10-Q 1 cmmh092908form10q.htm FORM 10Q China Marketing Media Holdings, Inc.: Form 10-Q - Prepared by TNT Filings Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

Q   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2008

£  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File Number: 000-51806

CHINA MARKETING MEDIA HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Texas

 

76-0641113

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Empl. Ident. No.)

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 Q            No £

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

  Large accelerated filer         £   

            Accelerated filer                £   

Non-accelerated filer          £
(Do not check if a smaller reporting company)

Smaller reporting company         Q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes £            No Q

The number of shares outstanding of each of the issuer’s classes of common equity, as of September 26, 2008 is as follows:

Class of Securities

 

Shares Outstanding

Common Stock, no par value

 

27,586,002

 


TABLE OF CONTENTS

 

PART I

Page

     

Item 1.

Unaudited Financial Statements

1-16

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17-25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

27

     

 

PART II

 
     

Item 1.

Legal Proceedings

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Submission of Matters to a Vote of Securities Holders

29

Item 5.

Other Information

29

Item 6.

Exhibits

29



i


PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

INDEX TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

PAGE

 

 

CONSOLIDATED BALANCE SHEETS  (UNAUDITED)

2

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

3

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

4

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

5

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6-16




1


CHINA MARKETING MEDIA HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

June 30,

 

December 31,

 

 

2008

 

2007

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and cash equivalents

$

2,249,060

$

1,548,602

Accounts receivable

 

91,247

 

90,280

Inventory

 

166,244

 

-

Prepaid expenses

 

490,881

 

289,381

TOTAL CURRENT ASSETS

 

2,997,432

 

1,928,263

OTHER ASSETS

 

 

 

 

Investment Deposit - purchase of targets

 

5,820,891

 

5,476,001

Deferred tax asset

 

      -

 

34,154

Loan receivables to major sales agents

 

 875,622

 

58,949

Investment (equity method)

 

332,677

 

370,376

Related party receivables – affiliates

 

2,462,815

 

1,842,795

Other receivable

 

67,683

 

133,597

Goodwill

 

808,374

 

760,478

Other assets

 

-

 

149,064

Fixed assets

 

1,857,027

 

1,513,818

Accumulated depreciation

 

(311,922)

 

(191,887)

License agreement

 

1,471,128

 

1,383,964

Accumulated amortization

 

(686,527)

 

(576,651)

TOTAL OTHER ASSETS

 

12,697,768

 

10,954,658

TOTAL ASSETS

$

15,695,200

$

12,882,921

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable

$

206,035

$

74,762

Accrued expenses and levies

 

252,710

 

275,780

Deferred revenues

 

501,150

 

250,621

Other payable

 

64,668

 

49,664

Taxes payable

 

249,331

 

49,228

TOTAL CURRENT LIABILITIES

 

1,273,894

 

700,055

TOTAL LIABILITIES

 

1,273,894

 

700,055

Minority Interest

 

199,724

 

281,606

STOCKHOLDERS' EQUITY

 

 

 

 

Common stock: no par value; 100,000,000 common shares

 

1,112,546

 

1,112,546

authorized; 27,586,002 common shares issued and outstanding

 

 

 

 

Retained earnings

 

11,294,681

 

9,785,181

Accumulated other comprehensive income

 

1,814,355

 

1,003,533

TOTAL STOCKHOLDERS' EQUITY

 

14,221,582

 

11,901,260

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

15,659,200

$

12,882,921

See accompanying notes to unaudited consolidated financial statements

2


CHINA MARKETING MEDIA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

 

Three months
ended

Three months
ended

Six months
ended

Six months
ended

 

 

June 30,
 2008

 

June 30,
2007

 

June 30,
2008

June 30,
 2007

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

Sales revenue

$

3,135,283

$

2,763,238

$

5,745,067

$

4,771,418

Cost of goods sold

 

910,099

 

687,129

 

1,638,613

 

1,270,676

Gross profit

 

2,225,184

 

2,076,109

 

4,106,454

 

3,500,742

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Payroll expenses

 

808,616

 

391,458

 

1,150,391

 

560,211

Other general and administrative

 

515,702

 

548,056

 

1,273,109

 

952,993

Total expenses

 

1,324,318

 

939,514

 

2,423,500

 

1,513,204

 

 

 

 

 

 

-

 

-

Income from operations

 

  900,866

 

1,136,595

 

1,682,954

 

1,987,538

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

Interest income

 

 11,372

 

24,773

 

12,677

 

42,885

Interest expense

 

   -

 

(14,399)

 

-

 

(31,568)

Investment loss from unconsolidated subsidiary

 

(12,536)

 

(14,196)

 

(25,360)

 

(26,948)

Other

 

(13,448)

 

(16,935)

 

33,293

 

15,496

Total other income (expenses)

 

(14,612)

 

(20,757)

 

20,610

 

(135)

 

 

 

 

 

 

-

 

-

Net income before taxes

 

 886,254

 

1,115,838

 

1,703,564

 

1,987,403

   

 

 

 

 

 

 

 

Provision for income taxes

 

195,442

 

1,472

 

275,946

 

2,531

   

 

 

 

 

 

 

 

Net income before minority interest

$

690,812

$

1,114,366

$

1,427,618

$

1,984,872

    Less minority interest (loss)

 

(41,588)

 

 

(81,882)

 

-

Net income

$

732,400

$

1,114,366

$

1,509,500

$

1,984,872

   

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

303,463

 

148,377

 

810,822

 

230,627

Comprehensive income

$

1,035,863

$

1,262,743

$

2,320,322

$

2,215,499

 

