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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



[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

Or


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


Commission File Number: 000-50320


CREDIT ONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)


Florida                                                                   59-3641205

(State or other jurisdiction of incorporation or organization         (I.R.S. Employer Identification No.)


80 WALL STREET, SUITE 818, NEW YORK, NEW YORK             10005

(Address of principal executive offices)                  (Zip Code)


(212) 809-1200

(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes [X]     No [   ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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, or a non- accelerated filer or a smaller reporting company. See definition of "large accelerated filer, and accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer        [   ]      Accelerated filer      [   ]      Non Accelerated filer   [   ]     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]



Applicable Only to Corporate Issuers


Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  302,155,623 shares of common stock, par value $0.001, as of May 11, 2012.









1





TABLE OF CONTENTS




 

 

 

 

 

 

 

 

 

PAGE

 

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1

Financial Statements

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Item 2

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

12

 

 

 

 

 

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

 

14

 

 

 

 

 

 

 

 

 

 

Item 4T

Controls and Procedures

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1

Legal Proceedings

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

Item 1A

Risk Factors

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

15

 

 

 

 

 

 

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

Item 4

Mine Safety Disclosures

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

Item 5

Other Information

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

Item 6

Exhibits

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

15
















Item 1.    Financial Statements











2




CREDIT ONE FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



 

 

 

 

March 31,

December 31,

 

 

 

 

2012

 

2011

ASSETS

 

(Unaudited)

 

(Audited)

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

362,032

 

$

250,167

 

Investment in gold bullion

 

 

2,472,995

 

 

2,312,683

 

Prepaid expenses and other current assets

 

 

173,870

 

 

173,772

 

 

Total Current Assets

 

 

3,008,897

 

 

2,736,622

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

 

 

Furniture and fixture, net of accumulated depreciation of $2,822 and $2,331, respectively

 

 

3,734

 

 

4,225

 

 

Total Property, Plant and Equipment

 

 

3,734

 

 

4,225

 

 

 

 

 

 

 

 

 

Trademark, net

 

 

25,488

 

 

21,824

Other receivable

 

 

1,486

 

 

-

Note receivable

 

 

4,580,859

 

 

4,487,907

Intangible assets, net of accumulated amortization of $485,544 and $360,212, respectively

 

 

4,212,638

 

 

4,335,309

 

 

 

 

 

 

 

Total Assets

 

$

11,833,102

 

$

11,585,887

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

97,793

 

$

49,421

 

Advance from officer

 

 

275,379

 

 

275,223

 

Deferred revenue

 

 

86,935

 

 

-

 

 

Total Current Liabilities

 

 

460,107

 

 

324,644

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value, 500,000,000 shares authorized, 302,155,623 shares issued

 

 

 

 

 

 

 

 

and outstanding at March 31, 2012 and  December 31, 2011, respectively

 

 

302,156

 

 

302,156

 

Additional paid-in capital

 

 

11,893,303

 

 

11,893,303

 

Accumulated deficit

 

 

(805,267)

 

 

(910,722)

 

Currency translation adjustment

 

 

(17,197)

 

 

(23,494)

 

 

Total Stockholders' Equity

 

 

11,372,995

 

 

11,261,243

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

11,833,102

 

$

11,585,887







See accompanying notes to the consolidated financial statements









3







CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)





 

 

 

 

 

 

Three-Months Ended March 31,

 

 

 

 

 

 

2012

 

2011

Revenue

 

 

 

Advertising Revenue

$

56,055

 

$

23,886

TV Program

 

-

 

 

-

 

 

 

 

 

 

56,055

 

23,886

Operating Expenses

 

 

 

 

 

 

 

Selling, general and administrative

200,147

 

125,851

 

 

Total operating expenses

200,147

 

125,851

 

 

 

 

 

 

 

 

 

Loss From Operations

(144,092)

 

(101,965)

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

Interest income

90,460

 

23,178

 

Unrealized gain on investment

159,087

 

-

 

 

Total other income (expense)

249,547

 

23,178

 

 

 

 

 

 

 

 

 

Net Income (Loss) Before Income Taxes

105,455

 

(78,787)

 

 

 

 

 

 

 

 

 

Income Tax Provision

-

 

-

 

 

 

 

Net Income (Loss)

