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EXCEL - IDEA: XBRL DOCUMENT - China Marketing Media Holdings, Inc.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10−Q
 
(Mark One)
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2011
 
[ ] 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
(I.R.S. Empl. Ident. No.)
incorporation or organization)
 
 
RMA 901
KunTai International Mansion
No. 12 Chaowai Street
Beijing, 100020, China
(Address of principal executive offices, Zip Code)
 
(86)10-59251090
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [  ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes [  ]             No [  ] 
 
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. (Check one):

Large accelerated filer [  ]
Accelerated filer [  ]
   
Non-accelerated filer [  ]
(Do not check if a smaller reporting company)
Smaller reporting company [X]
 
 
 

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [  ]             No [X]
 
The number of shares outstanding of each of the issuer’s classes of common equity, as of September 22, 2011 is as follows:

Class of Securities
Shares Outstanding
Common Stock, no par value
28,686,002
 


 
 

 
 
TABLE OF CONTENTS

  PART I – Financial Information  
     
Item 1.
Financial Statements
2
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
13
Item 4.
Controls and Procedures
13
     
 
PART II – Other Information
15
     
Item 1.
Legal Proceedings
15
Item 1A.
Risk Factors
15
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
Item 3.
Defaults Upon Senior Securities
18
Item 4.
[Removed and Reserved]
18
Item 5.
Other Information
18
Item 6.
Exhibits
18
 
 
F-1

 
 
PART I
FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 

 
CHINA MARKETING MEDIA HOLDINGS, INC.
 
(Unaudited)
 
Condensed Consolidated Financial Statements
 
For The Three And Six Months Ended June 30, 2011 and 2010
 

 
 
 

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.

 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Page
   
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010
F-2
   
Condensed Consolidated Statements of Operations And Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
F-3 – F4
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
F-5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the  Six Months Ended June 30, 2011 (Unaudited)
F-6
   
F-7 – F-23
 
 
 

 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash
  $ 2,485,440     $ 7,177,767  
Securities available-for-sale
    326,195       -  
Accounts receivable, net
    2,705,238       2,295,022  
Prepaid expenses
    131,800       154,418  
Advances to suppliers
    3,508,970       3,692,151  
Other receivables
    1,308,588       828,181  
Advance to unrelated party
    4,331,683       -  
Inventory
    491,016       653,857  
Due from affiliates
    6,079,134       3,779,441  
Investments held to maturity
    464,109       -  
Total current assets
    21,832,173       18,580,837  
                 
Other assets:
               
Investments – cost method
    -       75,622  
Investments – equity method
    2,212,790       2,247,684  
Investment held to maturity – non-current
    773,514       907,468  
Goodwill
    391,087       382,345  
Property, plant and equipment, net
    1,260,770       1,156,583  
License agreement, net
    458,884       455,785  
Deposit on purchase of real estate
    2,994,059       -  
Website development costs
    5,538       -  
Total other assets
    8,096,642       5,225,487  
                 
TOTAL ASSETS
  $ 29,928,815     $ 23,806,324  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,178,399     $ 828,692  
Accrued expenses
    247,584       153,582  
Deferred revenues
    1,891,619       1,113,735  
Taxes payable
    27,149       197,433  
Other payable
    617,953       521,480  
Short-term bank loan
    4,331,683       -  
Total current liabilities
    8,294,387       2,814,922  
                 
Long-term liabilities:
               
Deferred tax liability
    -       28,329  
                 
Total liabilities
    8,294,387       2,843,251  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, no par value, 100,000,000 shares authorized, 28,686,002 shares issued and outstanding
    1,112,546       1,112,546  
Additional paid-in capital
    165,000       165,000  
Statutory reserve
    1,660,752       299,472  
Retained earnings
    15,580,966       16,771,045  
Accumulated other comprehensive income
    3,115,164       2,615,010  
                 
Total stockholders’ equity
    21,634,428       20,963,073  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 29,928,815     $ 23,806,324  
 
See accompanying notes to condensed consolidated financial statements.
 
 
F-2

 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenue
  $ 9,608,012     $ 8,712,848     $ 16,737,767     $ 17,503,940  
                                 
Cost of revenue
    7,445,144       6,216,953       12,059,158       12,209,252  
                                 
Gross profit
    2,162,868       2,495,895       4,678,609       5,294,688  
                                 
Operating expenses:
                               
Salaries and related benefits expenses
    789,352       822,704       1,565,791       1,516,949  
Selling, general and administrative expenses
    1,256,752       799,632       2,565,989       1,570,530  
                                 
Total operating expenses
    2,046,104       1,622,336       4,131,780       3,087,479  
                                 
Income from operations
    116,764       873,559       546,829       2,207,209  
                                 
Other income (expense):
                               
Interest income
   
4,013
      85,492      
4,911
      85,425  
Interest expenses
   
(67,994
)     -      
(67,994
)     (34,016 )
Investment loss in unconsolidated affiliates
    (160,924 )     (2,634 )     (161,480 )     (10,088 )
Other(expenses) income
    (83,042 )     (174 )     (22,338 )     595  
                                 
Total other (expenses) income
    (307,947 )     82,684       (246,901 )     41,916  
                                 
(Loss) income from continuing operations before income tax expense
    (191,183 )     956,243       299,928       2,249,125  
Income tax expense
    (983 )     (22,810 )     (68,718 )     (28,128 )
                                 
(Loss) income from continuing operations, net of income tax expense
    (192,166 )     933,433       231,210       2,220,997  
                                 
(Loss) income from discontinued operations, net of income tax expense
    -       5,045       (60,009 )     (83,097 )
                                 
NET (LOSS) INCOME
  $ (192,166 )   $ 938,478     $ 171,201     $ 2,137,900  
Add: net loss attributable to non-controlling interests
    -       -       -       4,742  
                                 
Net (loss) income attributable to China Marketing Media Holdings, Inc.
  $ (192,166 )   $ 938,478     $ 171,201     $ 2,142,642  
                                 
Amounts attributable to China Media Holdings, Inc.
                               
(Loss) income from continuing operations
    (192,166 )     933,433       231,210       2,220,997  
(Loss) income from discontinued operations
    -       5,045       (60,009 )     (78,355 )
Net (loss) income attributable to China Media Holdings, Inc.
  $ (192,166 )   $ 938,478     $ 171,201     $ 2,142,642  
 
 
F-3

 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (CONTINUED)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net (loss) income per common share attributable to China Marketing Media Holdings, Inc. – Basic and diluted
                       
Continuing operations
    (0.01 )     0.03       0.01       0.08  
Discontinued operations
    -       0.00       0.00       (0.00 )
Net (loss) income per common share
    (0.01 )     0.03       0.01       0.07  
                                 
Weighted average number of common share outstanding – basic and diluted
    28,686,002       28,686,002       28,686,002       28,686,002  
                                 
Other comprehensive income, net of tax
                               
Net (loss) income
  $ (192,166 )   $ 938,478     $ 171,201     $ 2,137,900  
Unrealized gain on securities available-for-sale
    17,803       -       17,803       -  
Foreign currency translation adjustment
   
347,934
      72,641       482,351       65,241  
Comprehensive income
   
173,571
      1,011,119       671,355       2,203,141  
Comprehensive loss attributable to non-controlling interests
    -       -       -       4,742  
                                 
Comprehensive income attributable to China Marketing Media Holdings, Inc.
  $
173,571
    $ 1,011,119     $ 671,355     $ 2,207,883  
 
See accompanying notes to condensed consolidated financial statements
 
 
F-4

 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

   
Six months ended June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income from continuing operations
  $ 231,210     $ 2,220,997  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Amortization and depreciation
    155,408       127,925  
Bad debt expenses
    252,067       -  
Equity investment loss from unconsolidated subsidiaries
    85,123       10,088  
Impairment loss on investment – cost method
    76,357       -  
Loss on disposal of property, plant and equipment
    5,313       14,505  
Changes in operating assets and liabilities:
               
