CREDIT ONE FINANCIAL INC - FORM 10-Q

Attached files

file	filename
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, 2016

[ ] 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 [X] Non Accelerated filer [ ] Smaller Reporting Company [ ]

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: 326,155,623 shares of common stock, par value $0.001, as of November 4, 2016.

TABLE OF CONTENTS


		PAGE

	PART I - FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4	Controls and Procedures	17

	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	18

Item 1A	Risk Factors	18

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	18

Item 3	Defaults Upon Senior Securities	18

Item 4	Mine Safety Disclosures	18

Item 5	Other Information	18

Item 6	Exhibits	18

	SIGNATURES	19

Item 1. Financial Statements

CREDIT ONE FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


			September 30,		December 31,
			2016		2015
ASSETS
Current Assets:
	Cash and cash equivalents		$	18,625	$	1,501,835
	Note receivable			1,599,010		-
	Interest receivable			111,931		-
	Prepaid expenses and other current assets			517,504		682,319
		Total Current Assets		2,247,070		2,184,154

Long-term notes receivable, net of discount				7,850,382		7,441,978

Total Assets			$	10,097,452	$	9,626,132

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable and accrued expenses		$	16,457	$	8,079
	Deferred revenue			67,700		-
		Total Liabilities		84,157		8,079

Commitment and Contingencies

Stockholders' Equity:
	Common stock, $0.001 par value, 500,000,000 shares authorized, 326,155,623 shares issued and outstanding			326,156		326,156
	Additional paid-in capital			12,589,304		12,589,304
	Accumulated deficit			(2,902,044)		(3,302,453)
	Accumulated other comprehensive income - currency translation adjustment			(121)		5,046
		Total Stockholders' Equity		10,013,295		9,618,053

Total Liabilities and Stockholders' Equity			$	10,097,452	$	9,626,132

See accompanying notes to the unaudited consolidated financial statements.

CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)


			Three Months Ended September 30,					Nine Months Ended September 30,
				2016		2015		2016		2015

Advertising Revenue			$	67,882	$	58,061	$	203,069	$	174,133
	Total revenues			67,882		58,061		203,069		174,133

Operating Expenses
	License fee			53,790		48,800		157,466		143,212
	Amortization of intangible asset			-		72,593		-		217,716
	Selling, general and administrative			47,427		36,860		169,387		122,220
		Total operating expenses		101,217		158,253		326,853		483,148

Loss from operations				(33,335)		(100,192)		(123,784)		(309,015)

Other Income
	Interest income			188,612		146,688		524,193		436,812

Net Income			$	155,277	$	46,496	$	400,409	$	127,797

Other Comprehensive Income
	Foreign currency translation adjustment			4,387		3,657		(5,167)		10,487

Total Comprehensive Income			$	159,664	$	50,153	$	395,242	$	138,284

Earnings Per Share -
	Basic and Diluted		$	0.00	$	0.00	$	0.00	$	0.00

Weighted Average Number of Shares - Basic and Diluted				326,155,623		326,155,623		326,155,623		326,155,623

See accompanying notes to the unaudited consolidated financial statements.

CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


				Nine Months Ended September 30,
				2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	400,409	$	127,797
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Accretion of interest on note receivable			(412,275)		(431,467)
		Amortization of intangible asset			-		217,716
		Depreciation			-		27
	Changes in operating assets and liabilities:
		Interest receivable			(111,913)		-
		Prepaid expenses and other current assets			164,429		24,072
		Account payable and accrued expenses			8,378		143,395
		Deferred revenue			67,690		(174,133)
			Cash provided by (used in) operating activities		116,718		(92,593)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Investment in note receivable				(1,598,762)		-
	Investment in trademark				-		(2,817)
		Cash used in investing activities			(1,598,762)		(2,817)

Impact of exchange rate on foreign currency					(1,166)		(4,623)

Net decrease in cash and cash equivalents					(1,483,210)		(100,033)

Cash and cash equivalents, beginning of the period					1,501,835		641,514

Cash and cash equivalents, end of the period				$	18,625	$	541,481

SUPPLEMENTAL CASH FLOWS INFORMATION:
		Cash paid for interest		$	-	$	-
		Cash paid for income taxes		$	-	$	-

See accompanying notes to the unaudited consolidated financial statements.

CREDIT ONE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Nature of Business

Credit One Financial, Inc. (the “Company”) was incorporated in the State of Florida on September 24, 1999. In August 2010, the Company established a wholly owned subsidiary, E&M International Limited (“E&M”), in the Cayman Islands. On September 16, 2010, E&M changed its name to CEM International Ltd. (“CEM”).

