PINX:CMKM China Marketing Media Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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: March 31, 2012
 
[ ] 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 [X]             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 May 10, 2012 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
10
Item 4.
Controls and Procedures
10
     
 
PART II – Other Information
11
     
Item 1. Legal Proceedings 11
Item 1A.
Risk Factors
11
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
15
Item 3.
Defaults Upon Senior Securities
16
Item 4.
Mine Safety Disclosures
16
Item 5.
Other Information
16
Item 6.
Exhibits
16
 
 
 

 
 
PART I
FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 


 
CHINA MARKETING MEDIA HOLDINGS, INC.
 
(Unaudited)
 
Condensed Consolidated Financial Statements
 
For The Three Months Ended March 31, 2012 and 2011

 


 
2

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Page
   
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011
F-2
   
Condensed Consolidated Statements of Operations And Comprehensive (Loss) Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
F-3
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
F-4
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 (Unaudited)
F-5
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
F-6 – F-18

 
F-1

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

   
March 31, 2012
   
December 31, 2011
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 1,272,685     $ 909,534  
Accounts receivable, net
    184,001       41,322  
Prepaid expenses
    188,657       168,922  
                 
Total current assets
    1,645,343       1,119,778  
                 
Non-current assets:
               
Investments – equity method
    2,190,898       2,186,808  
Related party receivables – affiliates
    5,333,814       5,463,404  
Other receivables
    3,375,647       3,482,126  
Investment held to maturity
    790,551       1,259,386  
Deposit on purchase of real estate
    3,060,003       3,046,707  
Property, plant and equipment, net
    1,146,246       1,178,185  
License agreement, net
    314,062       356,953  
                 
Total non-current assets
    16,211,221       16,973,569  
                 
TOTAL ASSETS
  $ 17,856,564     $ 18,093,347  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 369,284     $ 365,223  
Accrued expenses and levies
    649,118       522,945  
Deferred revenues
    1,354,280       1,401,046  
Taxes payable
    -       78,097  
Other payable
    982,035       767,936  
                 
Total liabilities
    3,354,717       3,135,247  
                 
Commitments and contingencies
               
                 
Equity:
               
China Marketing Media Holdings, Inc. stockholders’ equity:
               
Common stock, no par value, 100,000,000 shares authorized, 28,686,002 shares issued and outstanding
    1,112,546       1,112,546  
Additional paid-in capital
    165,000       165,000  
Retained earnings
    9,786,346       10,309,061  
Accumulated other comprehensive income
    3,437,955       3,371,493  
                 
Total equity
    14,501,847       14,958,100  
                 
TOTAL LIABILITIES AND EQUITY
  $ 17,856,564     $ 18,093,347  
 
See accompanying notes to condensed consolidated financial statements.
 
 
F-2

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

   
Three months ended March 31,
 
   
2012
   
2011
 
             
Revenue, net
  $ 2,246,629     $ 3,129,345  
                 
Cost of revenue
    (1,007,286 )     (863,384 )
                 
Gross profit
    1,239,343       2,265,961  
                 
Operating expenses:
               
Salaries and related benefits expenses
    (1,116,377 )     (709,443 )
General and administrative
    (642,858 )     (1,014,578 )
                 
Total operating expenses
    (1,759,235 )     (1,724,021 )
                 
(Loss) income from operations
    (519,892 )     541,940  
                 
Other income (expense):
               
Interest income
    2,634       21,337  
Investment (loss) gain in equity investment
    (5,457 )     21,908  
Subsidy income
    -       60,704  
                 
Total other (expenses) income
    (2,823 )     103,949  
                 
(Loss) income from continuing operations before income taxes
    (522,715 )     645,889  
                 
Income tax expense
    -       (67,735 )
                 
(Loss) income from continuing operations, net of tax
    (522,715 )     578,154  
                 
Discontinued operations, net of tax
    -       (214,412 )
                 
NET (LOSS) INCOME
  $ (522,715 )   $ 363,742  
                 
Other comprehensive income:
               
- Foreign currency translation gain
    66,462       134,042  
                 
COMPREHENSIVE (LOSS) INCOME
  $ (456,253 )   $ 497,784  
                 
Earnings per share – basic and diluted:
               
(Loss) income from continuing operations attributable to China Marketing Media Holdings, Inc. common stockholders
  $ (0.02 )   $ 0.02  
Discontinued operations attributable to China Marketing Media Holdings, Inc. common stockholders
    -       (0.01 )
Net (loss) income attributable to China Marketing Media Holdings, Inc. common stockholders
  $ (0.02 )   $ 0.01  
                 
Weighted average common stock outstanding – basic and diluted
    28,686,002       28,686,002  

See accompanying notes to condensed consolidated financial statements.
 