Accounts receivable
    (677,156 )     426,320  
Prepaid expenses
    25,813       273,386  
Advances to suppliers
    (501,271 )     194,767  
Other receivables
    (470,082 )     (366,331 )
Inventory
    175,506       (611,066 )
Accounts payable
    326,507       437,225  
Accrued expenses
    90,463       (4,333 )
Deferred revenues
    913,974       284,840  
Taxes payable
    (161,171 )     (107,312 )
Other payable
    87,598       49,431  
Deferred tax liability
    (28,604 )     -  
Net cash provided by operating activities
    587,055       2,950,442  
                 
Cash flows from investing activities:
               
Proceeds from (advances made to) affiliates
    1,081,156       (2,437,924 )
Advances made to unrelated party
    (4,275,997 )     -  
Purchase of property, plant and equipment
    (182,130 )     (38,329 )
Payment of website development costs
    (5,467 )     -  
Deposit on purchase of real estate
    (2,955,569 )     -  
Proceeds from disposal of a subsidiary
    152,714       -  
Purchase of investment held to maturity
    (305,428 )     (438,933 )
Purchase of securities available-for-sale
    (304,428 )        
Purchase of intangible assets
    (74,844 )     -  
Net cash used in investing activities
    (6,869,993 )     (2,915,186 )
                 
Cash flows from financing activities:
               
Proceeds from short-term bank loan
    4,275,997       -  
                 
Net cash provided by financing activities
    4,275,997       -  
                 
Cash flows from discontinued operations:
               
Operating cash flows
    823,080       (90,786 )
Investing cash flows
    (142,563 )     38,041  
Financing cash flows
    (3,469,059 )     -  
                 
Net cash used in discontinued operations
    (2,788,542 )     (52,745 )
                 
Effect of exchange rate changes in cash and cash equivalents
    103,156       22,712  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (4,692,327 )     5,223  
                 
BEGINNING OF PERIOD
    7,177,767       5,546,749  
                 
END OF PERIOD
  $ 2,485,440     $ 5,551,972  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid for income taxes
  $
68,718
    $ 28,128  
Cash paid for interest
  $ 109,543     $ -  
 
See accompanying notes to condensed consolidated financial statements.
 
 
F-5

 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Common stock
               
Accumulated
other
             
   
Shares
   
Amount
   
 Retained
earnings
   
Additional
paid-in capital
   
comprehensive
income
   
Statutory reserve
   
Total
stockholders’ equity
 
                                           
Balance as of January 1, 2011
    28,686,002     $ 1,112,546     $ 16,771,045     $ 165,000     $ 2,615,010     $ 299,472     $ 20,963,073  
                                                         
Net income for the period
    -       -       171,201       -       -       -       171,201  
                                                         
Unrealized holding gain on securities available-for-sale
    -       -       -       -       17,803       -       17,803  
                                                         
Appropriation to statutory reserve
    -       -       (1,361,280 )     -       -       1,361,280       -  
                                                         
Foreign currency translation adjustment
    -       -       -       -       482,351       -       482,351  
Balance as of June 30, 2011
    28,686,002     $ 1,112,546     $ 15,580,966     $ 165,000     $ 3,115,164     $ 1,660,752     $ 21,634,428  
 
See accompanying notes to condensed consolidated financial statements.
 
 
F-6

 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
NOTE – 1
ORGANIZATION AND BASIS OF PRESENTATION

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. All of the Company’s operations, assets, personnel, officers and directors are located in China. Currently, the Company publishes China Marketing magazine in China.

The Company has adopted the Accounting Standards Codification (“ASC”) Topic 810-10-25, “Variable Interest Entities” (“ASC 810-10-25”). ASC 810-10-25 requires a variable interest entity or VIE to be consolidated by the Company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. Pursuant to an operating agreement, the Company has the ability to control Sale and Marketing Publishing House (“CMO”) as the primary beneficiary. Accordingly, the operating results of CMO have been included in the condensed consolidated financial statements of the Company for the three and six months ended June 30, 2011 and 2010.

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 three months ended June 30, 2011.

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 stand covering over approximately 300 cities throughout China.

As mentioned above, the Company operates its advertising business and sale of its consumer products through various entities, either wholly owned or through certain ownership percentages.  Below is a chart of all the entities of which the Company has an interest in, reflecting the ownership percentage and a brief description of the activities of each entity. The condensed 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.

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 Media Investment Co., Ltd. (“MIC”)
 
100%
 
Online sales of consumer products
         
Shenzhen Caina Brand Consultant Company (“SCBCC”)
 
100%
 
Provision of strategic marketing and consulting services
 
 
F-7

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
Beijing Media Management and Consulting Co., Ltd. (“BMMCC”)
 
100%
 
Provision of consulting and professional training services
         
Beijing Caina XianLiang Marketing and Layout Company
 
100%
 
Provision of strategic marketing and consulting services
         
Sale and Marketing Publishing House (“CMO”) (A)
 
N/A
 
Publishing and distribution of magazines - government owned

(A) represents variable interest entity (“VIE”)

The accompanying unaudited condensed consolidated financial statements as of June 30, 2011 and for the three and six months then ended June 30, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual audited consolidated financial statements. The unaudited condensed consolidated balance sheet as of June 30, 2011, the unaudited condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2011 and 2010, the unaudited consolidated statement of changes in stockholders’ equity for the  six months ended June 30, 2011, and the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The results for the six months ended June 30, 2011 are not necessarily indicative of results to be expected for the year ending December 31, 2011 or for any future periods. The consolidated balance sheet at December 31, 2010 has been derived from audited consolidated financial statements; however, the notes to the consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on March 31, 2011.


NOTE – 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

l
Reclassifications

Certain comparative figures have been reclassified to conform to the current period financial statement presentation.
 
l  
Basis of consolidation
 
The condensed consolidated financial statements include the accounts of CMKM and its majority-owned subsidiaries and variable interest entity (“VIE”). All significant inter-company balances and transactions have been eliminated in consolidation.

The Company has adopted the Accounting Standards Codification (“ASC”) Topic 810-10-25, “Variable Interest Entities ” (“ASC 810-10-25”). ASC 810-10-25 requires a variable interest entity or VIE to be consolidated by the Company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. Pursuant to an operating agreement, the Company has the ability to control Sale and Marketing Publishing House (“CMO”) as the primary beneficiary. Accordingly, the operating results of CMO have been included in the condensed consolidated financial statements of the Company for the six months ended June 30, 2011 and 2010.
 
 
F-8

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
l
Use of estimates

The preparation of the financial statements in conformity with US generally accepted accounting principles (“GAAP”) requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; long- term investments, valuation allowances for receivables and due from affiliates, realizable values for inventories. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the unaudited consolidated financial statements in the periods they are deemed to be necessary.
 
l
Cash

Cash consist of cash on hand and at banks. Substantially all of the Company’s cash deposits are held with financial institutions located in the PRC. Management believes that these major financial institutions are of high credit quality.

l
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 adjust 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.

As of June 30, 2011, the Company had an allowance for doubtful accounts of $49,567.

l
Inventory

Inventories mainly consist of consumer products such as personal computers, electronic appliances and mobile phones, which are stated at the lower of cost or market value. 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. The cost of inventories is measured using the weighted average method.

l
Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is recorded 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 condensed consolidated statement of operations.
 
 
F-9

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
Property, plant and equipment consist of the following:

   
June 30, 2011
   
December 31, 2010
 
             
Buildings
  $ 1,140,416     $ 1,114,923  
Motor vehicles
    417,555       356,669  
Furniture and equipment
    123,382       136,685  
Computer equipment
    223,159       215,880  
      1,904,512       1,824,157  
Less: accumulated depreciation
    (643,742 )     (667,574 )
                 
Property, plant and equipment, net
  $ 1,260,770     $ 1,156,583  

Depreciation expense for the three months ended June 30, 2011 and 2010 was $49,231 and $24,776, respectively.

Depreciation expense for the six months ended June 30, 2011 and 2010 was $73,335 and $50,299, 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 ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”. No impairment of assets was recorded as of June 30, 2011.

l
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. The Company did not have any goodwill impairment as of June 30, 2011.
 
l
License agreements

In accordance with ASC Topic 350-50, “General Intangibles Other Than Goodwill”, intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives. 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 as of June 30, 2011.
 