The Company, through CEM, operates as an advertising agent to place and handle advertising for its clients. On August 26, 2010, CEM entered into an exclusive agreement with Macau Lotus Satellite TV Media Limited (“Lotus TV”) to provide advertising services for a ten-year period commencing on September 1, 2010. Because the clients of the Company 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, and there is no advertising creating and planning activities involved at this time. The exclusive right agreement was amended in 2014. The Company is currently a preferred advertising agent of Lotus TV.

As Lotus TV’s preferred advertising agent, the Company provides advertising agency services to its clients by providing them with the advertising time slots the Company obtains from Lotus TV. Advertisers can purchase advertising time slots of Lotus TV directly from the Company.

The Company generates revenues primarily from advertising sales paid by clients for the planning and placement of advertisements on Lotus TV.

Note 2 - Summary of Significant Accounting Policies

Basic Presentation

The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim unaudited consolidated financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The unaudited consolidated financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 and notes thereto contained in the Company’s Annual Report on Form 10-K (Amendment No. 2) filed on August 12, 2016.

Consolidation Scope and Principles of Consolidation

The consolidated financial statements present 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.

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 notes receivable, are based on level 1 input, and equal carrying amounts.

Foreign Currency

The Company reports its 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. Revenues, expenses, gains, and losses were translated at the average exchange rate for the periods presented. Transaction adjustments result from the process of translating the subsidiary’ financial statements into U.S. dollars are not included in determining net income, but are reported in other comprehensive income (loss).

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.

Cash and Cash 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, 2016, the Company maintained $9,048 in foreign bank accounts not subject to Federal Deposit Insurance Corporation (“FDIC”) coverage. The remaining balance of $9,577 at September 30, 2016 was maintained in a U.S. bank account and was fully insured by FDIC.

Long-Term Notes Receivable

Long-term notes receivable are recorded at issuance at its present value using an effective interest rate. 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.

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 dedicated to 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.

Provision for Income Taxes

An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

Earnings Per Common Share

Basic earnings (loss) per common share (“EPS”) 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, 2016 and 2015.

Subsequent Events

The Company’s management reviewed all material events through the date of the consolidated financial statements were issued for subsequent event disclosure consideration.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current period presentation.

Recently Issued Accounting Standards

In May 2014, a pronouncement was issued that creates common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance supersedes most preexisting revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with an option to adopt the standard one year earlier. The new standard is to be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the new pronouncement on its financial statements.

In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.

The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

Note 3 – Note Receivable

In February 2016, the Company entered into a promissory note agreement to lend approximately $1,600,000 (HK$ 12,400,000) to a third party. The note matures in February 2017 and has an annual interest rate of 12%. Interest is payable when the note matures. For the three and nine months ended September 30, 2016, the Company recorded interest income of approximately $48,000 (HK$372,000) and $112,000 (HK$868,000), respectively. As of September 30, 2016, the Company had interest receivable of approximately $112,000.

Note 4 – Prepaid Advertising Cost

In 2012, the Company paid $1,000,000 to Lotus TV for 20,000 advertising slots. The Company had used 6,500 slots as of September 30, 2016 and December 31, 2015. During the nine months ended September 30, 2016, Lotus TV agreed to offset the Company’s license fees payable by the prepaid advertising cost of approximately $164,000. As of September 30, 2016 and December 31, 2015, the Company had prepaid advertising cost of approximately $518,000 and $682,000, respectively.

Note 5 – Long-Term Notes Receivable and Advertising Right

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

Prior to December 31, 2013, CEM issued Lotus TV various non-interest bearing promissory notes of approximately $9,500,000 (HK$74,242,425). During the year ended December 31, 2014, CEM issued Lotus TV an additional loan of approximately $1,390,000 (HK$10,800,000). All the notes receivable are due on August 31, 2020 and discounted to its estimated fair value using an effective interest rate of 8%. This difference between the face value and the present value of the notes was allocated to the intangible asset captioned Advertising Rights. This difference was deemed an asset because the interest-free note was a condition of the advertising right agreement.

On November 25, 2014, CEM amended its 2010 agreement with Lotus TV whereby Lotus TV agreed to accelerate its repayment of the loan balance in annual instalments of $2,000,000 (amended to annual minimum instalments of $1,000,000 on December 28, 2015) each starting from 2015 until the entire remaining loan balance shall have been paid in full. Additionally, CEM agreed to forego its exclusive advertising rights granted by Lotus TV, but remain as Lotus TV’s preferred advertising agent.

