Item 1. BUSINESS
Background
Credit One Financial, Inc. (the "Company") was incorporated in the State of Florida on September 24, 1999. Prior to July 2007, the Company was engaged in market research regarding the cost and availability of non-performing credit card debt portfolio and in contemplating the acquisition of non-performing accounts receivable. In spite of it, no meaningful operations were carried out.
In July 2007, the Company’s four principal shareholders sold an aggregate of 6,962,438 shares, which represented 89.48% of the Company’s capital shares, to ten persons for a total of $625,000 in cash. Following the change of control, the Company made an effort to provide funding, primarily in the form of advance, to small- and medium-sized companies with good and feasible business plans, but lacking capital to implement their business plans. In January 2008, the Company ceased its project financing business, and a joint venture, Moderation Limited (“Moderation”) was established in Hong Kong. The Company owned 51.6% of Moderation’s equity interest.
In January 2009, Liaoning Sinorth Resources Co., Ltd. was established in Liaoning, China, as Moderation’s wholly owned subsidiary. Its main business was production, processing and sale of mineral products, primarily graphite, in China. Despite the efforts the Company had made, the sales did not grow as much as the Company had expected. The Company found more and more difficult to carry out its graphite business as planned. Accordingly, the Company started looking for new business opportunities.
On November 18, 2010, the Company sold its 51.6% equity interest in Moderation for $16 million Hong Kong dollars, approximately $2.06 million in cash. 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 newly established, 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 authorizes E&M as its exclusive agent to operate all of its advertising businesses.
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 exclusive advertising rights, E&M agrees to pay Lotus TV a fixed fee on an annual basis regardless of the total amount of revenues generated from the advertising business to be received by E&M. Under the agreement, E&M paid Lotus TV an initial annual fee of HK$1,000,000 (approximately US$128,900) for the first year of the agreement. Such fee will increase at 10% every year for the following two years.
E&M also agrees to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling a minimum of US$10 million over a period of ten years. The terms of each loan and the increase of the annual fee after the first three years of the agreement will be negotiated by the parties.
On September 16, 2010, the name of E&M was changed to CEM International Ltd.
The Company has not been involved in any bankruptcy, receivership or similar proceeding.
Description of Business
Until November 30, 2010, the Company’s main business was processing and distribution of mineral products, primarily graphite products, in China. The products processed and distributed by the Company consisted primarily of medium- and high-carbon graphite, high-purity graphite, micro-power graphite and expandable graphite.
The Company purchased unprocessed raw materials, primarily mixed size graphite and semi-processed graphite, from a variety of sources, including mining companies, brokers and other intermediaries in China. For the period from January 1, 2010 to November 31, 2010, the Company procured raw materials from 18 raw material suppliers, of which four accounted for 10% or more of our total purchases.
After processing, the Company marketed its graphite products on a wholesale basis, primarily to graphite distributors and resellers. From January 1, 2010 to November 30, 2010, the Company had two significant customers who each accounted for more than 10% of our total sales.
Currently, the Company, through its wholly owned subsidiary CEM International Ltd, operates as an advertising agent, which dedicates to creating, planning and handling 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. In consideration for the exclusive advertising rights granted by Lotus TV, CEM agreed to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling of $10 million over the course of the agreement. As of December 31, 2011, CEM has loaned Lotus TV approximately $8.95 million under this agreement.
As Lotus TV’s exclusive 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. To a lesser extent, the Company also provides certain services, such as formulation of advertising strategies, as well as identification of talents and facilitation for the production of advertising clips and trailers.
The Company generates revenues primarily from the advertising sales paid by clients for the planning and placement of advertisements on Lotus TV, which does not charge the Company for the advertising time slots allocated to the Company.
Sales and Marketing
Currently, all our clients are introduced or brought in by Lotus TV.
Government Regulation
As a U.S. based company doing business in Macau, the Company seeks to comply with all Macau laws, rules and regulations and pronouncements, and endeavor to obtain all necessary approvals from applicable Chinese regulatory agencies. The Company believes it is in compliance in all material respects with existing applicable statutes and government regulations affecting its business and operations.
Research and Development
For the year ended December 31, 2011, the Company did not conduct any research or development activities. The Company does not anticipate conducting such activities in the near future.
Seasonality
In general, there is no seasonal nature in our business.
Patents, trademarks, franchises, concessions, royalty agreements or labor contracts
The Company does not own any copyrights, franchises, concessions, royalty agreements, or labor contracts.
The Company has applied for certain patent and trademark. The legal costs associated with serving and protecting patent and trademark are being capitalized and will be amortized over its estimated useful life.
Employees
As of December 31, 2011, the Company had two employees. As its business activities increase in size, the Company may need to hire additional employees. None of the Company’s employees are covered by collective bargaining agreements. We believe our relationships with employees to be satisfactory.
Item 1A.
Item 1A. RISK FACTORS
An investment in us involves a high degree of risk. Investors should carefully consider the risks below before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment. As of the date of this report, our management is aware of the following material risks.
Risks Related to the Company’s Business
We have incurred net losses in the past and may incur losses in the future.
We have incurred operating losses since our inception. As a result, at December 31, 2012 we had an accumulated deficit of $910,722. Our revenues from continuing operations for the years ended December 31, 2011 and 2010 were $128,643 and $5,932, respectively. There is no assurance that we can achieve profitability.
We have a limited operating history, which may make it difficult for you to evaluate our business and prospects.
We began our current business operations in 2010. Our limited operating history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. As a young company, we are subject to all of the risks associated with a new business enterprise. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by new business endeavors. We do not have a significant operating history which would provide you with meaningful information about our future operations.
We are dependent on limited number of clients to generate revenues. The loss of our clients’ business could result in a total lack of revenues unless we are able to continually attract additional clients.
Currently, the number of our clients is limited. If there were a material business disruption in any of those clients, we would likely lose a substantial amount of revenues. We intend to seek new and additional clients. With minimal clientele and no long-term arrangements or agreements with those clients, our future operations could be seriously affected especially if we fail to continue to secure additional and new clients. This could result in a total lack of revenues and would negatively impact our cash flows.
