Credit One Financial (COFI) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

Or

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

Commission File Number: 000-50320

CREDIT ONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Florida                                                                   59-3641205

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

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

(Address of principal executive offices)                  (Zip Code)

(212) 809-1200

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes [X]     No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   [  ]     No  [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer or a smaller reporting company. See definition of "large accelerated filer, and accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [   ]     No    [X]

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 107,781,150 shares of common stock, par value $0.001, as of August 13, 2010.

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TABLE OF CONTENTS

		PAGE
	PART I - FINANCIAL INFORMATION
Item 1	Financial Statements	3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4T	Controls and Procedures	14
	PART II – OTHER INFORMATION
Item 1	Legal Information	15
Item 1A	Risk Factors	15
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3	Defaults Upon Senior Securities	15
Item 5	Other Information	15
Item 6	Exhibits	15
	SIGNATURES	15

Item 1.    Financial Statements

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CREDIT ONE FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

			June 30,		December 31,
			2010			2009
ASSETS			(Unaudited)			(Audited)
Current Assets:
	Cash and cash equivalents		$	801,732		$	982,315
	Accounts receivable, net			991,596			978,998
	Notes receivable from customers			83,862			242,138
	Inventories			215,917			990,825
	Prepaid expenses and other current assets			121,316			143,507
		Total Current Assets		2,214,423			3,337,783
Land Use Right, net				220,310			220,126
Property, Plant and Equipment
	Equipment and machinery			2,752,030			421,171
	Work-in-progress			14,383			1,917,547
	Furniture and fixtures			-			37,686
	Less:  Accumulated depreciation			(55,136)			(2,534)
		Total Property, Plant and Equipment		2,711,277			2,373,870
Total Assets			$	5,146,010		$	5,931,779
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable		$	195,305		$	549,436
	Customer deposit			1,001,965			1,006,200
	Salary payable			13,563			8,805
		Total Current Liabilities		1,210,833			1,564,441
Stockholders' Equity:
	Common stock, $0.001 par value, 500,000,000 shares authorized,
		107,781,150 shares issued and outstanding		107,781			107,781
	Additional paid-in capital			3,087,678			3,087,678
	Accumulated deficit			(803,155)			(538,768)
	Currency translation adjustment			17,510			-
	Non-controlling interest in subsidiary			1,525,363			1,710,647
		Total Stockholders' Equity		3,935,177			4,367,338
Total Liabilities and Stockholders' Equity			$	5,146,010		$	5,931,779

See accompanying notes to the unaudited consolidated financial statements

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CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND

 COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

				Three-Months Ended June 30,			Six-Months Ended  June 30,
				2010	2009		2010	2009
Sales			$	1,162,980	727,848	$	2,371,896	727,848
Cost of sales				(1,207,362)	683,464		2,532,546	683,464
	Gross profit (loss)			(44,382)	44,384		(160,650)	44,384
Operating expenses
	Selling, general and administrative			61,949	28,723		191,250	30,620
	Salary expense			26,209	20,224		49,522	54,925
		Total operating expenses		88,158	48,947		240,772	85,545
Loss from operations				(132,540)	(4,563)		(401,422)	(41,161)
Other income and expenses
	Interest income			538	379		538	803
	Bad debt expense			12,192	-		(46,339)	-
	Foreign currency loss			(343)	(5,044)		(2,448)	(15,229)
		Total other income (loss)		12,387	(4,665)		(48,249)	(14,426)
Net loss before income taxes				(120,153)	(9,228)		(449,671)	(55,587)
Income tax provision				-	-		-	-
Net loss				(120,153)	(9,228)		(449,671)	(55,587)
Loss attributed to non-controlling interest in subsidiary				(47,816)	(4,065)		(185,284)	(23,364)
Loss attributed to common stockholders			$	(72,337)	(5,163)	$	(264,387)	(32,223)
Loss per share
	Basic and Diluted		$	(0.00)	(.000)	$	(0.00)	(0.00)
Weighted average common shares outstanding				107,781,150	107,781,150		107,781,150	107,781,150
Net loss			$	(120,153)	(9,228)	$	(449,671)	(55,587)
Currency translation adjustment				16,636	-		17,510	-
Comprehensive income (loss)			$	(103,517)	(9,228)	$	(432,161)	(55,587)

