advertising services in China include: (1) the Advertising Administrative Regulations, effective December 1987; and (2) the Implementing Rules for the Advertising Administrative Regulations, effective January 2005. Chinese advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibitions on, among other things, misleading content, superlative wording, socially destabilizing content, or content involving obscenities, the supernatural, violence, discrimination or infringement of the public interest.  There are specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, veterinary pharmaceuticals, foodstuff, alcohol, cosmetics and others. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through radio, film, television, newspaper, periodical and other forms of media, together with any other advertisements which are subject to censorship by administrative authorities according to relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination.

Advertisers, advertising operators and advertising distributors are required by Chinese advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute are true and in full compliance with applicable laws.  In providing advertising services, advertising operators and advertising distributors must review the prescribed supporting documents in connection with any advertisements and verify that the content of such advertisements comply with applicable Chinese laws and regulations.  In addition, prior to distributing advertisements for certain commodities that are subject to government censorship and approval, advertising distributors are required to ensure that governmental review has been performed and approval obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of advertisements and orders to publish an advertisement correcting the misleading information.  In circumstances involving serious violations, the relevant administrative authorities may order violators to cease their advertising business operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.  At the present time, we are not subject to any of the penalties mentioned above.

ITEM 1A.     RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this report.  If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline.  You should also refer to the other information about us contained in this report, including our financial statements and related notes.
 
 
10

 

RISKS RELATING TO OUR BUSINESS
 
The Company has incurred a significant loss during the fiscal year ended December 31, 2011 and there is substantial doubt as to our ability to continue as a going concern.
 
The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the continuity of operations and realization of assets and satisfaction of liabilities and commitments in the normal course of business. For the year ended December 31, 2011, including the loss on disposal of a subsidiary of $3,310,262, the Company has incurred a net loss of $6,761,456 and experienced negative operating cash flows of $2,704,158. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope, or eliminate one or more of our programs, or substantially curtail or close our operations altogether.
 
Our success is dependent on our ability to modify our magazines and develop new media products to address current trends in our industry.  The development of new products is costly and time consuming with no guarantee that the new product will generate our intended results.

Our success depends, in large part, on our ability to monitor the sales and marketing community in China and market trends, and to adapt our magazines and any new media products that we develop to the evolving information needs of existing and emerging target audiences.  Our future success will depend in part on our ability to continue offering new publications and services that successfully gain market acceptance by addressing the needs of specific audience groups within our target markets.  The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new publication or service, is inherently risky and costly with no guarantee of success.  New publications typically require several years and significant investment to achieve profitability.  We cannot guarantee that our efforts to introduce new, or assimilate acquired, publications or services will be successful or profitable.  Costs related to the development of new publications are expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the number and timing of new product launches.

We are currently significantly dependent on an operation and management right agreement between us and CMO and our failure to extend this agreement may have a material negative effect on our results of operations, financial condition and cash flow.

We obtained our rights to market the magazines, sell the magazines and advertising space, pursuant to an operation and management right agreement that runs through October 31, 2013. Therefore, our relationship with CMO is critically important to us. Our failure to extend the contractual relationship with CMO on commercially reasonable terms may make it difficult for us to continue to operate our business unless and until we find a comparable replacement publishing house.  It would be very difficult for us to find a comparable replacement publishing house and we are not at all certain that we would be able to do so.

As discussed in Note 9 of the financial statements, a significant portion of the Company’s operations is derived from and depends upon an agreement with CMO. For twelve-month period ended December 31, 2011, CMO’s $5.62 million revenue represented approximately 43.7% of the Company’s total revenue. The Company is striving to diversify its revenue sources by offering new product lines and seeking acquisition. The Company cannot provide any assurance that it will be successful in achieving sufficient diversification in the near future, if at all.

Since we publish our magazines in China, we are subject to the Chinese Advertising Law, which imposes upon us restrictions regarding the content of our publication and our ability, as a foreign corporation, to own media assets in China.

The advertising industry in China is governed by the Advertising Law which came into effect in February 1995. Advertisers, advertising operators and distributors, including entities such as ourselves, which engage in advertising activities are required to comply with applicable procedures and provisions under the Advertising Law.  If our operations are determined to be in breach of the Advertising Law, penalties may be imposed which include fines, confiscation of advertising fees, orders to cease dissemination of the relevant advertisement and orders to publish an advertisement with corrective information.

We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key editorial staff and senior management personnel, including our Chief Executive Officer, Yingsheng Li, who has over 15 years of experience in the publication business.  They also depend in significant part upon our ability to attract and retain additional qualified management, editorial staff, marketing and sales and support personnel for our operations.  If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer.  Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team.  We depend on the skills and abilities of these key employees in managing the publication, marketing and sales aspects of our business, any part of which could be harmed by further turnover.

 
11

 
 
Fluctuations in the cost of paper, which can result in increases in the price we pay to third parties to print our magazines, can have a significant effect on our operating results.

The physical printing, assembling and production of the magazines are outsourced to independent third party printers pursuant to outsourcing agreements that we have entered into with these printers.  Under these outsourcing agreements, the paper cost accounts for a large proportion of the quoted price.  The printing price is equal to the quantity of units multiplied by the unit price, which is a fixed price under the agreement.  This fixed price remains constant during the term of the agreement.  Therefore, the printer assumes the risk of increasing paper costs during the term of the agreement.  However, these agreements generally have a term of one year and, therefore, increases in paper costs could result in increased outsourcing costs for us from year to year.  Unexpected or significant increases in paper prices may have an adverse effect on our future results of operations.  We may not be able to recoup paper cost increases by passing them through to our advertisers and readers and, accordingly, such cost increases could have a material adverse effect on our results of operations.

We face strong competition from both local and foreign competitors and increased competition could negatively affect our financial results.

Our magazines compete with a number of other magazine publishers.  Both local and overseas publishers issue business related magazines in China, some of which may have substantially greater financial resources than us that may enhance their ability to compete in the publication of sales and marketing periodicals.  In addition, we face broad competition for audiences and advertising revenue from other media companies that produce magazines, newspapers and online content. Overall competitive factors include product positioning, editorial quality, circulation, price and customer service.  Competition for advertising dollars is primarily based on advertising rates, the nature and scope of readership, reader response to advertisers’ products and services and the effectiveness of the sales team.  Increased competition could force us to lower our prices or offer services at a higher cost to us, which could reduce our operating income.

Our holding company structure may limit the payment of dividends to our stockholders.

We have no direct business operations, other than our ownership of our subsidiaries and their contractual relationship with CMO and the business incident to such contractual relationship.  While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments.  In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds.  Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends.  If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

The recent global economic conditions could negatively affect our business, results of operations, and financial condition.

The recent international, national and regional economic conditions may have an impact on our business and our financial condition, especially the downgrading of U.S. credit rating. Experts believe that the U.S. credit rating downgrade is likely to increase the intensity of external pressure, increasing the pressure on China’s economic development. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions.  In addition, these economic conditions also impact levels of consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future.  Consumer purchases of discretionary items, including our magazines and consumer products, generally decline during recessionary periods and other periods where disposable income is adversely affected.  In addition, a substantial portion of our revenues is derived from the sale of advertising space.  In a down economy, advertising budgets are usually the first budgets to be cut. Also, even slight downturns in the economy may cause our advertising customers to advertise less or negotiate lower rates with us.  If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.
 
 
12

 

Investor confidence and the market price of our shares may be adversely impacted if we are unable to correct significant deficiency in our internal controls over our financial reporting identified by our management.

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified significant deficiencies related to our U.S. GAAP expertise, internal audit functions and the absence of Audit Committee, as of that date.  The current staff in the accounting department of the subsidiaries is relatively new to U.S. GAAP and internal control procedures and needs substantial additional training so as to meet with the higher demands of being a U.S. public company.  The significant deficiency in internal audit function is also due to the Company’s lack of sufficient qualified resources to perform internal audit functions.  We have taken steps to address these deficiencies. However, as of the end of 2011 fiscal year, these deficiencies remain, which, in turn, could adversely affect our operations and investor confidence.

RISKS RELATED TO THE MARKET FOR OUR STOCK

Our common stock is quoted on the Over-the-Counter Bulletin Board which may have an unfavorable impact on our stock price and liquidity.

Our common stock is currently quoted on the Over-the-Counter Bulletin Board. The Over-the-Counter Bulletin Board is a significantly more limited market than any national securities exchange.  The market for our securities is very limited, volatile and characterized by very low trading volumes. The quotation of our shares on the Over-the-Counter Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

We are subject to penny stock regulations and restrictions, which may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions.  As of March 15, 2012, the closing price for our common stock was $0.081 per share and therefore, it is designated a “penny stock.”  As a “penny stock”, our common stock may become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses).  For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale.  As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule.  In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
 
 
13

 

Certain of our stockholders hold a significant percentage of our outstanding voting securities and accordingly may make decisions regarding our daily operations, significant corporate transactions and other matters that other stockholders may believe are not in their best interests.

Our major stockholder, Yingsheng Li, owns 32.07% of our outstanding voting securities. As a result, he possesses significant influence, giving him the ability, among other things, to elect a majority of our Board of Directors and to authorize or prevent proposed significant corporate transactions.  His ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. Other stockholders may believe that these future decisions made by the major stockholder are not in their best interests.

RISKS RELATED TO DOING BUSINESS IN CHINA

Changes in China’s political or economic situation could harm us and our operational results.

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time.  This could either benefit or damage our operations and profitability.  Some of the things that could have this effect are:

•           Level of government involvement in the economy;
•           Control of foreign exchange;
•           Methods of allocating resources;
•           Balance of payments position;
•           International trade restrictions; and
•           International conflict.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways.  As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

Our business is largely subject to the uncertain legal environment in China and the legal protection could be limited.

The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used.  The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses.  In addition, all of our executive officers and our directors are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S.  As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities that could have negative effect on our business operations in China.

China only recently has permitted provincial and local economic autonomy and private economic activities.  The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.  Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters.  We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.  However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.  Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

 
14

 
 
We may be unable to negotiate or complete a business combination transaction due to complicated merger and acquisition regulations that became effective on September 8, 2006.