 
F-10

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
Amortization expense of the various license agreements included in cost of revenue for the three months ended June 30, 2011 and 2010 was $40,885 and $38,591, respectively.

Amortization expense of the various license agreements included in cost of revenue for the six months ended June 30, 2011 and 2010 was $82,073 and $77,626, respectively.

As of June 30, 2011, the estimated future annual amortization expenses related to the license agreements for the balance of the agreements are as follows:

Years ending December 31:
     
2011
  $ 91,577  
2012
    180,518  
2013
    149,200  
2014
    16,397  
2015 and thereafter
    21,192  
         
Total:
  $ 458,884  

l
Investments at cost and equity

Investment in unconsolidated entities over which the Company has significant influence (20% to 50%) are accounted for under the equity method of accounting. Generally, the investment is carried at the initial amount invested, plus the Company’s ownership equity in undistributed earnings or losses since acquisition.

Investments in entities over which the Company does not have the ability to exert significant influence (up to 20%) over the investees’ operating and financing activities are accounted for under the cost method of accounting. Under the cost method of accounting, the investment is recorded at cost without any recognition of income or loss in the investee.

Under both methods, the Company performs an impairment analysis in the event a write down is necessary.

As of June 30, 2011, the following entities are accounted under the equity method of accounting:

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

SKTC’s 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 MIC, owns 48% of the equity interest of SKTC whereas the remaining 52% is owned by three shareholders of the Company.

Balance as of December 31, 2010
  $ 8,949  
Investment loss (48%) for the six months ended June 30, 2011
    (1,080 )
Exchange difference
    135  
         
Balance as of June 30, 2011
  $ 8,004  

(b)
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 MIC, owns 30% of the equity interest of SDMM and one individual shareholder, Ge Zhihong, owns the remaining 70% equity interest.
 
 
F-11

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
Balance as of December 31, 2010
  $ 2,173,515  
Investment loss (30%) for the six months ended June 30, 2011
    (21,770 )
Exchange difference
    49,414  
         
Balance as of June 30, 2011
  $ 2,201,159  

(c)
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, owns 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.

Balance as of December 31, 2010
  $ 3,546  
Investment loss (40%) for the six months ended June 30, 2011
    -  
Exchange difference
    81  
         
Balance as of June 30, 2011
  $ 3,627  

(d)
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, owns 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.

Balance as of December 31, 2010
  $ 61,674  
Investment loss (20%) for the six months ended June 30, 2011
    (62,273 )
Exchange difference
    599  
         
Balance as of June 30, 2011
  $ -  

As of June 30, 2011, the following entities are accounted under the cost method:

Name of entity
 
Ownership %
 
Cost
 
Description of entity
             
Beijing Orient Converge Human Resources Management Center Co. Ltd (“BJOC”)
 
10%
 
$77,351
 
Provides consulting, professional training and relevant sale and marketing services to business enterprises in China

For the six months ended June 30, 2011, the Company recognized an impairment loss of $76,357 after the recovery assessment.
 
 
F-12

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
l
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 collectability is reasonably assured. Revenue recognition by each of the Company’s segment is described below:

(a)         Advertising page sales and marketing consulting service

The Company recognizes revenues for the advertising page sales and marketing consulting services ratably over the periods when the customer's advertisements are published and services are provided.

(b)         Publishing

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. The Company gives the sales agent the right to return the magazines. Provisions for estimated returns are provided for in the same period the related sales are recorded. Generally, the Company will record a reduction to gross sales based on estimated sales agents returns. The actual amount of sales returns realized may differ from the estimates. If actual sales return is determined, adjustment would be made to net sales in the period in which such a determination is made.

(c)         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 collectability is reasonably assured.

An analysis of the Company’s revenues by products is as follows:

   
Three months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 1,577,556     $ 2,017,955  
Marketing consulting service
    1,353,026       639,560  
Publishing
    421,834       340,623  
Total magazine advertising
    3,352,416       2,998,138  
Consumer products
    6,255,596       5,714,710  
                 
Total revenue
  $ 9,608,012     $ 8,712,848  

   
Six months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 2,857,284     $ 4,311,591  
Marketing consulting service
    2,809,105       1,298,424  
Publishing
    815,372       710,416  
Total magazine advertising
    6,481,761       6,320,431  
Consumer products
    10,256,006       11,183,509  
                 
Total revenue
  $ 16,737,767     $ 17,503,940  
 
 
F-13

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
l
Cost of revenue
 
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.
 
l
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 period. Diluted EPS is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants. For the three and six months ended June 30, 2011 and 2010, the Company did not have any potentially dilutive securities.

l
Foreign currency translation

The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their functional currency, Chinese Renminbi (“RMB”), being the lawful currency in the PRC.   Assets and liabilities of the subsidiaries are translated from RMB into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Results of operations and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income in statement of changes in stockholders’ equity. The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to these restrictions.

The exchange rates used to translate amounts from RMB into U.S. Dollars for the purposes of preparing the condensed consolidated financial statements are as follows:

   
June 30, 2011
   
June 30, 2010
 
             
Balance sheet items, except for equity accounts – (as of)
    6.4640       6.8086  
Items in statements of income and cash flows – (for the six months ended)
    6.5482       6.8348  

There is no assurance that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.

l
Income taxes

The Company adopted ASC Topic 740, “Income Taxes” regarding accounting for uncertainty in income taxes, which prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.
 
 
F-14

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
The Company has recorded no deferred tax assets as of June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011, the Company recognized interest and penalties of $83,424 associated with late tax filing charge for the tax year ended December 31, 2007. As of June 30, 2011, the Company did not have any significant unrecognized uncertain income tax positions.
 
The Company conducts a major portion of its business in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.
 
l
Segment reporting
 
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates in two reportable operating segments: Advertising and marketing are deemed to be one segment and online sales of consumer products as the other segment.
 
l
Fair value of measurement
 
The Company has adopted ASC Topic 825, “Financial Instruments ” for disclosures about fair value of financial instruments. The carrying value of the Company’s financial instruments include cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses, deferred revenues and taxes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature.

Investment held to maturity is determined using Level 2, which is carried at fair value, with quoted prices in markets that are not active, determined by the financial institution who sold the unit trust.

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

·
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

·
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·
Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

l
Statutory reserve

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, namely the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the Company's registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Beginning January 1, 2006, enterprises have no further requirements to make the appropriation to the statutory public welfare fund. The discretionary surplus reserve is a prescribed percentage approved by the shareholders. The Company does not make appropriations to the discretionary surplus reserve fund.
 
 
F-15

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
The Company established a statutory surplus reserve as well as a statutory public welfare fund and commenced to appropriate 10% and 5%, respectively, of the PRC net income after taxation to these reserves. The amounts included in the statutory reserves consisted of surplus reserve of $1,660,752 and $299,472 as of June 30, 2011 and December 31, 2010, respectively.

l
Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.


NOTE – 3
SECURITIES AVAILABLE-FOR-SALE

In June 2011, the Company acquired 164,600 shares of Suning Corporation, a security listed in the Shenzhen Stock Exchange, for a consideration of $308,392.

The security is classified as available-for-sale and is recorded at their fair market values with the corresponding unrealized holding gains or losses, recorded as a separate component of other comprehensive income within stockholders’ equity. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. Realized gains and losses are determined by the difference between historical purchase price and gross proceeds received when the marketable securities are sold.