 

 

 

 

 

 

 

 

Basic and fully diluted earnings per share

$

0.03

$

0.04

$

0.05

$

0.07

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted average shares outstanding

$

27,586,002

$

27,586,002

$

27,586,002

$

27,586,002

See accompanying notes to unaudited financial statements

3


CHINA MARKETING MEDIA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

 

 

 

 

 

 

Accumulated Other

 

Total

 

Common

 

Common

 

Retained

Comprehensive

Stockholders’

 

Shares

 

Stocks

 

Earnings

 

Income

 

Equity

December 31, 2006

27,586,002

$

1,112,546

$

6,855,026

$

328,421

$

8,295,993

Net income for the year ended December 31, 2007

 

 

 

 

2,930,155

 

 

 

2,930,155

Foreign currency translation

 

 

 

 

 

 

675,112

 

675,112

December 31, 2007

27,586,002

$

1,112,546

$

9,785,181

$

1,003,533

$

11,901,260

Net income for the six months ended June 30, 2008

 

 

 

 

1,509,500

 

 

 

     1,509,500

Foreign currency translation

 

 

 

 

 

 

   810,822

 

     810,822

Balance June 30, 2008

27,586,002

$

1,112,546

$

11,294,681

$

1,814,355

$

14,221,582

See accompanying notes to unaudited consolidated financial statements



 



4


 CHINA MARKETING MEDIA HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

Six months ended June 30,

 

2008

2007

Cash flow from operating activities:

 

 

 

 

Net income

$

1,509,500

$

1,984,872

Adjustments to reconcile net income to cash provided by operations:

 

 

 

  

Minority interest

 

(81,882)

 

Amortization and depreciation

 

207,560

 

108,396

Investment  loss (equity method)

 

25,360

 

26,948

Change in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

4,585

 

(307,281)

Inventory

 

(161,524)

 

 

Other receivable

 

105,372

 

-

Due from major sales agent

 

      (648,486)

 

(1,135,829)

Deferred tax asset

 

37,307

 

-

Prepaid expenses

 

(178,070)

 

118,151

Other asset

 

-

 

117,381

Accounts payable

 

122,971

 

(34,968)

Accrued expenses

 

        (38,847)

 

(100,990)

Other payable

 

(13,546)

 

(218,800)

Taxes payable

 

       191,408

 

(28,303)

Deferred revenues

 

228,079

 

7,971

Net cash provided by operations

 

1,309,787

 

537,548

Cash flow from investing activities:

 

 

 

 

Purchase of fixed assets

 

(272,035)

 

(25,327)

Receipts from directors

 

-

 

-

Deposits to acquire target company

 

-

 

(673,626)

Cash acquired in purchase of subsidiary

 

-

 

111,378

Advance to related entities

 

(489,647)

 

-

Net cash used in investing activities

 

(761,682)

 

(587,575)

Cash flow from financing activities:

 

 

 

 

Loan advanced from directors

 

-

 

949,350

Repayment of related party payables

 

 

 

(3,189,451)

Net cash used in financing activities

 

-

 

(2,240,101)

Increase (decrease) in cash and cash equivalents

 

548,105

 

(2,290,128)

 

 

 

 

 

Effect on rate changes on cash

 

152,353

 

169,276

Cash and cash equivalents, beginning of period

 

1,548,602

 

5,127,840

Cash and cash equivalents, end of period

$

2,249,060

$

3,006,988

Supplemental disclosures of cash flow information:

 

 

 

 

Interest paid in cash

$

-

$

-

Income taxes paid in cash

$

275,946

$

2,531

Non-Cash investing and financing activities

 

 

 

 

Dividend payable offset by related party receivable

$

-

$

-

See accompanying notes to unaudited consolidated financial statements

5


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the financial statements and footnotes thereto included in our Annual Report Form 10-KSB for the year ended December 31, 2007.

1. Nature of operations

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

On December 31, 2005, China Marketing completed a share exchange (the "Exchange") with the stockholders of Media Challenge Holdings Limited ("Media Challenge") pursuant to the terms of an Agreement for Share Exchange dated December 31, 2005. In the Exchange, China Marketing acquired all of the issued and outstanding stock of Media Challenge in exchange for a convertible promissory note in the amount of $441,600 that was converted into 22,808,002 shares of China Marketing common stock upon the completion of a one for ten reverse stock split. The Exchange resulted in the previous controlling shareholders of Media Challenge becoming the controlling shareholders of China Marketing. Consequently, the Exchange is accounted for as a reverse merger, whereby the accounts of Media Challenge are recapitalized to show the adopted capital structure of China Marketing.

Media Challenge was incorporated on August 12, 2004, under the laws of the Territory of the British Virgin Islands (BVI). Media Challenge is a holding company and has no operations other than operations that it conducts through its direct and indirect subsidiaries. One of Media Challenge's subsidiaries, Shenzhen New Media Consulting Co., Ltd. ("Shenzhen New Media") was incorporated on November 15, 2004 under the law of People's Republic of China ("PRC").

On March 7, 2005, Shenzhen New Media entered into an agreement to acquire 100% of Shenzhen Media Investment Co., Ltd. ("Shenzhen Media"), an entity controlled by three common owners of Media Challenge. Shenzhen Media was formed on October 22, 2003, under the laws of PRC.  Shenzhen New Media completed the acquisition of Shenzhen Media on December 21, 2005, and Shenzhen Media is now a wholly owned subsidiary of Shenzhen New Media. The transaction was accounted for as a transfer of entities under common control.