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
 
The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the Ministry of Commerce and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business.  We have operations, agreements with third parties and we make sales in China.  Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents or distributors of our Company, even though they may not always be subject to our control.  It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible.  Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
 
 
15

 

Government regulation of currency conversion and the fluctuation of RMB may materially and adversely affect our operations and financial results.

We receive substantially all of our revenues in RMB, which currently is not a freely convertible currency.  We will have to convert a portion of these revenues into other currencies in order to make payments to those of our service providers and others who do not transact business in RMB.  Under the PRC’s existing foreign exchange regulations, we will be able to make payments to parties that do not transact business in RMB without prior approval from the State Administration on Foreign Exchange, or SAFE, by complying with various procedural requirements.  The Chinese government, however, may, at its discretion, restrict access in the future to foreign currencies for current account transactions.  If this were to occur, we may not be able to pay service providers or others whom we work with that transact business in currencies other than RMB.  The value of RMB against the US dollar and other currencies fluctuates and is affected by, among other things, changes in China’s political and economic conditions.  Since 1994, the conversion of RMB into foreign currencies, including US dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets.  Any devaluation of RMB, however, may materially and adversely affect the value of our assets and our financial results, since we will receive substantially all of our revenues, and express our profits, in RMB.
 
ITEM 2.        PROPERTIES

All land in China is owned by the State or collectives.  Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes.  In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years.  This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

Our main executive office is located at Unit 901, KunTai International Mansion, No. 12 Chaowai Street, Beijing, 100020, China.  We have land use rights relating to the land and physical office space within the building where our offices are located.  These land use rights initially expire in 2056.  This location has a total of 630 square feet of working space including 150 square feet open working area, two large conference rooms, six small meeting rooms and eight offices.

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

ITEM 3.        LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 4.        MINE SAFETY DISCLOSURES

Not Applicable.
 
 
16

 
 
PART II
 
ITEM 5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market for Our Common Stock
 
Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “CMKM”. Trading in our common stock has been limited and sporadic.

The following table sets forth, for the periods indicated, the high and low bid prices of our common stock.  These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 
Closing Bid Prices(1)
 
High
Low
     
Year Ended December 31, 2011
   
First Quarter
$0.51
$0.50
Second Quarter
$0.30
$0.13
Third Quarter
$0.17
$0.15
Fourth Quarter
$0.10
$0.08
     
Year Ended December 31, 2010
   
First Quarter
$0.95
$0.95
Second Quarter
$0.87
$0.87
Third Quarter
$0.80
$0.80
Fourth Quarter
$0.95
$0.90
________________________
(1)           The above tables set forth the range of high and low closing prices per share of our common stock as reported by www.quotemedia.com for the periods indicated.

As of March 4, 2012, there were approximately 271 stockholders of record of our common stock.

Dividends

During fiscal years 2010  and 2011, we did not declare or pay a cash dividend.  Any future decisions regarding dividends will be made by the board of directors of the company.  The Company currently intends to retain and use any future earnings for the development and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

We do not have in effect any compensation plans under which our equity securities are authorized for issuance and we do not have any outstanding stock options.

Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year ended December 31, 2011 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal year.

Purchases of Equity Securities
 
No repurchases of our common stock were made during the fourth quarter of 2011.
 
 
17

 

ITEM 6.        SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward-Looking Statements” above for certain information concerning those forward-looking statements.

General
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has cash flow constraints and has suffered a large loss from operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
 
Also discussed in Note 2 to the consolidated financial statements, the management  plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis.
 
We generate revenues through sales of our magazines, sales of advertising space in our magazines, providing sales and marketing consulting services and online sales of electronic products.  During the fiscal year ended December 31, 2011, we generated $1,851,938 in revenues from the sale of our magazines, $5,768,340 in revenues from the sale of advertising space in these magazines, $5,243,823 in revenues from providing consulting services.  During the fiscal year ended December 31, 2010, we generated $1,646,740 in revenues from the sale of our magazines, $9,184,076 in revenues from the sale of advertising space in these magazines, $3,350,205 in revenues from providing consulting services.

In July 2008, we launched a new business of online marketing and sales of consumer products, such as personal computers, cellular phones, jewelries, watches, apparel, beauty products and home appliances. The Company decided to sell the online marketing and sales of consumer products division on December 26, 2011 after more than three years of suffering losses. The management anticipates that the sale of the interest will enable the Company to focus on the growth of its magazine and advertizing business.

Results of Operations

Fiscal Year Ended December 31, 2011 Compared with Fiscal Year Ended December 31, 2010

The following table summarizes the results of our operations during the fiscal years ended December 31, 2011 and 2010.  It provides information regarding the dollar and percentage increase or (decrease) from 2010 fiscal year to 2011 fiscal year:

 
Year Ended December 31, 2011
 
   
Item
2011
2010
Increase
(Decrease)
% Increase
(% Decrease)
Revenue
$12,864,101
$14,181,021
$(1,316,920)
(9.3)%
Cost of Sales
$6,007,838
$3,602,996
$2,404,842
66.7%
Gross Profit
$6,856,263
$10,578,025
$(3,721,762)
(35.2)%
Operating Expenses
$9,328,288
$5,684,190
$3,644,098
64.1%
Other Income (expense)
$49,711
$201,273
$(151,562)
(75.3)%
Provision for Taxes
$39,656
$55,992
$(16,336)
(29.2)%
Net income attributable to China Marketing Media Holding, Inc.
$(6,761,456)
$4,310,264
$(11,071,720)
(256.9)%

 
18

 
 
Revenue

Our revenues for the fiscal year ended December 31, 2011 were $12,864,101, which are $1,316,920 or 9.3% less than the same period in 2010, when we had revenues of $14,181,021. The decrease in revenues for the fiscal year ended December 31, 2011 was mainly due to a decrease in Advertising Space Sales of $3,415,736 or 37.2%, but offset by an increase in Consulting Service of $1,893,618 or 56.5% and an increase in Magazine Sales of $205,198 or 12.5%. Even though the Consulting Service sector has been growing rapidly in recent months, the Advertising Space Sales still suffer from a soft market.

Components of Revenues

The following table shows the different components comprising our total revenues during each of the past two fiscal years.
Revenue Category
2011
2010
Increase (Decrease)
% Increase
(% Decrease)
         
Magazine Sales
$1,851,938
$1,646,740
$205,198
12.5%
         
Advertising Sales
$5,768,340
$9,184,076
$(3,415,736)
(37.2)%
         
Consulting Services
$5,243,823
$3,350,205
$1,893,618
56.5%
         
Consumer products
-
-
-
-
         
Total
$12,864,101
$14,181,021
$(1,316,920)
(9.3)%

CMO’s Revenue
 
CMO, a related party which is owned by the PRC government, is controlled and directed by a major shareholder which is also the President and Chief Executive Officer of the Company, Mr. Yingsheng Li. Under ASC 810-10-15-12, CMO is not qualified as a VIE as it is a governmental organization. In fact, CMO’s revenues and expenses are included in the consolidated statement of operations under the terms of management contract which is, effectively, an operating lease.
 
On October 23, 2003, Shenzhen Media Investment Co., Ltd. entered into a 10-year agreement with CMO in exchange for a right to oversee the operation and strategic planning of advertising, publishing, and staff training for the magazines that are published by CMO. This right was transferred to Shenzhen New Media Consulting Co., Ltd. on November 20, 2004. The Company has generated the following revenue as part of the agreement.

   
Twelve months ended December 31,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
 
$
1,851,939
   
$
1,646,740
 
Publishing
   
3,772,869
     
7,611,633
 
Total magazine advertising sales generated from CMO, included in consolidated total
 
$
5,624,808
   
$
9,258,373
 

The CMO’s revenues for the fiscal year ended December 31, 2011 were $5,624,808 (43.7% of total revenue), which is $3,633,565 or 39.2% less than the same period in 2010, when we had CMO’s revenues of $9,258,373 (65.3% of total revenue). The decrease in CMO’s revenue for the fiscal year ended December 31, 2011 was primarily due to a drop in revenue in advisory service. The advisory service’s revenue for the fiscal year ended December 31, 2011 was $359,219, a decrease of 85.3% from $2,436,117 for the same period in 2010. The decrease in advisory service’s revenue was caused by a decrease in demand beginning in the 2nd quarter of 2011. The management expects a further decline in the advisory service’s revenue in the coming months.

 
19

 
 
Cost of Sales

Our cost of sales for the fiscal year ended December 31, 2011 and for the same period of 2010 were $6,007,838 and $3,602,996, respectively, which accounted for 46.7% and 25.4% of revenue, respectively. As a percentage of total revenues, cost of sales increased by approximately 21.3% during the applicable periods. Such increase was primarily driven by (1) the significant decrease of revenue in Advertising Space Sales which has a high gross margin than the other segments and (2) additional sales promotion for consulting service through Beijing Media Consulting Co.

Operating Expenses

Impairment of goodwill

The Company generally conducts its annual impairment evaluation to its acquired goodwill, usually in the fourth quarter of each year, or more frequently if indicators of impairment exist, such as a significant sustained change in the business climate. The recoverability of acquired goodwill is measured at the reporting unit level.

For the 2011 fiscal year, we performed a goodwill impairment test using a discounted cash flow method to calculate and compare to the fair value of the reporting unit, Shenzhen Caina, against its carrying amount of the acquired goodwill. This method is based on our own market assumptions and estimates, which are considered reasonable and inherent in the discounted cash flow analysis. Based on the result of this testing, we recognized an impairment loss of $391,669 which was the remaining book value of the unit and allocated its impairment charge to the Magazine Advertising Business Segment.

In accordance with the same methodology in this discounted cash flow method, we used projections of future cash flow and other assumptions which are considered reasonable and inherent in the undiscounted cash flow analysis. The projections are based on the historical performance and anticipated growth rate in 2012 and onwards in the business to be generated by Shenzhen Caina. After an assessment of the assumptions and projections, the management believes no further impact of the impairment on the business prospectively and reasonably believes similar trends to impact income from continuing operations is unlikely to occur in the near future.