See accompanying notes to the unaudited consolidated financial statements

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CREDIT ONE FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

				Six-Months Ended
				June 30, 2010		June 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(449,671)	$	(55,587)
	Adjustments to reconcile net loss to net
		cash provided by operating activities:
			Depreciation		52,602		406
	Changes in operating assets and liabilities:
		Accounts receivable			(12,598)		(1,115,441)
		Inventories			774,908		(224,145)
		Prepaid expenses and other current assets			22,191		(183,687)
		Accounts payable			(354,131)		342,359
		Salary payable			4,758		33,052
		Note receivable			158,276		-
			Cash provided (used in) operating activities		196,335		(1,203,043)
CASH FLOWS USED IN INVESTING ACTIVITIES:
	Purchase of property, plant and equipment				(387,322)		(102,664)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
	Proceeds from non-controlling interest				-		1,936,969
Impact of foreign currency on cash					10,404		-
Net increase (decrease) in cash and cash equivalents					(180,583)		631,262
Cash and cash equivalents, beginning of period					982,315		2,924,405
Cash and cash equivalents, end of period				$	801,732	$	3,555,667
Supplemental Cash Flow Information:
	Cash Payments For:
		Interest		$	-	$	-
		Income Taxes		$	-	$	-

See accompanying notes to the unaudited consolidated financial statements

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CREDIT ONE FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2010

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.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Credit One Financial, Inc., Moderation Ltd. and Liaoning Sinorth Resources Co., Ltd.  All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of Liaoning Sinorth Resources Co., Ltd. (“Liaoning”), which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in China. All necessary adjustments have been made to present the financial statements in accordance with US GAAP. There were no material adjustments to Liaoning’s accounts to convert to US GAAP.

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with US GAAP and the rules of the United States Securities and Exchange Commission.  In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the audited financial statements of the Company for the most recent fiscal year ended December 31, 2009, as reported in Form 10-K filed on March 30, 2010.

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 $1,223,704 in net operating loss carry-forwards as of June 30, 2010, 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.

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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, 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.

Concentrations of Credit Risk

The Company maintains its cash in banks which participate in the Federal Deposit Insurance Corporation (FDIC) Transaction Account Guarantee Program, which provides separate FDIC coverage on the full balance of personal and non-personal checking accounts. Under that program, through June 30, 2010, all non-interest and low interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.  Coverage is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules, which provide coverage on interest bearing balances up to $250,000.  After December 31, 2013, balances up to $100,000 will be insured. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

As of June 30, 2010, the Company maintained $753,026 in foreign bank accounts not subject to FDIC coverage.

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 $16,636 for the quarter ended June 30, 2010.

Foreign currency transactions are transactions denominated in a currency other than the entity's functional currency.  At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity are adjusted to reflect the current exchange rate, with any resulting differences reported in the current period statement of operations. For the three months ended June 30, 2010 and 2009, the Company

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recognized $343 and $5,044, respectively, in foreign currency exchange losses in the consolidated statements of operations.

Inventory

Raw material inventories consist of mixed-size and semi-processed graphite which are further processed into medium- and high-carbon, high-purity, micro-power and expandable graphite to become finished goods inventories.  Inventory is stated at the lower of cost or market, using the first-in, first out method. Cost includes materials, labor, and production overhead related to the purchase and production of inventory. The Company reviews its inventory regularly to identify potentially obsolete inventory.   No reserve is considered necessary as of June 30, 2010.

In the normal course of business, the Company enters into raw material purchase and finished goods sales contracts at fixed prices and quantities for terms which extend beyond the balance sheet date. Provisions for losses, if any, to be sustained related to such commitments are recognized when such losses are probable.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on a review of specifically identified accounts and aging data. The Company reviews its allowance for doubtful accounts monthly. As of June 30, 2010 and December 31, 2009, allowance for doubtful accounts was $98,334 and $52,063, respectively.