In October 2004, Shenzhen Media formed a new wholly owned subsidiary in PRC known as Beijing Media Management and Consulting Co., Ltd. ("Beijing Media").

In November 2005, Shenzhen New Media formed a new wholly owned subsidiary in PRC known as Shenzhen New Media Advertising Co., Ltd. ("NMA"). The registered capital of NMA is one million RMB, i.e., 122,100USD (exchange rate as 1USD: 8.19 RMB).

On March 26, 2007, the Company acquired 100% of Shenzhen Caina Brand Consultant Company ("Shenzhen Caina"). Shenzhen Caina owned 100% of Beijing Caina Xianliang Marketing and Layout Company (“Beijing Caina”). After the acquisition, Shenzhen New Media owned 100% of Shenzhen Caina and Beijing Caina.

In November 2007, Shenzhen Media formed a new 52% owned subsidiary in PRC known as Beijing Orient Converge Human Resources Management Center Co. Ltd.( "BJOC"). The registered capital of BJOC is RMB5, 000,000, i.e., 684,500USD (exchange rate as 1USD: 7.30 RMB).

The consolidated entity is hereafter referred to as "the Company".  The Company engages in the sale of its magazines and advertising space within its magazines, which are sold throughout China; and provide consulting services to clients concerning advertising and marketing matters.

6


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. Basis of Presentation

The consolidated financial statements include the accounts of China Marketing, Media Challenge, Shenzhen New Media, Shenzhen Media, Beijing Media, NMA, Shenzhen Caina, Beijing Caina and BJOC. All material intercompany accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis differs from that used in the statutory accounts of our subsidiaries, Beijing Media, NMA, Shenzhen Caina, Beijing Caina and BJOC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

3. Summary of Significant Accounting Policies

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.

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.

Cash and Cash Equivalents

For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in the PRC are not insured by any government entity or agency.

Inventory

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

Trade Accounts Receivable

Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount becomes questionable.

Revenue Recognition

Revenues are recognized when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred according to the sale terms, (3) the seller's price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Magazines

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).

7


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

The Company recognizes revenue for the advertising sales and marketing consulting service ratably over the periods when the customer's advertisements are published and service are provided. Total revenue from the advertising sales is $2,852,113 and $3,465,637 for the six months ended June, 2008 and 2007, respectively. Total revenue from marketing consulting service is $2,102,866 and $574,113 for the six months ended June 30, 2008 and 2007 respectively.

In addition, the Company recognizes revenue from the publishing of 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 $790,088 and $731, 668 for the six months ended June 30, 2008 and 2007, respectively.

Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:

Buildings

20 years

Vehicle

5 years

Furniture and equipment

5 years

Depreciation expense for the six months ended June 30, 2008 and 2007 was $136, 092 and $42,467, respectively. The increase of depreciation expense is mainly due to the increase in motor vehicles, office improvement, furniture and equipments.

At cost

June 30, 2008

 

December 31, 2007

Building

$1,072,740

 

$969,717

Motor vehicles

326,422

 

119,803

Furniture and equipment

457,865

 

424,298

 

 

 

 

 

1,857,027

 

1,513,818

Less: accumulated depreciation

(311,922)

 

(191,825)

 

$1,545,105

 

$1,321,993

Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." No impairment of assets was recorded in the periods reported.

Intangible Assets

In accordance with SFAS 142, "Goodwill and Other Intangible Assets", 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 is the ten years of the "license agreement." 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 six months ended June 30, 2008 and 2007.

8


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

License amortization expense included in cost of sales for the six months ended June 30, 2008 and 2007 was $71,468 and $65,929, respectively.

Goodwill on acquisition of subsidiaries

On March 26, 2007, the Company acquired 100% of Shenzhen Caina, an entity formerly owned by an individual not related to the Company. Shenzhen Caina owns 100% of Beijing Caina. After acquisition, Shenzhen New Media owns 100% of Shenzhen Caina and Beijing Caina. Both Shenzhen Caina and Beijing Caina provide consulting services to clients regarding advertising and marketing matters. Goodwill on acquisition of the above-mentioned subsidiaries was calculated as follows:

 

 

RMB

 

USD

Purchase consideration

¥

8,000,000

$

1,095,200

Less: Net assets at fair value

 

 

 

-

Cash and cash equivalents

 

848,200

 

116,119

Accounts receivable

 

934,000

 

127,865

Prepaid expenses

 

110,236

 

15,091

Deposit

 

248,532

 

34,024

Settlement receivable

 

 

 

-

Others

 

544,100

 

74,487

Related party receivable

 

1,180,920

 

161,668

Fixed assets

 

1,365,173

 

186,892

Accumulated depreciation

 

(142,390)

 

(19,493)

Accrued expenses and levies

 

(1,409,544)

 

(192,967)

Other payable

 

(1,066,164)

 

(145,958)

Taxes payable

 

(168,051)

 

(23,006)

Net assets acquired

¥

2,445,013

$

334,722

Goodwill on acquisition

¥

5,554,987

$

760,478

Acquisition of subsidiaries (net of cash acquired)

¥

7,151,800

$

979,081

9


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Investment (equity method)

Shenzhen Keungxi Technology Company Ltd. (“SKTC”) was incorporated in China in October 2005. Its business scope includes, among others, sales and development of computer software, computer and communication systems. It also provides information system consulting services. Shenzhen Media holds 48% of the equity of SKTC and three individual shareholders, Wengao Luo, Xi Chen and Bin Li own the remaining 21.5%, 21.5% and 9% of SKTC, respectively.