$         105,455    

 

$        (78,787)

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Foreign currency translation adjustment

 

6,297

 

(2,434)

 

6,297

 

(2,434)

Total Comprehensive Income (Loss)

$          111,752

 

$        (81,221)

Income (Loss) Per Share:

 

 

 

 

Basic and Diluted

$

0.00

 

$

(0.04)

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares:

302,155,623

 

2,155,623

 

 

 

 






See accompanying notes to the consolidated financial statements










4





CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)




 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31, 2012

 

March 31, 2011

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net Income (loss)

 

$

105,455

 

$

(78,787)

 

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

 

Acretion of interest on note receivable

 

 

(90,458)

 

 

-

 

 

Amortization of intangible asset

 

 

125,195

 

 

-

 

 

Depreciation and amortization

 

 

491

 

 

11,222

 

      Unrealized gain on investment

 

 

(159,087)

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Other receivable

 

 

(1,486)

 

 

-

 

 

Prepaid expenses and other current assets

 

 

(98)

 

 

-

 

 

Account payable and accrued expenses

 

 

48,372

 

 

53,788

 

 

Deferred revenue

 

 

86,935

 

 

(17,896)

 

 

 

Cash provided (used ) by operating activities

 

 

115,319

 

 

(31,673)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Investment in note receivable

 

 

-

 

 

(780,000)

 

Payments received on notes receivable

 

 

-

 

 

790,754

 

Change in amount due to director for gold investment

 

 

156

 

 

-

 

Investment in trademark

 

 

(3,664)

 

 

-

 

 

Cash provided (used) by investing activities

 

 

(3,508)

 

 

10,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Exchange Rate on Cash and Cash Equivalents

 

 

54

 

 

(1,374)

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

111,865

 

 

(22,293)

 

 

 

 

 

 

 

 

 

 

Cash and  Cash Equivalents, Beginning

 

 

250,167

 

 

241,125

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, Ending

 

$

362,032

 

$

218,832

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

-

 

$

-

 

 

Cash Paid for Income Taxes

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 






See accompanying notes to the consolidated financial statements









5





CREDIT ONE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2012



Note 1 –Nature of Business


Credit One Financial, Inc. (the “Company”) was incorporated in the State of Florida on September 24, 1999.  The Company was engaged in market research regarding the cost and availability of non-performing credit card debt portfolios.  It was also engaged in research regarding the current market price for re-performing portfolios as well as the market prices offered for portfolios deemed non-collectable at the time of sale.


In February 2008, the Company entered into a Joint Venture Agreement with Global Select Limited in Hong Kong. Under the agreement, a joint venture company, Moderation Limited, was set up in Hong Kong, whereby, on January 12, 2009, the Company contributed $16 million Hong Kong dollars, approximately $2.06 million, in exchange for 51.6% of the equity interest in Moderation, and Global Select and its partner together contributed $15 million Hong Kong dollars, approximately $1.94 million, for 48.4% of the equity interest in Moderation. The purpose of the joint venture is to engage in a business of natural resources products, primarily graphite at this time, in China.


In January 2009, Moderation Limited established a wholly owned subsidiary “Liaoning Sinorth Resources Co., Ltd.” in Yingkou, Liaoning Province, China. The main business of Liaoning Sinorth Resources Co., Ltd. is processing and distribution of mineral products, primarily graphite, in China.


In August 2010, the Company established a wholly owned subsidiary “E&M International Limited (“E&M”)” in the Cayman Islands.  The purpose of E&M is to conduct its operations in the business of entertainment and media. On September 16, 2010, E&M changed its name to CEM International Ltd. (“CEM”).


On November 18, 2010, the Company entered into a share purchase agreement with China Minerals International Limited (“China Minerals”).  Pursuant to the share purchase agreement, the Company agreed to sell and China Minerals agreed to acquire the Company’s 51.6% equity interest in Moderation Limited (“Moderation”), a subsidiary of the Company located in Hong Kong, for $16 million Hong Kong dollars, approximately $2.06 million in cash. The transaction was closed on November 30, 2010.


Note 2 - Summary of Significant Accounting Policies


Financial Reporting


The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Revenues and expenses are reported on the accrual basis, which means that income is recognized as it is earned and expenses are recognized as they are incurred.