 
F-3

 

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

   
Three months ended March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net (loss) income
  $ (522,715 )   $ 363,742  
Less: net (loss) from discontinued operations
    -       (214,412 )
Net (loss) income from continuing operations
    (522,715 )     578,154  
Adjustments to reconcile (loss) income from continuing operations to net cash (used in) provided by operating activities:
               
Amortization and depreciation
    89,698       50,607  
Allowance for doubtful accounts
    290       106,231  
Equity investment loss (gain) from unconsolidated subsidiaries
    5,457       (21,908 )
Deferred taxation
    -       (28,426 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (142,893 )     (40,095 )
Prepaid expenses
    (22,552 )     84,143  
Other receivables
    121,763       (218,540 )
Advances to affiliates
    153,543       3,862,400  
Accounts payable
    2,469       (36,979 )
Accrued expenses
    124,797       (18,642 )
Deferred revenues
    (52,918 )     226,494  
Taxes payable
    (78,495 )     84,904  
Other payable
    210,902       21,535  
Net cash (used in) provided by operating activities – continuing operations
    (110,654 )     4,649,878  
Net cash used in discontinued operations
    -       (5,123,585 )
Net cash used in operating activities
    (110,654 )     (473,707 )
                 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (4,571 )     (102,852 )
Deposit on purchase of real estate
    -       (2,937,081 )
Proceeds from investment held to maturity
    474,675       -  
Purchase of investment held to maturity
    -       (303,518 )
Purchase of intangible assets
    -       (69,202 )
Net cash provided by (used in) investing activities – continuing operations
    470,104       (3,412,653 )
Net cash used in discontinued operations
    -       (4,255,698 )
Net cash provided by (used in) investing activities
    470,104       (7,668,351 )
                 
Cash flows from financing activities:
               
Net cash provided by discontinued operations
    -       4,249,249  
                 
Net cash provided by financing activities
    -       4,249,249  
                 
Effect of exchange rate changes in cash and cash equivalents
    3,701       34,042  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    363,151       (3,858,767 )
                 
BEGINNING OF PERIOD
    909,534       7,177,767  
                 
END OF PERIOD
    1,272,685       3,319,000  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid for income taxes
  $ -     $ -  
Cash paid for interest
  $ -     $ 20,439  
 
See accompanying notes to condensed consolidated financial statements.
 
 
F-4

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Common stock
     
Retained
     
Additional
   
Accumulated
other
comprehensive
   
Total
stockholders’
 
   
Shares
   
Amount
   
earnings
   
paid-in capital
   
income
   
equity
 
                                     
Balance as of January 1, 2012
    28,686,002     $ 1,112,546     $ 10,309,061     $ 165,000     $ 3,371,493     $ 14,958,100  
                                                 
Net loss for the period
    -       -       (522,715 )     -       -       (522,715 )
                                                 
Foreign currency translation adjustment
    -       -       -       -       66,462       66,462  
 
Balance as of March 31, 2012
    28,686,002     $ 1,112,546     $ 9,786,346     $ 165,000     $ 3,437,955     $ 14,501,847  

See accompanying notes to condensed consolidated financial statements.
 
 
F-5

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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 conducted online sales of consumer products consisting primarily of personal computers, electronic appliances, cosmetic products, mobile phones and jewelries. In December 2011, the Company disposed the online sales business to a former director and an individual shareholder of the Company. All of the Company’s operations, assets, personnel, officers and directors are located in China. Currently, the Company publishes China Marketing magazine in China.

On March 31, 2011, the Company disposed of its wholly owned subsidiary, Shenzhen New Media Advertising Co., Ltd. (“SNMAC”) for a consideration of $154,703.

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

On December 26, 2011, the Company entered into an Equity Transfer Agreement (the “Agreement”) with Mr. Bin Li, a former director of the Company and Mr. Feng Yu, an individual shareholder of the Company, to dispose 100% equity interest in MIC for a total consideration of $6,111,473 (equivalent to RMB38,915,724).

As the Company disposed its subsidiaries mentioned above, all financial information for the three months ended March 31, 2011 presented in the condensed consolidated financial statements have been reclassified to give effect to the discontinued operations.
 
The Company currently publishes 4 main issues and 7 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 newsstands covering over approximately 300 cities throughout China.

As mentioned above, the Company operates its advertising business 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.
 
 
F-6

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 

Name of entity
 
Ownership interest
 
Description of entity
         
Media Challenge Holdings Limited
 
100%
 
Investment holdings
         
Shenzhen New Media Consulting Co., Ltd. (“SNMC”)
 
100%
 
Investment holdings
         
Shenzhen Caina Brand Consultant Company (“SCBCC”)
 
100%
 
Provision of strategic marketing and consulting services
         
Beijing Media Management and Consulting Co., Ltd. (“BMMCC”)
 
100%
 
Provision of consulting and professional training services
         
Beijing Caina XianLiang Marketing and Layout Company (“BCXMLC”)
 
100%
 
Provision of strategic marketing and consulting services

The consolidated entity is hereafter referred to as "the Company".


NOTE – 2              GOING CONCERN UNCERTAINTIES

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

For the three months ended March 31, 2012, the Company has incurred a net loss of $522,715 and experienced negative operating cash flows of $110,654. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.


NOTE – 3              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications

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

Use of estimates

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.
 
 
F-7

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 

Basis of consolidation

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

Cash and cash equivalents

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

Accounts receivable

Accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to 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.

For the three months ended March 31, 2012 and 2011, the Company provided allowance for doubtful accounts of $290 and $106,231, respectively. As of March 31, 2012 and December 31, 2011, the allowance for doubtful accounts was $126,041 and $125,204, respectively.

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.