Balance as of Dec.31, 2006

$

202,751

Investment Losses (48%)

 $

(49,916)

Advances made to SKTC

 $

217,541

Balance as of Dec.31, 2007

 $

370,376

Investment Losses (48%)

 $

(25,360)

Advances made to SKTC

 $

(12,339)

Balance as of Jun 30, 2008

 $

332,677

Minority Interest

Minority interest represents non-controlling owners’ 48% of equity interest in BJOC.

Cost of Goods Sold

Cost of goods sold includes printing, labor costs and amortization incurred by the Company in the production of its magazines. The Company records the estimated cost of returned magazines at the date we delivered the magazines to our vendors. Our sales are based on three main distribution channels throughout China: (1) postal subscription base distribution; (2) direct order distribution; and (3) agency base distribution.

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

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

10


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Third, agency distribution involves delivery of our magazines to sales agents who in turn distribute the magazines to retail agents at various locations throughout China. We granted sales agents a two-month return privilege. Average return rate for the six months ended June 30, 2008 was 12.57% and for the six months ended June 30, 2007 was 17%.

In accordance with the provisions of SFAS 48, "Criteria for Recognizing Revenue When Right of Return Exists.": If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

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

We recognize magazine sales revenue in accordance with the provisions of SFAS 48: first, our price to the sale agent is fixed; second, the sale agent has to pay us fully upon order request and the payment is not contingent on resale of the magazines; third, we are not responsible in the event of theft or physical destruction or damage of the product after delivery; fourth, our sale agents include bookstores, reading group, and culture group, etc.; fifth, we have no obligations to resell the magazines distributed to sale agents; finally, the amount of returns can be reasonably estimated and are included in accrued liabilities.

Advertising and Promotion Expense

Advertising and promotion costs are expensed as incurred. The Company incurred $88,538 and $48,487 of advertising and promotion costs for the six months ended June 30, 2008 and 2007 respectively.

Reclassification

Certain amounts in the prior year have been reclassified to conform to the current year's presentation.

Earnings Per Share

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

11


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

 

 

Six months ended June 30,

 

 

2008

 

2007

NUMERATOR FOR BASIC AND DILUTED EPS

 

 

 

 

Net income to common stockholders

$

1,509,500

$

1,984,872

 

 

 

 

 

DENOMINATORS FOR BASIC AND DILUTED EPS

 

 

 

 

Weighted average shares of common stock outstanding

 

27,586,002

 

27,586,002

EPS - Basic and Diluted

$

0.05

$

0.07

Foreign Currency and Comprehensive Income

The accompanying financial statements are presented in US dollars. The functional currency is the Renminbi ("RMB") of the PRC. The financial statements are translated into US dollars 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/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.

Taxes

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws.

12


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

The Company has implemented SFAS No.109 "Accounting for Income Taxes", which provides for a liability approach to accounting for income taxes. Deferred income taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. The Company has recorded deferred tax assets of $0 and $34,154 as of June 30, 2008 and December 31, 2007, respectively.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No.107 "Disclosures About Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments. The carrying amounts of reported current assets and current liabilities approximate their fair value because of short maturity of theses instrument and market rates of interest.

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.

Restrictions on Transfer of Assets Out of the PRC

Dividend payments by Shenzhen New Media and its direct and indirect subsidiary are limited by certain statutory regulations in the PRC. No dividends may be paid by Shenzhen New Media without first receiving prior approval from the State Administration of Foreign Exchange or its local offices. Dividend payments are restricted to 85% of profits, after tax.

4. Loan Receivable with Major Sales Agents

The Company had loans receivable amounting to $875,622 and $58,949 as of June 30, 2008 and December 31, 2007, respectively. Such loans were provided to the Company's major sales agents. The loans are unsecured, and bear no interest. These loans have no fixed payment schedule and are payable on demand.

Approximately 64% of the Company's magazine and advertising sales are generated from its four major sale agents in the PRC. The representatives of these sale agents solicited advertising from general public in their respective designated geographic territories. The Company's magazines are believed to be well established and recognized by the general public. In this regard, the management believes no severe impact on the company sales would result if any of the sale agents are lost.

5. Prepaid Expenses

Prepaid expenses consist primarily of prepayments made to the unrelated company in advance for future financial and legal consultation services. As of June 30, 2008 and December 31, 2007, prepaid balance under these arrangements totaled $490,881 and $289,381, respectively.

6. Investment Deposit – purchase of a target company

On December 13, 2007, Shenzhen New Media signed an agreement with Shanghai Longcom Telecom Co. Ltd. ("Longcom") for an acquisition of 100% operation rights in Shanghai Longcom. Shenzhen New Media paid RMB 40,000,000 (approximately $5,476,001) as a purchase deposit. Longcom is engaged in online direct marketing, distribution, B2C (business to consumer) e-commerce, IT retail and 3 C (computer, communication and consumer products) retail sales model by cooperating with mainstream products OEM / ODM manufacturers.

13


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. Related Party Transactions with an Affiliate

Sale and Marketing Publishing House (“CMO”), an affiliate 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. Transactions with CMO are listed as follows:

 

 

June 30,

 

December 30,

 

 

2008

 

2007

 

 

 

 

 

Net balance: amount due from CMO, zero interest

$

2,272,181

$

1,842,795

Operation and Management Right Agreement

On October 23, 2003, Shenzhen Media entered into a 10-year agreement 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, Shenzhen Media is entitled to collect advertising revenues from customers already existing at the time of the contract, in addition to any new clients that Shenzhen Media can solicit and develop.  Shenzhen Media shall bear all the operating costs and receive all the revenues from the contracted businesses.