Management is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.


Basis of presentation


The accompanying interim consolidated financial statements for the three months ended March 31, 2012 and 2011 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and 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 U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The results of operations realized during an interim period are not necessarily indicative of results to be expected for a full year.  These consolidated financial statements should be read in conjunction with the information filed as part of the Company’s 2011 Annual Report on Form 10-K, which was filed on March 30, 2012.


Consolidation Scope and Principles of Consolidation




6




The consolidated financial statements presented the financial position and the results of operations of Credit One Financial, Inc. and its 100% owned subsidiary, CEM International Ltd.

All significant intercompany transactions and balances have been eliminated in consolidation.


Provision for Income Taxes


Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon, and for the expected future tax benefits to be derived from net operating losses and tax credit carry forwards. The Company has approximately $437,692 in U.S. net operating loss carry-forwards and $367,574 in Macau net operating loss carry-forwards as of March 31, 2012, and a valuation allowance equal to the tax benefit of the accumulated net operating losses has been established since it is uncertain that future taxable income from operations in the United States of America will be realized during the applicable carry-forward periods.  The net operating loss carry-forwards may be limited under the change of control provisions of the Internal Revenue Code, Section 382.


The Company applies the provisions of income tax accounting standards for uncertainty in income taxes, which prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  When applicable, the Company will include interest and penalties related to uncertain tax positions in income tax expense.


Use of Estimates in the Preparation of the Financial Statements


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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and those differences could be material.

Fair Value Measurements


The Company follows accounting guidance relating to fair value measurements. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:


Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.


Level 2 – inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.


Level 3 – unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.


The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the unobservable inputs.


The fair value of the Company’s financial instruments, which consist principally of cash and cash equivalents and investments in gold bullion, are based on level 1 input, and equal carrying amounts.


Cash and Equivalents


For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.


As of March 31, 2012, the Company maintained $346,779 in foreign bank accounts not subject to FDIC coverage.  The remaining balance of $15,253 at March 31, 2012 was maintained in a domestic bank account and fully insured by FDIC.


Investment in Gold Bullion


The Company invests in gold bullion. As a precious metal, the investment in gold bullion is stated its monetary fair value as determined by the Chinese Gold & Silver Exchange Society. Any adjustments to the fair value of the



7




investments are recorded in unrealized gain or loss on the accompanying consolidated statements of operations and comprehensive income (loss).

Foreign Currency


The Company reports it financial position and results of operations in U.S. dollars.  For its subsidiaries that have functional currencies that are foreign currencies, the elements of the financial statements are translated by using a current exchange rate.  For assets and liabilities, the exchange rate at the balance sheet date is used and for revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized is used.  Transaction adjustments result from the process of translating the subsidiaries’ financial statements into US dollars and are not included in determining net income, but are reported in other comprehensive income.  There was currency translation adjustment of $6,297 and $(2,434) for the three months ended March 31, 2012 and 2011, respectively.


Foreign currency transactions are transactions denominated in a currency other than the entity's functional currency.  At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity are adjusted to reflect the current exchange rate, with any resulting differences reported in the current period statement of operations. For the three months ended March 31, 2012 and 2011, the Company recognized no foreign currency exchange losses in the consolidated statements of operations.


Revenue Recognition


The Company recognizes revenue in accordance with Securities and Exchange Commission revenue recognition accounting standards.  Sales revenues were recognized when the products were shipped to the customers, net of discounts and collectibility is reasonably assured.  No provisions were made for returns because, historically in China and in the industry, there have been very few sales returns and adjustments that would have impacted the Company’s ultimate collection of revenues.


As an advertising agent, CEM is in the service business dedicated to creating, planning and handling advertising for its clients.  Advertising revenue is recognized upon the delivery of the contracted advertising services and when no significant Company performance obligation remains. Service revenue is recognized as the contracted services are rendered.


Exclusive Advertising Rights


Exclusive advertising rights represent costs for exclusive rights to advertise on Macau Lotus Satellite TV Media Limited’s (“Lotus”) network. The costs were determined as the difference between the face value of non-interest bearing notes receivable from Lotus and the present value of the notes receivable at the time of issuance. This intangible asset is being amortized over the remaining life of the rights, which expire August 31, 2020.