We generally do not have long-term contracts with our clients.
Our clients typically hire us on a project-by-project basis. Moreover, they generally have the right to terminate their relationships with us without penalty and with relatively short or no notice. Once a project is completed there is no assurance that a client will engage us for further services. The termination of our business relationships with any of our significant clients, or a material reduction in the use of our services by any of our significant clients, could adversely affect our future business, operating results and financial condition.
The impact of worldwide economic and business conditions, including the resulting effect on advertising budgets as the same are being reallocated to Internet marketing, may adversely affect our business, operating results and financial condition.
Our performance is subject to worldwide economic conditions and their impact on levels of advertising. In addition, the marketing budgets that have been traditionally invested in mediums such as print and television media are now being reallocated to Internet marketing, our existing and potential clients may no longer consider investment in our marketing solutions a necessity, or may reduce their advertising budgets in television. Historically, economic downturns have resulted in overall reductions in advertising spending. In particular, television marketing advertising solutions may be viewed by some of our existing and potential clients as a lower priority and may be among the expenditures to be reduced first as a result of unfavorable economic conditions. These developments could have an adverse effect on our business, operating results and financial condition.
We will require additional financing in the future, but such financing may not be available to us.
We will require additional capital to continue our operations. To date, our revenues from operations have not generated cash flow sufficient to finance our operations and growth. As a result, we have since our inception sought financing and we will likely continue to require additional financing in the future. If adequate funds are not available on acceptable terms, we may be unable to fund the operation of our business. As a result, we would likely be forced to dramatically alter or cease our operations.
If we raise additional capital, such capital raisings could dilute current shareholders’ ownership interests.
If additional funds are raised by the issuance of our equity securities, such as through the issuance of stock or convertible securities, then the ownership interest of our existing stockholders will be diluted. If additional funds are raised by the issuance of debt or other equity instruments, we may become subject to certain operational limitations (e.g., negative operating covenants), and such securities may have rights senior to those of the existing holders of common stock.
We face significant competition, and if we do not compete successfully, our profits may decline.
As a small business in the advertising industry, we face significant competition. We compete for advertisers primarily on the basis of network size and coverage, location, price, program quality, the range of services offered and brand recognition. We compete for advertising dollars spent in the television advertising sector. We also compete for overall advertising spending with other alternative advertising media, such as Internet, street facilities, billboard and public transport advertising, and with other traditional advertising media such as newspapers, magazines and radio.
Significant competition could reduce our operating margins and profitability and could have an adverse effect on our business, operating results and financial condition. Even though we have entered a long-term exclusive agreement with Lotus TV, our competitors generally have significantly larger advertising networks than we do, which gives them an ability to reach a larger number of potential consumers. There is no assurance that we will be able to successfully compete against new or existing competitors, and failure to compete may have an adverse effect on our business, operating results and financial condition.
Our operating results may fluctuate significantly, which make our future results difficult to predict and could cause our operating results to fall below expectations.
Our operating results may fluctuate significantly in the future due to a variety of factors, many of which are beyond our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and, therefore, prior results are not necessarily indicative of results to be expected in future periods.
Loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.
Our success is dependent to a significant extent on our executive officers and key personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers and key personnel or attract additional qualified personnel. The loss of any of our executive officers or other key personnel, or our inability to recruit and retain qualified personnel, could hurt our ability to operate and make it difficult to execute our acquisition and internal growth strategies.
Risks Related to Doing Business in Macau
Our business operations may be adversely affected by the changing political and economic policies in Macau.
Considerable portions of our assets are located in Macau, and a considerable portion of our revenues are expected to derive from our operations in Macau. The Macau government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in Macau may be adversely affected by changes in Macau laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. As a result, changes in the political and economic policies of the Macau government could have a significant impact on the results of our operations and financial condition.
Our assets, officers and directors are located outside of the U.S. It is difficult to effect service of process and enforcement of legal judgments upon us and our officers and directors.
Our assets, officers and directors are located outside of the United States. As a result, it may be difficult to effect service of process within the United States and enforce judgment of the US courts obtained against us and our executive officers and directors. Particularly, our shareholders may not be able to:
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Effect service of process within the United States on us or any of our executive officers and directors;
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Enforce judgments obtained in U.S. courts against us based upon the civil liability provisions of the U.S. federal securities laws;
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Enforce, in a court in Macau, judgments of U.S. courts based on the civil liability provisions of the U.S. federal securities laws; and
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Bring an original action in a court in Macau to enforce liabilities against us or any of our executive officers and directors based upon the U.S. federal securities laws.
Fluctuations in the exchange rate between the Hong Kong dollar and the United States dollar may bring down our operating income.
The functional currency of our operations in Macau is the Hong Kong dollar. Results of our operations are translated at average exchange rates into United States dollars for purposes of reporting results. During the years ended December 31, 2012 and 2011 and through this date, there has been little 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.
Risks Related to the Company’s Securities
Management exercises significant control over matters requiring shareholder approval which may result in the delay or prevention of a change in our control.
Dicky Cheung, our President and CEO, currently beneficially owns 90,693,454 shares, or approximately 30.02%, of our outstanding common stock. Accordingly, he could significantly influence us on matters submitted to the stockholders for approval. These matters include the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control that might otherwise be beneficial to our other stockholders. His interests may differ from the interests of our other shareholders.
Our stock is very thinly traded, and the price has been extremely volatile and may continue to fluctuate significantly, which may make it more difficult for you to resell shares when you want at prices you find attractive.
Our common stock is very thinly traded, and the price, if traded, has been and may continue to be subject to significant daily fluctuations. Consequently, investors may not be able to liquidate their investment at all, or if they are able to liquidate it may only be at a price that does not reflect the value of the business. Even if a more active market should develop, the price may be highly volatile. Consequently, there can be no assurances as to whether:
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any market for our common stock will develop;
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the prices at which our common stock will trade; or
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the extent to which investor interest in us will lead to the development of an active, liquid trading market.
Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.
In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. There are no assurances that an orderly or liquid market will ever develop for the shares of our common stock.