SG&A

Our selling, general and administrative expenses were $8,936,619 (69.5% of total sales) and $5,237,647 (36.9% of total sales) for the fiscal year ended December 31, 2011 and 2010, respectively. The increase was mainly due to (1) salaries and related benefits expenses that amounted to $3,167,732 for the fiscal year ended December 31, 2011 as compared to $2,830,629 during the same period of 2010. A $337,103 or 11.9% increase in payroll expense for the fiscal year ended December 31, 2011 was caused by an increase in headcount in Shenzhen Caina by 16.4% but offset by a decrease of 12% from CMO and 37.4% from Shenzhen New Media. The 37.4% decrease in headcount from Shenzhen New Media was mainly attributable to the close down of its Advertising division in April, 2011, (2) the expenses related to additional bad debt expenses for CMO for the amount of approximately $1.8 million and Shenzhen New Media for the amount of approximately $0.28 million and (3) the penalty and interest expenses for the 2007 and 2008 late tax filings of $85,400 and $90,406, respectively. We are in the process of appealing penalty abatement for both cases. The Company also incurred additional legal and accounting fees related to the review of an SEC comment letter.

Other Income and Expense
 
Other income and expense includes interest income, investment income and loss in unconsolidated affiliates, subsidy income and other income and expense not directly related to our principal operations.

Interest income represents interest earned from bank accounts with PRC financial institutions, totaling $14,091 during the fiscal year ended December 31, 2011. A decrease in interest income of $86,070 or 85.9% as compared to $100,161 during the same period of 2010 was due to the decrease in the average balance of cash and cash equivalents.

 
20

 
 
Investment in unconsolidated entities over which the Company has significant influence (20% to 50%) are accounted for under the equity method of accounting and the Company does not have the ability to exert significant influence (up to 20%) are accounted for under the cost method of accounting. We had an investment loss from unconsolidated subsidiaries totaling $66,810 during the fiscal year ended December 31, 2011. The significant loss increased by $126,883 or 211.2% as compared to an income of $60,073 during the same period of 2010. Such increase was attributable to the continuing operating loss from Beijing Kang Pusen Media (20% interest) as compared to an investment gain from a year ago.

Subsidy Income is received at a discretionary amount as determined by the local PRC government, which represents government grant or incentive award accredited to the Company for its contribution in the promotion and development of culture and media industry in the PRC. The amount is un-conditional, non-refundable and without any restrictions on usage at the time of grant to and receipt by the Company. The subsidy income for the fiscal year ended December 31, 2011 totaled $102,187 as compared to $40,586 for the same period in 2010.

We had other income of $243 and $453 for the fiscal year ended December 2011 and 2010, respectively.

Income taxes

United States

China Marketing Media Holdings, Inc. is subject to United States tax at a tax rate of 34%.  No provision for income taxes in the United States has been made as we had no U.S. taxable income for the period presented.

British Virgin Islands
 
Media Challenge was incorporated in the BVI, and, under the current laws of the BVI, is not subject to income taxes.

PRC

Before the implementation of the enterprise income tax (“EIT”) law (as discussed below), Foreign Invested Enterprises (“FIE”) established in the PRC are generally subject to an EIT rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax.  On March 16, 2007, the National People’s Congress of China passed the new Corporate Income Tax Law (“EIT Law”), and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions.  Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old tax laws applicable to FIEs, and its associated preferential tax treatments, beginning January 1, 2008.

Despite these pending changes, the EIT Law gives the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments.  During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT Law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%.  In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT Law, are allowed to remain to enjoy their preference until these holidays expire. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on any organization’s business, fiscal condition and current operations in China.

In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to a EIT of 25.0% on its global income. The Implementing Rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then the organization’s global income will be subject to PRC income tax of 25.0%.

 
21

 
 
Under the income tax law and the related implementing rules, FIEs engaging in manufacturing businesses with a term of operation exceeding ten years may, subject to approval from local taxation authorities, be entitled to a two-year tax exemption from PRC EIT starting from the year they become profitable and a 50.0% tax reduction for the three years thereafter.

We are currently subject to income taxes according to applicable tax laws in the PRC.  The tax rates are 15% for SNMC, 25% for BMMCC, SCBCC and BCXMLC and 0% for CMO.  CMO is exempt from PRC income tax as a part of the government supporting program from year 2009 to 2013.

We incurred income taxes of $39,656 and $55,992 for the fiscal year ended December 31, 2011 and 2010, respectively, or a decrease of $16,336 or 29.2%. The decrease in income tax expense was the result of a tax refund of $30,000 for an over payment from 2010 by Shenzhen Caina to the Chinese tax authority.

Net income attributable to China Marketing Media Holdings, Inc. (profit after taxes)

Including the loss from discontinued operations of $4,299,486, we reported net loss of $6,761,456 for the fiscal year ended December 31, 2011, as compared to net income of $4,310,264 a year ago. The decrease of $11,071,720 or 256.9% resulted from an increase in cost of goods sold as well as a significant increase in operating expenses.

Liquidity and Capital Resources

As of December 31, 2011, we had cash and cash equivalents of approximately $0.91 million. We had no bank loans during the period.

The Company’s consolidated financial statements are presented on a going concern basis, as discussed in Financial footnote 2, which contemplates the continuity of operations and realization of assets and satisfaction of liabilities and commitments in the normal course of business.

For the year ended December 31, 2011, including the loss on discontinued operations of $4,299,486, the Company has incurred a net loss of $6,761,456 and experienced negative operating cash flows of $2,704,158. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis.

The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

Cash Flow
 (All amounts in thousands of U.S. dollars)

   
Fiscal Years Ended 
December 31,
 
   
2011
   
2010
 
Net cash (used in) provided by  operating activities
  $ (2,704,158 )   $ 8,784,112  
Net cash used in investing activities
    (3,774,026 )     (7,391,657 )
Net cash provided by financing activities
    -       -  
Effect of exchange rate changes in cash and equivalents
      209,951         238,563  
Net cash (out flow) inflow
    (6,268,233 )     1,631,018  

 
22

 
 
Operating Activities:

Including a loss on discontinued operations approximately $4.3 million, net cash used in operating activities was approximately $2.7 million for the fiscal year ended December 31, 2011, which was an increase in cash outflow of approximately $11.49 million from approximately $8.78 million net cash provided by operating activities for the same period in 2010. The increase in cash outflow was primarily due to a significant net loss of approximately $6.76 million along with the following (1) related party receivable- affiliates of approximately $5.2 million which included approximately $5.5 million due from CMO and approximately $0.23 million due to other affiliates, and (2) increase in other receivables of approximately $4.2 million which included an increase in advances to employees of approximately $1.1 million, but partially offset by an increase in current liabilities such as (i) deferred revenue of approximately $0.33 million; the increase was attributable to advanced payment collected from the customers, (ii) other payable of approximately $0.38 million.

Investing Activities:

Net cash used in investing activities was approximately $3.77 million for the fiscal year ended December 31, 2011, a decrease in cash used of approximately $3.62 million from approximately $7.39 million net cash used in investing activities for the same period of 2010. Such decrease in net cash used in investing activities was included in the cash used of approximately $6.48 million from discontinued operations. We also had a deposit on purchase of real estate of $2.9 million for a piece of real estate property, which is currently under construction and the property developer has postponed the delivery. The Company believes that the title to the property will be received by the end of 2012. The Company intends to use this property to house its staff.

We also use cash for investing activities to make payments relating to acquisition of property, plant and equipment.

Financing Activities

There is no net cash provided or used by financing activities for the fiscal years ended December 31, 2011 and 2010.

Cash Flows from Discontinued Operations

Operating Activities:

Net cash provided by operating activities from discontinued operations was approximately $6.54 million for the fiscal year ended December 31, 2011 as compared to $3.19 million for the same period in 2010.

Investing Activities:

Net cash used in investing activities from discontinued operations was approximately $0.25 million for the fiscal year ended 2011, as compared to net cash used approximately $6.48 million for the same period in 2010.

Financing Activities

There is no net cash provided or used from discontinued operations by financing activities for the fiscal year ended December 31, 2011 and 2010.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Inflation

Our results of operations have not been affected by inflation and management does not expect that inflation risk would cause material impact on its operations in the future.

 
23

 
 
Seasonality

Our results of operations are not materially affected by seasonality and we do not expect seasonality to cause any material impact on our operations in the future.

Currency Fluctuations

Our operating subsidiaries are located in China.  All expenses of the subsidiary and revenue received from customers are incurred in China denominated in RMB as the functional currency.  Based on Chinese government regulation, all foreign currencies under the category of current accounts are allowed to be freely exchanged with hard currencies.  During the past years of operation through July of 2005, there were no significant changes in exchange rates.  On July 21, 2005, the Chinese government changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under the control of the Chinese government.  From August 2005 through December 2011, the value of RMB against US dollars appreciated by 20.99%, from RMB 8.1/$1 to RMB 6.4/$1.

Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
 
Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents. For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in China are not insured by any government entity or agency.
 
Trade Accounts Receivable. During the normal course of business, we extend short-term unsecured credit to our customers; however, collection normally occurs from 30 to 120 days. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records a reserve when management believes collection of amounts due are at risk. Accounts considered uncollectible are written off. We regularly review the creditworthiness of our customers and, based on the results of the credit review, determine whether extended payment terms can be granted to or, in some cases, partial prepayment is required from certain customers.
 
Revenue Recognition . In accordance with ASC Topic 605, "Revenue Recognition", the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured. Revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

(a)
The seller's price to the buyer is substantially fixed or determinable at the date of sale.
   
(b)
The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
   
(c)
The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.
   
(d)
The buyer acquiring the product for resale has economic substance apart from that provided by the seller.
 
 
24

 
 
   
(e)
The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
   
(f)
The amount of future returns can be reasonably estimated. Estimated returns are based on historical data but require significant judgment on the part of management.

Restrictions on Transfer of Assets Out of the PRC. Dividend payments by SNMC and its subsidiary are limited by certain statutory regulations in China. No dividends may be paid by SNMC without first receiving prior approval from the State Administration of Foreign Exchange. Dividend payments are restricted to 85% of profits, after tax.

Foreign Currency and Comprehensive Income. The financial statements are presented in US dollars. The functional currency is the RMB of the PRC. The financial statements are translated into US dollars from RMB using exchange rates at the end of the period for assets and liabilities and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under the control of the PRC's government. We use the Closing Rate Method in currency translation of the financial statements of the Company.
RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

Restrictions on Transfer of Assets Out of the PRC. Dividend payments by Shenzhen New Media and its subsidiary are limited by certain statutory regulations in China. No dividends may be paid by Shenzhen New Media without first receiving prior approval from the State Administration of Foreign Exchange. Dividend payments are restricted to 85% of profits, after tax.