NOTE – 4
INVESTMENTS HELD TO MATURITY

   
June 30, 2011
   
December 31, 2010
 
Investment in unit trust in the PRC, held to maturity:
           
- Maturity in 18 months with an interest rate ranging from 8.5% to 9.5% per annum 
  $ 773,514     $ 756,223  
- Maturity in 24 months with an interest rate of 9% per annum
    464,109       151,245  
                 
      1,237,623       907,468  
Current portion due within one year
    (464,109 )     -  
                 
Investments in unit trust, non-current
  $ 773,514     $ 907,468  


NOTE – 5
DUE FROM AFFILIATES

A)         Operation and Management Right Agreement - CMO

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. CMO is deemed to be a variable interest entity of the Company and accordingly consolidates all of its operations. Transactions with CMO are pursuant to the following agreement:
 
 
F-16

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
On October 23, 2003, MIC entered into a 10-year agreement with CMO. The agreement required a payment of $1,220,930 (treated as a licensing fee) to 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. Under this agreement, MIC is entitled to collect advertising revenues from customers already existing at the time of the contract, in addition to any new clients that MIC can solicit and develop. Shenzhen Media shall bear all the operating costs and receive all the revenues from the contracted businesses.
 
In connection with the agreement with CMO as discussed in note 1, the Company has generated the following revenue as part of the agreement.

   
Three months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 1,032,907     $ 1,604,831  
Publishing
    421,834       340,622  
                 
Total magazine advertising sales generated from CMO,
   Included in consolidated total
  $ 1,454,741     $ 1,945,453  

   
Six months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 2,223,402     $ 3,649,939  
Publishing
    815,372       710,416  
                 
Total magazine advertising sales generated from CMO,
   Included in consolidated total
  $ 3,038,774     $ 4,360,355  

As of June 30, 2011 and December 31, 2010, due from affiliates includes receivable from CMO totaling $3,965,124 and $3,020,402, which are unsecured, and non-interest bearing. These receivables have no fixed payment schedule and are due on demand.

B)         SDMM

As of June 30, 2011, the balance of due from affiliates includes a receivable from SDMM totaling $1,810,823, which is unsecured, and non-interest bearing. The receivable has no fixed repayment schedule and is due on demand.

C)         SKTC

As of June 30, 2011 and December 31, 2010, the balance of due from affiliates includes receivable from SKTC totaling $1,392 and $392,906, respectively which is unsecured, and non-interest bearing. The receivable has no fixed repayment schedule and is due on demand.

D)         Other affiliates

As of June 30, 2011 and December 31, 2010, balances due from other affiliates, namely Shenzhen China Branding and Product Design Co., Ltd. and Shanghai China Marketing and Planning Co., Ltd., which are controlled by Mr. Zhu Yu Tong, a director of the Company’s subsidiary, SCBCC, represent temporary advances totaling $301,795 and $366,133, which are unsecured, and bear no interest. These amounts due from affiliates have no fixed repayment schedule and are due on demand.

 
F-17

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
NOTE – 6
OTHER RECEIVABLES

Other receivables consisted of:

   
June 30, 2011
   
December 31, 2010
 
             
Advances to third parties
  $ 768,735     $ 732,816  
Advances to employees
    415,105       90,165  
Rental deposits
    33,525       2,722  
Value-added tax recoverable
    46,727       -  
Others
    44,496       2,478  
                 
    $ 1,308,588     $ 828,181  


NOTE – 7
ADVANCE TO UNRELATED PARTY

As of June 30, 2011, advance to unrelated party represented funds advanced by the Company to an independent party namely, Mr. Yu Feng, which is unsecured, bears interest at a rate of 5% per annum over the prime rate of The People’s Bank of China, payable monthly and due by March 2012. As of June 30, 2011, the interest rate was 6.4%.


NOTE – 8
DEPOSIT ON PURCHASE OF REAL ESTATE

On January 18, 2011, the Company entered a real estate property purchase agreement (the “Agreement”) with an independent party namely, Shenzhen Wan Jiang Investment Co., Ltd. (“Wan Jiang”) to purchase various residential units in Shenzhen City, Guangdong Province, the PRC with a consideration of $2,994,059 (equivalent to RMB 19,353,600). As of June 30, 2011, the transfer of the real estate property title has not yet occurred.


NOTE – 9
SHORT-TERM BANK LOAN, SECURED

On March 22, 2011, the Company obtained short-term bank borrowing of $4,331,683 from a PRC financial institution, in a term of one year due on March 22, 2012. The short-term bank borrowing bears interest at a rate of 5% per annum over the prime rate of The People’s Bank of China, payable monthly. As of June 30, 2011, the interest rate was 6.4% per annum. The borrowing is secured by a pledge of 1,500,000 ordinary shares of Beijing Fuxing Xiaocheng Electronic Technology Stock Co., Ltd., a public company which shares are owned by Shenzhen Junwei Investment and Development Co., Ltd., a financial institution, an independent party to the Company.

 
F-18

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
NOTE – 10
DISCONTINUED OPERATIONS

On March 31, 2011 SNMC entered into an agreement with two unrelated parties to sell its 100% subsidiary SNMAC for a consideration of $154,703. At the same time SNMC applied for transfer of ownership with the local government. The transfer process was completed and finalized on April 6, 2011.

The assets and liabilities of the discontinued operations as of June 30, 2011 were as follows:

Assets of discontinued operations
     
Current assets
  $ 157,297  
Plant and equipment, net
    16,027  
Total assets
    173,324  
Less: liabilities of discontinued operations
     (18,621
 
     154,703  
Less: consideration received
   
(154,703
Gain/(loss) on disposal of subsidiary
  -  


NOTE – 11
INCOME TAXES

United States

The Company was incorporated in the United States of America and is subject to U.S. tax law. No provisions for income taxes have been made as the Company has no U.S. taxable income for the periods presented. The applicable income tax rates for the Company for the six months ended June 30, 2011 and 2010 are 34%.

During the six months ended June 30, 2011, the Company recognized a late tax filing charge of $83,424.

British Virgin Islands

The Company’s subsidiary, Media Challenge was incorporated in the British Virgin Islands and is not subject to income taxes under the current laws of the British Virgin Islands.

PRC

The Company’s subsidiaries in the PRC are currently subject to income taxes according to applicable tax laws in the PRC. The tax rates are 24% for SNMAC, 24% for SNMC and MIC, 25% for BMMCC and 0% for CMO. The provision for income taxes for the six months ended June 30, 2011 and 2010 was $68,718 and $28,128, respectively.

Pursuant to the laws and regulations in the PRC, SNMAC, as a wholly-foreign-owned enterprise ("WFOE") in the PRC, is entitled to an exemption from the PRC enterprise income tax for two years commencing from its first profitable year in 2006. NMA accounts for most of the revenue during the periods presented. Other subsidiaries income tax rates range from 0% to 25%.
 
 
F-19

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
(a)         The provision for income taxes consists of the following for the:

   
Six months ended June 30,
 
   
2011
   
2010
 
PRC:
           
Current tax
  $ 68,718     $ 28,128  
Deferred tax
    -       -  
                 
Total
  $ 68,718     $ 28,128  

(b)         Deferred tax

No provision for deferred tax assets or liabilities has been made since the Company had no material temporary differences between the tax bases of assets and liabilities and their carrying amounts.

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of June 30, 2011:

Deferred tax assets:
     
Net operating loss carryforwards from:
     
- Local
  $ -  
- Foreign
    582,332  
      582,332  
Less: valuation allowance
  $ (582,332 )
Deferred tax assets
    -  

As of June 30, 2011, the Company has accumulated $2,362,503 of net operating loss carryforwards available to offset its taxable income for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $582,332 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.


NOTE – 12
CONCENTRATIONS AND RISK

The Company is exposed to the following concentrations of risk:

(a)         Business risk with CMO

As discussed in Note 5, a significant portion of the Company's operations are conducted through an agreement with CMO, a company owned by the PRC government. The revenues are generated through production of the magazines owned by CMO. The current contract will terminate in 2013, and it is unknown whether the contract will be renewed. A change in the political climate in the PRC could also have a material adverse effect on the Company's business.
 
 
F-20

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
For the three months ended June 30, 2011 and 2010, $1,454,741 and $1,945,453 of sales and $280,257 and $1,207,167 of net income were generated through the arrangement with CMO, respectively.

For the six months ended June 30, 2011 and 2010, $3,038,774 and $4,360,355 of sales and $878,774 and $2,840,671 of net income were generated through the arrangement with CMO, respectively.

