Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - CREDIT ONE FINANCIAL INC | Financial_Report.xls |
| EX-32 - EX 32 - CREDIT ONE FINANCIAL INC | exhibit32.htm |
| EX-31 - EX 31 - CREDIT ONE FINANCIAL INC | exhibit31.htm |
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 September 30, 2013
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: 326,155,637 shares of common stock, par value $0.001, as of November 11, 2013.
1
TABLE OF CONTENTS
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| PART I - FINANCIAL INFORMATION |
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Item 1 | Financial Statements |
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Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |||||||
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Item 3 | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4T | Controls and Procedures |
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| PART II – OTHER INFORMATION |
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Item 1 | Legal Proceedings |
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Item 1A | Risk Factors |
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3 | Defaults Upon Senior Securities |
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Item 4 | Mine Safety Disclosures |
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| 16 | ||
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Item 5 | Other Information |
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Item 6 | Exhibits |
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| 16 |
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| SIGNATURES |
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| 17 | |
2
Item 1. Financial Statements
CREDIT ONE FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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| September 30, | December 31, | |||||
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| 2013 |
| 2012 | ||||
ASSETS |
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| (Audited) | ||||||
Current Assets: |
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| Cash and cash equivalents |
| $ | 220,496 |
| $ | 200,791 | |||
| Investment in gold bullion |
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| 3,274,467 |
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| 4,367,420 | |||
| Prepaid expenses and other current assets |
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| 856,397 |
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| 1,105,628 | |||
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| Total Current Assets |
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| 4,351,360 |
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| 5,673,839 | ||
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Property, Plant and Equipment |
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| Furniture and fixture, net of accumulated depreciation of $5,633 and $4,295, respectively |
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| 923 |
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| 2,261 | |||
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| Total Property, Plant and Equipment |
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| 923 |
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| 2,261 | ||
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Trademark, net |
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| 64,591 |
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| 48,370 | ||||
Notes receivable |
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| 4,682,056 |
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| 4,058,268 | ||||
Intangible assets, net of accumulated amortization of $1,256,083 and $862,427, respectively |
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| 3,716,733 |
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| 3,843,938 | ||||
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Total Assets |
| $ | 12,815,663 |
| $ | 13,626,676 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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| Accounts payable and accrued expenses |
| $ | 418,022 |
| $ | 295,067 | |||
| Advance from officer |
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| 275,828 | |||
| Deferred revenue |
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| 1,500,247 |
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| 2,020,448 | |||
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| Total Current Liabilities |
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| 1,918,269 |
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| 2,591,343 | ||
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Stockholders' Equity: |
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| Common stock, $0.001 par value, 500,000,000 shares authorized, 326,155,637 and 302,155,637 shares issued |
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| and outstanding at September 30, 2013 and December 31, 2012, respectively |
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| 326,156 |
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| 302,156 | ||
| Additional paid-in capital |
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| 12,589,304 |
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| 11,893,303 | |||
| Accumulated deficit |
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| (2,019,415) |
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| (1,162,312) | |||
| Currency translation adjustment |
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| 1,349 |
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| 2,186 | |||
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| Total Stockholders' Equity |
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| 10,897,394 |
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| 11,035,333 | ||
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Total Liabilities and Stockholders' Equity |
| $ | 12,815,663 |
| $ | 13,626,676 | ||||
See accompanying notes to the consolidated financial statements
3
CREDIT ONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, | |||||||
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Advertising Revenue | $ | 173,578 |
| $ | 62,535 |
| $ | 557,870 |
| $ | 174,635 | ||
TV Program |
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| 18,792 |
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| 3,996 |
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| 28,532 | ||
| Total revenue |
| 173,578 |
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| 81,327 |
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| 561,866 |
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| 203,167 | |
Operating Expenses |
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| Selling, general and administrative |
| 293,579 |
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| 414,815 |
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| 878,573 |
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| 785,257 | |