Property, plant and equipment consist of the following:
 
 
F-8

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 
 
   
March 31, 2012
   
December 31, 2011
 
             
Buildings
  $ 917,426     $ 913,440  
Motor vehicles
    404,811       403,053  
Furniture and equipment
    62,135       61,865  
Computer equipment
    189,588       184,216  
      1,573,960       1,562,574  
Less: accumulated depreciation
    (427,714 )     (384,389 )
                 
Property, plant and equipment, net
  $ 1,146,246     $ 1,178,185  

Depreciation expense for the three months ended March 31, 2012 and 2011 was $41,677 and $19,393, 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 March 31, 2012.

Intangible assets

In accordance with ASC Topic 350-50, “General Intangibles Other Than Goodwill”, goodwill amounts are not amortized, but rather are tested for impairment at least annually. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which are the ten years of the "license agreement" and the five years of the integrated office system. The carrying amount of the asset is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. No intangible asset impairment charges are deemed necessary for the three months ended March 31, 2012 and 2011.

Amortization expense of the various license agreements included in cost of revenue for the three months ended March 31, 2012 and 2011 was $48,021 and $31,214, respectively.
 
As of March 31, 2012, the estimated future annual amortization expenses related to the license agreements for the balance of the agreements in the next five years are as follows:

Years ending March 31:
     
2013
  $ 176,362  
2014
    107,658  
2015
    14,420  
2016
    14,420  
2017
    1,202  
 
Total:
  $ 314,062  

Long term investments

Long-term investments represent cost and equity method investments in the PRC. Equity method investments are recorded at original cost and adjusted to recognize the Company’s proportionate share of the investee’s net income or losses and additional contributions made and distributions received. The Company recognizes a loss if it is determined that other than temporary decline in the value of the investment exists. The Company also accounts for investments, other than marketable securities, with ownership less than 20% using the cost method.
 
 
F-9

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)

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

SKTC was incorporated in China in October 2005. Its business scope includes, among others, sales and development of computer software, and computer and communication systems. It also provides information system consulting services. The Company, through Shenzhen Media, holds 48% of the equity interest of SKTC and three individual shareholders, Wengao Luo, Xi Chen and Bin Li own the remaining 21.5%, 21.5% and 9% equity interest of SKTC, respectively and accounts for the investment using the equity method. As of March 31, 2012 and December 31, 2011, the investment cost was $0.

(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 Shenzhen Media, holds 30% of the equity interest of SDMM and one individual shareholder, Ge Zhihong, owns the remaining 70% equity interest of SDMM, respectively, and accounts for the investment using the equity method.

Balance as of December 31, 2011
  $ 2,186,808  
Investment loss (30%) for the three months ended March 31, 2012
    (5,457 )
Exchange difference
    9,547  
         
Balance as of March 31, 2012
  $ 2,190,898  

(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, holds 40% of the equity interest of BJGL and one corporate shareholder, Highlight Consulting Co., Ltd., and two individual shareholders, Tianyou Cai and Tieying Luo, own the remaining 40%, 10% and 10% equity interest of BJGL, respectively, and accounts for the investment using the equity method. As of March 31, 2012 and December 31, 2011, the investment cost was $0.

(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, holds 20% of the equity interest of BJKP and four individual shareholders, Xiaofang Wang, Yi Rong, Qiang Zhao and Lijie Wang, own the remaining 50%, 10%, 10% and 10% equity interest of BJKP, respectively, and accounts for the investment using the equity method. As of March 31, 2012 and December 31, 2011, the investment cost was $0. The Company has applied for deregistration with the local government in January 2012 and it is pending for approval.

(e)
Beijing Orient Converge Human Resources Management Center Co. Ltd (“BJOC”)
 
 
F-10

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 
 
BJOC was incorporated in China in October 2004 and is mainly engaged in providing consultation, professional training and relevant sale and marketing services to business enterprises in China. The Company, through SNMC, owns 10% equity interest of BJOC and accounts for this investment using the cost method. As of March 31, 2012 and December 31, 2011, the investment cost was $0.

Investment held to maturity

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

Prepayment on purchase of real estate

The deposit in the amount of $3,060,003 is equivalent to the total purchase price for the residential units in Shenzhen City, Guangdong Province, the PRC which will be used for staff quarters.

Revenue recognition

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

(a)         Magazine advertising

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

The Company recognizes revenues for the advertising sales and consulting service ratably over the periods when the customer's advertisements are published and services are provided. Total revenue from the advertising sales is $754,308 and $1,279,727 for the three months ended March 31, 2012 and 2011, respectively. Total revenue from marketing consulting service is $1,058,105 and $1,456,080 for the three months ended March 31, 2012 and 2011, respectively.

The Company recognizes revenue from the publishing of the above magazines when the risks and rewards of ownership of the goods have transferred to the customer, which is usually on delivery or when title passes. Total revenue from the publishing business is $434,216 and $393,538 for the three months ended March 31, 2012 and 2011, respectively.

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

   
Three months ended March 31,
 
   
2012
   
2011
 
Magazine advertising:
           
Advertising pages sales
  $ 754,308     $ 1,279,727  
Marketing consulting service
    1,058,105       1,456,080  
Publishing
    434,216       393,538  
                 
Total revenue
  $ 2,246,629     $ 3,129,345  

 
F-11

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 
  
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 months ended March 31, 2012 and 2011, the Company did not have any potentially dilutive securities.

Foreign currency translation and comprehensive income

The accompanying financial statements are presented in United States Dollars (“US$”). The functional currency is Renminbi Yuan ("RMB") of the PRC. The financial statements are translated into US$ from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC's government. The Company uses the Closing Rate Method in currency translation of the financial statements of the Company.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US$ at rates used in translation.