(b)          Economic and political risks

The Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political climates in the PRC could have a significant effect on the Company's business.

(c)          Control by principal stockholders

The directors, executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets.


NOTE – 13
COMMITMENTS AND CONTINGENCIES

(a)          Operating lease commitments

The Company leases various office spaces under several non-cancelable operating agreements in a term ranging from 1 to 4 years, with fixed monthly rentals, expiring between December 2010 and December 2012. Costs incurred under these operating leases are recorded as rent expense and totaled approximately $176,724 and $155,953 for the six months ended June 30, 2011 and 2010.
 
As of June 30, 2011, future minimum rent payments due under the remaining term of the various non-cancelable operating leases are as follows:

Year ending December 31:
     
2011
  $ 191,557  
2012
    304,684  
2013
    75,186  
2014
    13,946  
Total:
  $ 585,373  

(b)          Contingencies

The Company has not, historically carried any property or casualty insurance. No amounts have been accrued for any liability that could arise from the lack of insurance.

 
F-21

 

CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
NOTE – 14
SEGMENT INFORMATION

The Company’s business units have been aggregated into two reportable segments: Advertising and marketing has been deemed to be one segment with online sales of consumer products being another. The Company, through its subsidiaries operates these segments in the PRC. All the identifiable assets of the Company are located in the PRC during the period presented.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company had no inter-segment sales for the three and six months ended June 30, 2011 and 2010. The Company’s reportable segments offer different products and services. They are managed separately because each business requires different technology and marketing strategies.
 
Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and six months ended June 30, 2011 and 2010:

   
Three months ended June 30, 2011
 
   
Magazine advertising
   
Consumer products
   
Corporate
   
Total
 
                         
Revenue, net
  $ 3,352,416     $ 6,255,596     $ -     $ 9,608,012  
Cost of revenue
    (1,595,844 )     (5,849,300 )     -       (7,445,144 )
Gross profit
    1,756,572       406,296       -      
2,162,868
 
Depreciation and amortization
    48,195       41,921       -       90,116  
Income (loss) from continuing operations, net of tax
    173,882       (264,206 )     (101,842 )     (192,166 )
Discontinued operations, net of tax
    -       -       -       -  
Net income (loss)
    173,882       (264,206 )     (101,842 )     (192,166 )
Total assets  
8,965,263
   
20,953,815
   
9,737
   
29,928,815
 

   
Three months ended June 30, 2010
 
   
Magazine advertising
   
Consumer products
   
Corporate
   
Total
 
                         
Revenue, net
  $ 2,998,138     $ 5,714,710     $ -     $ 8,712,848  
Cost of revenue
    (784,455 )     (5,432,498 )     -       (6,216,953 )
Gross profit
    2,213,683       282,212       -       2,495,895  
Depreciation and amortization
    19,840       43,527       -       63,367  
Income (loss) from continuing operations, net of tax
    1,137,001       (201,793 )     (1,775 )     933,433  
Discontinued operations, net of tax
    5,045       -       -       5,045  
Net income (loss)
    1,142,046       (201,793 )     (1,775 )     938,478  
Total assets  
7,590,250
   
12,284,150
   
32,747
   
19,907,147
 
 
 
F-22

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
 
   
Six months ended June 30, 2011
 
   
Magazine advertising
   
Consumer products
   
Corporate
   
Total
 
                         
Revenue, net
  $ 6,481,761     $ 10,256,006     $ -     $ 16,737,767  
Cost of revenue
    (2,459,228 )     (9,599,930 )     -       (12,059,158 )
Gross profit
    4,022,533       656,076       -       4,678,609  
Depreciation and amortization
    69,117       86,291       -       155,408  
Income (loss) from continuing operations, net of tax
    763,407       (418,984 )     (113,213 )     231,210  
Discontinued operations, net of tax
    (60,009 )     -       -       (60,009 )
Net income (loss)
    703,398       (418,984 )     (113,213 )     171,201  
Total assets   
8,965,263
   
20,953,815
   
9,737
   
29,928,815
 

   
Six months ended June 30, 2010
 
   
Magazine advertising
   
Consumer products
   
Corporate
   
Total
 
                         
Revenue, net
  $ 6,320,431     $ 11,183,509     $ -     $ 17,503,940  
Cost of revenue
    (1,434,104 )     (10,775,148 )     -       (12,209,252 )
Gross profit
    4,886,327       408,361       -       5,294,688  
Depreciation and amortization
    39,802       88,123       -       127,925  
Income (loss) from continuing operations, net of tax
    2,445,277       (222,226 )     (2,054 )     2,220,997  
Discontinued operations, net of tax
    (83,097 )     -       -       (83,097 )
Net income (loss)
    2,362,180       (222,226 )     (2,054 )     2,137,900  
Total assets   
7,590,250
   
12,284,150
   
32,747
   
19,907,147
 

All of the Company’s revenues were derived from customers located in the PRC.

 
 
 
F-23

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Special Note Regarding Forward Looking Statements
 
This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 31, 2011 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.
 
Certain Terms
 
Except where the context otherwise requires and for the purposes of this report only:
 
 
·
 “BVI” refers to the British Virgin Islands;
 
 
·
“China,” “Chinese” and “PRC” refer to the People’s Republic of China and do not include Taiwan and the special administrative regions of Hong Kong and Macao;
 
 
·
 “China Marketing Media,” “the Company,” “we,” “us,” and “our” refer to China Marketing Media Holdings, Inc. and its subsidiaries;
 
 
·
 “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
 
 
·
 “Media Challenge” refers to Medial Challenge Holdings, Limited, our direct, wholly-owned BVI subsidiary;
 
 
·
 “RMB” refers to Renminbi, the legal currency of China;
 
 
·
 “CMO” refers to our affiliate, Sale and Marketing Publishing House;
 
 
·
 “SEC” refers to the United States Securities and Exchange Commission;
 
 
·
 “Securities Act” refers to the Securities Act of 1933, as amended;
 
 
·
 “MIC” refers to Shenzhen Media Investment Co., Ltd., our indirect, wholly-owned subsidiary, a Chinese company;
 
 
·
 “SNMC” refers to Shenzhen New Media Consulting Co., Ltd., our indirect, wholly-owned subsidiary, a Chinese company;
 
 
·
 “SNMAC” refers to Shenzhen New Media Advertising Co., Ltd, our indirect, wholly-owned subsidiary, a Chinese company. The entity was sold on April 7, 2011;
 
 
·
 “SCBCC” refers to Shenzhen Caina Brand Consultant Company, our indirect, wholly-owned subsidiary, a Chinese company;
 
 
·
 “U.S. dollar,” “$” and “US$” refer to the legal currency of the United States.
 
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, such as personal computer, electronic appliances, cosmetic products, mobile phones and jewelries. All of our operations, assets, personnel, officers and directors are located in China. Currently, we publish China Marketing magazine in China. We publish four main issues of China Marketing per month, including a sales edition, case edition, channel edition and the career development edition. In June 2009, we began to publish seven special issues of China Marketing, which include cosmetic edition, food edition, gift edition, tobacco edition, sporting goods edition, edition for agricultural resources and edition for entrepreneurs in Henan province. In April 2011, we published a new special issue of home appliance edition. Currently, the distribution network of our magazines consists of over 60 distribution agencies and 30,000 bookstores and news stands covering over 300 cities throughout China.
 
 
3

 
 
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. We anticipate that this will generate more advertising revenues for the Company.
 
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.
 
Second Quarter Financial Performance Highlights
 
The following are some financial highlights for the second quarter of 2011:
 
 
·
Revenues: Our revenues were approximately $9.61 million for the second quarter of 2011, an increase of 10.3% from the same quarter a year ago.
 
·
Gross Margin: Gross margin was 22.5% for the second quarter of 2011, as compared to 28.6% for the same quarter in 2010.
 
·
Operating Profit: Operating profit was approximately $0.12 million for the second quarter 2011, a decrease of approximately 86.6% from approximately $0.87 million of the same period of 2010.
 