As a result of the November 25, 2014 amendment to accelerate repayment of the notes and to forego exclusive rights but remain as a preferred agent, the Company increased the carrying value of the notes receivable by $1,889,427 and decreased the intangible asset by $1,889,427. The adjustment was based on the calculated present value of the notes in aggregate using annual repayment installments of $2 million beginning in 2015 until paid in full and an effective interest rate of 8%.

A summary of the notes receivable is as follows:


Issuance Date		September 30, 2016		December 31, 2015
December 17, 2010	$	1,934,286	$	1,935,309
January 31, 2011		784,546		784,961
May 12, 2011		5,635,219		5,638,200
August 9, 2011		618,971		619,299
April 9, 2013		600,715		601,033
February 17, 2014		1,005,829		1,006,361
June 13, 2014		386,859		387,063
Total principal		10,966,425		10,972,226
Total repayments		(2,062,108)		(2,063,199)
Discount		(1,053,935)		(1,467,049)
Notes receivable, net	$	7,850,382	$	7,441,978

For the three months ended September 30, 2016 and 2015, the Company recorded interest income of approximately $140,000 and $147,000 on these notes, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded interest income of approximately $412,000 and $437,000 on these notes, respectively.

At December 31, 2015, the Company determined that the advertising right was impaired and recorded an impairment loss of $1,295,605 (translated at average exchange rate for the year ended December 31, 2015). The net amount of the advertising right was $0 at September 30, 2016 and December 31, 2015. For the three and nine months ended September 30, 2016, the Company recorded amortization expense of $0. For the three and nine months ended September 30, 2015, the Company recorded amortization expense of $72,593 and $217,716, respectively.

Note 6 – Income Taxes

The Company operates through the parent company in the United States and a subsidiary in Macau, China. Income taxes have been provided based upon the tax laws and rates of the countries in which operations are conducted and

income is earned. 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%. As of September 30, 2016, the Company had net operating loss carry-forwards of approximately $803,000 in U.S. and $2,100,000 in Macau.

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, 2016 was 0% due to the net operating loss carry-forward. 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 following are the major tax jurisdictions in which the Company operates and the tax year that net operating loss carry-forward subject to expiration:


Jurisdiction			Expiration
United States			2019 - 2036
Macau			2016 - 2019

Note 7 – Advertising Revenues

In October 2014, the Company entered into an advertising agreement with a third party. Pursuant to the agreement, the Company agreed to provide advertising service to the third party from January 1, 2015 to December 31, 2015 for approximately $229,800 (HK$1,800,000) with service from July to December 2015 free of charge. The Company received prepayment from the third party in 2014 and recorded deferred revenue of $232,028 at December 31, 2014. For the three and nine months ended September 30, 2015, the Company recorded advertising revenue of approximately $58,000 (HK$450,000) and $174,000 (HK$1,350,000) related to this agreement, respectively.

In December 2015, the Company entered into a new advertising agreement with the third party. Pursuant to the agreement, the Company agreed to provide advertising service to the third party from January 1, 2016 to December 31, 2016 for approximately $270,000 (HK$ 2,100,000) with service from January to May 2016 free of charge. The Company received prepayment of approximately $270,000 (HK$ 2,100,000) from the third party in February 2016. For the three and nine months ended September 30, 2016, the Company recorded advertising revenue of approximately $68,000 (HK$525,000) and $203,000 (HK$1,575,000), respectively, related to this agreement. As of September 30, 2016, the Company had deferred revenue of $67,700 (HK$525,000).

All of the Company’s revenues are from one customer for the nine months ended September 30, 2016 and 2015.

Note 8 - Commitments and Contingencies

In consideration for Lotus TV’s grant of the advertising right in 2010, CEM agreed to pay Lotus TV a fixed annual fee every year regardless of the total amount of advertising revenues received by CEM. Under the agreement, CEM paid Lotus TV an initial annual fee of approximately $128,900 (HK$1,000,000) for the first year of the agreement, which annual fee will increase at 10% every year for the following first seven subsequent years, as amended in August 2016. As of September 30, 2016 and December 31, 2015, the Company had no license fee payable to Lotus TV. For the three months ended September 30, 2016 and 2015, the Company recorded license fee expense of $53,790 and $48,800, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded license fee expense of $157,466 and $143,212, respectively.