Recent Changes in Accounting Standards

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income — Presentation of Comprehensive Income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity. It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption will have no significant impact on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet — Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments and will be applied retrospectively for all comparative periods presented. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company currently believes that this ASU will have no significant impact on its consolidated financial statements.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
 
The full text of our audited consolidated financial statements as of December 31, 2011 and 2010 begins on page F-1 of this annual report.
 
 
25

 
 
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A.     CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Certifying Officers have concluded that, because of the deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2011. The details of the management analysis are provided below.

Management’s annual report on internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:

(1)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011.  In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that evaluation, our management concluded that our internal controls over financial reporting as of December 31, 2011 were not effective.  During our assessment, management identified the significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) the absence of an Audit Committee.

Because the knowledge of our current accounting department staff of the U.S. GAAP and related internal control procedures is limited, our management has determined that they require additional training and assistance in U.S. GAAP matters.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of a stand alone Audit Committee of the Board also contributes to insufficient oversight of our accounting and audit functions.

 
26

 
 
In order to correct the foregoing significant deficiencies, we have taken and/or continue to work on the following remediation measures:

 
·
The Company has been taking certain remedial measures which includes, among other things, increasing the number of our accounting staff and professionals. In June 2011, we began our work with an ERP system provider to design and implement an efficient ERP system to improve our financial and internal control system. We anticipate completing this work on or before October 2012.
 
 
 
·
We continue to search for qualified personnel. However, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the PRC, in general, and in the province where the Company maintains its operations, in particular, we have been  not able to hire such additional personnel to date. Due to the lack of internal control resources in China, the management has decided to outsource its internal control team. Since March 2011, we have been working with a PRC consulting firm to develop a system to manage, monitor and plan a risk management and internal control function. We will focus on policies and procedures that will be in place to ensure future risk is properly mitigated.
 
 
 
·
We have allocated significant financial and human resources to strengthen the internal control structure. We have designated two full time staff  to work with several external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting; and
 
 
 
·
We have and continue to search for suitable candidates to serve as independent directors on our Board of Directors and on the Audit (or other standing committee thereof) Committee, who are financially literate, and to contain at least one member who is a “financial expert” as that term is defined in the SEC’s rules. We intend to have our Audit Committee meet at least once every quarter, prior to the release of that periods’ financial statements, to, among other things, discuss, with management and our independent auditors, prior to the release of each periods’ financial statements, the financial statements themselves, significant accounting policies and estimates, our internal controls, and the scope and findings of the work performed by our independent auditor in its audit or review of the financial statements. We estimate that we need to elect at least two additional directors that meet the independence requirements and intend to complete this search in the near future. We have interviewed several candidates to date, but have not yet filled either independent director or Audit Committee vacancy as of December 31, 2011. We anticipate completing these measures on or before June 2012.

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

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

Changes in internal control over financial reporting

As described above, during the fourth quarter of the fiscal year ended December 31, 2011, we have taken certain remediation measures that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In order to remediate this weakness, we are increasing the number of our accounting staff and professionals. Until we are able to hire professionals to help the Company implement a more efficient internal control system to remediate this weakness, management chose to address the above-described weakness frequently to its staff.

ITEM 9B.     OTHER INFORMATION.

None.
 
 
27

 

PART III

ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following table sets forth the name, age and position of each of our current executive officers and directors:

Name
Age
Position
     
Yingsheng Li
54
President, Chief Executive Officer and Chairman
     
Xiaofeng Ding
43
Director
     
Dongsheng Ren  40  Director
     
Wengao Luo  38  Chief Operating Officer 
     
Zhen Zhen Peri  56  Chief Financial Officer 
 
Yingsheng Li has been our Chief Executive Officer, President and Chairman since December 31, 2005.  Mr. Li has more than 15 years of experience in Magazine Publishing and has worked in various positions, including Senior Editor, Chief Editor and Chief Marketing Correspondent. Mr. Li was awarded one of the top ten publishers by the Henan Provincial Government in 2002. Mr. Li’s substantial experience in the publishing industry and his day to day leadership of the Company provides him with intimate knowledge of our business and operations. Mr. Li holds a Bachelor’s degree in Commerce and a postgraduate degree in Economics from Zhengzhou University.

Xiaofeng Ding has been our Director and the Senior Manager of our publishing house since December 31, 2005. Mr. Ding has been working for the organization for more than 10 years and became the distribution manager of CMO in 2000. Mr. Ding handles negotiations for distribution contracts and plays a major role in maintaining and establishing relationships with the advertising agencies. Mr. Ding has brought to the Company extensive publishing experience and keeps up to date with industry information and finds potential business opportunities for the Company. Mr. Ding graduated from He Fei Industry University of China with a Bachelor’s degree in Material Science and Engineering and a Master’s degree in National Economics at Zhengzhou University.

Dongsheng Ren has been our Director since December 2005. Prior to joining the Company in March 2003, Mr. Ren held a General Manager position at Bank of Nanfang. Mr. Ren has more than 7 years of experience in asset management and investment banking. He received a bachelor’s degree in Electronic Engineering and a Master’s degree in International Economics from Xi’an Jiao Tong University in 1993 and 1996, respectively.

Wengao Luo has been our Chief Operating officer since September 6, 2010. Mr. Luo has more than 10 years of employment with CMKM in various positions, including Manager in the Beijing office, as well as Chief Editor and General Manager of “Channel Edition.” Mr. Luo has contributed his editing and publishing experience to CMKM and has been a great asset for the Company ever since. Mr. Luo has a Bachelor’s degree in Management from Xi’an Jiao Tong University and an MBA from China People University.

Zhen Zhen Peri joined the Company in July 2010 and has served as Chief Financial Officer since September 6, 2010. Mrs. Peri has more than 20 years of financial reporting experience in both private and public held companies in the United States. Mrs. Peri worked as a Senior Accountant at Thrifty Oil Company from 1995 to 1997; Senior Cost Accountant at CTX Int’l from 1997 to 1999; Tax and Fixed Assets Analyst at Avery Dennison Corporation from 1999 to 2003; Assistant Controller at California Expanded Metal from 2003 to 2005; and Accounting Manager at the Hill Phoenix division of Dover Corporation from 2005 to 2009, where she also served on the Internal Control Committee. Mrs. Peri holds a Bachelor of Science in Business degree from California State University, Fresno with a major in Accounting.

 
28

 
 
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

Directors are elected until their successors are duly elected and qualified.

Board Composition and Committees

The board of directors is currently composed of four members, Yingsheng Li, Xiaofeng Ding, Dongsheng Ren and Wengao Luo, none of whom is independent for the purposes of the federal securities law.  All board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.  We may increase the size of our board of directors in the future but have not determined the approximate time to take such action. Notwithstanding  the fact that the Company’s securities are not listed on a U.S. securities stock exchange, the Board has determined to adhere to the “independence” standards set forth in the Nasdaq Stock Market.

We currently do not have standing audit, nominating or compensation committees.  Our board of directors handles the functions that would otherwise be handled by each of the committees. We intend, however, to establish an audit committee, a nominating committee and a compensation committee of the board of directors as soon as practicable.

Our board of directors has not made a determination as to whether any member of our board can fulfill the functions of an Audit Committee financial expert. Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.

Family Relationships

There are no family relationships among our directors or officers:

Involvement in Certain Legal Proceedings

There were no material changes to the procedures by which shareholders may recommend nominees to the Board since the Company’s last disclosure of such policies.

No director or officer of the Company has, during the last 10 years, been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, been convicted of any criminal proceeding (excluding traffic violations or similar misdemeanors), or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities laws or finding any violations with respect to such laws.

Section 16(a) Beneficial Ownership Reporting Compliance

Under U.S. securities laws, directors, certain executive officers and persons holding more than 10% of our common stock must report their initial ownership of the common stock, and any changes in that ownership, to the SEC.  The SEC has designated specific due dates for these reports.  Based solely on our review of copies of such reports filed with the SEC and written representations of our directors and executive officers, we believe that all persons subject to reporting have filed the required reports on time in the 2011 fiscal year.
 
 
29

 
 
Code of Ethics

On December 28, 2006, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. The code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code.  A copy of the code of ethics has been filed as Exhibit 14 to our registration statement on Form 10-SB/A on January 3, 2007.  We are in the process of building up the Company website.  Once our website is available, we will make the code of ethics available on the website.  Thereafter, any amendments or waivers to the code of ethics will be posted on our website within four business days of such amendment or waiver. Until such time, however, any amendments or waivers to our code of ethics will be filed with the SEC in a Current Report on Form 8-K.

ITEM 11.       EXECUTIVE COMPENSATION
 
Summary Compensation Table – 2011 and 2010

The following summary compensation table sets forth the aggregate compensation we paid or accrued to Yingsheng Li, our Chief Executive Officer and Chairman, Zhen Zhen Peri, our Chief Financial Officer, Wengao Luo, our Chief Operating Officer and Xiaofeng Ding, our Director for services rendered in all capacities during the fiscal years 2011 and 2010.  No other executive officers received total compensation in excess of $100,000 in either year.

Name and Principal Position
Year
Salary ($)
Bonus ($)
 
Total ($)(1)
 
Yingsheng Li, Chief Executive Officer and Chairman
2011
20,699
3,326
24,025
2010
19,964
3,181
23,145
 
Wengao Luo, Chief Operating Officer
 
2011
18,818
1,568
20,386
2010
13,437
1,493
14,930
Zhen Zhen Peri, Chief Financial Officer
2011
47,044
3,920
50,964
2010
35,821
1,866
37,687
Xiaofeng Ding, Director
2011
10,702
1,759
12,461
2010
9,806
1,759
11,565


(1)           The compensations of Mr. Yingsheng Li, Mr. Wengao Luo, Ms. Zhen Zhen Peri and Mr. Xiaofeng Ding were paid by the Company in RMB. The dollar amounts in the above table were calculated on the base that $1= RMB 6.7 and $1= RMB 6.377 for years 2010 and 2011, respectively.

Employment Agreements

We entered into an employment agreement with Mr. Yingsheng Li, our named executive officer.  This agreement was renewed on April 2, 2011 for a two-year term ending April 1, 2013. We expect that this agreement will be automatically renewed for an additional year by the parties upon its expiration.  Under the terms of the agreement, as renewed, we are obligated to pay Mr. Li a monthly salary of RMB 11,000 (approximately $1,725).  This agreement does not include termination or severance provisions.