Trademark


Legal costs associated with serving and protecting trademark are being capitalized and will be amortized over its estimated useful life.


Imputed Interest


In 2010 and 2011, the Company issued non-interest bearing notes receivable which mature in 2020.  The notes receivable were recorded at issuance at its present value using an effective interest rate of 8%, which was the Company’s stated rate on another note receivable.  At the balance sheet date, the notes are revalued with the change in present value recorded as interest income in the Consolidated Statements of Operations.


Impairment of Long Lived Assets


Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison for the carrying amount of an asset to future cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets which considers the discounted future net cash flows.


Property, Plant and Equipment




8




Acquisitions of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that do not improve or extend the lives of furniture and equipment are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of each class of depreciable assets, which is 3-20 years.


Earnings Per Share


Earnings Per Share is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year.  Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options and warrants.  The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company's common stock at the average market price during the period.  The Company has no stock options, warrants or other potentially dilutive instruments outstanding at March 31, 2012 and 2011, respectively.


Recently Issued Accounting Standards


In June 2011, the FASB issued ASU 2011-5 Statement of Comprehensive Income. The new guidance requires companies to present net income and comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted ASU 2011-5 on a retrospective basis, effective January 1, 2012, presenting comprehensive income in one continuous statement of comprehensive income. As the ASU addressed only disclosure requirements, adoption of ASU 2011-5 did not have a material impact on the Company's financial position, results of operations, or cash flows.


Reclassifications


Certain amounts reflected in the accompanying financial statements for the three month ended March 31, 2011 have been reclassified from previously reported amounts to correspond to the current year presentation.


Note 3 - Note Receivable and Exclusive Advertising Rights Asset


CEM International Limited entered into an exclusive agreement with Macau Lotus Satellite TV Media Limited (Lotus) on August 26, 2010 to provide advertising services for a ten year period commencing on September 1, 2010.  In consideration for the exclusive advertising rights granted by Lotus, CEM will provide advertising services and issue, over the course of the agreement, US$10 million in loans to Lotus. The amount and duration of each loan shall be negotiated by the parties, depending on Lotus’s financial needs.


On December 17, 2010, CEM issued Lotus TV a HK$15,000,000 (US$1,928,839) loan which is backed by a non-interest bearing promissory note, due on August 31, 2020.  The note receivable was discounted to its estimated fair value of HK$7,105,808 (US$913,872) using an effective interest rate of 8%.  This difference between the face value and the present value of HK$7,894,192 (US$1,014,967) was allocated to an intangible asset captioned Exclusive Advertising Rights.    

On January 31, 2011, CEM issued Lotus TV an additional HK$6,084,000 (US$780,000) loan which is backed by a non-interest bearing promissory note, due on August 31, 2020.  The note receivable was discounted to its estimated fair value of HK$2,833,577 (US$363,279) using an effective interest rate of 8%.  This difference between the face value and the present value of HK$3,250,423 (US$416,721) was allocated to an intangible asset captioned Exclusive Advertising Rights.


On June 12, 2011, CEM issued Lotus TV a series of additional loans totaling HK$43,700,000 (US$5,623,255), backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$20,831,819 (US$ 2,680,610) using an effective interest rate of 8%. This difference between the face value and the present value of HK$22,868,181 (US$2,942,645) was allocated to the intangible asset captioned Exclusive Advertising Rights.


On August 9, 2011, CEM issued Lotus TV an additional loan HK$4,800,000 (US$614,731), backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$2,334,232 (US$ 299,814) using an effective interest rate of 8%. This difference between the face value and the present value of HK$2,465,768 (US$314,917) was allocated to the intangible asset captioned Exclusive Advertising Rights.




9




An intangible asset captioned Exclusive Advertising Rights has been recorded in the accompanying consolidated balance sheets representing the difference between the face amount of the notes receivable and the respective present values at the time of issuance.  This difference was deemed an asset because the interest-free note was a condition of the exclusive agreement.