Our common stock is subject to the penny stock restrictions which will create a lack of liquidity and make trading difficult or impossible.
Our common stock is currently subject to the penny stock rules adopted by the Securities and Exchange Commission. Under the SEC Rule 15g-9, a stock is considered a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The penny stock rules require brokers to provide extensive disclosure explaining the penny stock market and the risks associated with investing in penny stocks to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our shareholders to sell their securities.
We may never pay any dividends to shareholders.
We have paid no cash dividends on our common stock to date and it is not anticipated that any cash dividends will be paid to holders of our common stock in the near future. While our dividend policy will be based on our operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion. As an investor, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in the Company.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
Our principal executive offices are located at 80 Wall Street, Suite 818, New York, NY 10005. We pay rent of $650 per month for this space on a month-by-month sublease basis.
We believe that our property is suitable and adequate for our present and proposed needs. If additional spaces are required, we believe that we will be able to obtain such space on commercially reasonable terms.
Item 3.
Item 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings and, to our knowledge, none of our officers, directors or principal shareholders are party to any legal proceeding in which they have an interest adverse to us.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock has been quoted on the OTC Bulletin Board under the symbol "COFI" since December 27, 2005.
The Company’s common stock has traded infrequently on the OTC Bulletin Board, which limits its ability to locate accurate high and low bid prices for each quarter within the last two fiscal years. Therefore, the following table lists the quotations for the high and low bid prices as reported by a Quarterly Trade and Quote Summary Report of the OTC Bulletin Board for the periods indicated. The quotations reflect inter-dealer prices without retail mark-up, markdown, or commissions and may not represent actual transactions.
The last reported trade was on March 1, 2012 with a quote price of $1.01 per share.
Holders
As of March 27, 2012, the Company had approximately 58 holders of record of its common stock.
Dividends
The Company has never declared or paid any cash dividends on its common stock nor does the Company anticipate paying any in the foreseeable future. The Company expects to retain any future earnings to finance its operations and expansion. The payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon the Company’s earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The Company does not have any equity compensation plans.
Performance graph
As a smaller reporting company, the Company is not required to provide the information under this item.
Recent Sales of Unregistered Securities
On December 22, 2008, the Company issued an aggregate of 2,000,000 shares of the Company's common stock at a price of $1.50 per share to 16 investors for an aggregate consideration of $3,000,000 in cash.
On May 3, 2011, the Company entered into a Securities Purchase Agreement with 16 investors in a private placement. Pursuant to the agreement, the Company issued and investors purchased an aggregate of 300 million shares of the Company’s common stock, at a price of $0.03 per share, for an aggregate consideration of $9,000,000 in cash.
All shares sold as described above were unregistered under the Securities Act of 1933, as amended. The shares were issued in reliance upon exemptions from registration provided by Regulation S and/or Section 4(2) promulgated under the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
No purchases of our equity securities were made by us or any affiliated entity during the year ended December 31, 2011.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under "Risk factors," and elsewhere in this Form 10-K.
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 China Mineral. The transaction was closed on November 30, 2010, and the Company ceased to be a processor and distributor of graphite products.
On August 26, 2010, E&M International Limited (“E&M”), a wholly-owned subsidiary of the Company, entered into an advertising agreement with Macau Lotus Satellite TV Media Limited (“Lotus TV”), pursuant to which Lotus TV authorized E&M as its exclusive agent to operate all of its advertising businesses (“Advertising Rights”).
The term of this agreement is ten years from September 1, 2010 to August 31, 2020. In consideration for Lotus TV’s grant of the Advertising Rights, E&M agreed to pay Lotus TV a fixed fee on an annual basis regardless of the total amount of revenues generated from the advertising business to be received by E&M. Under the agreement, E&M paid Lotus TV an initial annual fee of HK$1,000,000 (approximately US$128,900) for the first year of the agreement, which will increase at 10% every year for the following two years.
E&M also agreed to extend to Lotus TV, interest free, a credit facility consisting of a series of loans totaling a minimum of US$10 million over a period of ten years. The terms of each loan and the increase of the annual fee after the first three years
of the agreement will be negotiated by the parties depending on Lotus TV’s financial needs and the amount of advertising revenues generated. As of December 31, 2011, the Company has loaned Lotus TV approximately $8.95 million under this agreement.
On September 16, 2010, the name of E&M was changed to CEM International Ltd.
At the Annual Meeting of Stockholders of the Company, held on October 29, 2010, the stockholders voted on and approved an amendment to the Company’s Articles of Incorporation, as amended, to approve an amendment to the Company’s Articles of Incorporation to effect an one-for-fifty reverse stock split of its issued and outstanding common stock, $0.001 par value per share. The amendment became effective as of December 27, 2010. All share transactions disclosed in these financial statements give retroactive effect to this 1:50 reverse split.
Results of Operations
For the Year ended December 31, 2011 Compared to 2010
Revenue
For the year ended December 31, 2011, the revenue from the Company’s continuing operations was $128,643, as compared to $5,932 for the prior year. On November 30, 2010 the Company sold its 51.6% equity interest in Moderation Limited, which in turn, owned 100% of Liaoning Sinorth Resources Co., Ltd. The Company recognized a gain of $408,467 on the sale of the subsidiary.
Operating expenses
Operating expenses for the year ended December 31, 2011 were $622,345, as compared to $145,034 for the same period of fiscal 2010. The increase in operating expenses was primarily due to accrual of annual license fees to Lotus TV and amortization of the advertising rights asset.
Other income (expenses)
Our total other income (expense) for the year ended December 31, 2011 was $(41,467), which consisted of interest income of $223,247 and unrealized loss on gold bullion investments of $264,714. For the same period of fiscal 2010, the other income (expenses) was $2,910, which consisted of interest income.
Discontinued Operations
The Company recognized losses from the discontinued operations of Moderation, Ltd, which was disposed of on November 30, 2010, for the year ended December 31, 2010 of $(211,298). Net sales for the year ended December 31, 2010 were $2,998,507. Cost of sales for the year ended December 31, 2010 was $2,883,336. Operating expenses were $384,490. Losses from discontinued operations allocated to the non-controlling interest were $102,269 in 2010.