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| Total operating expenses |
| 293,579 |
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| 414,815 |
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| 878,573 |
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| 785,257 |
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Loss from operations |
| (120,001) |
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| (333,488) |
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| (316,707) |
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| (582,090) | ||
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Other Income (Expenses) |
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| Foreign currency exchange gain (loss) |
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| - |
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| (2,900) | |
| Interest income |
| 100,048 |
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| 94,195 |
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| 292,588 |
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| 276,930 | |
| Unrealized gain (loss) on investment |
| 301,934 |
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| 319,080 |
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| (832,984) |
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| 335,725 | |
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| Total other income (expenses) |
| 401,982 |
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| 413,274 |
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| (540,396) |
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| 609,755 |
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Net Income (Loss) Before Income Taxes |
| 281,981 |
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| 79,786 |
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| (857,103) |
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| 27,665 | ||
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Income Tax Provision |
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Net Income (Loss) | $ | 281,981 |
| $ | 79,786 |
| $ | (857,103) |
| $ | 27,665 | ||
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Other Comprehensive Income (Loss) |
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| Foreign currency translation adjustment |
| 2,880 |
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| 4,625 |
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| (837) |
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| 21,538 | |
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Total Comprehensive Income (Loss) | $ | 284,861 |
| $ | 84,411 |
| $ | (857,940) |
| $ | 49,023 | ||
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Income loss Per Share: |
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| Basic and Diluted | $ | - |
| $ | - |
| $ | - |
| $ | - | |
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Weighted Average Number of Shares: |
| 326,155,637 |
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| 302,155,637 |
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| 317,452,340 |
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| 302,155,637 | ||
See accompanying notes to the consolidated financial statements
4
CREDIT ONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
See accompanying notes to the consolidated financial statements
5
CREDIT ONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
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 nine months ended September 30, 2013 and 2012 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 2012 Annual Report on Form 10-K, which was filed on April 15, 2013.
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Consolidation Scope and Principles of Consolidation
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 $2,019,415 in U.S. net operating loss carry-forwards and $1,488,419 in Macau net operating loss carry-forwards as of September 30, 2013, 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 September 30, 2013, the Company maintained $168,837 in foreign bank accounts not subject to FDIC coverage. The remaining balance of $51,659 at September 30, 2013 was maintained in a domestic bank account and fully insured by FDIC.
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Investment in Gold Bullion
The Company invests in gold bullion. As a precious metal, the investment in gold bullion is stated at its monetary fair value as determined by the Chinese Gold & Silver Exchange Society. Any adjustments to the fair value of the investments are recorded in unrealized gain or loss on the accompanying consolidated statements of operations and comprehensive income (loss).
In September 2012, the Company entered into a Trust Agreement with William G. Hu, Esq., as trustee to hold the Company’s gold bullions. Upon receipt of the gold bullions, the Trustee issued electronic receipts, each known as a “Goldeq”, which can be used, in lieu of gold, as an intermediary to facilitate the exchange of goods and services conducted on the Company’s proposed joint venture with Lotus TV, in which a series of interactive game shows will be launched via satellite TV and the Internet for viewers throughout the world to participate, and Lotus TV will provide broadcasting time. To date, the Company has neither participated in the exchange of goods and services, nor interactive game shows. At this stage, the Company receives payment for advertising time spots from a client of Lotus TV in gold bullion.
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 $2,880 and $4,625 for the three months ended September 30, 2013 and 2012, respectively, and $(837) and $21,538 for the nine months ended September 30, 2013 and 2012, 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.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission revenue recognition accounting standards.
As an advertising agent, CEM is in the service business placing 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.
In September 2012, the Company entered into an advertising agreement in exchange for $2,014,825 of gold bullion. During the three and nine months ended September 30, 2013, $129,695 and $403,181 of revenue was earned under the arrangement, respectively. The remaining amount of $1,500,247 is included in deferred revenue at September 30, 2013.
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, 2011 and 2013, 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
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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
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 September 30, 2013 and 2012, respectively.
Recently Issued Accounting Standards
The Company has evaluated all newly issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company’s financial statements.
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
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present value of HK$2,465,768 (US$314,917) was allocated to the intangible asset captioned Exclusive Advertising Rights.