Shenzhen Caina Corporate Image Consulting and Design Company is a company owned and controlled by Mr. Zhu Yuhong, brother of Mr. Zhu Yu Tong. Shenzhen Caina loaned $190,634 and $104,044 as of June 30, 2008 and December 31, 2007 to Shenzhen Caina Corporate Image Consulting and Design Company to develop businesses for Shenzhen Caina.

Related party balance as of June 30, 2008 and December 31, 2007 are as follows:

 

June 30, 2008

December 31, 2007

Loan receivable – CMO

$  2,272,181

$  1,738,751

Loan receivable - Shenzhen Caina Corporate Image Consulting and Design Company

190,634

104,044

Total of related party receivables

$  2,462,815

$  1,842,795

The above loans are unsecured, and bear no interest. These loans have no fixed payment schedule and are payable on demand.

8.  Income Taxes Expense

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 periods ended June 30, 2008 and 2007 are 34%.

British Virgin Islands

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.

14


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.  Income Taxes Expense (continued)

PRC

The Company is currently subject to income taxes according to applicable tax laws in the PRC. The tax rates are 15% for NMA, 15% for Shenzhen New Media and Shenzhen Media and 33% for CMO. The provision for income taxes for the three months ended June 30, 2008 and 2007 was $80,504 and $26,999, respectively.

Pursuant to the laws and regulations in the PRC, NMA, as a wholly foreign owned enterprise ("WFOE") in the PRC, is entitled to an exemption from the PRC enterprise income tax for two years commencing from its first profitable year in 2006. NMA accounts for most of the revenue during the periods presented. Other subsidiaries income tax rate range from 0% to 33%.

a) The provision for income taxes consists of the following:

Six months ended June 30,

2008

2007

PRC:

-

Current Tax

$

275,946

$

2,531

- Deferral tax provision

-

-

Total

$

275,946

$

2,531

9. Lease Commitments

The Company leases five office spaces located at Room 101-114, Jinglian Garden, Jingtian Road, Futian District, Shenzhen, 518000, PRC, Room 903-905, Kun Tai International Mansion, Chao Wai Street, Beijing, 100020, PRC, 4A602 Houxiandai City, No.16 Baiziwan Rd., Beijing, 100200, PRC, 7th Floor, Building 1, Qinghua Post-graduation school of Qinghua University, Guanghua Road, Beijing,100020, PRC. and Room 556 Shenchang Building, No.51 Zhichun Rd., Haidian District, Beijing, PRC.

These leases require monthly payments as of following: a monthly payment of $16,136 from November 2007 to November 2009, a monthly payment of $4,756 from September 2007 to August 2009, a monthly payment of $3,817 from November 2007 to October 2008, a monthly payment of $10,889 from May 2007 to June 2009 and a monthly payment of $330 from November 2007 to November 2008, respectively.

The future lease commitment for the office lease is $430,643 and $207,472 for years 2008 and 2009, respectively.

15


CHINA MARKETING MEDIA HOLDINGS, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Concentrations and Risk

As discussed in Note 7, the Company's major operations are conducted through an agreement with CMO, a company owned by the PRC government. All 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.

11. 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.

Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Company, is remote.

12. Recent Accounting Pronouncements

In March 2008, The Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 161 on its consolidated financial position, results of operations and cash flows.

In December, 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), "Business Combinations" (hereinafter "SFAS No. 141 (revised 2007)"). This statement establishes principles and requirements for how an acquirer a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The scope of SFAS No. 141 (revised 2007) is broader than the scope of SFAS No. 141, which it replaces. The effective date of SFAS No. 141 (revised 2007) is for all acquisitions in which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this statement will have no immediate material effect on the Company's consolidated financial condition or results of operations.

In December, 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" (hereinafter "SFAS No. 160"). This statement establishes accounting and reporting standards that require a) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position with equity, but separate from the parent's equity, b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, c) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, d) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value and e) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The effective date of this standard is for fiscal years and interim periods beginning on or after December 15, 2008. The adoption of this statement will have no immediate material effect on the Company's consolidated financial condition or results of operations.

16


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; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-KSB for the year ended December 31, 2007 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 as otherwise indicated by the context, references to "we," "us," "our," or "the Company" are to China Marketing Media Holdings, Inc. and its subsidiaries.  References to "Media Challenge" are references to Media Challenge Holdings Limited, a British Virgin Islands company.  Unless the context otherwise requires, all references to (i) "Shenzhen New Media" are to Shenzhen New Media Consulting Co., Ltd.; (ii) "Shenzhen Media" are to Shenzhen Media Investment Co., Ltd.; (iii) "BVI" are to the British Virgin Islands; (iv) "PRC" and "China" are to the People’s Republic of China; (v) "U.S. dollar," "$" and "US$" are to United States dollars; (vi) "RMB" are to Renminbi, the legal currency of China; (vii) "Securities Act" are to the United States Securities Act of 1933, as amended; and (viii) "Exchange Act" are to the United States Securities Exchange Act of 1934, as amended.

Overview Our Business

We are a holding company and we have no operations other than administrative matters and the ownership of our direct and indirect operating subsidiaries.  Through our indirect Chinese subsidiaries, we are engaged in the business of selling magazines and advertising space in our magazines 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 (Xiao Shou Yu Shi Chang) magazine in China.  We publish three issues of China Marketing per month, including a sales edition, case edition and channel edition.  