 
30

 
 
We entered into an employment agreement with Mr. Wengao Luo, our Chief Operating officer.  This agreement was signed on March 26, 2010 for a two-year term ending March 25, 2012.  We expect that this agreement will be automatically renewed for an additional year by the parties upon its expiration.  Under the terms of the agreement, as renewed, we are obligated to pay Mr. Luo a monthly salary of RMB 10,000 (approximately $1,568). This agreement does not include termination or severance provisions.

We entered into an employment agreement with Ms. Zhen Zhen Peri, our Chief Financial Officer.  This agreement was renewed on July 19, 2011 for a one-year term ending July 18, 2012. We expect that this agreement will be automatically renewed for an additional year by the parties upon its expiration.  Under the terms of the agreement, as renewed, we are obligated to pay Ms.  Zhen Zhen Peri a monthly salary of RMB 25,000 (approximately $3,920).  This agreement does not include termination or severance provisions.

Outstanding Equity Awards at Fiscal Year End

None of our executive officers received any equity awards, including, options, restricted stock or other equity incentives, during the fiscal year ended December 31, 2011.

Director Compensation

The following table provides information on the compensation paid by us to our directors for the fiscal years ended on December 31, 2011 only.  Bonus compensation that Mr. Yingsheng Li, our Chairman and Chief Executive Officer, received for his services as a director is reflected in the Summary Compensation Table above.

Name
 
 
Year
Fees earned or paid in Cash ($)
Total
($)(1)
 
Dongsheng Ren
2011
-
-
 
-
-

(1)           Each of the persons listed in the above table received compensation from the Company in RMB.  The dollar amounts in the above table were calculated on the base that $1= RMB 6.7 and $1= RMB 6.377 for years 2010 and 2011, respectively.

During 2011 and 2010, we did not pay our directors retainer fees or fees for attending meetings of our board of directors, but we do reimburse directors for reasonable travel expenses related to attendance at board meetings.  In the future, we may adopt a policy of paying independent directors a fee for their attendance at board and committee meetings. No stock or stock options or other equity incentives were awarded to our directors during the fiscal year ended December 31, 2011.  We do not have non-equity incentive or a deferred compensation plan that our directors may participate in.
 
ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of March 31, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.  Except as otherwise noted, each person listed below is the sole beneficial owner of the shares and has sole investment and voting power as to such shares.  No person listed below has any options, warrants or other rights to acquire additional securities of the Company except as may be otherwise noted.

Address of each of the persons set forth below is in care of China Marketing Media Holdings, Inc. RMA 901, KunTai International Mansion, No. 12 Chaowai Street, Beijing, 100020, China.

 
31

 

Name of Beneficial Owner
Office
Amount of Beneficial Ownership
Percent of Class
       
Yingsheng Li
 
President, Chief Executive Officer, and Chairman
9,198,271
32.07%
       
Xiaofeng Ding
 
Director
147,172
Less than 1%
       
Dongsheng Ren
 
Director
896,922
3.13%
       
Wengao Luo
 
Chief Operating Officer
238,197
Less than 1%
       
Zhen Zhen Peri 
 
Chief Financial Officer     - 
All officers and directors as a group (5 persons named above)
 
10,480,562
 
36.54%
 
 
1Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

2A total of 28,686,002 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d) (1) as of March 31, 2012.  For each beneficial owner above, any options or warrants exercisable within 60 days have been included in the denominator.
 
ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Transactions with Related Persons

The following includes a summary of transactions since the beginning of the 2009 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11, “Executive Compensation”).

 
32

 
 
Our Chief Executive Officer, Yingsheng Li, and our director, Xiaofeng Ding are also executive officers and/or directors of Sale and Marketing Publishing House (“CMO”). We are parties to the Operation and Management Right Agreement with CMO. This agreement is material to the operation of our business.  Under this agreement, from November 1, 2003 to October 31, 2013, our subsidiary, Shenzhen Media Investment Co., is obligated to market the magazines, sell the magazines and advertising space, provide strategic planning for the magazines, and train the professional staff of CMO. Under the terms of the contract, Shenzhen Media Investment Co. bears all of the operating costs relating to the publishing of the magazines and is entitled to all revenues generated from selling the magazines and its advertising space. On November 20, 2004, Shenzhen Media Investment Co. transferred all the rights to Shenzhen New Media Co.

Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
 
Director Independence

Notwithstanding the fact that the Company’s securities are not listed on a U.S. securities stock exchange, the Board has determined to adhere to the “independence” standards set forth in the Nasdaq Marketplace Rules. Under the foregoing standards, the Board determined that none of our current directors meet “independence” requirements.  The Company will seek to add members to its Board and the Board committees (once they are established) as soon as practicable.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
On October 19, 2011, the Board of Directors of China Marketing Media Holdings, Inc. (the “Company”) approved and determined to dismiss the Company’s current auditors, UHY LLP (“UHY”).

The Company engaged UHY in April 2011 to audit the Company’s financial statements as of December 31, 2011 and for the year then ended and to perform the reviews of the unaudited condensed consolidated quarterly financial statements included in the Company’s quarterly reports on Form 10-Q, which reviews included financial quarters beginning with the quarter ending March 31, 2011. During the term of UHY’s engagement, the Company had no disagreements with UHY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of UHY, would have caused UHY to make reference to the matter.

On October 24, 2011, the Company engaged Child, Van Wagoner & Bradshaw, PLLC (“PLLC”) to serve as the Company’s independent auditors to audit the Company’s financial statements as of December 31, 2011 and for the year then ended. In addition, CVB will also perform the reviews of the unaudited condensed consolidated quarterly financial statements to be included in the Company’s quarterly reports on Form 10-Q, which reviews will include financial quarters beginning with the quarter ending September 30, 2011.

The following is a summary of the fees billed to the Company by our independent auditor, UHY LLP and Child, Van Wagoner & Bradshaw, PLLC, for professional services rendered for the fiscal years ended December 31, 2011 and 2010:

   
2011
 
2010
 
           
Audit fees(1)
   
$156,000
   
$155,000
 
Audit-related fees(2)
   
 56,026
   
183
 
Tax fees(3)
   
10,500
   
10,500
 
All other fees
   
0
   
0
 
     Total
   
$222,526
   
$165,683
 
 
(1)
Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
 
(2)
Consists of fees billed for all out-of-pocket expenses associated with performing audit and review services.
 
(3)
Consists of fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
 
 
33

 
 
Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit and non-audit services performed by Child Van Wagoner & Bradshaw, PLLC for our consolidated financial statements as of and for the year ended December 31, 2011.
 
PART IV
 
ITEM 15.       EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.
 
(a) The following documents are filed as part of this report:  
         
  (1) Financial Statement are set forth beginning on page F-1 of the Report  
         
   
·
Report of Independent Registered Public Accounting Firm of CVB, PLLC
F-1
         
   
·
Consolidated Balance Sheets
F-2
         
   
·
Consolidated Statement of Operations
F-3 - F-4
         
   
·
Consolidated Statement of Stockholders’ Equity
F-5 - F-6
         
   
·
Consolidated Statement of Cash Flows
F-7
         
   
·
Notes to Consolidated Statements
F-8 - F-26
         
  (2) Financial Statement Schedules: All Schedules are omitted because the information called for is not applicable, is not required, or because the financial information is set forth in the financial statements or notes thereto.  
         
  (3) Exhibits  
 
Exhibits (including those incorporated by reference).
 
Exhibit Number
Description of Exhibit
   
2.1
Share Exchange Agreement by and among the Company, Media Challenge Holdings Limited and certain shareholders thereof, dated as of December 31, 2005 [Incorporated by reference to Exhibit 2.1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on February 14, 2006, in file number 0-51806]
 
2.2
Convertible Promissory Note [Incorporated by reference to Exhibit 2.2 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
3.1
Articles of Incorporation, as amended [Incorporated by reference to Exhibit 3.1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on February 14, 2006, in file number 0-51806]
 
 
34

 
 
3.2
Amended and Restated Bylaws [Incorporated by reference to Exhibit 3.2 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.1
Operation and Management Right Agreement, dated October 23, 2006, by and between CMO and Shenzhen Media [Incorporated by reference to Exhibit 10.1 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.2
Amendment to Operation and Management Right Agreement, dated January 8, 2004, by and between CMO and Shenzhen Media [Incorporated by reference to Exhibit 10.2 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.3
Description of Verbal Amendment to Operation and Management Right Agreement, dated January 8, 2004, by and between Sale and Marketing Publishing House and Shenzhen Media Investment Co., Ltd. [Incorporated by reference to Exhibit 10.3 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 17, 2007, in file number 0-51806]
 
10.4
Entrust Agreement, dated November 20, 2004, by and between Shenzhen New Media and Shenzhen Media [Incorporated by reference to Exhibit 10.3 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.5
Equity Transfer Agreement, dated October 10, 2006, by and between Zhu Yu Tong and Shenzhen New Media.  [Incorporated by reference to Exhibit 10.5 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 17, 2007, in file number 0-51806]
 
10.6
Outsourcing Agreement, dated December 30, 2006, by and between Henan Xinhua Printing Factory and CMO.  [Incorporated by reference to Exhibit 10.6 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 17, 2007, in file number 0-51806]
 
10.7
Outsourcing Agreement, dated December 30, 2006, by and between Henan Xinhua Printing Factory and CMO.  [Incorporated by reference to Exhibit 10.6 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 17, 2007, in file number 0-51806]
 
10.8
Outsourcing Agreement, dated December 16, 2006, by and between Henan Ruiguang Printing Co., Ltd. and CMO.  [Incorporated by reference to Exhibit 10.6 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 17, 2007, in file number 0-51806]
 
10.9
Employment Agreement, dated March 1, 2004, by and between Bin Li and Shenzhen New Media [Incorporated by reference to Exhibit 10.7 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]**
 
10.10
Employment Agreement, dated December 15, 2006, by and between Yifang Fu and China Marketing [Incorporated by reference to Exhibit 10.8 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]**
 
 
35

 
 