On April 9, 2013, CEM issued Lotus TV an additional loan HK$4,658,425 (approx. US$600,000), 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$2,578,771 (US$332,376) using an effective interest rate of 8%. This difference between the face value and the present value of HK$2,079,654 (US$268,045) was allocated to the intangible asset captioned Exclusive Advertising Rights.
On September 25, 2012, Lotus TV invoiced the Company $1,000,000 for handling fees related to an advertising agreement which had not commenced. The invoice terms included $200,000 cash and $800,000 reduction in the note receivable balance due from Lotus TV. The $1,000,000 fee was included in prepaid expense, and is being amortized to expense as advertising spots are used. As of September 30, 2013, the balance of prepaid expenses related to this advertising agreement is approximately $729,366.
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:
SCHEDULE OF NOTE RECEIVABLE
Date of Note | Amount Paid Lotus TV | Discounted Note Balance at Inception | Note Balance As of 12/31/ 2012 | Note Balance As of 9/30/2013 |
12/17/2010 | $ 1,928,839 | $ 913,872 | $ 236,804 | $ 289,300 |
1/31/2011 | 780,000 | 363,279 | 425,945 | 452,025 |
6/12/2011 | 5,623,255 | 2,680,610 | 3,059,468 | 3,237,995 |
8/9/2011 | 616,523 | 299,814 | 336,051 | 356,627 |
4/9/2013 | 600,000 | 332,376 | - | 346,109 |
| $ 9,548,617 | $ 4,589,951 | $ 4,058,268 | $ 4,682,056 |
SCHEDULE OF INTANGIBLE ASSET
Date of Note | Amount Paid Lotus TV | Amount Allocated to Intangible Asset | Intangible Asset, Net As of 12/31/ 2012 | Intangible Asset, Net As of 9/30/2013 |
12/17/2010 | $ 1,928,839 | $ 1,014,967 | $ 804,298 | $ 725,346 |
1/31/2011 | 780,000 | 416,721 | 335,489 | 302,556 |
6/12/2011 | 5,623,255 | 2,942,645 | 2,434,403 | 2,195,433 |
8/9/2011 | 616,523 | 316,709 | 269,748 | 243,269 |
4/9/2013 | 600,000 | 268,045 | - | 250,129 |
| $ 9,548,617 | $ 4,959,087 | $ 3,843,938 | $ 3,716,733 |
Interest income accrued on the notes amounted to $100,047 and $292,585 for the three and nine months ended September 30, 2013. Amortization of the intangible asset amounted to $134,312 and $393,791 for the three and nine months ended September 30, 2013, and was included in selling, general and administrative expenses in the accompanying consolidated 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%.
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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 September 30, 2013 was 0% due to the net operating loss carry-forward. The Company’s taxes were subject to a full valuation allowance as follows at September 30, 2013 and December 31, 2012:
September 30, 2013 | ||||||||||
Tax |
| Accumulated Net |
|
|
|
| Deferred |
|
| Valuation |
Jurisdiction |
| Operating Loss |
| Expiration |
|
| Tax Asset |
|
| Allowance |
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 531,005 |
| 2019 - 2032 |
| $ | 199,817 |
| $ | (199,817) |
Macau |
| 1,488,410 |
| 2013 - 2015 |
|
| 178,609 |
|
| (178,609) |
| $ | 2,019,415 |
|
|
| $ | 378,426 |
| $ | (378,426) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
December 31, 2012 | ||||||||||
Tax |
| Accumulated Net |
|
|
|
| Deferred |
|
| Valuation |
Jurisdiction |
| Operating Loss |
| Expiration |
|
| Tax Asset |
|
| Allowance |
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 474,192 |
| 2019 - 2032 |
| $ | 178,438 |
| $ | (178,438) |
Macau |
| 688,120 |
| 2013 - 2015 |
|
| 82,574 |
|
| (82,574) |
| $ | 1,162,312 |
|
|
| $ | 261,012 |
| $ | (261,012) |
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2013 and 2012.
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 September 30, 2013, there were 326,155,637 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.
