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CREDIT ONE FINANCIAL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 30, 2014

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



Overview

Until November 30, 2010, the Company's main business was processing and distribution of mineral products, primarily graphite products, in China. Despite the efforts it had made, the Company's sales did not grow as much as the Company had expected. Because it was more and more difficult to carry out its graphite business, on November 18, 2010, the Company entered into a share purchase agreement with China Minerals International Ltd., by which the Company sold its 51.6% equity interest in Moderation Ltd. for $16 millionHong 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, 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 six years. CEM 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 (amended to US$15 million on June 13, 2014) over a period of ten years. The terms of each loan and 13

-------------------------------------------------------------------------------- the increase of the annual fee after the first three years of the agreement will be renegotiated by the parties. As of June 30, 2014, the loan balance to Lotus TV was approximately $10.14 million under this agreement. On June 13, 2014, CEM loaned HK$3,000,000 Hong Kong dollars (approx. US$387,027) to Lotus TV.



Results of Operations

FOR THE THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO 2013

Operating Revenues

The following table presents a breakdown of our operating revenues among advertising revenues and revenue from TV program, i.e., revenue from sale of the advertising TV time obtained from Lotus TV:

For the Three Month Ended June 30, 2014 2013 Amount % Amount % Operating revenues: Advertising revenue $ 48,368 100 % $ 183,820 100 % TV Program - - % - - % Total operating revenues $ 48,368 100 % $ 183,820 100.0 % In January 2014, the Company received an advance payment of $193,374, and in December 2012, an advance payment of $154,575 under a contract to provide advertising for all of 2014 and 2013. During the three months ended June 30, 2014 and 2013, the Company recognized revenue of $48,368 and $183,820, respectively, related to the contract. At June 30, 2014, $96,757 of deferred revenue was recorded related to the contact. Operating expenses



The following table presents a breakdown of our operating expenses:

For the Three Month Ended June 30, 2014 2013 Amount % Amount % Operating expense: License fee $ 42,919 19.2 % $ 38,974 12.7 % Amortization of advertising right assets 142,246 63.6 % 134,208 43.5 % Other general and administrative 38,242 17.2 % 135,049 43.8 % Total operating expenses $ 223,407 100.0 % $ 308,231

100.0 % Operating expenses for the three months ended June 30, 2014 were $223,407, as compared to $308,231 for the same period of 2013. The decrease in operating expenses was mainly due to decrease in other general and administrative expenses. Other income (expenses)



Our total other income for the three months ended June 30, 2014 was $128,863, which consisted of interest income. For the same period of 2013, the other expense was $890,727, which consisted of interest income of $97,996 and unrealized loss on investment of $988,723.

Net income (loss)

For the three months ended June 30, 2014, the Company had a net loss of $46,177, or $0.00 per share, as compared to a net loss of $1,015,138, or $0.00 per share, for the same period of prior year. 14

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FOR THE SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO 2013

Operating Revenues

The following table presents a breakdown of our operating revenues among advertising revenues and revenue from TV program, i.e., revenue from sale of the advertising TV time obtained from Lotus TV:

For the Six Month Ended June 30, 2014 2013 Amount % Amount % Operating revenues: Advertising revenue $ 96,701 100 % $ 384,292 99.0 % TV Program - - % 3,996 1.0 % Total operating revenues $ 96,701 100.0 % $ 388,288 100 % In September 2012, the Company entered into an advertising agreement in exchange for $2,014,825 of gold bullion. The terms of the contract provide that the Company will sell 10,000 minutes of advertising time divided into 30-second time slots for a total of 20,000 advertising slots. Revenue is recognized as advertisements are aired. During the six months ended June 30, 2013, $273,409 of revenue was recognized related to advertising time slots used. On December 12, 2013, the Company refund all unused advertising time on Lotus TV in the aggregate amount of 404,995 seconds (or 6,750 minutes) valued $7,593,834.93 Hong Kong dollars. In January 2014, the Company received an advance payment of $193,374, and in December 2012, an advance payment of $154,575 under a contract to provide advertising for all of 2014 and 2013. During the six months ended June 30, 2014 and 2013, the Company recognized revenue of $96,701 and $384,292, respectively, related to the contract. At June 30, 2014, $96,757 of deferred revenue was recorded related to the contact.