Net income (loss)
For the year ended December 31, 2011, the Company had a net loss of $535,170 attributed to common stockholders, or $0.00 per share, as compared to a net income of $163,246, or $0.08 per share, for the same period of 2010.
Liquidity and Capital Resources
At December 31, 2011, the Company had cash balance of $250,167. For the year ended December 31, 2011, the operating activities of the Company used net cash of $406,687, as compared to net cash provided by the operating activities $277,434 for the prior year. The decrease in 2011 operating cash flows was primarily from the current year net loss of ($535,170) and an increase in prepaid expense ($173,772), partially offset by non-cash expenses totaling $398,444 of depreciation, amortization, and unrealized loss on investments.
Net cash used by investing activities amounted to $8,558,204 for the year ended December 31, 2011 compared to $892,061 for 2010. This 2011 increase was primarily due to issuances of funds to Lotus TV to totaling approximately $7.0 million and investments in gold bullion of $2.6 million, which were offset by net amounts paid by director of$275,223 on behalf of the Company to purchase gold bullion and proceeds of $790,754 received from prior year note related Moderation sale. The 2010 amount pertains to purchase of property, plant and equipment, and funds issued to Lotus TV under note arrangements, offset by note proceeds and cash from Moderation sale.
For the year ended December 31, 2011, the cash provided by financing activities was $9,000,000, which was from issuance of 300 million shares of the Company’s common stock in a private placement. During the same period of 2010, there were no financing activities.
In our opinion, available funds and revenues generated from our operation will satisfy our capital requirements for the next twelve months. However, we may need to raise additional funds to pursue growth opportunities and make capital improvements. We may raise funds through private placements, either in equity offerings, or interest bearing borrowings. There is no guarantee that we will be able to raise additional funds through offerings or other sources. If we are unable to raise funds, our ability to continue with operations will be materially hindered.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, such as doubtful accounts, inventories, and impairment of long-lived assets. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that we follow are set forth in Note 2 to our financial statements as included in this report. These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently applied in the preparation of the financial statements.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information under this Item.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Certified Public Accounting Firm
To The Board of Directors of
Credit One Financial, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Credit One Financial, Inc., and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Credit One Financial, Inc. and subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss, Krusick & Associates, LLC
Winter Park, Florida
March 27, 2012
CREDIT ONE FINANCIAL, INC.
Consolidated Balance Sheets
See the accompanying notes to consolidated financial statements.
CREDIT ONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
See the accompanying notes to consolidated financial statements.
CREDIT ONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2011 and 2010
See the accompanying notes to consolidated financial statements.
CREDIT ONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010 and 2009
See the accompanying notes to consolidated financial statements.
CREDIT ONE FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2011
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
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 51.6% owned subsidiary, Moderation Limited (a Hong Kong corporation, “Moderation”) through November 30, 2010, the date Moderation was sold. Moderation, in turn, was the 100% owner and consolidated Liaoning Sinorth Resources Co., Ltd, a People’s Republic of China corporation. Also included in the consolidated financial statements are the financial position, results of operations and cash flows of the Company’s 100% owned subsidiary, CEM.
The non-controlling interest in Moderation was classified as part of stockholders’ equity in the consolidated balance sheet, and the non-controlling interest’s share of Moderation’s net loss was shown as a reduction of the Company’s net loss in the consolidated statement of operations.
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 $414,498 in U.S. net operating loss carry-forwards and $496,223 in Macau net operating loss carry-forwards as of December 31, 2011, 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 December 31, 2011, the Company maintained $225,138 in foreign bank accounts not subject to FDIC coverage. The remaining balance of $25,029 at December 31, 2011 was maintained in a domestic bank account and fully insured by FDIC.
Investment in Gold Bullion
The Company invests in gold bullion. As a precious metal, the investment in gold bullion is stated its monetary fair value as determined by the Chinese Gold & Silver Exchange Society. Any adjustments to the fair value of the investments are recorded in unrealized gain or loss on the accompanying consolidated statements of operations and comprehensive income (loss).
Foreign Currency
The Company reports it financial position and results of operations in U.S. dollars. For its subsidiaries that have functional currencies that are foreign currencies, the elements of the financial statements are translated by using a current exchange rate. For assets and liabilities, the exchange rate at the balance sheet date is used and for revenues, expenses, gains, and losses, the exchange rate at the dates on which those elements are recognized is used. Transaction adjustments result from the process of translating the subsidiaries’ financial statements into US dollars and are not included in determining net income, but are reported in other comprehensive income. There was currency translation adjustment of $18,131 and $5,363 as of December 31, 2011 and 2010, respectively.
Foreign currency transactions are transactions denominated in a currency other than the entity's functional currency. At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity are adjusted to reflect the current exchange rate, with any resulting differences reported in the current period statement of operations. For the years ended December 31, 2011 and 2010, the Company recognized no foreign currency exchange losses in the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue in accordance with Securities and Exchange Commission revenue recognition accounting standards. Sales revenues were recognized when the products were shipped to the customers, net of discounts and collectibility is reasonably assured. No provisions were made for returns because, historically in China and in the industry, there have been very few sales returns and adjustments that would have impacted the Company’s ultimate collection of revenues.
As an advertising agent, CEM is in the service business dedicated to creating, planning and handling advertising for its clients. Advertising revenue is recognized upon the delivery of the contracted advertising services and when no significant Company performance obligation remains. Service revenue is recognized as the contracted services are rendered.
Exclusive Advertising Rights
Exclusive advertising rights represent costs for exclusive rights to advertise on Macau Lotus Satellite TV Media Limited’s (“Lotus”) network. The costs were determined as the difference between the face value of non-interest bearing notes receivable from Lotus and the present value of the notes receivable at the time of issuance. This intangible asset is being amortized over the remaining life of the rights, which expire August 31, 2020.
Trademark
Legal costs associated with serving and protecting trademark are being capitalized and will be amortized over its estimated useful life.