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.

The Company has recorded no deferred tax assets as of March 31, 2012 and December 31, 2011, respectively. For the three months ended March 31, 2012 and 2011, the Company did not have any interest and penalties associated with any tax positions. As of March 31, 2012, 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.

Related parties

 
F-12

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 
  
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

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 only one reportable operating segment, namely advertising and marketing.

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.

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.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income”(“ASU 2011-05”). ASU 2011-05 requires companies to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income. This statement is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted and the amendments in this update will be applied retrospectively. The adoption has not had a material effect on the Company’s financial statements.
 
 
F-13

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)
 
 
 
NOTE – 4              RELATED PARTY TRANSACTIONS WITH AN AFFILIATE

Sale and Marketing Publishing House ("CMO"), an entity owned by the PRC government, is controlled and directed by a common director and major shareholder of the Company. CMO is not a direct or indirect subsidiary of the Company. The Company transacted with CMO in accordance with the Operation and Management Right Agreement (“the agreement”) in the normal course of business.

On October 23, 2003, MIC entered into the agreement in a term of 10 years with CMO. The agreement calls for the payment of $1,220,930 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. MIC shall bear all the operating costs and receive all the revenues from the contracted businesses.

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

In connection with the agreement with CMO, the Company has generated the following operating results as part of the agreement:

   
Three months ended March 31,
 
   
2012
   
2011
 
Magazine advertising:
           
Advertising pages sales
  $ 357,095     $ 971,416  
Consulting service
    47,173       219,079  
Publishing
    434,216       393,538  
                 
Total magazine advertising sales generated from CMO, included in consolidated total
    838,484       1,584,033  
Cost of revenue
    (352,874 )     (430,708 )
                 
Gross profit
    485,610       1,153,325  
General and administrative expenses
    (493,492 )     (615,676 )
Interest income
    1,487       164  
Subsidy income
    -       60,704  
                 
Net (loss) income generated from CMO, included in net income
  $ (6,395 )   $ 598,517  

As of March 31, 2012, related party receivables represented loans receivable from CMO, SDMM and the affiliates of SCBCC of $3,127,223, $1,977,070 and $229,521, respectively, which are unsecured, and non-interest bearing. These loans have no fixed repayment schedule and are receivable on demand.

 
F-14

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)

 
NOTE – 5               OTHER RECEIVABLES

Other receivables consisted of:

   
March 31, 2012
   
December 31, 2011
 
             
Advances to third parties
  $ 2,274,259     $ 2,307,272  
Advances to employees
    1,053,772       1,171,539  
Rental deposits
    34,264       -  
Others
    13,352       3,315  
                 
    $ 3,375,647     $ 3,482,126  
 
 
NOTE – 6              INVESTMENTS HELD TO MATURITY

   
March 31, 2012
   
December 31, 2011
 
Investment in unit trust in the PRC, held to maturity:
           
- Maturity in July 2012 with an interest rate of 9.5% per annum
  $ 316,221     $ 787,116  
- Maturity in September and November 2012 with an interest rate of 9% per annum
    474,330       472,270  
                 
Investments in unit trust
  $ 790,551     $ 1,259,386  
 
 
NOTE – 7              DEPOSIT ON PURCHASE OF REAL ESTATE

On January 18, 2011, the Company entered into 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 $3,060,003 (equivalent to RMB 19,353,600). As of March 31, 2012, the transfer of the title has not yet occurred because the property developer has postponed the delivery of real estate property. The Company believes that the title of real estate property will be received in the next twelve months. The Company intends to use this property as staff quarters.
 
 
NOTE – 8              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 three months ended March 31, 2012 and 2011 are 34%.
 
 
F-15

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)

 
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 15% for SNMC, 25% for BMMCC, SCBCC and BCXMLC and 0% for CMO. The provision for current income taxes for the three months ended March 31, 2012 and 2011 was $0 and $67,735, respectively.

CMO accounts for most of the revenue during the periods presented and its operating profit is entitled to a full tax exemption under the specialized industry tax rules. Other subsidiaries’ income tax rates range from 15% to 25%. A reconciliation of income before income taxes to the effective tax rate as follows:

   
Three months ended March 31,
 
   
2012
   
2011
 
             
(Loss) income before income taxes from the PRC operation
  $ (517,638 )   $ 657,261  
PRC income tax rate
    25 %     25 %
Income tax (credit) expense computed at statutory rate
    (129,410 )     164,315  
Tax effect of non-deductible items
    -       1,092  
Effect of tax exemption credit on CMO
    -       (149,629 )
Net operating loss not recognized as deferred assets
    129,410       51,957  
Income tax expense at effective rate
  $ -     $ 67,735  

(b)         Deferred tax liabilities

There is no material unrecognized tax benefit as of March 31, 2012 and December 31, 2011.
 
 
NOTE – 9               SEGMENT INFORMATION

The Company’s business units have been aggregated into a single reportable segment, namely advertising and marketing. All the identifiable assets of the Company are located in the PRC during the periods presented.

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


NOTE – 10            CONCENTRATIONS AND RISK

The Company is exposed to the following concentrations of risk:

(a)         Business risk with CMO
 
 
F-16

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)

 
As discussed in Note 4, 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.