Revenue Recognition

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

Shipping and Handling Costs

The Company recognizes amounts billed to a customer in a sales transaction related to shipping as revenue. The costs incurred by the Company for shipping and handling are classified as cost of sales.

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.

Prepaid Expenses

Prepaid expenses at June 30, 2010 and December 31, 2009 represent prepayment for the purchase of graphite from miners and other graphite suppliers, as well as prepaid valued-added taxes.

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 3-10 years.

Properties under construction are recorded as construction in progress, and upon completion of construction, are transferred to a depreciable asset class, at which time the depreciation would start.

Land Use Rights

Land use rights represent the cost to obtain the right to use land in China.  Land use rights are carried at cost and amortized over the life of the rights of 50 years.

8

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 June 30, 2010 and 2009, respectively.

Recent Accounting Pronouncements

In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASU 2010-09”), “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” which among other things amended ASC 855 to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between ASC 855 and the SEC’s requirements. All of the amendments in this update are effective upon issuance of this update. Management has included the provisions of these amendments in the financial statements.

The Company has reviewed all recently issued, but not effective, accounting pronouncements and does  not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

Reclassifications

Certain amounts reflected in the accompanying financial statements as of December 31, 2009 and for the three and six months ended June 30, 2009 have been reclassified from previously reported amounts.

Note 3 – Inventory

Inventory consists of the following at June 30, 2010 and December 31, 2009:

		June 30, 2010		December 31, 2009
Raw Materials	$	178,698	$	886,218
Finished Goods		37,219		104,607
Total	$	215,917	$	990,825

Note 4 – Land Use Rights

All land in the People’s Republic of China is government owned and cannot be sold to any individual or company.  Instead, the government grants the user a “Land use right” (the “Right”) to use the land.

On November 29, 2008, the Company entered into an agreement with the Chinese government, whereby the Company will acquire for RMB 5,000,000 (equivalent $733,555 at June 30, 2010) the right to use certain land.  The Company has remitted RMB 1,500,000 (equivalent $220,310 at June 30, 2010) to use the government for these rights, with the remaining RMB 3,500,000 (equivalent $514,056 at June 30, 2010) to be paid once the deed has been awarded.  The purchase price will be amortized over the term of the right, which is 50 years.

Net land use right at June 30, 2010 and December 31, 2009 were as follows:

		June 30, 2010		December 31, 2009
Land use right	$	220,310	$	220,126
Less: Accumulated amortization		-		-
Total	$	220,310	$	220,126

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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.

Due to the Company’s net loss, there was no provision for income taxes. The Company’s effective tax rate for the quarter ended June 30, 2010 was 0% due to the net loss position in both years.

The Company’s taxes were subject to a full valuation allowance as follows at June 30, 2010 and December 31, 2009:

June 30, 2010
Tax		Accumulated Net			Deferred		Valuation
Jurisdiction		Operating Loss	Expiration		Tax Asset		Allowance
United States	$	360,144	2019-2030	$	135,522	$	(135,522)
Hong Kong		63,608	None		10,496		(10,496)
China		799,952	2014-2015		199,988		(199,988)
	$	1,223,704		$	346,006	$	(346,006)
December 31, 2009
Tax		Accumulated Net			Deferred		Valuation
Jurisdiction		Operating Loss	Expiration		Tax Asset		Allowance
United States	$	293,292	2019-2029	$	110,366	$	(110,366)
Hong Kong		63,004	None		10,396		(10,396)
China		412,725	2014		103,181		(103,181)
	$	769,021		$	223,943	$	(223,943)

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

The tax authority of the People’s Republic of China (PRC) Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises have completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.

The Company has no United States corporate income tax liability as of June 30, 2010 and December 31, 2009.

Note 6 – Stockholders’ Equity

On September 22, 2008, the Company entered into a Securities Purchase Agreement with sixteen investors in a private placement.  Pursuant to the agreement, the Company issued and investors purchased an aggregate of 100,000,000 shares of the Company's common stock, par value $0.001 per share, at a price of $0.03 per share, for an aggregate consideration of $3,000,000 in cash.  Net cash proceeds of $2,346,292 were received in December 2008.