17


     
China Marketing -Sales edition China Marketing -Case edition China Marketing -Channel edition
     

Our Current Organizational Structure

The following organizational chart illustrates our current organizational structure and our respective ownership interest in our various subsidiaries.

 

18


19


 

---------------------------------------------------------

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

(2) Shenzhen Keungxi Technology Company Ltd., or SKTC, was incorporated in China in October 2005.  Its business scope includes, among others, sales and development of computer software, computer and communication systems.  It also provides information system consulting services.  Shenzhen Media holds 48% of the equity of SKTC and three individual shareholders, Wengao Luo, Xi Chen and Bin Li own the remaining 21.5%, 21.5% and 9% of SKTC, respectively.

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

(4) Beijing Orient Converge Human Resources Management Center Co. Ltd., or Beijing Orient, was incorporated in China in November 2007.  It is engaged in the business of vocational training, employment recommendation and services.  It also conducts sales and marketing professional training.  Shenzhen Media Investment Co., Ltd. owns 52% of Beijing Orient while Shanghai Faith Biological Cell Technology Co., Ltd. owns the other 48%.

Second Quarter Financial Performance Highlights

The following are some financial highlights for the second quarter ended June 30, 2008:

Revenues: Our revenues were approximately $3.14 million for the second quarter ended June 30, 2008, an increase of 13.46% from the same quarter of last year.

Gross Margin: Gross margin was 70.97% for the second quarter ended June 30, 2008, as compared to 75.13% for the same period in 2007.

Operating Profit: Operating profit was approximately $0.9 million for the second quarter ended June 30, 2008, a decline from approximately $1.14 million of the same period last year.

Net Income: Net income was approximately $0.73 million for the second quarter ended June 30, 2008, a decrease of 34.18% from the same period of last year.

Fully diluted earnings per share was $0.05 for the second quarter of 2008.

Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

During the three month period ended June 30, 2008, we generated revenues through sales of our magazines, sales of advertising space in our magazines and providing sales and marketing consulting services.  The following table summarizes the results of our operations during the three month periods ended June 30, 2008 and 2007, and provides information regarding the dollar and percentage increase or (decrease) from the three month period ended June 30, 2007 to the three month period ended June 30, 2008.

 

Three Months Ended June 30,

Item

2008

2007

Increase
(Decrease)

% Increase
(% Decrease)

Revenue

$3,135,283

$2,763,238

$372,045

13.46%

Cost of Sales

$910,099

$687,129

$222,970

32.45%

Gross Profit

$2,225,184

$2,076,109

$149,075

7.18%

Operating Expenses

$1,324,318

$939,514

$384,804

40.96%

Other Income (expense)

($14,612)

($20,757)

$6,145

(29.6%)

Provision for Taxes

$195,442

$1,472

$193,970

13177%

Net income

$732,400

$1,114,366

($381,966)

(34.28%)

20


 

Revenues

The increase in revenues was mainly attributable to our newly acquired subsidiary, Shenzhen Caina, which contributed revenues of $1,095,654 from advertising consulting services.  For the same period in 2007, Shenzhen Caina contributed of $529,901. The increase in revenues from Shenzhen Caina resulted primarily from the expansion of advertising consulting services that it provided during the three months ended June 30, 2008.  During the second quarter of 2008, in addition to three regular issues of our magazines that we publish each month, we also published seven special issues for certain business events.  We sold 11,600 copies of these special issues during the three months ended June 30, 2008.

The following table shows the different components comprising our total revenues during the three month periods ended June 30, 2008 and 2007.

Revenue
Category

Three Months Ended
June 30, 2008

Three Months Ended
June 30, 2007

Increase
(Decrease)

% Increase
(% Decrease)

 

 

 

 

 

Magazine Sales

$494,198

$330,985

$163,213

49.31%

 

       

Advertising Space Sales

$1,545,430

$1,902,352

($356,922)

(18.76%)

 

       

Marketing Consulting Service

$1,095,655

$529,901

$565,754

106.77%

 

       

Total

$3,135,283

$2,763,238

$372,045

13.46%

Cost of Sales

Our cost of sales during the three-month period ended June 30, 2008 and during the same period in 2007 was $910,099 and $687,129, respectively, which accounts for 29.03% and 24.87%, respectively, as a percentage of total revenues during the applicable periods.  Cost of sales as a percentage of revenues increased by about 4.16% during the three-month ended of 2008 as compared with the same period in 2007, as a result of a change in product mix.  Certain lower margin products such as special issue magazine sales accounted for a higher percentage of our revenues during this period as compared to the similar period in 2007.  The printing cost we paid for the special issues is 20%-30% higher than the regular issues.   

Expenses

Our expenses consist of payroll and other general and administrative expenses.  Payroll expense was $808,616 during the three-month period ended June 30, 2008 compared to $391,458 during the same period of 2007.  The increase of payroll expense is due to a 30% increase of employee salaries of our newly acquired subsidiary Shenzhen Caina as a result of the expansion of its advertising consulting services business.

Our other general and administrative expenses were $515,702 (16.45% of total sales) and $548,056 (19.83% of total sales) in the three months ended of June 30, 2008 and the same period of 2007, respectively.  We paid less other general and administrative fees in the three months ended June 30, 2008 mainly because during the second quarter of 2007, in addition to the payment of our regular professional fees, we paid RMB270,000 (approximately US$38,500) auditing fees in connection with the acquisition of Shenzhen Caina, which was completed in March 2007.  

Income taxes

United States

21


 

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

British Virgin Islands

Medial Challenge was incorporated in the BVI, and under the current laws of the BVI, is not subject to income taxes.