(b)          Major customers

For the three months ended March 31, 2012 and 2011, there is no single customer who accounts for 10% or more of revenues.

(c)          Major vendors

For the three months ended March 31, 2012 and 2011, there is no single vendor who accounts for 10% or more of purchases.

(d)          Major distribution agents for the publishing business

For the three months ended March 31, 2012 and 2011, approximately 64.5% and 53.3% of the Company’s sales are generated from its 4 major sales agents in the PRC, respectively. The representatives solicited advertising from the general public in their designated geographic territory.

The Company’s magazines are believed to be well established and recognized by the general public. In this regard, management believes no severe impact would occur on the Company’s sales if any of the distributing agents were lost.

(e)          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.

(f)          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 – 11            COMMITMENTS AND CONTINGENCIES

(a)          Operating lease commitments

The Company is committed to lease various office spaces under several non-cancelable operating agreements in a term ranging from 1 to 3 years, with fixed monthly rentals, expiring between May 2012 and March 2014. Costs incurred under these operating leases are recorded as rent expense and totaled approximately $97,959 and $81,663 for the three months ended March 31, 2012 and 2011.
 
 
F-17

 
 
CHINA MARKETING MEDIA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Unaudited)

 
As of March 31, 2012, future minimum rent payments due under the remaining term of the various non-cancelable operating leases in the next two years are as follows:

Year ending March 31:
     
2013
  $ 232,718  
2014
    71,884  
 
Total:
  $ 304,602  

(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. Management feels the chances of such an obligation arising are remote.


NOTE – 12            SUBSEQUENT EVENTS

The Company evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.
 
 
F-18

 
 
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, 2011 filed with the SEC on April 16, 2012 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;

 
·
 “SNMC” refers to Shenzhen New Media Consulting Co., Ltd.;

 
·
“SCBCC” refers to Shenzhen Caina Brand Consultant 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 operating subsidiaries. Through our Chinese subsidiaries, we are engaged in the business of selling magazines and advertising space in our magazines and providing sales and marketing consulting services.  All of our operations, assets, personnel, officers and directors are located in China. Currently, we publish China Marketing magazine in China. We publish four issues of China Marketing per month, including a sales edition, case edition, channel edition and career development edition. In June 2009, we began to publish eight special issues of China Marketing, which include cosmetic edition, food edition, gift edition, tobacco edition, home appliance edition, sporting goods edition, edition for agricultural resources and edition for entrepreneurs in Henan province. In October 2011, we discontinued the special issue of sporting goods edition. Therefore, we currently have 4 main issues and 7 special issues. Currently, the distribution network of our magazines consists of over 60 major distribution agencies and 30,000 bookstores and newsstands covering over 300 cities throughout China.
 
 
3

 
 
In July 2008, we launched a new business of online marketing and sales of consumer products, such as personal computers, cellular phones, jewelries, watches, apparel, beauty products and home appliances. The Company decided to sell the online marketing and sales of consumer products division on December 26, 2011 after more than three years of suffering losses. The management anticipates that the sale of the interest will enable the Company to focus on the growth of its magazine and advertising business.
 
In June 2010, we launched a new business platform called "Easy Buy" that connects businesses, banks and customers on a single platform. With the innovative Invisible Printing Optical Identification Technology (IP-OIT), this sales and marketing platform helps the advertising clients to further promote their products and enhance their sales distribution channel. At the same time, we will be able to market and sell our products by sending the special catalog to the gold and platinum card holders through various banks, thus; bringing 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.
 
First Quarter Financial Performance Highlights
 
The following are some financial highlights for the first quarter of 2012:
 
 
·
Revenues: Our revenues were approximately $2.25 million for the first quarter of 2012, a decrease of 28.2% from the same quarter a year ago.
 
·
Gross Margin: Gross margin was 55.2% for the first quarter of 2012, as compared to 72.4% for the same quarter in 2011.
 
·
Operating Expenses: Operating expenses was approximately $1.76 million for the first quarter 2012, an increase of approximately 2.0% from approximately $1.72 million of the same period of 2011.
 
·
Net Income (Loss) attributable to China Marketing Media Holdings, Inc.: Net income (loss) was approximately $(0.52) million for the first quarter of 2012, a decrease of 243.7% from the same period of last year.
 
·
Fully diluted earnings per share was $(0.02) for the first quarter of 2012, as compared to $.01 for the first quarter ended March 31, 2011.
 
Results of Operations
 
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
 
During the three-month period ended March 31, 2012, 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 March 31, 2012 and 2011, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the three month period ended March 31, 2011 to the three month period ended March 31, 2012.

   
Three Months Ended March 31
             
 Item
             
Increase
   
% Increase
 
   
2012
   
2011
   
(Decrease)
   
(%Decrease)
 
Revenue
 
$
2,246,629
   
$
3,129,345
   
$
(882,716
)
   
(28.2)%
 
Cost of Sales
   
1,007,286
     
863,384
     
143,902
     
16.7%
 
Gross Profit
   
1,239,343
     
2,265,961
     
(1,026,618
)
   
(45.3)%
 
Operating Expenses
   
1,759,235
     
1,724,021
     
35,214
     
2.0%
 
Other Income (expense)
   
(2,823)
     
103,949
     
(106,772)
     
102.7%
 
Provision for Taxes
   
-
     
67,735
     
67,735
     
100.0%
 
Net Income attributable to China Marketing Media Holdings, Inc.
   