10.11
Agreement of Share Transfer, dated March 7, 2005, by and among Yingsheng Li, Xiaofeng Ding, Dongsheng Ren and Shenzhen New Media [Incorporated by reference to Exhibit 10.9 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.12
Agreement of Share Transfer, dated March 7, 2005, by and between CMO and Shenzhen New Media [Incorporated by reference to Exhibit 10.10 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.13
Distribution Agreement, dated February 8, 2006, by and between Shenzhen New Media and Guangzhou Qiankuntai Bookstore [Incorporated by reference to Exhibit 10.11 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.14
Distribution Agreement, dated April 3, 2006, by and between Shenzhen New Media and Huadao Consulting Co., Ltd. [Incorporated by reference to Exhibit 10.12 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.15
Distribution Agreement, dated February 8, 2006, by and between Shenzhen New Media and Nanjing Cultural Development Co., Ltd. [Incorporated by reference to Exhibit 10.13 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.16
Distribution Agreement, dated February 8, 2006, by and between Shenzhen New Media and Shandong Qianyan Culture Dissemination Co., Ltd. [Incorporated by reference to Exhibit 10.14 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.17
Distribution Agreement, dated February 28, 2006, by and between Shenzhen New Media and Changsha Youyou Reading Group [Incorporated by reference to Exhibit 10.15 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.18
Distribution Agreement, dated February 9, 2006, by and between Shenzhen New Media and Zhengzhou Huanghe Culture Group [Incorporated by reference to Exhibit 10.16 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.19
Distribution Agreement, dated February 8, 2006, by and between Shenzhen New Media and Hangzhou Tianyi Books Co., Ltd. [Incorporated by reference to Exhibit 10.17 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
10.20
Operation and Management Agreement, dated December 13, 2007, by and beween Shenzhen New Media and Shanghai Longcom Telecom Co., Ltd. [Incorporated by reference to Exhibit 10.20 to the Annual Report of the Company on Form 10-KSB, filed with the SEC on April 18, 2008, in file number 0-51806]
 
10.21
Termination Agreement, dated December 12, 2008, by and between Shenzhen New Media and Shanghai Longcom Telecom Co., Ltd. [Incorporated by reference to Exhibit 10.1 to the Current Report of the Company on Form 8-K, filed with the SEC on December 17, 2008, in file number 0-51806]
 
 
36

 
 
10.22
Equity Transfer Agreement dated December 26, 2011 (Incorporated by reference from the Company Quarterly Report on Form 10-Q filed with the SEC on December 29, 2011).
 
14
Code of Ethics [Incorporated by reference to Exhibit 14 to the Amendment No. 1 to the Registration Statement of the Company on Form 10-SB, filed with the SEC on January 3, 2007, in file number 0-51806]
 
16.1
Letter from CVB dated April 4, 2011 (Incorporated by reference to exhibit 16.1 to the Current Report on Form 8-K filed with SEC on April 5, 2011).
 
16.2
Letter from UHY LLP dated November 10, 2011 (Incorporated by reference to exhibit 16.1 to the Current Report on Form 8-K filed with SEC on November 14, 2011).
 
21
List of Subsidiaries of the Registrant*
 
31.1
Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
31.2
Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
32.1
Certifications of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
32.2
Certifications of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
101
The following materials from China Marketing Media Holdings, Inc’s Annual Report on Form 10-K for the year ended December 31, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations And Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity, and (v) Notes to Condensed Consolidated Financial Statements.
 
101. INS **
XBRL Instance
 
101. SCH **
XBRL Taxonomy Extension Schema
 
101. CAL **
 
XBRL Taxonomy Extension Calculation
 
101. DEF **
 
XBRL Taxonomy Extension Definition
 
101. LAB **
 
XBRL Taxonomy Extension Labels
 
101. PRE **
XBRL Taxonomy Extension Presentation

* Filed herewith.

** Represents management contract or compensatory plan or arrangement.

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
37

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  China Marketing Media Holdings, Inc.  
       
 
By:
/s/ Yingsheng Li  
   
Yingsheng Li
 
   
Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
       
 
Date: April 16, 2012
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.

Signature
Capacity
Date
 
/s/ Yingsheng Li 
Yingsheng Li
 
President, Chief Executive Officer and Chairman
April 16, 2012
/s/ Xiaofeng Ding 
Xiaofeng Ding
 
Director
April 16, 2012
/s/ Dongsheng Ren 
Dongsheng Ren
 
Director
April 16, 2012
/s/ Wengao Luo 
Wengao Luo
 
Chief Operating Officer
April 16, 2012
/s/ Zhen Zhen Peri 
Zhen Zhen Peri
 
Chief Financial Officer (Principal Financial and Accounting Officer)
April 16, 2012
 
 
38

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
Report of Independent Registered Public Accounting Firm of CVB, PLLC F-1
   
Consolidated Balance Sheets
F-2
   
Consolidated Statements of Operations And Comprehensive Income (Loss)
F-3 – F-4
   
Consolidated Statements of Cash Flows
F-5 – F-6
   
Consolidated Statements of Changes in Equity
F-7
   
Notes to Consolidated Financial Statements
F-8 – F-26
 
 
 

 
 
 
 
 
F-1

 
RDGXBRLParseBegin
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))

   
As of December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 909,534     $ 7,177,767  
Accounts receivable
    41,322       2,295,022  
Prepaid expenses
    168,922       3,846,569  
Inventory
    -       653,857  
                 
Total current assets
    1,119,778       13,973,215  
                 
Non-current assets:
               
Investments – cost method
    -       75,622  
Investments – equity method
    2,186,808       2,640,590  
Related party receivables – affiliates
    5,463,404       3,020,402  
Related party receivables
    -       366,133  
Other receivable
    3,482,126       828,181  
Investment held to maturity
    1,259,386       907,468  
Goodwill
    -       382,345  
Deposit on purchase of real estate
    3,046,707       -  
Property, plant and equipment
    1,562,574       1,824,157  
Less: accumulated depreciation
    (384,389 )     (667,574 )
License agreement
    1,667,799       1,533,373  
Less: accumulated amortization
    (1,310,846 )     (1,077,588 )
                 
Total non-current assets
    16,973,569       9,833,109  
                 
TOTAL ASSETS
  $ 18,093,347     $ 23,806,324  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 365,223     $ 828,692  
Accrued expenses and levies
    522,945       153,582  
Deferred revenues
    1,401,046       1,113,735  
Taxes payable
    78,097       197,433  
Other payable
    767,936       521,480  
                 
Total current liabilities
    3,135,247       2,814,922  
                 
Long-term liabilities:
               
Deferred tax liability
    -       28,329  
                 
Total liabilities
    3,135,247       2,843,251  
                 
Commitments and contingencies
               
                 
Equity:
               
China Marketing Media Holdings, Inc. stockholders’ equity:
               
Common stock, no par value, 100,000,000 shares authorized, 28,686,002 shares issued and outstanding, respectively
    1,112,546       1,112,546  
Additional paid-in capital
    165,000       165,000  
Retained earnings
    10,309,061       17,070,517  
Accumulated other comprehensive income
    3,371,493       2,615,010  
Total equity
    14,958,100       20,963,073  
                 
TOTAL LIABILITIES AND EQUITY
  $ 18,093,347     $ 23,806,324  

See accompanying notes to consolidated financial statements.
 
 
F-2

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))

   
Years ended December 31,
 
   
2011
   
2010
 
Revenue, net
           
Magazine advertising
  $ 12,864,101     $ 14,181,021  
Total operating revenue, net
    12,864,101       14,181,021  
                 
Cost of revenue
               
Magazine advertising
    6,007,838       3,602,996  
Total cost of revenue
    6,007,838       3,602,996  
                 
Gross profit
    6,856,263       10,578,025  
                 
Operating expenses:
               
Impairment loss on goodwill
    391,669       446,543  
General and administrative
    8,936,619       5,237,647  
Total operating expenses
    9,328,288       5,684,190  
                 
(Loss) income from operations
    (2,472,025 )     4,893,835  
                 
Other income (expense):
               
Interest income
    14,091       100,161  
Investment (loss) income (equity method)
    (66,810 )     60,073  
Subsidy income
    102,187       40,586  
Other income
    243       453  
Total other income
    49,711       201,273  
                 
(Loss) income from continuing operations before income taxes
    (2,422,314 )     5,095,108  
                 
Income tax expense
    (39,656 )     (55,992 )
                 
(Loss) income from continuing operations, net of tax
    (2,461,970 )     5,039,116  
                 
Discontinued operations
               
(Loss) gain on disposal of a subsidiary
    (3,310,262 )     30,376  
Loss from discontinued operations, net of tax
    (989,224 )     (730,886 )
Loss on discontinued operations
    (4,299,486 )     (700,510 )
                 
NET (LOSS) INCOME
  $ (6,761,456 )   $ 4,338,606  
                 
Subtract: net income attributable to non-controlling interests
    -       (28,342 )
                 
Net (loss) income attributable to China Marketing Media Holdings, Inc.
  $ (6,761,456 )   $ 4,310,264  
                 
Earnings per share – basic and diluted:
               
(Loss) income from continuing operations attributable to China Marketing Media Holdings, Inc. common stockholders
  $ (0.09 )   $ 0.18  
Discontinued operations attributable to China Marketing Media Holdings, Inc. common stockholders
    (0.15 )     (0.03 )
Net (loss) income attributable to China Marketing Media Holdings, Inc. common stockholders
  $ (0.24 )   $ 0.15  
                 
Weighted average common stock outstanding – basic and diluted
    28,686,002       28,686,002  
 
See accompanying notes to consolidated financial statements.
 
 
F-3

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))

   
Years ended December 31,
 
   
2011
   
2010
 
             
NET (LOSS) INCOME
  $ (6,761,456 )   $ 4,338,606  
Other comprehensive income:
               
- Foreign currency translation gain
    756,483       667,661  
                 
COMPREHENSIVE (LOSS) INCOME
  $ (6,004,973 )   $ 5,006,267  
                 
Comprehensive income attributable to non-controlling interests
  $ -     $ 28,342  
Comprehensive (loss) income attributable to China Marketing Media Holdings, Inc.
  $ (6,004,973 )   $ 4,977,925  
 
See accompanying notes to consolidated financial statements.
 