On January 30, 2013, the Company entered into a Securities Purchase Agreement with certain investors in a private placement. Pursuant to the agreement, the Company agreed to issue and investors agreed to purchase an aggregate of 183 million shares of the Company’s common stock at a price of $0.03 per share, for an aggregate consideration of $5,490,000 in cash, of which $720,000 was received on April 9, 2013 for 24,000,000 shares.
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 second annual fee of $141,919 was due in August 2012, of which $103,544 was paid. The amount of Annual Fee payable at September 30, 2013 and 2012 was $208,718 and $124,831, respectively.
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
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after the first three years of the Agreement will be renegotiated by the parties. 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 September 30, 2013 and 2012 were $40,305 and $60,266, respectively, and $118,283 and $107,514 for the nine months ended September 30, 2013 and 2012, respectively, and was included in selling, general and administrative expenses.
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
Dicky Cheung, the Company’s director, President and CEO, purchased gold bullions 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 $275,828) remained payable to Dicky Cheung at December 31, 2012 and was non-interest bearing and due on demand. In September 2013, the remaining payable balance was paid off.
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 9 – Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at September 30, 2013 and December 31, 2012.
|
|
| September 30, 2013 |
|
| December 31, 2012 |
Accounts payable |
| $ | 209,304 |
| $ | 202,075 |
Wage payable |
|
| - |
|
| 2,580 |
License fee payable |
|
| 208,718 |
|
| 90,412 |
Total |
| $ | 418,022 |
| $ | 295,067 |
Note 10 - 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 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
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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 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 renegotiated by the parties. As of September 30, 2013, the Company has loaned Lotus TV approximately $9.55 million under this agreement, and as of September 30, 2013, $800,000 has been repaid under the notes.
The funds the Company loaned to Lotus TV were from the private placements conducted in reliance upon exemptions from registration provided by Regulation S and/or Section 4(a)(2) promulgated under the Securities Act of 1933, as amended. All investors were not a “U.S. Person” as that term is defined in Regulation S.
On September 16, 2010, the name of E&M was changed to CEM International Ltd.
As an advertising agent, the Company places and handles advertising for its clients. Because all of the Company’s clients have created and produced their own advertising clips and trailers, or programs, the Company currently acts only as an advertising placement agent for Lotus TV. The Company only has two employees at this time.
As Lotus TV’s exclusive advertising agent, the Company provides advertising agency services to its clients by providing them with the advertising time spots the Company obtains from Lotus TV. Advertisers can purchase advertising time spots of Lotus TV directly from the Company. In September 2012, the Company entered into an Advertising Time Purchasing Agreement through Lotus TV in exchange for gold bullions valued at $2,014,825 at the time. The terms of the contract provide that the Company will sell a total of 10,000 minutes of advertising spots to a client of Lotus TV, Makeliving Ltd., who is paying for advertising spots per the Agreement. Revenue is recognized as advertisements are aired. During the year ended December 31, 2012 and for the nine months ended September 30, 2013, $149,978 and $403,181 of revenue were recognized, respectively, related to advertising time slots used. The remaining amount is included in deferred revenue.
The Company invests in gold bullion. As of September 30, 2013 and December 31, 2012, the Company held gold bullion valued at $3,274,467 and $4,367,420, respectively. In September 2012, the Company entered into a Trust Agreement with William Hu, Esq., as trustee to hold the Company’s gold bullions. Upon receipt of the gold bullions, the Trustee issued electronic receipts, each known as a “Goldeq”, which can be used, in lieu of gold, as an intermediary to facilitate the exchange of goods and services conducted on the Company’s proposed joint venture with Lotus TV, in which a series of interactive game shows will be launched via satellite TV and the Internet for viewers throughout the world to participate, and Lotus TV will provide broadcasting time. The goods and services originally proposed for exchange were household items or household services, such as books and audios, cosmetics, shoes and leather bags, computers and office suppliers, home repairs or web design, etc. To date, however, the Company has neither participated in the exchange of goods and services, nor in the interactive game shows.
Results of Operations
For the Three Months ended September 30, 2013 Compared to 2012
Revenue
For the three months ended September 30, 2013, the Company generated total revenue of $173,578 from advertising. Total revenue for the same period of previous year was $81,327, of which $62,535 was from advertising and $18,792 from TV programs.