Imputed Interest
In 2010 and 2011, the Company issued non-interest bearing notes receivable which mature in 2020. The notes receivable were recorded at issuance at its present value using an effective interest rate of 8%, which was the Company’s stated rate on another note receivable. At the balance sheet date, the notes are revalued with the change in present value recorded as interest income in the Consolidated Statements of Operations.
Impairment of Long Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison for the carrying amount of an asset to future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets which considers the discounted future net cash flows.
Property, Plant and Equipment
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 December 31, 2011 and 2010, respectively.
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company is assessing the impact of ASU 2011-11 on its disclosures.
Reclassifications
Certain amounts reflected in the accompanying financial statements for the year ended December 31, 2010 have been reclassified from previously reported amounts to correspond to the current year presentation..
Note 3- Discontinued Operations
On November 30, 2010 the Company sold its 51.6% equity interest in Moderation Limited, which in turn, owned 100% of Liaoning Sinorth Resources Co., Ltd. The Company decided to sell its stake in order due to a reassessment of its business plan. The Company sold its interest in Moderation for HK$16,000,000 (approximately $2.06 million at date of sale). The purchaser was also required to repay Moderation’s note payable of $790,754 to the Company, which was repaid in January 2011. The Company recognized a gain of $408,467 on the sale of the subsidiary.
Summarized financial information for discontinued operations is shown below for the years ended December 31, 2011 and 2010, respectively:
Note 4 - Note Receivable and Exclusive Advertising Rights Asset
CEM International Limited entered into an exclusive agreement with Macau Lotus Satellite TV Media Limited (Lotus) on August 26, 2010 to provide advertising services for a ten year period commencing on September 1, 2010. In consideration for the exclusive advertising rights granted by Lotus, CEM will provide advertising services and issue, over the course of the agreement, US$10 million in loans to Lotus. The amount and duration of each loan shall be negotiated by the parties, depending on Lotus’s financial needs.
On December 17, 2010, CEM issued Lotus TV a HK$15,000,000 (US$1,928,839) loan which is backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$7,105,808 (US$913,872) using an effective interest rate of 8%. This difference between the face value and the present value of HK$7,894,192 (US$1,014,967) was allocated to an intangible asset captioned Exclusive Advertising Rights.
On January 31, 2011, CEM issued Lotus TV an additional HK$6,084,000 (US$780,000) loan which is backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$2,833,577 (US$363,279) using an effective interest rate of 8%. This difference between the face value and the present value of HK$3,250,423 (US$416,721) was allocated to an intangible asset captioned Exclusive Advertising Rights.
On June 12, 2011, CEM issued Lotus TV a series of additional loans totaling HK$43,700,000 (US$5,623,255), backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$20,831,819 (US$ 2,680,610) using an effective interest rate of 8%. This difference between the face value and the present value of HK$22,868,181 (US$2,942,645) was allocated to the intangible asset captioned Exclusive Advertising Rights.
On August 9, 2011, CEM issued Lotus TV an additional loan HK$4,800,000 (US$614,731), backed by a non-interest bearing promissory note, due on August 31, 2020. The note receivable was discounted to its estimated fair value of HK$2,334,232 (US$ 299,814) using an effective interest rate of 8%. This difference between the face value and the present value of HK$2,465,768 (US$314,917) was allocated to the intangible asset captioned Exclusive Advertising Rights.
An intangible asset captioned Exclusive Advertising Rights has been recorded in the accompanying consolidated balance sheets representing the difference between the face amount of the notes receivable and the respective present values at the time of issuance. This difference was deemed an asset because the interest-free note was a condition of the exclusive agreement.
A Summary of the notes receivable and intangible asset are as follows:
NOTE RECEIVABLE
INTANGIBLE ASSET
Interest income accrued on the notes amounted $223,661 for 2011 and $2,910 for 2010. Amortization of the intangible asset amounted to $335,850 for 2011 and $4,357 for 2010 and in included in selling, general and administrative expenses in the accompanying financial statements.
Note 5 - Income Taxes
The Company accounts for income taxes using the liability method, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
Effective January 1, 2008, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The tax rate for Macau is 12%.
Due to the Company’s accumulated net losses, there was no provision for income taxes. The Company’s effective tax rate for the period ended December 31, 2011 was 0% due to the net operating loss carry-forward. The Company’s taxes were subject to a full valuation allowance as follows at December 31, 2011 and 2010:
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 December 31, 2011 and 2010.
Note 6 - 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 December 31, 2011, there were 302,155,623 shares of the Company’s common stock issued and outstanding.
On October 29, 2010, the stockholders of the Company approved an amendment to the Company’s Articles of Incorporation to effect an one-for-fifty reverse stock split of its issued and outstanding common stock, $0.001 par value per share. The amendment became effective as of December 27, 2010. All share transactions disclosed in these financial statements give retroactive effect to this 1:50 reverse split.
On May 3, 2011, the Company issued an aggregate of 300 million shares of the Company’s common stock to 16 investors in a private placement at a price of $0.03 per share, for an aggregate consideration of $9,000,000 in cash.
Note 7 - Commitments and Contingencies
On August 26, 2010, E&M (name changed to CEM International Ltd on September 16, 2010) entered into an Advertising Agreement (the “Agreement”) with Macau Lotus Satellite TV Media Limited (“Lotus TV”), pursuant to which Lotus TV authorizes E&M as its exclusive agent to operate all of its advertising businesses, and to be entitled to all the revenues generated therefrom (“Advertising Rights”).
The term of this Agreement is 10 years from September 1, 2010 to August 31, 2020. In consideration for Lotus TV’s grant of the Advertising Rights, E&M agrees to pay Lotus TV a fixed annual fee every year (the “Annual Fee”) regardless of the total amount of advertising revenues received by E&M. Under the Agreement, E&M paid Lotus TV an initial Annual Fee of $1,000,000 Hong Kong dollars (approximately US$128,900) for the first year of the Agreement, which Annual Fee will increase at 10% every year for the following two years. The initial annual fee of $128,900 was paid in August 2011, and the
Company accrued $47,197 as payable in the consolidated balance sheet as of December 31, 2011 for the fee due in August 2012.