PRC

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

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

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

The Company is currently subject to income taxes according to applicable tax laws in the PRC.  The tax rates are 15% for NMA, 15% for Shenzhen New Media and Shenzhen Media and 33% for CMO.

We incurred income taxes of $195,442 and $1,472 during the three-month periods ended June 30, 2008 and 2007, respectively or an increase of 13,177.31%.  In year 2008, our subsidiaries including NMA, Shenzhen Caina, and  Shenzhen New Media and Shenzhen Media are no longer eligible for the tax exemption as they were in 2007.  Each of these subsidiaries had paid income tax according to applicable tax laws in the PRC in 2008.  Therefore, the income tax expense increased significantly for the second quarter of 2008 compared to the same period of 2007.

Net income (profit after taxes)

We earned net income of $732,400 and $1,114,366 during the three-month periods ended June 30, 2008 and 2007, respectively, which represented a decrease of 34.28%.  The decrease in our net income in the three-month ended of 2008 is primarily attributable to the increase of payroll expense.

22


Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

During the six month period ended June 30, 2008, we generated revenues through sales of our magazines, sales of advertising space in our magazines and proving sales and marketing consulting services.  The following table summarizes the results of our operations during the six month periods ended June 30, 2008 and 2007, and provides information regarding the dollar and percentage increase or (decrease) from the six month period ended June 30, 2007 to the six month period ended June 30, 2008.

 

Six Months Ended June 30,

Item

2008

2007

Increase
(Decrease)

% Increase
(% Decrease)

Revenue

$5,745,067

$4,771,418

$973,649

20.41%

Cost of Sales

$1,638,613

$1,270,676

$367,937

28.96%

Gross Profit

$4,106,454

$3,500,743

$605,712

17.30%

Operating Expenses

$2,423,500

$1,513,204

$910,296

60.16%

Other Income (expense)

$20,610

($135)

$20,745

15,366.67%

Provision for Taxes

$275,946

$2,531

$273,415

10,802.65%

Net income

$1,509,500

$ 1,984,872

($475,372)

(23.95%)

Our revenues during the six-month period ended June 30, 2008 were $5,745,067 which is $973,649, or 20.41%, more than the same period in 2007, when we had revenues of $4,771,418.  The increase in revenues was mainly attributable to our newly acquired subsidiary, Shenzhen Caina, which contributed revenues of $2,102,866 from advertising consulting services.  For the same period in 2007, Shenzhen Caina contributed of $574,113. The increase in revenues from Shenzhen Caina primarily resulted from an expansion of advertising consulting services it provided during the six months ended June 30, 2008.  In addition, during the six-month period ended June 30, 2008, we sold more magazines by publishing various special issues in addition to three regular issues of our magazines that we publish each month.  We sold about 34,800 copies of these special issues during the six months ended June 30, 2008.

The following table shows the different components comprising our total revenues during the six month periods ended June 30, 2008 and 2007.

Revenue
Category

Six Months Ended
June 30, 2008

Six Months Ended
June 30, 2007

Increase
(Decrease)

% Increase
(% Decrease)

 

 

 

 

 

Magazine Sales

$790,088

$731,668

$58,420

7.98%

 

       

Advertising Space Sales

$2,852,113

$3,465,637

($613,524)

(17.70 %)

 

       

Marketing Consulting Service

$2,102,866

$574,113

$1,528,753

266.28%

 

       

Total

$5,745,067

$4,771,418

$973,649

20.41%

Cost of Sales

Our cost of sales during the six-month period ended June 30, 2008 and during the same period in 2007 was $1,638,613 and $1,270,676, respectively, which accounts for 28.52% and 26.63%, respectively, as a percentage of total revenues during the applicable periods.  Cost of sales as a percentage of revenues increased by about 1.89% during the six-month period of 2008 as compared with the same period in 2007, which is mainly attributable to the change of product mix during the period.  Certain lower margin products such as special issue magazine sales accounted for a higher percentage of our revenues during this period as compared to the similar period in 2007.  The printing cost we paid for the special issues is 20%-30% higher than the regular issues.

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Expenses

Our expenses consist of payroll and other general and administrative expenses.  Payroll expense was $1,150,391 during the six-month period ended June 30, 2008 compared to $560,211 during the same period of 2007.  The increase of payroll expense is due to a 30% increase of employee salaries of our newly acquired subsidiary Shenzhen Caina as a result of the expansion of its advertising consulting services business.

Our other general and administrative expenses were $1,273,109 (22.16% of total sales) and $952,933 (19.97% of total sales) in the six month ended of June 30, 2008 and the same period of 2007, respectively.  The increase of other general and administrative expenses was partially due to rental expenses paid in the first six months of 2008 for Beijing Orient, our majority owned subsidiary that was incorporated in November 2007.  In addition, Shenzhen Caina incurred more traveling expense as the company made significant effort to develop new customers of their advertising consulting service during this period.  

Income taxes

We incurred income taxes of $275,946 and $2,531 during the six-month periods ended June 30, 2008 and 2007, respectively or an increase of 10,802.65%. In year 2008, our subsidiaries including NMA, Shenzhen Caina, and  Shenzhen New Media and Shenzhen Media are no longer eligible for the tax exemption as they were in 2007.  Each of these subsidiaries had paid income tax according to applicable tax laws in the PRC in 2008.  Therefore, the income tax expense increased significantly during the six months ended June 30, 2008 compared to the same period of 2007.