·
Net Loss attributable to China Marketing Media Holdings, Inc.: Net loss was approximately $0.19 million for the second quarter of 2011, a decrease of 120.5% from the same period of last year.
 
·
Fully diluted earnings per share was $0.01 for the second quarter of 2011, as compared to $0.03 for the second quarter ended June 30, 2010.
 
Results of Operations
 
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
 
During the three-month period ended June 30, 2011, we generated all of our revenues through sales of our magazines, sales of advertising space in our magazines and providing sales, marketing consulting services and online sale of consumer products. The following table summarizes the results of our operations during the three month periods ended June 30, 2011 and 2010, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the three month period ended June 30, 2010 to the three month period ended June 30, 2011.

   
Three Months Ended June 30
             
Item
             
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(%Decrease)
 
Revenue
  $ 9,608,012     $ 8,712,848     $ 895,164       10.3 %
Cost of Sales
    7,445,144       6,216,953       1,228,191       19.8 %
Gross Profit
    2,162,868       2,495,895       (333,027 )     (13.3 %)
Operating Expenses
    2,046,104       1,622,336       423,768       26.1 %
Other Income (expense)
    (307,947 )     82,684       (390,631 )     472.4 %
Provision for Taxes
    983       22,810       (21,827 )     (95.7 %)
Net Income attributable to China Marketing Media Holdings, Inc.
    (192,166 )     938,478       (1,130,644 )     (120.5 %)
 
 
4

 
 
Revenues
 
Our revenues during the three-month period ended June 30, 2011 were $9,608,012, which are $895,164 or 10.3% more than the same period in 2010, when we had revenues of $8,712,848. The increase in revenues for the three months ended June 30, 2011 was due to the following: (1) increase in Magazine Sales of $81,211 or 23.8%, (2) increase in Consulting Service of $713,466 or 111.6% and (3) increase in Consumer Products of $540,886 or 9.5%, but offset by the decrease in Advertising Space Sales of $440,399 or 21.8%. In spite of a decrease in Advertising Space Sales resulting from a soft market, the total revenues are still ahead by 10.3% compared to the same period in 2010. The increase was attributable to the online sales promotions for our Consumer Products and the Consulting Service Sales by more well-established sales channels and a variety of sales promotions to attract more customers.
 
Components of Revenues
 
The following table shows the different components comprising our total revenues during the three month periods ended June 30, 2011 and 2010.

   
Three Months Ended June 30
             
Revenue Category
             
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(%Decrease)
 
                         
Publishing
  $ 421,834     $ 340,623       81,211       23.8 %
Advertising Page Sales
    1,577,556       2,017,955       (440,399 )     (21.8 %)
Consulting Service
    1,353,026       639,560       713,466       111.6 %
Consumer Products
    6,255,596       5,714,710       540,886       9.5 %
Total
  $ 9,608,012     $ 8,712,848     $ 895,164       10.3 %
 
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. CMO is deemed to be a variable interest entity of the Company and accordingly consolidates all of its operations.
 
On October 23, 2003, Shenzhen Media Investment Co. (MIC), our indirect and wholly-owned Subsidiary 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. Under this agreement, MIC is entitled to collect advertising revenues from customers already existing at the time of the contract, in addition to any new clients that MIC can solicit and develop. Shenzhen Media shall bear all the operating costs and revenues from the contracted businesses. The Company has generated the following revenue as part of the agreement.

   
Three months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 1,032,907     $ 1,604,831  
Publishing
    421,834       340,623  
Total magazine advertising sales generated from CMO, included in consolidated total
  $ 1,454,741     $ 1,945,454  

The CMO’s revenues during the three-month period ended June 30, 2011 were $1,454,741( 15.1% of total revenue), which is $490,713 or 25.2% less than the same period in 2010, when we had CMO’s revenue of $1,945,454(22.3% of total revenue). The decrease in CMO’s revenue for the three months ended June 30, 2011 was due to a decrease revenue in advisory service under advertising pages sales. The advisory service’s revenue during the three-month period ended June 30, 2011 was $7,335, a decrease of 98% from $322,983 for the same period in 2010. The decrease in advisory service’s revenue was caused by a decrease in demand beginning in early 2011. The management expects a further decline in the advisory service’s revenue in the coming months.
 
 
5

 
 
Cost of Sales
 
Our cost of sales during the three-month period ended June 30, 2011 and for the same period of 2010 were $7,445,144 and $6,216,953, respectively, which accounted for 77.5% and 71.4%, respectively. As a percentage of total revenues, cost of sales increased by approximately 6.1% during the applicable periods. Such increase was primarily driven by lower the selling price during the online sales promotions for our Consumer Products.
 
Operating Expenses
 
Salaries and related benefits expenses amounted to $789,352 during the three-month period ended June 30, 2011 as compared to $822,704 during the same period of 2010. The decrease in payroll expense by $33,352 or 4.1% was mainly attributable to the close down of  the advisory department under Beijing Media Management and Consulting Co. The advisory department was closed down in April 2011 and had nine employees with total salaries and related benefits of approximately $11,000 per month. However, the decrease was also offset by an increase headcount in CMO.
 
Our selling, general and administrative expenses were $1,256,752 (13.1% of total sales) and $799,632 (9.2% of total sales) during the second quarter of 2011 and the second quarter of 2010, respectively. The increase was mainly due to the expenses related to additional bad debt expenses, company wide internal control consulting related costs and the Company also accrued additional professional fees beginning 2011 due to an engagement with a new independent registered public accounting firm.
 
Other Income and Expense
 
Other income and expense includes interest income, interest expense, investment in unconsolidated affiliates 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 $4,013 during the three -month period ended June 30,2011. A decrease in interest income of $81,479 or 95.3% as compared to $85,492 during the same period of 2010 was due to the decrease in the average balance of cash and cash equivalents.
 
Interest expense represents interest relates to the cost of short- term and long-term borrowings from bank accounts with PRC financial institutions, totaling $67,994 during the three- month ended June 30, 2011. An increase of $67,994 or 100% as compared to 0 during the same period of 2010 was attributable to a recent short term bank borrowing of $4,331,683.
 
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. Investment loss from unconsolidated subsidiaries totally $160,924 during the three-month period ended June 30, 2011. A significant loss increased by $158,290 or 6,009.5% as compared to a loss of $2,634 during the same period of 2010. Such increase was attributable to the continuing operation loss in the unconsolidated entities such as SDMM (30% interest) and BJKP (20% interest). The Company also recognized an impairment loss of $76,357 after the recovery assessment from BJOC (10% interest).
 
We had other expense of $83,042 for the three-month period ended June 30, 2011, which was a penalty and interest expense due to a late tax filing as compared to other expense of $174 for the same period of 2010.
 
Income taxes
 
United States
 
China Marketing Media Holdings Inc. is subject to Unites 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.
 
 
6

 

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 were generally subject to an EIT rate of 33.0%, which included 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 imposed a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualified 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 our 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”, a PRC regulatory term used to describe executive management and Board of Directors or equivalent governing 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%.
 
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 24% for SNMAC, 24% for SNMC and MIC and 0% for CMO. CMO is exempt from PRC income tax as a part of the government supporting program extending from year 2009 to 2013.
 
We incurred income taxes of $983 and $22,810 during the three-month period ended June 30, 2011 and 2010, respectively, or a decrease of 95.7%. This was mainly attributable to a net loss for the three-month period ended June 30, 2011 as compared to a net income for the same period of 2010.
 
Net income attributable to China Marketing Media Holdings, Inc.
 
We reported a net loss of $192,166 for the three-month period ended June 30, 2011, as compared to the net income of $938,478 for the same period in 2010. The decrease of $1,130,644 or 120.5% resulted from a significant increase in operating expenses. In addition, we had other expense of $307,947 during the three-month period ended June 30, 2011 as compared to $82,684 of other income during the same period in 2010. The increase was attributable to the additional interest expenses of $67,994 from a recent short term bank borrowing of $4,331,683, a penalty and interest expense for a late tax filing of $83,424 and an investment loss of $160,924 from the unconsolidated entities.
 