E&M also agrees to extend to Lotus TV, interest free, a credit facility consisting of a series of loans (each a “Loan”) totaling a minimum of US$10 million over a period of 10 years. The terms of each Loan and the increase of Annual Fee after the first three years of the Agreement will be negotiated by the parties depending on financial needs and the advertising revenues. The Company currently expects that the loans will be originated from its cash reserve, advertising revenue and, if necessary, raised from the capital market.
License fee expense for the years ended December 31, 2011 and 2010 were $132,752 and $42,870, respectively, and is included in selling, general and administrative expenses.
Note 8 - 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 9 - Related Party Transactions
A director of the Company purchased investments in gold bullion on behalf of the Company in August 2011. Purchases made under this arrangement totaled approximately HKD $20 Million (USD $2.6 Million). HKD $2,137,915 (USD $275,223) remained payable to the director at December 31, 2011 and is non-interest bearing and due on demand.
In May 2011, the Company issued 90 million shares of its common stock, as part of the 300 million issued in a private placement, to a related party of Dicky Cheung, the Company’s president and CEO, in exchange for $2,700,000 in cash.
Note 10 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31, 2011 and 2010.
Note 11 - Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued. Per our evaluation there were no significant subsequent events that require disclosure.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As used herein, the term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms issued by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and its principal financial officer or officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
(b) Management’s report on internal control over financial reporting
The management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal controls over our financial reporting.
The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.
To evaluate the effectiveness of our internal controls over financial reporting, we have adopted the framework prescribed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the related guidance provided in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies, also issued by COSO.
Material Weaknesses Addressed in 2011
Based on our evaluation of our internal controls as of December 31, 2010, our principal executive officer and principal financial officer concluded that our internal controls over financial reporting were
ineffective in enabling the Company to record, process, summarize and report, in a timely manner, the information that the Company is required to disclose in its Exchange Act reports. The material weaknesses the management identified as of December 31, 2010 were described below.
·
Lack of independent directors;
·
Lack of effective policies regarding the general accounting system; and
·
Lack of effective control over financial statement disclosure.
Although management believed that the material weaknesses set forth above were the result of the scale of our operations and intrinsic to our small size, and that these weaknesses did not have an effect on our financial reporting. During 2011, the Company has engaged in the following remediation efforts to ensure that the significant deficiencies do not recur:
(1)
Appoint a new independent director to our Board of Directors who will undertake the oversight in the establishment, reviewing, authorizing and monitoring of management’s actions (Although there is no requirement that we have any independent directors, we intend to have a majority of independent directors as soon as we are reasonably able to do so);
(2) Hire a new accounting staff and provide additional training on the requirements of the U.S. generally accepted accounting principles to improve their familiarity with those standards, and ensure their proper application of the U.S. GAAP to various financial transactions; and
(2) Conduct additional accounting review and control, and confirm that our financial statements for each period, present fairly, in all material respects, our financial positions, results of operations and cash flows for the periods presented are in conformity with U.S. generally accepted accounting principles.
These remediation efforts have been designed to address the material weaknesses identified and to improve and strengthen the Company’s overall control environment. The Company believes these actions will prevent significant deficiencies from recurring.
As a result of these improvements and remedial actions, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2011 based on the criteria prescribed by COSO and the related guidance provided in Internal Control Over Financial Reporting - Guidance for Smaller Public Companies, issued by COSO.
Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected. While we believe that our disclosure controls and procedures and our internal control over financial reporting are effective, in light of the foregoing, we intend to continue to examine and refine our disclosure controls and procedures and our internal control over financial reporting to monitor ongoing developments in this area.
(c) Changes in internal controls over financial reporting
Except for these improvements and remedial actions noted above, there were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting because as a smaller reporting company we are not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9B.
Item 9B. OTHER INFORMATION
None
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the information about our directors and executive officer:
Mr. Dicky Cheung has been the Company's President, Chief Executive Officer, Chief Financial Officer, Secretary and the Director since July 2007. Mr. Cheung has been the President of Companhhia Internacional Tek Tat Limitada, a privately held company located in Macau, since its formation in 2007. Since 2002, Mr. Cheung has been a self-employed stock and bond investor.
Ms. Fan has been selected as a director of the Company since December 2011. She is the founder of XYZ Gallery, which makes and markets a variety of paintings and drawings in Beijing, China. Since 2002, Ms. Fan has been XYZ Gallery’s President, Chief Executive Officer, and Chief Financial Officer. In 2007, Ms. Fan co-founded Four-Season Matou Space Gallery in Beijing, China, and she has been served as its vice president in Arts and Business Development.
During the past five years, each of Mr. Cheung and Ms. Fan did not hold any directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Significant Employees
There are no significant employees other than our executive officer.
Family Relationships
None of our directors, executive officers, or key employees is related by blood, marriage, or adoption to any other Director, executive officer, or other key employees.
Involvement in Certain Legal Proceedings
None.
CORPORATE GOVERNANCE
The business, properties and affairs of the Company are managed by the Chief Executive Officer under the direction of the Board of Directors. The Board has responsibility for establishing broad corporate policies and for overall performance and direction of the Company, but is not involved in day-to-day operations. Members of the Board keep informed of the Company’s business by participating in Board meetings, by reviewing analyses and reports sent to them regularly, and through discussions with the Chief Executive Officer and other officers.
Board Leadership Structure and Board's Role in Risk Oversight
Mr. Dicky Cheung, our Chief Executive Officer, serves as the Chairman of the Board of Directors. As a result of the size of the Company and only having one executive officer, the Board believes this leadership structure provides the most efficient and effective leadership model for the Company by enhancing the Chairman and Chief Executive Officer’s ability to provide clear insight and direction of business strategies and plans to both the Board and management.