Net income (profit after taxes)

We earned net income of $1,509,500 and $1,984,872 during the six-month periods ended June 30, 2008 and 2007, respectively, which represented a decrease of 23.95%.  The decrease in our net income is primarily attributable to the increase of payroll expense.

Liquidity and Capital Resources

As of June 30, 2008, we had cash and cash equivalents of approximately $2.25 million.  We had no bank loans during the period.  

We believe that our current cash on hand and continuing revenue from operations is sufficient to maintain operations at current levels for at least the next twelve months.  However, in order to expand operations, management believes that it will be necessary for us to raise additional capital either through the sale of equity securities or through a long-term debt financing.  Full implementation of the current expansion plans will include an acquisition of other magazines and/or advertising businesses that requires approximately $10 million additional capital.  We can provide no assurances that we will be able to obtain additional capital on terms favorable to the Company, if at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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 foreseeable 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.  

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Currency Fluctuations

Our operating subsidiaries are located in China.  All expenses of the subsidiary and revenue received from customers are incurred in China denominated in RMB as the functional currency.  Based on Chinese government regulation, all foreign currencies under the category of current accounts are allowed to be freely exchanged with hard currencies.  During the past years of operation through July of 2005, there were no significant changes in exchange rates.  On July 21, 2005, the Chinese government changed its foreign currency exchange policy from a fixed RMB/USD exchange rate into a flexible rate under the control of the Chinese government.  From August 2005 through June 2008, the value of RMB against US dollars appreciated by 15.14 %, from RMB8.1/$1 to RMB  6.8718/$1.  

Critical Accounting Policies  

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents. For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. Deposits held in financial institutions in China are not insured by any government entity or agency.

Trade Accounts Receivable. Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount becomes questionable.

Revenue Recognition We recognize magazine sales revenue in accordance with the provisions of SFAS 48, "Criteria for Recognizing Revenue When Right of Return Exists," which states that if an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at time of sale only if all of the following conditions are met:

(a)     The seller's price to the buyer is substantially fixed or determinable at the date of sale.

(b)     The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product.

(c)     The buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.

(d)     The buyer acquiring the product for resale has economic substance apart from that provided by the seller.

(e)     The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.

(f)     The amount of future returns can be reasonably estimated. Estimated returns are based on historical data but require significant judgment on the part of management.

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.

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

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

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

Recent Changes in Accounting Standards

In March 2008, The Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 161 on its consolidated financial position, results of operations and cash flows.

In December, 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), "Business Combinations" (hereinafter "SFAS No. 141 (revised 2007)"). This statement establishes principles and requirements for how an acquirer a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The scope of SFAS No. 141 (revised 2007) is broader than the scope of SFAS No. 141, which it replaces. The effective date of SFAS No. 141 (revised 2007) is for all acquisitions in which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this statement will have no immediate material effect on the Company's consolidated financial condition or results of operations.

In December, 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" (hereinafter "SFAS No. 160"). This statement establishes accounting and reporting standards that require a) the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position with equity, but separate from the parent's equity, b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, c) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, d) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value and e) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The effective date of this standard is for fiscal years and interim periods beginning on or after December 15, 2008. The adoption of this statement will have no immediate material effect on the Company's consolidated financial condition or results of operations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

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ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our Chief Executive Officer and Interim Chief Financial Officer, Mr. Yingsheng Li, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2008.  Based on that evaluation, Mr. Li concluded that because of the significant deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2008.

As we disclosed in our Annual Report on Form 10-KSB filed with the SEC on April 18, 2008, during our assessment of the effectiveness of internal control over financial reporting as of December 31, 2007, management identified the significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) the absence of an Audit Committee.

Although our former CFO, Yifang Fu has sufficient knowledge and experience in U.S. GAAP principles, our current accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies.  Management has determined that they require additional training and assistance in U.S. GAAP matters.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of an Audit Committee of the board of directors of the Company also contributes to insufficient oversight of our accounting and audit functions.   

In order to correct the foregoing significant deficiencies, we have taken or are taking the following remediation measures:

We are in the process of arranging necessary training for our accounting department staff.

We are in the process of engaging external professional accounting or consultancy firms to assist us in the preparation of the US GAAP accounts.

We have committed to the establishment of effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources before the end of our reporting period.   However, we will increase our search for qualified candidates with assistance from recruiters and through referrals.

In addition, we have allocated significant financial and human resources to strengthen the internal control structure.  As part of our efforts to comply with Section 404 of the Sarbanes-Oxley Act for fiscal year 2008, we are actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting.

We have also launched a search for suitable candidates to serve as our independent directors and to serve on an audit committee and other standing committees in the near future.  We expect to establish these committees within the next 12 months.

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We believe that the foregoing steps will remediate the significant deficiency identified above, and 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.

During the fiscal quarter ended June 30, 2008, other than as described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the periods covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

28


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.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.  

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three-month period ended June 30, 2008, we made no unregistered sales of our equity securities.  

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

EXHIBITS.

31*

Certification of Principal Executive Officer and Interim Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32*

Certification of Principal Executive Officer and Interim Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


DATED:  September 29, 2008

CHINA MARKETING MEDIA HOLDINGS, INC.

By: /s/ Yingsheng Li
-------------------------------------------------------------------------------

Yingsheng Li
CEO, President and Interim CFO
(Principal Executive Officer and Principal Financial Officer)

 

 

30


EXHIBIT INDEX

Exhibit
Number
Description

31*

Certification of Principal Executive Officer and Interim Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32*

Certification of Principal Executive Officer and Interim Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

 

 

 

 

 

31