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
 
The following table summarizes the results of our operations during the six months periods ended June 30, 2011 and 2010, and provides information regarding the dollar and percentage increase or (decrease) from the six month period ended June 30, 2010 to the six month period ended June 30, 2011.
 
 
7

 
 
   
Six Months Ended June 30
             
Item
             
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(%Decrease)
 
Revenue
  $ 16,737,767     $ 17,503,940     $ (766,173 )     (4.4 %)
Cost of Sales
    12,059,158       12,209,252       (150,094 )     (1.2 %)
Gross Profit
    4,678,609       5,294,688       (616,079 )     (11.6 %)
Operating Expenses
    4,131,780       3,087,479       1,044,301       33.8 %
Other Income (expense)
    (246,901 )     41,916       (288,817 )     689.0 %
Provision for Taxes
    68,718       28,128       40,590       144.3 %
Net Income attributable to China Marketing Media Holdings, Inc.
    171,201       2,142,642       (1,971,441 )     (92.0 %)
 
Revenue
 
Our revenues during the six-month period ended June 30, 2011 were $16,737,767, which is $766,173 or 4.4% less than the same period in 2010, when we had revenues of $17,503,940. The decrease in revenues for the six months ended June 30, 2011 was due to the following: (1) increase in Magazine Sales of $104,956 or 14.8%, (2) increase in Consulting Service of $1,510,681 or 116.3%, (3) decrease in Consumer Products of $927,503 or 8.3% and (4) decrease in Advertising Space Sales of $1,454,307 or 33.7%. The decrease in Consumer Products was due to a supply shortage during January and February of 2011. The decline in Advertising Space Sales was resulted from a soft market.
 
Components of Revenues
 
The following table shows the different components comprising our total revenues during the six month periods ended June 30, 2011 and 2010.

   
Six Months Ended June 30
             
Revenue Category
             
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(%Decrease)
 
                         
Publishing
  $ 815,372     $ 710,416       104,956       14.8 %
Advertising Page Sales
    2,857,284       4,311,591       (1,454,307 )     (33.7 %)
Consulting Service
    2,809,105       1,298,424       1,510,681       116.3 %
Consumer Products
    10,256,006       11,183,509       (927,503 )     (8.3 %)
Total
  $ 16,737,767     $ 17,503,940     $ (766,173 )     (4.4 %)
 
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. CMO is deemed to be a variable interest entity of the Company and accordingly consolidates all of its operations.
 
On October 23, 2003, Shenzhen Media Investment Co. (MIC), our indirect and wholly-owned subsidiary 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. Under this agreement, MIC is entitled to collect advertising revenues from customers already existing at the time of the contract, in addition to any new clients that MIC can solicit and develop. Shenzhen Media shall bear all the operating costs and revenues from the contracted businesses. The Company has generated the following revenue as part of the agreement.

   
Six months ended June 30,
 
   
2011
   
2010
 
Magazine advertising:
           
Advertising pages sales
  $ 2,223,402     $ 3,649,939  
Publishing
    815,372       710,416  
Total magazine advertising sales generated from CMO, included in consolidated total
  $ 3,038,774     $ 4,360,355  

 
8

 
 
The CMO’s revenues during the six-month period ended June 30, 2011 were $3,038,774 (18.2% of total revenue), which is $1,321,580 or 30.3% less than the same period in 2010, when we had CMO’s revenue of $4,360,355 (24.9% of total revenue). The decrease in CMO’s revenue for the six months ended June 30, 2011 was caused mainly by the decrease revenue in advisory service under advertising pages sales. The advisory service’s revenue during the six-month period ended June 30, 2011 was $226,414, a decrease of 80% from $1,155,923 for the same period in 2010. The decrease in advisory service’s revenue was due to a decrease in demand beginning in early 2011. The management expects a further decline in the advisory service’s revenue in the coming months.
 
Cost of Sales
 
Our cost of sales during the six-month period ended June 30, 2011 and for the same period of 2010 were $12,059,158 and $12,209,252, respectively, which accounted for 72.0% and 69.8%, respectively. As a percentage of total revenues, cost of sales increased by approximately 2.2% during the applicable periods. Such increase was primarily driven by lower the selling price during the online sales promotions for our Consumer Products.
 
Operating Expenses
 
Salaries and related benefits expenses amounted to $1,565,791 during the six-month period ended June 30, 2011 as compared to $1,516,949 during the same period of 2010. The 3.2% increase in payroll expense for the six months period ended 2011 was offset by a 4.1% decrease in 2nd quarter of 2011. The 4.1% decrease was mainly attributable to the close down of the advisory department under Beijing Media Management and Consulting Co. The advisory department was close down in April 2011 and had nine employees with total salaries and related benefits of approximately $11,000 per month.
 
Our selling, general and administrative expenses were $2,565,989 (15.3% of total sales) and $1,570,530 (9.0% of total sales) for the six months period ended 2011 and for the same period of 2010, respectively. The increase was mainly due to the expenses related to additional bad debt expenses, company wide internal control consulting related costs, transfer title cost for a property between subsidiaries, the hiring of a new PRC legal counsel and the company also accrued additional professional fees beginning 2011 due to a recent engagement with a new independent registered public accounting firm.
 
Other Income and Expense
 
Other income and expense includes interest income, interest expense, investment in unconsolidated affiliates 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 $4,911 during the six -months period ended June 30, 2011. A decrease in interest income of $80,514 or 94.3% as compared to $85,425 during the same period of 2010 was due to the decrease in the average balance of cash and cash equivalents.
 
Interest expense represents interest relates to the cost of short- term and long-term borrowings from bank accounts with PRC financial institutions, totaling $67,994 during the six- month ended June 30, 2011. An increase of $67,994 or 100% as compared to 0 during the same period of 2010 was attributable to a recent short term bank borrowing of $4,331,683.
 
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 dose not have the ability to exert significant influence (up to 20%) are accounted for under the cost method of accounting. Investment loss from unconsolidated subsidiaries totaling $161,480 during the six-month period ended June 30, 2011. A significant loss increased by $151,392 or 1,500.7% as compared to a loss of $10,088 during the same period of 2010. Such increase was attributable to the continuing operation loss in the unconsolidated entities such as SDMM (30% interest) and BJKP (20% interest). The Company also recognized an impairment loss of $76,357 after the recovery assessment from BJOC(10% interest).
 
We had other expense of $22,338 during the six-month period ended 2011 as compared to other income of 595 during the same period of 2010.
 
Income taxes
 
We incurred income taxes of $68,718 and $28,128 during six months ended June 30, 2011 and 2010, respectively, or an increase of 144.3%. The increase in the income tax expense was driven by SCBCC’s taxable income of $561,005 as compared to a net loss for the same period in 2010.
 
 
9

 
 
Net income attributable to China Marketing Media Holdings, Inc.
 
Including the loss from discontinued operation of $60,009, we reported net income of $171,201 for the six-month period ended June 30, 2011, as compared to 2,142,642 for the same period in 2010. The decrease of $1,971,441 or 92.0% resulted form a 4.4% decrease in revenue and a significant increase in operating expenses. In addition, we had other expense of $246,901during the six-month period ended June 30, 2011 as compared to $41,916 of other income during the same period in 2010. The increase in other expense was attributable to the interest expenses of $67,994 from a recent short term bank borrowing of $4,331,683 as compared to $34,016 in the same period in 2010, penalty and interest expenses for a late tax filing of $83,424 and an investment loss of $161,480 from the unconsolidated entities.
 
Liquidity and Capital Resources
 
As of June 30, 2011, we had cash and cash equivalents of approximately $2.5 million and working capital of $13.6 million. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.
 