Management is responsible for the day-to-day management of risks the Company faces, while our whole board of directors has responsibility for the oversight of risk management. In its risk management role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
Because the Company has two board members, the board of directors’ role in overseeing the management of risk we face is conducted primarily through its committees, as discussed in the description of each committee below and as specified in each committee’s respective charter. The board of directors (or the appropriate board committee in the case of risks that are under the purview of a particular committee) discusses with management potential risk exposures, their potential impact on our company and the steps we take to manage them. When a board committee is responsible for evaluating and overseeing the management of a particular risk or risks, the committee will report such matters to the full board. This enables the board of directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Management provides timely and comprehensive information to the board to support the board’s role in oversight, approval and decision-making. As often as required, the board reviews the Company’s strategy, the key risks affecting strategy, operations, reporting, legal and compliance, the status of those risks, and how those risks are being managed. At present the board has a standing Audit Committee, but the board does not have outstanding Nominating or Compensation Committees.
The board also regularly receives reports from our internal personnel and independent accountants.
Committees of the Board of Directors
The Company does not have nominating, compensation or audit committees of the Board. The full board conducts the function of an audit committee.
Audit Committee.
Presently, the board of directors acts as the audit committee. Our board of directors does not have an “audit committee financial expert,” within the meaning of such phrase under applicable regulations of the Securities and Exchange Commission, serving on its audit committee. However, the board of directors believes that all members of its board are financially literate and experienced in business matters, and that one or more members of the board are capable of (i) understanding generally accepted accounting principles ("GAAP") and financial statements, (ii) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding our internal controls and procedures for financial reporting; and (v) understanding audit committee functions, all of which are attributes of an audit committee financial expert. The board believes that its current board is able to fulfill its role under SEC regulations despite not having a designated "audit committee financial expert."
Nominating Committee
The full board of directors of the Company functions as a Nominating Committee to select potential directors of the Company. The board has not specifically designated a separate nominating committee because all members of the board
of directors desire to be involved in the selection of any new director. The board does not have a specific charter to govern its actions as a nominating committee.
There are no specific, minimum qualifications that the board of directors believes must be met by a candidate recommended by the board of directors. The entire board of directors will assess candidates, whether submitted by management or stockholders, and make recommendations for election or appointment.
Stockholders may recommend director nominee candidates by sending the following information to the Board of Directors, Credit One Financial, Inc., 80 Wall Street, Suite 818, New York, NY 10005: stockholder’s name, number of shares owned, length of period held, and proof of ownership; name, age and address of candidate; candidate’s detailed resume; description of any arrangements or understandings between the stockholder and the candidate; and signed statement from the candidate confirming his or her willingness to serve on the Board of Directors.
The Company intends to seek additional qualified independent directors to serve on the board and ultimately form standing audit, nominating and compensation committees.
Director Independence
We are presently not required to comply with the director independence requirements of any securities exchange, which requires that a majority of a company's directors be independent.
Our board of directors has determined that Ms. Xueyi Fan is independent within the applicable rules of the SEC, and that she is also an independent director under Rule 10A-3 of the Exchange Act for the purpose of audit committee membership.
Code of Business Conduct and Ethics
Our Code of Ethics is applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and all of our employees. It has been designed to deter wrongdoing and to promote:
l
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
l
Full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, the Commission and in other public communications made by the Company;
l
Compliance with applicable governmental laws, rules and regulations;
l
Prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
l
Accountability for adherence to the Code.
Compensation Interlocks and Insider Participation
There were no compensation committee or board interlocks among the members of our Board.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, as of the date of this report, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners are complied with.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following tables set forth the compensation of the Company's executive officers during the last two fiscal years:
Summary Compensation Table
There were no "most highly compensated executive officers" as that term is defined in Item 402(a)(2) of Regulation S-K and there were no additional individuals for whom disclosure would have been made in this table.
Equity Compensation Plans
The Company has no equity compensation plans at present, and there have been no grants of plan-based award made to a named executive officer in the last two completed fiscal years under any plan.
Outstanding Equity Awards at Fiscal Year-End
The Company does not have any equity incentive plans. There was no outstanding equity awards at fiscal year ended December 31, 2011.
Option Exercises and Stock Vested
The Company does not have any equity incentive plans. There have been no exercise of stock options, SARs and similar instruments, and no vesting of stock, including restricted stock, restricted stock units and similar instruments, during the last two completed fiscal year for each of the named executive officers.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
The Company does not have employment agreements in place with its executive officers and directors. There are no contracts, agreements, plans or arrangements, whether written or unwritten, that provides for payment(s) to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control of the Company or a change in the named executive officer's responsibilities following a change in control, with respect to each named executive officer.
Employee Benefits Plans
(i) Pension Benefits
We do not sponsor any qualified or non-qualified pension benefit plans.
(ii) Nonqualified Deferred Compensation
We do not maintain any non-qualified defined contribution or deferred compensation plans. At this time we do not have a tax qualified defined contribution 401(k) plan in which all eligible executive officers and employees may participate.
Securities Authorized for Issuance under Equity Compensation Plans
As of the end of the most recently completed fiscal year, there were no compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
Potential Conflicts of Interest of Compensation Consultants
No compensation consultants have ever been hired to advise the Company and its Board of Directors.
Director Compensation
Directors do not receive any compensation for their services as directors. Our Board of Directors has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity. As of the date of this proxy statement, no guidelines for the compensation of our non-employee directors have been adopted.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the common stock beneficially owned as of March 27, 2012 by (i) each of our directors and director nominees; (ii) each of our current Named Executive Officers; and (iii) all current executive officers and directors as a group. There were 302,155,623 shares of our common stock outstanding as of March 27, 2012. We have no other classes of voting securities outstanding.
Security Ownership of Management
The following table sets forth certain information, as of March 27, 2012, as to each person known by us to own beneficially more than 5% of the outstanding shares of our common stock.
Notes:
(1)
Except as otherwise noted herein, percentage is determined on the basis of 302,155,623 shares of the Company’s common stock outstanding plus securities deemed outstanding pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under Rule 13d-3, a person is deemed to be a beneficial owner of any security owned by certain family members and any security of which that person has the right to acquire beneficial ownership within 60 days, including, without limitation, shares of common stock subject to currently exercisable options.