(522,715)
     
363,742
     
(886,457
)
   
(243.7)%
 
 
 
4

 
 
Revenues
 
Our revenues for the three months ended March 31, 2012 were $2,246,629 which are $882,716, or 28.21%, less than the same period in 2011, when we had revenues of $3,129,345. The decrease in revenues for the three months ended March 31, 2012 was mainly due to a decrease advertising space sales of $525,419, or 41.06%, and consulting services of $397,975, or 27.33%, but offset by an increase in publishing sales of $40,678, or 10.34%. The management believes that the advertising space sales will continue to suffer from a soft market.
 
Components of Revenues
 
The following table shows the different components comprising our total revenues during the three month periods ended March 31, 2012 and 2011.

   
Three Months March 31
             
Revenue Category
             
Increase
   
% Increase
 
   
2012
   
2011
   
(Decrease)
   
(%Decrease)
 
                         
Publishing
 
$
434,216
   
$
393,538
   
 $
40,678
     
10.3
%
Advertising space sales
   
754,308
     
1,279,727
     
(525,419
)
   
(41.1)
%
Consulting service
   
1,058,105
     
1,456,080
     
(397,975)
     
(27.3)
%
Total
 
 $
2,246,629
   
 $
3,129,345
   
 $
(882,716
)
   
(28.2)
%
 
CMO’s Revenue
 
CMO, a related party which is owned by the PRC government, is controlled and directed by a major shareholder who is also the President and Chief Executive Officer of the Company, Mr. Yingsheng Li. Under ASC 810-10-15-12, CMO is not qualified as a VIE as it is a governmental organization. In fact, CMO’s revenues and expenses are included in the consolidated statement of operations under the terms of management contract which is, effectively, an operating lease.

On October 23, 2003, Shenzhen Media Investment Co., Ltd. entered into a 10-year agreement with CMO in exchange for a right to oversee the operation and strategic planning of advertising, publishing, and staff training for the magazines that are published by CMO. This right was transferred to Shenzhen New Media Consulting Co., Ltd. on November 20, 2004. The Company has generated the following revenue as part of the agreement.

   
Three months ended March 31,
 
   
2012
   
2011
 
Magazine advertising:
           
Advertising space sales
 
$
404,268
   
$
1,190,495
 
Publishing
   
434,216
     
393,538
 
Total magazine advertising sales generated from CMO, included in consolidated total
 
$
838,484
   
$
1,584,033
 

The CMO’s revenues for the three months ended March 31, 2012 were $838,484 (37.3% of total revenue), which is $745,549, or 47.1%, less than the same period in 2011, when we had CMO’s revenues of $1,584,033 (50.6% of total revenue). The decrease in CMO’s revenue for the three months ended March 31, 2012 was primarily due to a drop of revenue in advisory service. The advisory service’s revenue for the three months ended March 31, 2012 was $47,173, a decrease of 78.5% from $219,079 for the same period in 2011. The decrease in advisory service’s revenue was caused by a decrease in demand beginning in the 2nd quarter of 2011. The management expects a further decline in the advisory service’s revenue in the coming months.
 
Cost of Sales
 
Our cost of sales for the three months ended March 31, 2012 and for the same period of 2011 were $1,007,286 and $863,384, respectively, which accounted for 44.8% and 27.6% of revenue, respectively. As a percentage of total revenues, cost of sales increased by approximately 17.3% during the applicable periods. Such increase was primarily driven by (1) the significant decrease of revenue in advertising space sales which has a high gross margin than the other segments and (2) additional sales promotion for consulting service through Beijing Media Consulting Co.
 
 
5

 
 
Operating Expenses
 
Salaries and related benefits expenses amounted to $1,116,377 during the three-month period ended March 31, 2012 as compared to $709,443 during the same period of 2011. The increase in payroll expense by $406,934, or 57.4%, was mainly attributable to an increase in headcount in Shenzhen Caina by almost 97% in anticipation of a 2nd quarter of 2012 high demand of sales in the consulting sector.

SG&A

Our selling, general and administrative expenses were $642,858 (28.6% of total sales) and $1,014,578 (32.4% of total sales) for the three months ended March 31, 2012 and 2011, respectively. The decrease was mainly due to an overall reduction in traveling and other sales and marketing expenses related to advertising space sales.

Other Income and Expenses

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

Interest income represents interest earned from bank accounts with PRC financial institutions, totaling $2,634 during the three months ended March 31, 2012. A decrease in interest income of $18,703, or 87.97%, as compared to $21,337 during the same period of 2011 was due to the decrease in the average balance of cash and cash equivalents.

Investment in unconsolidated entities over which the Company has significant influence (20% to 50%) are accounted for under the equity method of accounting and the Company does not have the ability to exert significant influence (up to 20%) are accounted for under the cost method of accounting. We had an investment loss from unconsolidated subsidiaries totaling $5,457 for the three months ended March 31, 2012. The loss increased by $27,236, or 124.9%, as compared to an income of $21,908 during the same period of 2011. Such increase was attributable to the continuing operating loss from SDMM (30% interest) as compared to an investment gain from Beijing Kang Pusen Media (20% interest) from a year ago. As of March 31, 2012, the investment for Beijing Kang Pusen Media cost was $0. The Company has applied for deregistration with the local government in January 2012 and it is pending for approval.