Cash Flow

   
Six Months Ended June 30,
 
   
2011
   
2010
 
Net cash provided by operating activities
  $ 587,055     $ 2,950,442  
Net cash used in investing activities
    (6,869,993 )     (2,915,186 )
Net cash provided by financing activities
    4,275,997       -  
Net cash flow (used) provided
  $ (2,006,941 )   $ 35,256  
 
Operating Activities:
 
Net cash provided by operating activities was approximately $0.59 million for the six months ended June 30, 2011which was a decrease of approximately $2.36 million from approximately $2.95 million net cash provided by operating activities for the same period of 2010. The decrease was primarily attributable to a significant decrease in net income along with increase in accounts receivable approximately $0.68 million, advances to suppliers approximately $0.50 million and other receivables approximately $0.47 million and partially offset by an increase in deferred revenues approximately $0.91 million.
 
Investing Activities:
 
Net cash used in investing activities was approximately $6.87 million for the six months ended June 30, 2011, an increase of approximately $3.95 million from approximately $2.92 million net cash used in investing activities for the same period of 2010. Such increase in net cash used in investing activities was attributable to an increase in (1) advances made to an unrelated party of $4.28 million, (2) purchase of a securities available for sale of $0.30 million and, (3) deposit on purchase of real estate of $2.96 million for a piece of real estate property, which is currently under construction and expected to be completed and delivered in 2011. The Company intends to use this property to house its staff, (4)purchase of units trust investment $0.31 million.
 
We also use cash for investing activities to make payments relating to acquisition of property, plant and equipment.

Financing Activities:
 
Net cash provided by financing activities during the six months ended June 30, 2011 was approximately $4.28 million as compared to $0 provided by financing activities for the same period of 2010. Such increase in the net cash provided by financing activities was mainly attributable to short-term bank loan borrowed on March 22, 2011. The short-term loan is secured by a pledge of 1,500,000 ordinary shares of Beijing Fuxing Xiaocheng Electronic Technology Stock Co., Ltd., an unrelated party. As stated in the financial statements note 7, the Company also signed a binding agreement with Mr. Yu Feng, an independent party, to make a temporary advance. Under the terms and conditions of the agreement, this is an unsecured, interest bearing loan at a rate of 5% per annum over the prime rate of the People’s bank of China, payable monthly and due by March 2012. The purpose of this short-term advance was to establish a business relationship and possible partnership in near future.
 
Cash Flows From Discontinued Operations
 
Operating Activities:
 
Net cash provided by operating activities form discontinued operations was approximately $0.82 million for the six months ended June 30, 2011, as compared to net cash used of $0.09 million for the same period in 2010.
 
 
10

 
 
Investing Activities:
 
Net cash used in investing activities from discontinued operations was approximately $0.14 million for the six months ended June 30, 2011, as compared to net cash provided of $0.04million for the same period in 2010.
 
Financing Activities:
 
Net cash used in financing activities from discontinued operations was approximately $3.47 million for the six month ended June 2011, as compared to 0 for the same period in 2010.
 
We believe that our current cash on hand and continuing revenue from operations is sufficient to maintain operations at current levels for at least the next twelve months. However, in order to expand operations, management believes that it will be necessary for us to raise additional capital either through the sale of equity securities or through a long-term debt financing. Full implementation of the current expansion plans may include an acquisition of other magazines and/or advertising businesses that requires approximately $10 million of additional capital. We can provide no ass urances that we will be able to obtain additional capital on terms favorable to the Company, if at all.
 
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.
 
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 June 2011, the value of RMB against US dollars appreciated by19.8%, from RMB8.1/ $1 to RMB6. 5/ $1.
 
Critical Accounting Policies
 
l
The preparation of the financial statements in conformity with US generally accepted accounting principles (“GAAP”) requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; long- term investments, valuation allowances for receivables and due from affiliates, realizable values for inventories. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the unaudited consolidated financial statements in the periods they are deemed to be necessary.
 
 
11

 
 
l
Cash and Cash Equivalents. For purposes of the statement 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.
 
l
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 form certain customers.
 
l
Revenue Recognition. We recognize the revenue from our advertising page sales and publishing at the date the magazines are published, marketing consulting services at the date of the service is conducted, and consumer products at the date of shipment to customers when a formal arrangement exists, the price is fixed, or determinable, the delivery is completed, no other significant obligations on our part exist and collectability is reasonably assured. Accordingly, management is required to apply its own judgment regarding collectability based on its experience and knowledge of its current customers, and thus exercise a certain degree of discretion.
 
l
Restrictions on Transfer of Assets Out of the PRC. Dividend payments by SNMAC and its subsidiary are limited by certain statutory regulations in China. No dividends may be paid by SNMAC without first receiving prior approval from the State Administration of Foreign Exchange. Dividend payments are restricted to 85% of profits, after tax.
 
Recent Accounting Pronouncement
 
The company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

 
12

 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures.
 
As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), an evaluation of the effectiveness of its “disclosure controls and procedures” (as the term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the Certifying Officers have concluded that, because of the deficiencies set forth below, the Company’s disclosure controls and procedures were not effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder.
 
As disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2011, and its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011, during the Company’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, management identified the significant deficiencies related to (i) the lack of sufficient U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) the lack of a stand alone Audit Committee of the Board of Directors.
 
Because of the state of the knowledge and training of our current accounting department staff of U.S. GAAP and related internal control procedures is limited, our management has determined that such staff members require additional training and assistance in such areas.  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.
 
In order to correct the foregoing deficiencies, the Company has been taking certain remedial measures which includes, among other things, increasing the number of our accounting staff and professionals. We have already started work with an ERP system provider to design and implement an efficient ERP system to improve our financial and internal control system.
 
•      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 were not able to hire such additional personnel before the end of this reporting period. Due to the fact that 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.
 
 
13

 
 
•      We have allocated significant financial and human resources to strengthen the internal audit and control structure. We have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting. We anticipate completing these measures on or before December 31, 2011.
 
•      We have and continue to search for suitable candidates to serve as independent directors on our Board and the Audit Committee. In addition, we are seeking to appoint a Board member that will meet the definitions of an “Audit Committee financial expert”. 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 have interviewed several candidates to date, but have not yet filled either independent director or Audit Committee as of the date of this Quarterly Report. We anticipate completing these measures on or before December, 2011.
 
We believe that the foregoing steps, when completed, will cure the significant deficiencies identified above. We will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
 
Changes in Internal Control Over Financial Reporting
 
Other than described above, there have been no changes in our internal control over financial reporting during the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
14

 
PART II
 
OTHER INFORMATION
 
ITEM 1. 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 expect will have a material adverse affect on our business, financial condition or operating results.
 

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.
 
RISKS RELATING TO OUR BUSINESS
 
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 12 of the financial statements, a significant portion of the Company’s operations is derived from and depends upon an agreement with CMO. For six-month period ended June 30, 2011, CMO’s $3.04 million revenue represented approximately 18.2% of the Company’s total revenue. More significantly, the net income generated from the CMO was approximately 708K more than company’s total net income. 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.
 
 
15

 
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.
 
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, specially 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.
 
 
16

 
 
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, 2010 and March 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 which steps are yet to be completed, and to the extent any of these deficiencies remains, our financial condition could be adversely affected.  
 
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 are significantly more limited markets 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 September 15, 2011, the closing price for our common stock was $0.07 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.
 
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.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three-month period ended June 30, 2011, we made no unregistered sales of our equity securities; nor were there any repurchases of our equity securities during the same period.
 
 
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. [REMOVED AND RESERVED]
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
3.1(i)
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; File number 0-51806)
3.1(ii)
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; File number 0-51806)
31.1
Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of Principal 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
Certification of Principal Financial Officer furnished pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
* Filed herewith
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CHINA MARKETING MEDIA HOLDINGS, INC.
 
DATE: September 22, 2011
 
By :/s/ Yingsheng Li                                                  
Yingsheng Li, President and CEO
(Principal Executive Officer)
 
DATE: September 22, 2011
 
By :/s/ Zhen Zhen Peri                                                
Zhen Zhen Peri, CFO
(Principal Accounting and Financial Officer)

 
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EXHIBIT INDEX

Exhibit Number
 
Description
3.1(i)
 
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; File number 0-51806)
3.1(ii)
 
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; File number 0-51806)
31.1
 
Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
 
Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
 
Certification of Principal 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
 
Certification of Principal Financial Officer furnished pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
* Filed herewith

 
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