In September 2012, the Company entered into an advertising agreement in exchange for $2,014,825 of gold bullion. The terms of the contract provide that the Company will sell 10,000 minutes of advertising time divided into 30-second time spots for a total of 20,000 advertising slots. Revenue is recognized as advertisements are aired. During the three
13
months ended September 30, 2013, $129,695 of revenue was recognized related to advertising time slots used. The remaining amount is included in deferred revenue.
Operating expenses
Operating expenses for the three months ended September 30, 2013 were $293,579, as compared to $414,815 for the same period of fiscal 2012.
Other income (expenses)
Our total other income (expenses) for the three months ended September 30, 2013 was $401,982, which consisted of interest income of $100,048 and unrealized gain on gold bullion investments of $301,934. For the same period of fiscal 2012, the other expense was $413,274, which primarily consisted of interest income of $94,195 and unrealized gain on gold bullion investments of $319,080.
Net income (loss)
For the three months ended September 30, 2013, the Company had a net income of $281,981, or $0.00 per share, as compared to a net income of $79,786, or $0.00 per share, for the same period of 2012.
For the Nine Months ended September 30, 2013 Compared to 2012
Revenue
For the nine months ended September 30, 2013, the Company generated total revenue of $561,866, of which $557,870 were from the sale the advertising TV time obtained from Lotus TV, and $3,996 from TV programs. Total revenue for the same period of previous year was $203,167.
In September 2012, the Company entered into an advertising agreement in exchange for $2,014,825 of gold bullion. The terms of the contract provide that the Company will sell 10,000 minutes of advertising time divided into 30-second time spots for a total of 20,000 advertising slots. Revenue is recognized as advertisements are aired. During the nine months ended September 30, 2013, $403,181 of revenue was recognized related to advertising time slots used. The remaining amount is included in deferred revenue.
Operating expenses
Operating expenses for the nine months ended September 30, 2013 were $878,573, as compared to $785,257 for the same period of fiscal 2012.
Other income (expenses)
Our total other expenses for the nine months ended September 30, 2013 was $540,396, which consisted of interest income of $292,588 and unrealized loss on gold bullion investments of $832,984. For the same period of fiscal 2012, the other income was $609,755, which consisted of interest income of $276,930, unrealized gain on gold bullion investments of $335,725, and foreign currency exchange loss of $2,900.
Net income (loss)
For the nine months ended September 30, 2013, the Company had a net loss of $857,103, or $0.00 per share, as compared to a net income of $27,665, or $0.00 per share, for the same period of 2012.
Liquidity and Capital Resources
At September 30, 2013, the Company had cash balance of $220,496. For the nine months ended September 30, 2013, the operating activities of the Company used net cash of $68,612, as compared to net cash used by the operating activities $107,132 for the same period of the prior year. The decrease in 2013 operating cash flows was primarily from the current period net loss of $857,103, increase in prepaid expenses and other current assets of $253,229, decrease in deferred revenue of $519,197, and increase in non-cash charges totaling $935,525 of depreciation, amortization, and unrealized loss on investments.
Net cash used in investing activities for the nine months ended September 30, 2013 amounted to $358,912, of which $600,506 was used in investments in notes receivable, $16,211 used in investment in trademark, partially offset by
14
$257,815 from proceed from sale of gold bullion. For the same period of 2012, the net cash used in investing activities was $16,811.
For the nine months ended September 30, 2013, 2013, net cash provided by financing activities were $444,407, of which $720,000 was proceeds from issuance of the Company’s common stock and $275,593 was used to payment of loan from related party. There were no financing activities for the same period of the prior year.
Other than the funds the Company may loan to Lotus TV, it is estimated that the Company will require appropriately $450,000 per year, or about $37,500 per month. In our opinion, available funds and revenues generated from our operation may not able to satisfy our capital requirements for the next 12 months, and we may need to raise additional funds to meet our needs and to pursue growth opportunities. 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 September 30, 2013, 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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
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
16
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
November 12, 2013
17