Subsidy Income is received at a discretionary amount as determined by the local PRC government, which represents government grant or incentive award accredited to the Company for its contribution in the promotion and development of culture and media industry in the PRC. The amount is un-conditional, non-refundable and without any restrictions on usage at the time of grant to and receipt by the Company. The subsidy income for the three months ended March 31, 2012 totaled $0 as compared to $60,704 for the same period in 2011.

 
Income taxes
 
United States
 
China Marketing Media Holdings, Inc. is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made, as we had no U.S. taxable income for the period presented.
 
 
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 15% for SNMC, 25% for BMMCC, SCBCC and BCXMLC and 0% for CMO.  CMO is exempt from PRC income tax as a part of the government supporting program from year 2009 to 2013.
 
We incurred income taxes of $0 and $67,735 for the three months ended March 31, 2012 and 2011, respectively.
 
Net income (loss) attributable to China Marketing Media Holdings, Inc.
 
We reported net loss of $522,715 for the three months ended March 31, 2012, as compared to net income of $363,742 a year ago. The decrease of $886,457, or 243.7%, resulted from a decrease of revenue and increase in cost of goods sold.
 
Liquidity and Capital Resources
 
As of March 31, 2012, we had cash and cash equivalents of approximately $1.3 million and working capital (deficit) of $(1.7) million. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.
 
The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the continuity of operations and realization of assets and satisfaction of liabilities and commitments in the normal course of business.
 
For the three months ended March 31, 2012, the Company has incurred a net loss of $522,715 and experienced negative operating cash flows of $110,654. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis.
 
Cash Flow

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Net cash used in operating activities
 
$
(110,654)
   
$
(473,707)
 
Net cash provided by (used in) in investing activities
   
470,104
     
(7,668,351)
 
Net cash provided by financing activities
 
 
-    
 
4,249,249
 
Exchange rate changes in cash
 
 
3,701
   
 
34,042
 
Net cash flow provided by (used in) for the period
 
$
363,151
   
$
(3,858,767)
 
 
 
7

 
 
Operating Activities:
 
Net cash used in operating activities was approximately $0.11 million for the three months ended March 31, 2012, which was a decrease in cash outflow of approximately $0.36 million from approximately $0.47 million for the same period in 2011. The decrease in cash outflow was primarily due to the increase in accrued expenses and other payable but partially offset by an increase in accounts receivable and prepaid expenses.

Investing Activities:
 
Net cash provided by investing activities was approximately $0.47 million for the three months ended March 31, 2012, an increase in cash provided of approximately $8.14 million from approximately $7.67 million net cash used in investing activities for the same period of 2011. Such increase in net cash provided by investing activities was mainly attributable to proceeds from investment held to maturity from Shenzhen Caina Brand Consultant Company.

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

Financing Activities
 
There is no net cash provided or used by financing activities for the three months ended March 31, 2012. There was net cash provided of $4.25 million from the discontinued operations in the same period in 2011.
  
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 March 2012, the value of RMB against US dollars appreciated by 22.0%, from RMB8.1/ $1 to RMB6.3/ $1.
 
 
8

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

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

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

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

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under the control of the PRC's government. We use the Closing Rate Method in currency translation of the financial statements of the Company.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

Restrictions on Transfer of Assets Out of the PRC. Dividend payments by Shenzhen New Media and its subsidiary are limited by certain statutory regulations in China. No dividends may be paid by Shenzhen New Media without first receiving prior approval from the State Administration of Foreign Exchange. Dividend payments are restricted to 85% of profits, after tax.
 
Recent Accounting Pronouncements
 
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.
 
 
9

 
 
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 April 16, 2012, during the Company’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2011, 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 the knowledge 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 U.S. GAAP matters.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of a stand alone Audit Committee of the Board also contributes to insufficient oversight of our accounting and audit functions.
 
In order to correct the foregoing deficiencies, we have taken and/or continue to work on the following remediation measures:
 
 
·
The Company has been taking certain remedial measures which includes, among other things, increasing the number of our accounting staff and professionals. In June 2011, we began our work with an ERP system provider to design and implement an efficient ERP system to improve our financial and internal control system. We anticipate completing this work on or before October 2012.
 
 
·
We continue to search for qualified personnel. However, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the PRC, in general, and in the province where the Company maintains its operations, in particular, we have been  not able to hire such additional personnel to date. Due to the lack of internal control resources in China, the management has decided to outsource its internal control team. Since March 2011, we have been working with a PRC consulting firm to develop a system to manage, monitor and plan a risk management and internal control function. We will focus on policies and procedures that will be in place to ensure future risk is properly mitigated.
 
 
·
We have allocated significant financial and human resources to strengthen the internal control structure. We have designated two full time staff  to work with several external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting; and
 
We have and continue to search for suitable candidates to serve as independent directors on our Board of Directors and on the Audit (or other standing committee thereof) Committee, who are financially literate, and to contain at least one member who is a “financial expert” as that term is defined in the SEC’s rules. We intend to have our Audit Committee meet at least once every quarter, prior to the release of that periods’ financial statements, to, among other things, discuss, with management and our independent auditors, prior to the release of each periods’ financial statements, the financial statements themselves, significant accounting policies and estimates, our internal controls, and the scope and findings of the work performed by our independent auditor in its audit or review of the financial statements. We estimate that we need to elect at least two additional directors that meet the independence requirements and intend to complete this search in the near future. We have interviewed several candidates to date, but have not yet filled either independent director or Audit Committee vacancy as of  March 31, 2012. We anticipate completing these measures on or before June 2012.
 