In 2009, the Company invested capital into the subsidiary Moderation Limited.  The 48.4% ($1,713,476) of the subsidiary’s capital held by the non-controlling party has been recorded in stockholders’ equity as the non-controlling interest in subsidiary.  The only equity transactions for the three months ended June 30, 2010 were the net loss and the currency translation adjustment for the period.

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Note 7 – Capital Stock and Contributed Capital

On March 30, 2005, the Company amended its Articles of Incorporation, to authorize the maximum number of shares to have outstanding at any one time to be 110,000,000 shares of common stock having a par value of $0.001 per share.  As of June 30, 2010, there were 107,781,150 shares of the Company’s common stock issued and outstanding.

On January 8, 2010, the board of directors and a majority of the Company’s shareholders at its Annual Stockholder Meeting the Company approved to amend its articles of incorporation to increase the number of shares of authorized common stock from 110 million to 500 million.

On April 9, 2010, the Company filed a Certificate of Amendment with the Secretary of State of the State of Florida, wherein the Company effected an amendment to its Articles of Incorporation 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.

Note 8 – Going Concern

The accompanying consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred a gross loss for the three months ended June 30, 2010 of $44,382 and a net loss of $120,153.  The Company also has an accumulated deficit of $803,155 as of June 30, 2010. The Company may have to seek loans or sale of its securities to raise cash to meet its cash needs.  

There can be no assurances that the Company will be able to achieve profitable operations to obtain additional funding. These factors create substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.

Note 9 – Establishment of a Subsidiary

On January 12, 2009, the Company remitted $2.8 million to its joint venture company, Moderation Limited (“Moderation”).  Of the $2.8 million remitted, $2,063,185 were the Company’s capital investment to Moderation for 51.6% of the equity interest in Moderation, the remaining $736,815 was provided by the Company to Moderation as temporary working capital at interest rate of 8% annually. On October 29, 2008, the Chinese government approved Moderation’s application for setting up a wholly owned subsidiary “Liaoning Sinorth Resources Co., Ltd.” (“Liaoning Sinorth”) in Yingkou, Liaoning province, China.  The working capital loan and intercompany accounts are eliminated in consolidation.

The main business of Liaoning Sinorth is producing, processing and sale of mineral products, primarily graphite, in China.  Liaoning Sinorth began operation on January 1, 2009.

Note 10 – 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:

The Company started current operations in 2009 and has not been profitable to date. It has financed operations principally through equity investments, and its ability to generate sufficient revenues to fund operations is uncertain. For the three months ended June 30, 2010, the Company incurred a net loss of $120,153, and has a total accumulated deficit of $803,155 as of June 30, 2010.  There can be no assurance that it will ever operate profitably, and if the losses continue, the Company’s ability to operate may be severely impacted or alternatively it may be forced to terminate operations

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

The Company’s operations could be adversely affected by changing political and economic policies in China.

The Company is constructing a processing and repackaging facility in China on land leased from the Chinese government, the final land use rights have not yet been awarded to the Company by the Chinese government.

Chinese government control of currency conversion may affect the Company’s ability to pay dividends declared, if any, in foreign currencies.

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Fluctuations in the exchange rate between the Chinese currency and the U.S. dollar may bring down the Company’s operating income.

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

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

Overview

The main business of the Company is processing and distribution of mineral products, primarily graphite products, in China.  The Company’s current operations began in April 2009.

The Company’s revenues are dependent on a relatively small number of industries and clients.  In the past year, the Company experienced lower demand for its products and lower gross profit margins, which was primarily attributable to the then current general economic conditions and increased competition. Because of the increased competitive pressure, the Company has to, in certain cases, lower sales prices in order to keep clients. Despite the efforts it has made, for the three months ended June 30, 2010, the sales revenue of the Company did not grow as much as the Company expected.  Instead, the sales in the month of June 2010 were lower than that in the previous months.  Currently the Company increasingly focuses on looking for new customers and developing new sales channels.