A Summary of the notes receivable and intangible asset are as follows:


NOTE RECEIVABLE


 

 

Discounted

 

 

 

Amount Paid

Note Balance

Note Balance

Note Balance

Date of Note

Lotus TV

At Inception

12/31/2011

3/31/2012

12/17/2010

$            1,928,839

$              913,872

$               967,444

$              986,944

1/31/2011

780,000

363,279

392,395

400,304

6/12/2011

5,623,255

2,680,610

2,818,486

2,875,295

8/9/2011

616,523

299,814

309,582

318,316

 

$            8,948,617

$           4,257,575

$               4,487,907

$           4,580,859


INTANGIBLE ASSET


 

 

Amount

Intangible

Intangible

 

Amount Paid

Allocated to

Asset, net

Asset, net

Date of Note

Lotus TV

Intangible Asset

12/31/2011

3/31/2012

12/17/2010

$            1,928,839

$          1,014,967

$          907,347

$            881,151

1/31/2011

780,000

416,721

377,149

366,222

6/12/2011

5,623,255

2,942,645

2,747,651

2,668,363

8/9/2011

616,523

316,709

303,162

296,902

 

$            8,948,617

$         4,691,042

$        4,335,309

$         4,212,638


Interest income accrued on the notes amounted $90,458 during the three months ended March 31, 2012. Amortization of the intangible asset amounted to $125,195 during the three months ended March 31, 2012, and included in selling, general and administrative expenses in the accompanying financial statements.


Note 4 – Income Taxes


The Company accounts for income taxes using the liability method, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.


Effective January 1, 2008, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The tax rate for Macau is 12%.


Due to the Company’s accumulated net losses, there was no provision for income taxes. The Company’s effective tax rate for the period ended March 31, 2012 was 0% due to the net operating loss carry-forward.  The Company’s taxes were subject to a full valuation allowance as follows at December 31, 2011 and 2010:




















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March 31, 2012


Tax

 

Accumulated Net

 

 

 

 


Deferred

 

 


Valuation

Jurisdiction

 

Operating Loss

 

Expiration

 

 

Tax Asset

 

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

United States

$

437,693

 

2019 - 2031

 

$

164,703

 

$

(164,703)

Macau

 

367,574

 

2013 - 2014

 

 

44,109

 

 

(44,109)

 

$

805,267

 

 

 

$

208,812

 

$

(208,812)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011


Tax

 


Accumulated Net

 

 

 

 


Deferred

 

 


Valuation

Jurisdiction

 

Operating Loss

 

Expiration

 

 

Tax Asset

 

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

United States

$

414,499

 

2019 - 2031

 

$

155,976

 

$

(155,976)

Macau

 

496,223

 

2013 - 2014

 

 

59,547

 

 

(59,547)

 

$

910,722

 

 

 

$

215,523

 

$

(215,523)

 

 

 

 

 

 

 

 

 

 

 


The net deferred tax asset generated by the loss carry-forward has been fully reserved.


The Company has no United States corporate income tax liability as of March 31, 2012 and 2011.


Note 5 – Capital Stock


On April 9, 2010, the Company filed a Certificate of Amendment with the Secretary of State of the State of Florida to increase the authorized number of shares of its common stock from 110,000,000 shares to 500,000,000 shares, with a par value of $0.001 per share. As of March 31, 2012, there were 302,155,623 shares of the Company’s common stock issued and outstanding.


On May 3, 2011, the Company issued an aggregate of 300 million shares of the Company’s common stock to 16 investors in a private placement at a price of $0.03 per share, for an aggregate consideration of $9,000,000 in cash.


Note 6 - Commitments and Contingencies


On August 26, 2010, E&M (name changed to CEM International Ltd on September 16, 2010) entered into an Advertising Agreement (the “Agreement”) with Macau Lotus Satellite TV Media Limited (“Lotus TV”), pursuant to which Lotus TV authorizes E&M as its exclusive agent to operate all of its advertising businesses, and to be entitled to all the revenues generated therefrom (“Advertising Rights”).


The term of this Agreement is 10 years from September 1, 2010 to August 31, 2020. In consideration for Lotus TV’s grant of the Advertising Rights, E&M agrees to pay Lotus TV a fixed annual fee every year (the “Annual Fee”) regardless of the total amount of advertising revenues received by E&M. Under the Agreement, E&M paid Lotus TV an initial Annual Fee of $1,000,000 Hong Kong dollars (approximately US$128,900) for the first year of the Agreement, which Annual Fee will increase at 10% every year for the following two years. The initial annual fee of $128,900 was paid in August 2011, and the Company accrued $82,642 as payable in the consolidated balance sheet as of March 31, 2012 for the fee due in August 2012.