 
F-4

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))

   
Years ended December 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net (loss) income
  $ (6,761,456 )   $ 4,338,606  
Net loss from discontinued operations
    4,299,486       700,510  
Net (loss) income from continuing operations
    (2,461,970 )     5,039,116  
Adjustments to reconcile (loss) income from continuing operations to net cash (used in) provided by operating activities:
               
Amortization and depreciation
    359,422       83,381  
Allowance for doubtful accounts
    231,677       -  
Loss on disposal of property, plant and equipment
    -       11,129  
Investment loss (gain) (equity method)
    66,810       (60,073 )
Impairment loss on goodwill
    391,669       446,543  
Loss on disposal of a subsidiary
    4,299,486       -  
Deferred taxation
    (29,020 )     27,632  
Changes in operating assets and liabilities:
               
Accounts receivable
    363,918       (389,205 )
Prepaid expenses
    (1,745 )     (43,295 )
Other receivables
    (4,211,815 )     174,574  
Advances to affiliates
    (5,272,541 )     -  
Proceeds from affiliates
    -       88,060  
Accounts payable and accrued expenses
    705,075       817,797  
Deferred revenues
    331,833       -  
Taxes payable
    (97,033 )     (56,082 )
Other payables
    378,374       35,412  
Net cash (used in) provided by operating activities – continuing operations
    (4,945,860 )     6,174,989  
Net cash provided by operating activities – discontinued operations
    2,241,702       2,609,123  
Net cash (used in) provided by operating activities
    (2,704,158 )     8,784,112  
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (144,669 )     (22,303 )
Deposit on purchase of real estate
    (2,998,513 )     -  
Purchase of intangible assets
    (70,649 )     -  
Purchase of investments
    -       (3,540 )
Purchase of investment held to maturity
    (309,866 )     (885,119 )
Net cash used in investing activities – continuing operations
    (3,523,697 )     (910,962 )
Net cash used in investing activities – discontinued operations
    (250,329 )     (6,480,695 )
Net cash used in investing activities
    (3,774,026 )     (7,391,657 )
 
See accompanying notes to consolidated financial statements.
 
 
F-5

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 

 
 
Years ended December 31,
 
 
2011
   
2010
 
             
Effect of exchange rate changes in cash and cash equivalents
    209,951       238,563  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (6,268,233 )     1,631,018  
                 
BEGINNING OF YEAR
    7,177,767       5,546,749  
                 
END OF YEAR
  $ 909,534     $ 7,177,767  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid for income taxes
  $ -     $ 26,881  
Cash paid for interest
  $ 70,643     $ -  
 
See accompanying notes to consolidated financial statements.
 
 
F-6

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
   
Stockholders’ equity
                 
                            Accumulated                  
                            other       Non-          
    Common stock     Retained     Additional       comprehensive       controlling       Total  
    No. of shares     Amount       earnings       paid-in capital       income      interest       equity  
                                                         
Balance at January 1, 2010
    28,686,002     $ 1,112,546     $ 12,760,253     $ 165,000     $ 1,947,349     $ (28,342 )   $ 15,956,806  
                                                         
Net income for the year
    -       -       4,310,264       -       -       28,342       4,338,606  
Foreign currency translation adjustment
    -       -       -       -       667,661       -       667,661  
                                                         
Balance as of December 31, 2010
    28,686,002     $ 1,112,546     $ 17,070,517       165,000       2,615,010       -       20,963,073  
                                                         
Net loss for the year
    -       -       (6,761,456 )     -       -       -       (6,761,456 )
Foreign currency translation adjustment
    -       -       -       -       756,483       -       756,483  
                                                         
Balance as of December 31, 2011
    28,686,002     $ 1,112,546     $ 10,309,061     $ 165,000     $ 3,371,493     $ -     $ 14,958,100  
 
See accompanying notes to consolidated financial statements.
 
 
F-7

 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
1.   ORGANIZATION AND BUSINESS BACKGROUND

China Marketing Media Holdings, Inc. ("China Marketing", “CMKM” or the "Company") was incorporated under the laws of the State of Texas on October 29, 1999.

The Company, through its wholly owned subsidiaries and investments in other entities, engages in the sale of its magazines and advertising space within its magazines, which are sold throughout China; and provides consulting services to clients concerning advertising and marketing programs. The Company also conducts online sales of consumer products consisting primarily of personal computers, electronic appliances, cosmetic products, mobile phones and jewelries. For the year ended December 31, 2011, the Company disposed the online sales business to a former director and an individual shareholder of the Company. All of the Company’s operations, assets, personnel, officers and directors are located in China. Currently, the Company publishes China Marketing magazine in China.

On March 31, 2011, the Company disposed of its wholly owned subsidiary, Shenzhen New Media Advertising Co., Ltd. (“SNMAC”) for a consideration of $154,703. There was no gain or loss on disposal of a subsidiary for the year ended December 31, 2011 for this transaction.

On December 23, 2011, Shenzhen Media Investment Co., Ltd. (“MIC”) transferred its 10% equity interest in Beijing Orient Converge Human Resources Management Center Co. Ltd., 98% equity interest in Beijing Media Management Consultation Company (“BMMCC”) and 30% equity interest in Shenzhen Directory Marketing Management Co. Ltd. to Shenzhen New Media Consulting Co., Ltd. (“SNMC”) for a consideration of $78,522 (equivalent to RMB500,000), $153,903 (equivalent to RMB 980,000) and $2,355,657 (equivalent to RMB15,000,000), respectively. In addition, Mr. Wengao Luo, a director of the Company, agreed to transfer all of his 2% equity interest in BMMCC to SNMC for a consideration of $3,141 (equivalent to RMB20,000).

On December 26, 2011, the Company entered an Equity Transfer Agreement (the “Agreement”) with Mr. Bin Li, a former director of the Company and Mr. Feng Yu, an individual shareholder of the Company, to dispose 100% equity interest in MIC for a total consideration of $6,111,473 (equivalent to RMB38,915,724). Pursuant to the Agreement, the consideration is receivable within one year of the date of the Agreement and none of such consideration has been received to date. For the year ended December 31, 2011, the Company has written-off the consideration receivable as it believed the potential for recovery is considered remote and a loss on disposal of a subsidiary is resulted.

The Company currently publishes 4 main issues and 8 special issues of its magazine. Currently, the distribution network of its magazines consists of over 60 major distribution agencies and approximately 30,000 bookstores and news stands covering over approximately 300 cities throughout China.

As mentioned above, the Company continues its operation in advertising business through various entities, either wholly owned or through certain ownership percentages. Below is a chart of the remaining entities of which the Company has an interest in, reflecting the ownership percentage and a brief description of the activities of each entity. The consolidated financial statements reflect the consolidated operations of the Company and the entities listed below. All significant inter-company balances and transactions have been eliminated in consolidation.
 
 
F-8

 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
Name of entity
 
Ownership interest
 
Description of entity
         
Media Challenge Holdings Limited
 
100%
 
Investment holdings
         
Shenzhen New Media Consulting Co., Ltd. (“SNMC”)
 
100%
 
Investment holdings
         
Shenzhen Caina Brand Consultant Company (“SCBCC”)
 
100%
 
Provision of strategic marketing and consulting services
         
Beijing Media Management and Consulting Co., Ltd. (“BMMCC”)
 
100%
 
Provision of consulting and professional training services
         
Beijing Caina XianLiang Marketing and Layout Company (“BCXMLC”)
 
100%
 
Provision of strategic marketing and consulting services

The consolidated entity is hereafter referred to as "the Company".
 
2.   GOING CONCERN UNCERTAINTIES

The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the continuity of operations and realization of assets and satisfaction of liabilities and commitments in the normal course of business.

For the year ended December 31, 2011, including the loss on disposal of a subsidiary of $3,310,262, the Company has incurred a net loss of $6,761,456 and experienced negative operating cash flows of $2,704,158. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.
 
3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
·
Basis of presentation
 
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

·
Use of estimates

In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

·
Reclassification

Certain comparative figures have been reclassified to conform to the current period financial statement presentation.
 
 
F-9

 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
·
Basis of consolidation

The consolidated financial statements include the accounts of CMKM and its majority-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

·
Cash and cash equivalents

For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency. The Company has ability to transfer cash within its corporate structure, except for cash and cash equivalents maintained in the PRC, which are restricted as to transfer out of the PRC, unless the approval is granted by the local government.

·
Accounts receivable

Accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. 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 Company does not have any off-balance-sheet credit exposure related to its customers.

·
Inventory

Inventories mainly consist of the electronic products purchased from third parties, which are stated at the lower of cost, as determined on a first-in, first-out basis, or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower.

·
Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

   
Expected useful life
 
Residual value
Buildings
 
20 years
 
5%
Motor vehicles
 
5 years
 
5%
Furniture and equipment
 
5 years
 
5%
Computer equipment
 
5 years
 
5%

Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statement of operations.
 
 
F-10

 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
   
As of December 31,
 
   
2011
   
2010
 
             
Buildings
  $ 913,440     $ 1,114,923  
Motor vehicles
    403,053       356,669  
Furniture and equipment
    61,865       136,685  
Computer equipment
    184,216       215,880  
      1,562,574       1,824,157  
Less: accumulated depreciation
    (384,389 )     (667,574 )
                 
Property, plant and equipment, net
  $ 1,178,185     $ 1,156,583  

Depreciation expense for the years ended December 31, 2011 and 2010 was $146,116 and $172,640, respectively.

Long-lived assets of the Company are reviewed annually to assess whether the carrying value has become impaired according to the guidelines established in the Accounting Standards Codification ("ASC") Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”. No impairment of assets was recorded during the years reported.

·
Goodwill

Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill acquired in a business combination is not amortized. The Company evaluates the carrying amount of goodwill for impairment annually on December 31 and whenever events or circumstances indicate impairment may have occurred.

When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

Due to inability to meet the anticipated sales growth in marketing consulting service, the Company assessed the acquired goodwill associated with the related business units for impairment as of December 31, 2011. Based on the discounted cash flows model utilizing estimated future earnings and cash flows, the fair value of the reporting unit is less than the carrying value of the acquired goodwill. The Company’s evaluation of goodwill completed during the year resulted in an impairment loss of $391,669 (2010: $446,543) and allocated to Magazine Advertising Business.
 