The Company’s future minimum annual license fee payments under the agreement for years ending December 31 after September 30, 2016 are as follows:


		Amount
2016	$	57,112
2017		236,062
2018		251,292
2019		251,292
2020		167,528
Total	$	963,286

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

On August 26, 2010, CEM International Limited (“CEM”, formerly E&M International Ltd.), 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 CEM 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, CEM 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 CEM. Under the agreement, CEM 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 five years.

CEM also agreed to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling a minimum of $10 million (amended to $15 million on June 13, 2014) 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, 2016, the loan balance to Lotus TV was approximately $10.97 million (HK$85,042,425) under this agreement, and as of September 30, 2016, Lotus TV has repaid about $2.06 million (HK$16,000,000) due under the notes.

On November 25, 2014, CEM amended its 2010 Agreement with Lotus TV whereby Lotus TV agreed to accelerate its repayment of the loan balance in annual instalments of $2,000,000 (amended to annual minimum instalments of $1,000,000 on December 28, 2015) each starting from 2015 until the entire remaining loan balance shall have been paid in full, and CEM agreed to forego its exclusive advertising rights granted by Lotus TV, but remain as Lotus TV’s preferred advertising agent.

As an advertising agent, the Company operates as an advertising agent to place and handle advertising for its clients. The Company’s revenues are derived primarily from advertising placement and sale of advertising time obtained from Lotus TV.

Because all of our clients have created and produced their own advertising clips and trailers, or programs, we currently act only as an advertising placement agent for Lotus TV, and there is no advertising creating and planning activities involved at this time. Advertisers can purchase advertising time slots of Lotus TV directly from the Company.

Results of Operations

For the Three Months ended September 30, 2016 as Compared to for the Three Months ended September 30, 2015

Operating Revenues

During the three months ended September 30, 2016 and 2015, the Company recognized revenues of $67,882 and $58,061, respectively, related to advertising contracts entered with a third party. The annual advertising rate increased by approximately 17% in 2016.

Operating Expenses

The following table presents a breakdown of our operating expenses:


	For the Three Month Ended September 30,
	2016				2015
	Amount		%		Amount		%
Operating expense:
License fee	$	53,790		53.14%	$	48,800	30.84	%
Amortization of intangible asset	-			0.00%	72,593		45.87	%
Other general and administrative	47,427			46.86%	36,860		23.29	%
Total operating expenses	$	101,217		100.00%	$	158,253	100.0	0 %

The decrease in operating expenses for the three months ended September 30, 2016 was mainly because of the decrease in amortization of advertising right. At December 31, 2015, the Company impaired the entire advertising right. As a result, there was no amortization expense for the three months ended September 30, 2016.

Other Income

Interest income for the three months ended September 30, 2016 was $188,612 as compared to $146,688 for the three months ended September 30, 2015. The increase in interest income was mainly attributable to interest income from a promissory note agreement to lend approximately $1,600,000 (HK$12,400,000) to a third party in February 2016 and the increase in accretion of long-term notes receivable.

Net Income

For the three months ended September 30, 2016, the Company had a net income of $155,277 as compared to a net income of $46,496 for the three months ended September 30, 2015. The increase was mainly due to the decrease in operating expenses.

For the Nine Months ended September 30, 2016 as Compared to for the Nine Months ended September 30, 2015

Operating Revenues

During the nine months ended September 30, 2016 and 2015, the Company recognized revenue of $203,069 and $174,133, respectively, related to the advertising contracts with a third party. The annual advertising rate increased by approximately 17% in 2016.

Operating Expenses

The following table presents a breakdown of our operating expenses:


	For the Nine Month Ended September 30,
	2016				2015
	Amount		%		Amount		%
Operating expense:
License fee	$	157,466		48.18%	$	143,212	29.64	%
Amortization of intangible asset	-			0.00%	217,716		45.06	%
Other general and administrative	169,387			51.82%	122,220		25.30	%
Total operating expenses	$	326,853		100.00%	$	483,148	100.0	0 %

Operating expenses for the nine months ended September 30, 2016 were $326,853, as compared to $483,148 for the same period of 2015. The decrease in operating expenses was mainly due to decrease in amortization of advertising right assets. At December 31, 2015, the Company impaired the entire advertising right. As a result, there was no amortization expense for the nine months ended September 30, 2016.

Other Income (Expenses)

Interest income for the nine months ended September 30, 2016 was $524,193 as compared to $436,812 for the nine months ended September 30, 2015. The Company entered into a promissory note agreement to lend approximately $1,600,000 (HK$12,400,000) to a third party in February 2016. The interest for this promissory note was $112,000 for the nine months ended September 30, 2016.