Operating expenses

The following table presents a breakdown of our operating expenses:

For the Six Month Ended June 30, 2014 2013 Amount % Amount % Operating expense: License fee $ 85,806 18.2 % $ 77,978 13.4 %



Amortization of advertising right assets 279,106 59.0 % 259,478 44.3 %

Other general and administrative 107,505 22.8 % 247,537 42.3 % Total operating expenses $ 472,417 100.0 % $ 584,993 100.0 %



Operating expenses for the six months ended June 30, 2014 were $472,417, as compared to $584,993 for the same period of 2013. The decrease in operating expenses was mainly due to decrease in other general and administrative expenses.

Other income (expenses)



Our total other income for the six months ended June 30, 2014 was $296,289, which consisted of interest income. For the same period of 2013, the other expense was $942,377, which consisted of interest income of $192,540 and unrealized loss on investment of $1,134,917.

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Net income (loss)

For the six months ended June 30, 2014, the Company had a net loss of $79,427, or $0.00 per share, as compared to a net loss of $1,139,082, or $0.00 per share, for the same period of prior year.



Liquidity and Capital Resources

Cash flow information is as follows:

Six Months Ended June 30, 2014 2013 Cash provided by (used in): Operating activities $ 110,529$ (51,253) Investing activities (1,401,810) (612,657) Financing activities - 720,000 Effect of exchange rate on cash and cash equivalents 106



3,508

Net increase (decrease) in cash and cash equivalents $ (1,291,175) $

59,588

At June 30, 2014, the Company had a cash balance of $795,768. For the six months ended June 30, 2014, the operating activities of the Company generated net cash of $110,529, as compared to net cash used by the operating activities of $51,252 for the prior year. Cash generated from operating activities in 2014 is primarily attributed to increases in the Company's operating assets and liabilities of $206,852, and partially offset by its current year net loss of $79,427. Net cash used in investing activities for the six months ended June 30, 2014 amounted to $1,401,810, compared to $612,657 of net cash used in the same period of 2013. The increased cash in investing activities was primarily a result of the additional loan to Lotus TV in February 2014.



For the six months ended June 30, 2014, there were no financing activities.

For

the same period of the prior year, the Company's net cash provided by financing activities were $720,000, which were proceeds from issuance of the Company's common stock. On January 30, 2013, the Company entered into a Securities Purchase Agreement with certain investors in a private placement. Pursuant to the agreement, the Company agreed to issue and investors agreed to purchase an aggregate of 183 million shares of the Company's common stock, at a price of $0.03 per share, for an aggregate consideration of $5,490,000 in cash. As of June 30, 2014, there were 24 million shares of the Company's common stock issued. Other than the funds the Company may loan to Lotus TV, it is estimated that the Company will require appropriately $450,000, or about $37,500 a month. In our opinion, available funds and revenues generated from our operation may not able to satisfy our capital requirements for the next 12 months, and we may need to raise additional funds to meet our needs and to pursue growth opportunities. We may raise funds through private placements, either in equity offerings, or interest bearing borrowings. There is no guarantee that we will be able to raise additional funds through offerings or other sources. If we are unable to raise funds, our ability to continue with operations will be materially hindered.



Off-Balance Sheet Arrangements

None. Commitments On August 26, 2010, CEM International Ltd. entered into an Advertising Agreement with Lotus TV, pursuant to which Lotus TV authorizes CEM as its exclusive agent to operate all of its advertising business, 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, CEM agrees to pay Lotus TV a fixed annual fee every year (the "Annual Fee") regardless of the total amount of advertising revenues received by CEM. Under the Agreement, CEM 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, 16



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which Annual Fee will increase at 10% every year until 2017. The amount of Annual Fee payable at June 30, 2014 and December 31, 2013 was $42,897 and $-0-, respectively.

CEM 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 (amended to US$15 million on June 13, 2014) 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 renegotiated by the parties. The Company currently expects that the loans will be originated from its cash reserve, advertising revenue and, if necessary, raised from the capital market.

License fee expense for the three months ended June 30, 2014 and 2013 was $42,919 and $39,004, respectively, and was included in selling, general and administrative expenses.

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.



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.


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Source: Edgar Glimpses


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