 
F-11

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
·
Intangible assets

In accordance with ASC Topic 350-50, “General Intangibles Other Than Goodwill”, goodwill amounts are not amortized, but rather are tested for impairment at least annually. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which are the ten years of the "license agreement" and the five years of the integrated office system. The carrying amount of the asset is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. No intangible asset impairment charges are deemed necessary for the years ended December 31, 2011 and 2010.

Amortization expense of the license agreement included in cost of revenue for the years ended December 31, 2011 and 2010 was $213,306 and $159,611, respectively.

As of December 31, 2011, estimated future annual amortization expense related to the license agreement in the next five years is as follows:

Years ending December 31:
     
2012
  $ 176,476  
2013
    146,977  
2014
    14,357  
2015
    14,357  
2016
    4,786  
Total:
  $ 356,953  

·
Long-term investments

Long-term investments represent cost and equity method investments in the PRC. Equity method investments are recorded at original cost and adjusted to recognize the Company’s proportionate share of the investee’s net income or losses and additional contributions made and distributions received. The Company recognizes a loss if it is determined that other than temporary decline in the value of the investment exists. The Company also accounts for investments, other than marketable securities, with ownership less than 20% using the cost method.

(a)
Shenzhen Keungxi Technology Company Ltd. ("SKTC")

SKTC was incorporated in China in October 2005. Its business scope includes, among others, sales and development of computer software, and computer and communication systems. It also provides information system consulting services. The Company, through Shenzhen Media, holds 48% of the equity interest of SKTC and three individual shareholders, Wengao Luo, Xi Chen and Bin Li own the remaining 21.5%, 21.5% and 9% equity interest of SKTC, respectively and accounts for the investment using the equity method.

Balance as of December 31, 2010
  $ 8,894  
Foreign translation difference
    (237 )
Loss on investment related to disposal of a subsidiary
    (8,657 )
Balance as of December 31, 2011
  $ -  

(b)
Beijing Orient Converge Human Resources Management Center Co. Ltd (“BJOC”)

BJOC was incorporated in China in October 2004 and is mainly engaged in providing consultation, professional training and relevant sale and marketing services to business enterprises in China. In November 2007, the Company, through MIC, held 52% of the equity interest of BJOC and accounted for the investment in consolidation.

 
F-12

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
On August 2, 2008, the Company’s subsidiary, MIC, sold 42% ownership of BJOC to Shanghai Cheng Mei Biotechnology Co., Ltd. ("Shanghai Cheng Mei") for a cash consideration of $141,831 (equivalent to RMB 987,461).

On December 23, 2011, MIC transferred the remaining 10% equity interest of BJOC to SNMC for a consideration of $78,522 (equivalent to RMB500,000). SNMC records this investment as a reorganization of equity interest under common control. No gain or loss was recognized on the transaction.

(c)
Shenzhen Directory Marketing Management Co. Ltd (“SDMM”)

SDMM was incorporated in China in June 2010 and is mainly engaged in providing advertising services, business enterprises marketing planning services and information system consulting services. The Company, through Shenzhen Media, holds 30% of the equity interest of SDMM and one individual shareholder, Ge Zhihong, owns the remaining 70% equity interest of SDMM, respectively and accounts for the investment using the equity method.

Purchases of investment
  $ 2,268,671  
Foreign translation difference
    (2,344 )
Investment loss (30%)
    (92,812 )
Balance as of December 31, 2010
  $ 2,173,515  
Foreign translation difference
    87,597  
Investment loss (30%)
    (74,304 )
Balance as of December 31, 2011
  $ 2,186,808  

(d)
Beijing Guangrun Lingzhi International Advertising Co. Ltd. (“BJGL”)

BJGL was incorporated in China in November 2010 and is mainly engaged in providing advertising services. The Company, through Beijing Media, holds 40% of the equity interest of BJGL and one corporate shareholder, Highlight Consulting Co., Ltd., and two individual shareholders, Tianyou Cai and Tieying Luo, own the remaining 40%, 10% and 10% equity interest of BJGL, respectively and accounts for the investment using the equity method.

Balance as of December 31, 2010
  $ 3,546  
Foreign translation difference
    86  
Investment loss (40%)
    (3,632 )
Balance as of December 31, 2011
  $ -  

(e)
Beijing Kang Pusen Media Consultation Planning Co., Ltd. (“BJKP”)

BJKP was incorporated in China in March 2008 and is mainly engaged in providing sales training services. The Company, through Shenzhen New Media, holds 20% of the equity interest of BJKP and four individual shareholders, Xiaofang Wang, Yi Rong, Qiang Zhao and Lijie Wang, own the remaining 50%, 10%, 10% and 10% equity interest of BJKP, respectively and accounts for the investment using the equity method.
 
 
F-13

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
Balance as of December 31, 2010
  $ 61,674  
Foreign translation difference
    1,504  
Investment loss (20%)
    (63,178 )
Balance as of December 31, 2011
  $ -  

·
Investment held to maturity

Investment in unit trusts in the PRC, which the Company has the intent and ability to hold to maturity are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

·
Prepayment on purchase of real estate

The deposit in the amount of $3,046,707 is equivalent to the total purchase price for the residential units in Shenzhen City, Guangdong Province, the PRC which will be used for staff quarters (see note 11).

·
Revenue recognition

In accordance with ASC Topic 605, "Revenue Recognition", the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

(a)         Magazine advertising

The Company publishes three issue magazines each month, (namely Sale edition, Channel edition and Case edition) of "China Marketing" and other special editions periodically, for example, "China Business & Trade" – (Training edition).

The Company recognizes revenues for the advertising sales and consulting service ratably over the periods when the customer's advertisements are published and services are provided. Total revenue from the advertising sales is $5,768,340 and $9,184,076 for the years ended December 31, 2011 and 2010, respectively. Total revenue from marketing consulting service is $5,243,823 and $3,350,205 for the years ended December 31, 2011 and 2010, respectively.

The Company recognizes revenue from the publishing of the above magazines when the risks and rewards of ownership of the goods have transferred to the customer, which is usually on delivery or when title passes. Total revenue from the publishing business is $1,851,938 and $1,646,740 for the years ended December 31, 2011 and 2010, respectively.

(b)         Consumer products

The Company derives the major revenues from the trading of consumer products. The Company recognizes its revenues net of value-added taxes (“VAT”) when the products are delivered to the customers, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectibility is reasonably assured. As the Company disposed its subsidiary which conducted online sales of consumer products during the year, the revenues from the trading of consumer products was recognized within loss from discontinued operations for the year ended December 31, 2011.

 
F-14

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
An analysis of the Company’s revenues by products is as follows:

   
Years ended December 31,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 5,768,340     $ 9,184,076  
Marketing consulting service
    5,243,823       3,350,205  
Publishing
    1,851,938       1,646,740  
                 
Total revenue
  $ 12,864,101     $ 14,181,021  

·
Cost of revenue

(a)         Magazine advertising

Cost of revenue includes printing, labor costs and amortization incurred by the Company in the production of its magazines. Cost of revenue also includes labor cost, subcontracting fee and direct operating cost incurred by the Company in rendering of the consulting service to the customers.

The Company records the estimated cost of returned magazines at the date we delivered the magazines to our customers. Our sales are based on three main distribution channels throughout China: (1) postal subscription base distribution; (2) direct order distribution; and (3) agency base distribution.

First, postal subscription channel involves the distribution of our magazines by Chinese post offices. Magazine subscribers can request their subscriptions delivered from the post offices in China. Returns are not allowed for magazines sold through postal subscription.

Second, order distribution involves requests made by a subscriber to us for a single or multiple issues of magazines that do not involve an ongoing subscription. Upon receipt of order requests and payment, we deliver the ordered issues to the address requested by the subscriber. Returns are not permitted for magazines sold through direct request subscription.

Third, agency distribution involves delivery of our magazines to sales agents who in turn distribute the magazines to retail agents at various locations throughout China. The Company granted sales agents a two-month return privilege. Average return rate for the years ended December 31, 2011 and 2010 was 15% and 17%, respectively.

In accordance with the provisions of ASC Topic 605-15-25-1, “Sales of Product when Right of Return Exists” (“ASC 605-15-25-1”), an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

a.
The seller's price to the buyer is substantially fixed or determinable at the date of sale.
b.
The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.
c.
The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.
d.
The buyer acquiring the product for resale has economic substance apart from that provided by the seller.
e.
The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
f.
The amount of future returns can be reasonably estimated.
 
 
F-15

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
The Company recognizes magazine sales revenue in accordance with the provisions of ASC 605-15-25-1: first, our price to the sales agent is fixed; second, the sales agent has to pay us fully upon order request and the payment is not contingent on resale of the magazines; third, the Company is not responsible in the event of theft or physical destruction or damage of the product after delivery; fourth, our sales agents include bookstores, reading groups, and culture groups, etc.; fifth, the Company has no obligations to resell the magazines distributed to sales agents; and finally, the amount of returns can be reasonably estimated and are included in accrued liabilities.

(b)         Consumer products

Cost of revenue consists primarily of purchase cost of consumer products, direct labor and other overheads, which are directly attributable to the sale of consumer products. Shipping and handling cost, associated with the delivery of consumer products to the customers, are recorded in cost of revenue and are recognized when the related product is delivered to the customer. As the Company disposed its subsidiary which conducted online sales of consumer products during the year, the cost of revenue on trading of consumer products was recognized within loss from discontinued operations for the year ended December 31, 2011.

·         Advertising expenses

Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred advertising costs of $349,226 and $85,659 for the years ended December 31, 2011 and 2010.

·         Subsidy income

Subsidy income is received at a discretionary amount as determined by the local PRC government, which represents government grant or incentive award accredited to the Company for its contribution in the promotion and development of culture and media industry in the PRC. The amount is un-conditional, non-refundable and without any restrictions on usage at the time of grant to and receipt by the Company. Subsidy income is recognized in the accompanying consolidated statements of operations in the period when it was received from the local PRC government.

·         Earnings per share

Basic earnings per common share ("EPS") are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants. The numerators and denominators used in the computations of basic EPS are presented in the following table:
 
 
F-16

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
 
 
   
Years ended December 31,
 
   
2011
   
2010
 
Numerator for basic and diluted EPS
           
(Loss) income from continuing operations attributable to China Marketing Media Holdings, Inc. common stockholders
  $ (2,461,970 )   $ 5,039,116  
Discontinued operations attributable to China Marketing Media Holdings, Inc. common stockholders
    (4,299,486 )