E&M also agrees to extend to Lotus TV, interest free, a credit facility consisting of a series of loans (each a “Loan”) totaling a minimum of US$10 million over a period of 10 years. The terms of each Loan and the increase of Annual Fee after the first three years of the Agreement will be negotiated by the parties depending on financial needs and the advertising revenues. The Company currently expects that the loans will be originated from its cash reserve, advertising revenue and, if necessary, raised from the capital market.


License fee expense for the three months ended March 31, 2012 and 2011 were $35,437 and $32,106, respectively, and is included in selling, general and administrative expenses.



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Note 7 – Risks and Uncertainties


The Company’s business, financial condition and results of operations could be materially affected by many risks and uncertainties including the following:


As a U.S. based company doing business in Macau, the Company must comply with all Macau laws, rules and regulations, and pronouncements, and endeavor to obtain all necessary approvals from applicable Chinese regulatory authorities.


Fluctuations in the exchange rate between the Hong Kong currency and the U.S. dollar may impact the Company’s operating income.


Note 8 – Related Party Transactions


A director of the Company purchased investments in gold bullion on behalf of the Company in August 2011. Purchases made under this arrangement totaled approximately HKD $20 Million (USD $2.6 Million). HKD $2,137,915 (USD $275,379) remained payable to the director at March 31, 2012 and is non-interest bearing and due on demand.


In May 2011, the Company issued 90 million shares of its common stock, as part of the 300 million issued in a private placement, to a related party of Dicky Cheung, the Company’s president and CEO, in exchange for $2,700,000 in cash.


Note 10 – Accounts Payable and Accrued Expenses


Accounts payable and accrued expenses consisted of the following at December 31, 2011 and 2010.


 

 

 

March 31, 2012

 

 

December 31, 2011

Accounts payable

 

$

15,151

 

$

2,224

License fee payable

 

 

82,642

 

 

47,197

Total

 

$

97,793

 

$

49,421


Note 11 - Subsequent Events


The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued.  Per our evaluation there were no significant subsequent events that require disclosure.




Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The discussion in this quarterly report on Form 10-Q contains forward-looking statements.  Such statements are based upon our beliefs, as well as assumptions made by and information currently available to us as of the date of this report.  These forward-looking statements can be identified by their use of such verbs as "expect", "anticipate", "believe" or similar verbs or conjugations of such verbs.  If any of these assumptions prove incorrect or should unanticipated circumstances arise, the actual results could materially differ from those anticipated by such forward-looking statements.  


Overview


Until November 30, 2010, the Company’s main business was processing and distribution of mineral products, primarily graphite products, in China. Despite the efforts it had made, the Company’s sales did not grow as much as the Company had expected.  Because it was more and more difficult to carry out its graphite business, on November 18, 2010, the Company entered into a share purchase agreement with China Minerals International Ltd., by which the Company sold its 51.6% equity interest in Moderation Ltd. for $16 million Hong Kong dollars, approximately $2.06 million in cash, to



12




China Mineral. The transaction was closed on November 30, 2010, and the Company ceased to be a processor and distributor of graphite products.


On August 26, 2010, E&M International Limited (“E&M”), a wholly-owned subsidiary of the Company, entered into an advertising agreement with Macau Lotus Satellite TV Media Limited (“Lotus TV”), pursuant to which Lotus TV authorized E&M as its exclusive agent to operate all of its advertising businesses (“Advertising Rights”).


The term of this agreement is ten years from September 1, 2010 to August 31, 2020.  In consideration for Lotus TV’s grant of the Advertising Rights, E&M agreed to pay Lotus TV a fixed fee on an annual basis regardless of the total amount of revenues generated from the advertising business to be received by E&M.  Under the agreement, E&M paid Lotus TV an initial annual fee of HK$1,000,000 (approximately US$128,900) for the first year of the agreement, which will increase at 10% every year for the following two years.


E&M also agreed to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling a minimum of US$10 million over a period of ten years. The terms of each loan and the increase of the annual fee after the first three years of the agreement will be negotiated by the parties depending on Lotus TV’s financial needs and the amount of advertising revenues generated.  As of March 31, 2011, the Company has loaned Lotus TV approximately $8.95 million under this agreement.