(2)
The Company has not granted any stock options or warrants to purchase shares of its common stock, and the Company has not issued and does not have any securities outstanding that may be converted into its common shares or have any rights convertible or exchangeable into shares of the Company’s common stock.
(3)
All shares are held by a corporation of which he is a controlling shareholder.
(4)
There are no shares that are pledged as security.
Changes in Control
There are no arrangements, known to the Company, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
Securities Authorized for Issuance under Equity Compensation Plans
As of the end of the most recently completed fiscal year, there were no compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
In July 2007, Companhhia Internacional Tek Tat Limitada, a company controlled by Dicky Cheung, our President and CEO, acquired an aggregate of 77,649 shares, or approximately 49.9%, of the Company's issued and outstanding common stock, from former directors and officers of the Company, for an aggregate cash purchase price of approximately $349,521.
In July and October 2007, respectively, the Company issued to Dicky Cheung, our President and CEO, three promissory notes, in an aggregate principal amount of $620,000 in consideration for a $620,000 cash loans made by Mr. Cheung to the Company. Interest on the note accrued at the rate of 5% per year.
In December 2008, all three notes mentioned above and accrued interest in a total amount of $653,708 was converted into the Company’s common stock shares at $1.50 per share. At the same time, Mr. Cheung purchased an additional 180,000 shares of the Company’s common stock at a purchase of $1.50 per share.
A director of the Company purchased investments in gold bullion on behalf of the Company in August 2011. Purchases made under this arrangement totaled approximately HKD $20 Million (USD $2.6 Million). HKD $2,137,915 (USD $275,223) remained payable to the director at December 31, 2011 and is non-interest bearing and due on demand.
In May 2011, the Company issued 90 million shares of its common stock as part of the 300 million issued in the private placement to a related party of Dicky Cheung, the Company’s president and CEO, in exchange for $2,700,000 in cash.
Procedures for Approval of Transactions with Related Persons
All transactions involving related persons are to be presented to and assessed by the independent members of the board of directors. Related persons include the Company’s directors and executive officers, immediate family members of the directors and executive officers, and certain large security holders and their family members. If the determination is made that a related person has or may have a material direct or indirect interest in any Company transaction and that the amount involved equals or exceeds $120,000, the Company’s independent directors will review, approve and ratify the transaction, if appropriate, and the transaction will be disclosed if required under SEC rules. If the related party at issue is a director of the Company or a family member of a director, then that director will not participate in the relevant discussion and review.
Information considered in evaluating such transactions include the nature of the related person’s interest in the transaction, the material terms of the transaction, the importance of the transaction to the Company and the related person, whether the transaction is on terms no less favorable to the Company than those available with other parties, whether the transaction would impair the judgment of a director or an executive officer to act in the best interests of the Company, and any other matters that management or the independent directors deem appropriate.
Parents
Not Applicable.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Accountant Fees and Services
The following is a summary of the fees billed to us by Moss, Krusick and Associates, LLC (“Moss Krusick”) for professional services rendered for the fiscal years ended December 31, 2011 and 2010:
(1) Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements included in our Form 10-Q.
(2) Audit related fees. None.
(3) Tax fees. Tax return preparation.
(4) All other fees. None.
(5) Pre-Approval Policies
The Company does not have an audit committee at present. Our Board of Directors has reviewed and discussed with Moss Krusick the audited financial statements of the Company contained in the Company's Annual Report on Form 10-K for the Company's 2011 fiscal year. Our Board has also discussed with Moss Krusick the matters required to be discussed pursuant to Public Company Accounting Oversight Board Standards and to SAS No. 61 (Codification of Statements on Auditing Standards, AU Section 380), which includes, among other items, matters related to the conduct of the audit of the Company's financial statements.
Our Board has received and reviewed the written disclosures and the letter from Moss Krusick required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and has discussed with Moss Krusick its independence from the Company.
Our Board has considered whether the provision of services other than audit services is compatible with maintaining auditor independence.
The Board’s policy is to pre-approve all audit services and all permitted non-audit services (including the fees and terms thereof) to be provided by the Company's independent auditor; provided, however, pre-approval requirements for non-audit services are not required if all such services (1) do not aggregate to more than five percent of total revenues paid by the Company to its accountant in the fiscal year when services are provided; (2) were not recognized as non-audit services at the time of the engagement; and (3) are promptly brought to the attention of the Board and approved prior to the completion of the audit.
Our Board pre-approved all of the fees described above.
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
3.1
Articles of Incorporation, incorporated by reference herein from Exhibit 3(i) (A) to our Form 10-SB filed June 25, 2003.
3.2
Amended Articles of Incorporation, incorporated by reference herein from Exhibit 3(i)(B) to our Form 10-SB filed June 25, 2003
3.3
Amended Articles of Incorporation, incorporated by reference herein from Exhibit 3(i)(C) to our Form 10-QSB for the fiscal quarter ended March 31, 2005.
3.3(i)
Amended Articles of Incorporation, incorporated by reference herein from Exhibit 3.3 to our Current Report on Form 8-K filed January 4, 2010.
3.4
By-laws incorporated by reference herein from Exhibit 3(ii) to our Form 10-SB filed June 25, 2003
10.1
Stock Purchase Agreement with STM 1, LLC dated May 3, 2006, incorporated by reference herein from Exhibit 99 to our Form 8-K filed May 9, 2006.
Code of Ethics, incorporated by reference herein from Exhibit 14 to our Form 8-K filed February 1, 2010
List of Subsidiaries of the Company
31.1
Certification pursuant to Section 13a-14 of the Securities Exchange Act of 1934
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 USC 1830)
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
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CREDIT ONE FINANCIAL, INC.
By: /s/ Dicky Cheung
Dicky Cheung
President & CEO
(Principal Executive Officer and Principal Financial Officer)
Date: March 29, 2012
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Dicky Cheung
Dicky Cheung
President & CEO
(Principal Executive Officer and Principal Financial Officer) Date: March 29, 2012
By: /s/ Xueyi Fan
Xueyi Fan, Director Date: March 29, 2012