Net Income

For the nine months ended September 30, 2016, the Company had a net income of $400,409 as compared to a net income of $122,797 for the nine months ended September 30, 2015. The increase was mainly due to the decrease in operating expenses and the increase in interest income.

Liquidity and Capital Resources

Cash flow information is as follows:


	Nine Months Ended September 30,
	2016		2015
Cash provided by (used in):
Operating activities	$	116,718	$	(92,593)
Investing activities		(1,598,762)		(2,817)
Impact of exchange rate on cash and cash equivalents		(1,166)		(4,623)
Net decrease in cash and cash equivalents	$	(1,483,210)	$	(100,033)

At September 30, 2016, the Company had a cash balance of $18,625. For the nine months ended September 30, 2016, the Company received net cash of $116,718 from operating activities as compared to net cash used in operating activities of $92,593 for the nine months ended September 30, 2015. The increase was mainly because of an advance from one customer.

For the nine months ended September 30, 2016, the Company used net cash of $1,598,762 in investment in short-term note receivable as compared to $2,817 of net cash used for investment in trademark for the nine months ended September 30, 2015.

For the nine months ended September 30, 2016 and 2015, there were no financing activities.

In our opinion, our available funds and revenues generated from our operation may not be 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.

Commitments

On August 26, 2010, CEM International Ltd. entered into an Advertising Agreement with Lotus TV, pursuant to which Lotus TV authorized CEM as its exclusive agent to operate all of its advertising business, and to be entitled to all the revenues generated therefrom (“Advertising Rights”). On November 25, 2014 and December 28, 2015, CEM amended the 2010 agreement and forego its exclusive advertising rights but remain as Lotus TV’s preferred advertising agent.

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, CEM agreed to pay Lotus TV a fixed annual fee every year regardless of the total amount of advertising revenues received by CEM. Under the agreement, CEM paid Lotus TV an initial annual fee of $128,900 (HK$1,000,000) for the first year of the agreement. The annual fee will increase at 10% every year until 2018 as amended in August 2016.

CEM also agreed to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling a minimum of $15 million over a period of 10 years. The terms of each loan 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. On November 25, 2014, CEM amended its 2010 agreement with Lotus TV whereby Lotus TV agreed to accelerate its repayment of the loan balance in annual instalments of $2,000,000 (amended to annual minimum instalments of $1,000,000 on December 28, 2015) each starting from 2015 until the entire remaining loan balance shall have been paid in full.

Critical Accounting Policies

The 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 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 consolidated 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.

Inflation

In general, our costs are affected by inflation and we may experience the effects of inflation in future periods. Such effects have not been material to us in the past and we believe will not materially affect us in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign currency fluctuations.

Foreign Exchange Risk

The functional currency of our subsidiary in Macau is the Hong Kong dollar. The results of operations of, and certain of our intercompany balances associated with, are exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. During the nine months ended September 30, 2016 and through this date, there has been no significant fluctuation in exchange rates between Hong Kong dollars and US dollars. However, future fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Any significant fluctuations in the exchange rate between the Hong Kong dollar and the United States dollar may bring down our operating income and lower our stock price. We have no current plans to undertake any hedging activity to minimize exchange rate fluctuations.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company carried out an evaluation required by the 1934 Act, 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, as defined in Rule 13a-15(e) of the 1934 Act, as of September 30, 2016. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2016, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2016 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). As a result of this assessment, management concluded that, as of September 30, 2016, the Company’s internal control over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Company had material weaknesses in its internal control over financial reporting. Specifically, management identified the following material weaknesses at September 30, 2016:

Lack of functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;

Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting and to allow for proper monitoring controls over accounting;

Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes.

To remediate our internal control weaknesses, management intends to implement the following measures:

The Company will appoint an audit committee.

The Company will add sufficient knowledgeable accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.

Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures.

The implementation is contingent upon the Company’s future growth on operations.

We understand that remediation of material weaknesses and deficiencies in internal controls are a continuing work in progress due to the issuance of new standards and promulgations. However, remediation of any known deficiency is among our highest priorities. Our management will periodically assess the progress and sufficiency of our ongoing initiatives and make adjustments as and when necessary.

Limitations on Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

(c) Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

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

Not applicable.

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/ Liang Huang

Liang Huang

President, Chief Executive Officer and Chief Financial Officer

November 4, 2016

Attached files

Stock widget

Investing forum

CREDIT ONE FINANCIAL INC Reports