On September 16, 2010, the name of E&M was changed to CEM International Ltd.


Results of Operations


For the Three Months ended March 31, 2012 Compared to 2011


Revenue


For the three months ended March 31, 2012, the Company generated revenue of $56,055, as compared to $23,886 for the same period of the previous year.  


Operating expenses


Operating expenses for the three months ended March 31, 2012 were $200,147, as compared to $125,851 for the same period of fiscal 2011.  The increase in operating expenses was primarily due to accrual of annual license fees to Lotus TV and amortization of the advertising rights asset.


Other income (expenses)


Our total other income for the three months ended March 31, 2012 was $249,547, which consisted of interest income of $90,460 and unrealized gain on gold bullion investments of $159,087.  For the same period of fiscal 2011, the other income was $23,178, which consisted of interest income.


Net income (loss)


For the three months ended March 31, 2012, the Company had a net income of $105,455, or $0.00 per share, as compared to a net loss of $78,787, or $0.04 per share, for the same period of 2011.


Liquidity and Capital Resources


At March 31, 2012, the Company had cash balance of $362,032.  For the three months ended March 31, 2012, the operating activities of the Company provided net cash of $471,170, as compared to net cash used by the operating activities $31,673 for the same period of the prior year. The increase in 2012 operating cash flows was primarily from the current year net income of $105,455 and an increase in accounts payable and accrued expenses of $48,372, increase in deferred revenue of $86,935, prepaid expense ($98), partially offset by non-cash charges totaling $123,859 of depreciation, amortization, and unrealized gain on investments.


Net cash used in investing activities for the three months ended March 31, 2012 amounted to $3,508 compared to $10,754 of net cash provided for the same period of 2011.  This 2012 amount pertains primarily to investments in trademark. The 2011 amount was primarily due to decrease in amount of investment in note receivable ($780,000), offset by payments received on note receivable of $790,754.


For the three months ended March 31, 2012 and 2011, there were no financing activities.




13




In our opinion, available funds and revenues generated from our operation will satisfy our capital requirements for the next twelve months.  However, we may need to raise additional funds to pursue growth opportunities and make capital improvements. We may raise funds through private placements, either in equity offerings, or interest bearing borrowings. There is no guarantee that we will be able to raise additional funds through offerings or other sources. If we are unable to raise funds, our ability to continue with operations will be materially hindered.


Off-Balance Sheet Arrangements


None.


Critical Accounting Policies


Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period.  On an on-going basis, management evaluates its estimates and judgments, such as doubtful accounts, inventories, and impairment of long-lived assets. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.


The accounting policies that we follow are set forth in Note 2 to our financial statements as included in this report.  These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently applied in the preparation of the financial statements.



Item 3.  Quantitative and Qualitative Disclosures about Market Risk



A smaller reporting company is not required to provide the information in this Item.



Item 4T.  Controls and Procedures


(a) Evaluation of disclosure controls and procedures


As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that, as of March 31, 2012, our disclosure controls and procedures were effective at providing reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our controls and procedures are effective in timely alerting them to material information required to be included in this report.


(b) Changes in control over financial reporting


There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings


None


Item 1A.  Risk Factors




14




Smaller reporting companies are not required to provide the information required by this item.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


None


Item 3. Defaults Upon Senior Securities


None


Item 4. Mine Safety Disclosures


None


Item 5. Other Information


None

 

Item 6.  Exhibits


(a)    Exhibits:


Exhibit No.                                                Title of Document


      31.1   Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


      32.1         Certification pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     101.INS    XBRL Instance Document

     101. SCH   XBRL Taxonomy Extension Schema Document

     101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document

     101. LAB   XBRL Taxonomy Extension Label Linkbase Document

     101. PRE   XBRL Taxonomy Extension Presentation Linkbase Document

     101.DEF   XBRL Taxonomy Extension Definition Linkbase Document


SIGNATURES




In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



CREDIT ONE FINANCIAL, INC.



By: /s/ Dicky Cheung

Dicky Cheung

President, Chief Executive Officer and Chief Financial Officer


May 11, 2012





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