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 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
10

 
 
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

The Company has incurred a significant loss during the quarter ended March 31, 2012 and there is substantial doubt as to our ability to continue as a going concern.

The Company’s consolidated financial statements are presented on a going concern basis, which contemplates the continuity of operations and realization of assets and satisfaction of liabilities and commitments in the normal course of business. For the quarter ended March 31, 2012, the Company has incurred a net loss of $522,715 and experienced negative operating cash flows of $110,654. The Company plans to obtain the additional capital injection from its shareholders or external financing. However, there can be no assurance that the Company will be able to obtain sufficient funds to meet its obligations on a timely basis. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope, or eliminate one or more of our programs, or substantially curtail or close our operations altogether.

Our success is dependent on our ability to modify our magazines and develop new media products to address current trends in our industry.  The development of new products is costly and time consuming with no guarantee that the new product will generate our intended results.

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

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

We obtained our rights to market the magazines, sell the magazines and advertising space, pursuant to an operation and management right agreement that runs through October 31, 2013. Therefore, our relationship with CMO is critically important to us. Our failure to extend the contractual relationship with CMO on commercially reasonable terms may make it difficult for us to continue to operate our business unless and until we find a comparable replacement publishing house.  It would be very difficult for us to find a comparable replacement publishing house and we are not at all certain that we would be able to do so.
 
 
11

 

As discussed in Note 4 of the financial statements, a significant portion of the Company’s operations is derived from and depends upon an agreement with CMO. For three-month period ended March 31, 2012, CMO’s $0.84 million revenue represented approximately 37.3% of the Company’s total revenue. The Company is striving to diversify its revenue sources by offering new product lines and seeking acquisition. The Company cannot provide any assurance that it will be successful in achieving sufficient diversification in the near future, if at all.

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

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

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

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

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.
 
 
12

 

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

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

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

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified significant deficiencies related to our U.S. GAAP expertise, internal audit functions and the absence of Audit Committee, as of that date.  The current staff in the accounting department of the subsidiaries is relatively new to U.S. GAAP and internal control procedures and needs substantial additional training so as to meet with the higher demands of being a U.S. public company.  The significant deficiency in internal audit function is also due to the Company’s lack of sufficient qualified resources to perform internal audit functions.  We have taken steps to address these deficiencies. However, as of the end of the quarter ended March 31, 2012, these deficiencies remain, which, in turn, could adversely affect our operations and investor confidence.

RISKS RELATED TO THE MARKET FOR OUR STOCK

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

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

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

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

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

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

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.
 
 
13

 

RISKS RELATED TO DOING BUSINESS IN CHINA

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

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

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

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

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

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

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

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

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

On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
 
The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the Ministry of Commerce and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
 
 
14

 

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

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

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

We receive substantially all of our revenues in RMB, which currently is not a freely convertible currency.  We will have to convert a portion of these revenues into other currencies in order to make payments to those of our service providers and others who do not transact business in RMB.  Under the PRC’s existing foreign exchange regulations, we will be able to make payments to parties that do not transact business in RMB without prior approval from the State Administration on Foreign Exchange, or SAFE, by complying with various procedural requirements.  The Chinese government, however, may, at its discretion, restrict access in the future to foreign currencies for current account transactions.  If this were to occur, we may not be able to pay service providers or others whom we work with that transact business in currencies other than RMB.  The value of RMB against the US dollar and other currencies fluctuates and is affected by, among other things, changes in China’s political and economic conditions.  Since 1994, the conversion of RMB into foreign currencies, including US dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets.  Any devaluation of RMB, however, may materially and adversely affect the value of our assets and our financial results, since we will receive substantially all of our revenues, and express our profits, in RMB.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three-month period ended March 31, 2012, we made no unregistered sales of our equity securities; nor were there any repurchases of our equity securities during the same period.
 
 
15

 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not Applicable
 
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.*
101.INS** XBRL Instance
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation
101.DEF** XBRL Taxonomy Extension Definition
101.LAB** XBRL Taxonomy Extension Labels
101.PRE** XBRL Taxonomy Extension Presentation

* Filed herewith
 ** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
16

 
 
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: May 15, 2012
     
       
 
By:
/s/ Yingsheng Li                                                  
 
   
Yingsheng Li, President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
 
Date: May 15, 2012
   
       
 
By:
/s/ Zhen Zhen Peri                                                
 
   
Zhen Zhen Peri, Chief Financial Officer
 
   
(Principal Accounting and Financial Officer)
 
       
 
 
17

 
 
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.*
101.INS**   XBRL Instance
101.SCH**   XBRL Taxonomy Extension Schema
101.CAL**   XBRL Taxonomy Extension Calculation
101.DEF**   XBRL Taxonomy Extension Definition
101.LAB**   XBRL Taxonomy Extension Labels
101.PRE**   XBRL Taxonomy Extension Presentation

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

PINX:CMKM China Marketing Media Holdings Inc Quarterly Report 10-Q Filling

China Marketing Media Holdings Inc PINX:CMKM Stock - Get Quarterly Report SEC Filing of China Marketing Media Holdings Inc PINX:CMKM stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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PINX:CMKM China Marketing Media Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012
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