Results of Operations for the Three Months Ended June 30, 2010 and 2009

Sales

For the three months ended June 30, 2010, the Company generated net sales of $1,162,980, as compared to $727,848 for the same period of the prior year. The increase in sales, $435,132, or 59.8%, was partially due to the shorter operating period in the prior year because the Company’s graphite business started in April, 2009.  The increase in sales was also attributable to a year’s worth of more experience in the industry.

Cost of Goods Sold

Cost of goods sold consists primarily of the purchase of raw materials and storage, processing, freight and direct labor expenses.  Cost of goods sold for the three months ended June 30, 2010 was $1,207,362, or 104% of the sales.  Because of unexpected costs and competitive pressure, our cost of goods sold for the period exceeded sales revenue by $44,382.  The cost of goods sold for the same period of 2009 was $683,464, or 93.9% of the sales.   

Operating expenses

Operating expenses for the three months ended June 30, 2010 were $88,158, an increase of $39,211, or 80%, as compared to $48,947 for the same period of the prior year. The significant increase in operating expenses was due to newly launched graphite business operation of the Company in 2009.  The three largest expense items of the Company were tax expense, professional fees, and salary expense, which represented approximately 11%, 14%, and 30%, respectively, of the total operating expenses for the three months ended June 30, 2010.

Other income (expenses)

The Company’s total other income (expense) for the three months ended June 30, 2010 was income of $12,387, which consisted primarily of bad debt recoveries of $12,192.   For the same period of the prior year, the Company’s total other expense was $4,665, which consisted of $379 of interest income offsetting a $5,044 of loss from foreign exchange transactions.

Net loss

For the three months ended June 30, 2010, the Company had a net loss of $120,153, or $(0.00) per share, as compared to a net loss of $9,228, or $(0.00) per share, for the same period of the prior year.

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Results of Operations for the Six Months Ended June 30, 2010 and 2009

Sales

For the six months ended June 30, 2010, the Company generated net sales of $2,371,896, as compared to $727,848 for the same period of the prior year. The increase in sales was primarily due to the shorter operating period in the prior year because the Company’s graphite operations started in April, 2009.

Cost of Goods Sold

Cost of goods sold for the six months ended June 30, 2010 was $2,532,546, or approximately 107% of the sales. Because of unexpected costs and competitive pressure, the Company’s cost of goods sold for the period exceeded the sales revenue by $160,650.  The cost of goods sold for the six months ended June 30, 2009 was $683,464, approximately 94% of the sales.   

Operating expenses

Operating expenses for the six months ended June 30, 2010 were $240,772, an increase of $155,227, or 181%, as compared to $85,545 for the same period of the prior year. The significant increase in operating expenses was due to newly launched graphite business operation of the Company in 2009.  The three largest expense items of the Company were tax expense, professional fees, and salary expense, which represented approximately 26%, 20%, and 21%, respectively, of the total operating expenses for the six months ended June 30, 2010.

Other income (expenses)

The Company’s total other income (expense) for the six months ended June 30, 2010 was expense of $48,249, which consisted primarily bad debt expense of $46,339.   For the same period of 2009, our total other expense was $14,426, which consisted of $803 of interest income offset by $15,229 of loss from foreign exchange transactions.

Net loss

For the six months ended June 30, 2010, the Company had a net loss of $449,671, or $(0.00) per share, as compared to a net loss of $55,587, or $(0.00) per share, for the same period of the previous year.

Liquidity and Capital Resources

Historically the Company met its capital requirements through the issuance of stock and borrowings from its executive officers and directors.  In 2007, the Company entered into three promissory notes with Dicky Cheung, our President and CEO, for an aggregate principal amount of $620,000 with interest rate at 5% per year. In December 2008, as a part of a private placement as set out below, the note ($620,000) with accrued interest ($33,708) were converted into the equity shares of the Company at $0.03 per share.

In December 2008, the Company issued a total of 100,000,000 shares of its common stock at a price of $0.03 per share to sixteen investors for an aggregate consideration of $3,000,000 in cash.  From this private placement, the Company received net cash proceeds of $2,346,292.

At June 30, 2010, the Company had cash balance of $801,732.  For the six months ended June 30, 2010, the operating activities of the Company generated net cash of $196,335, and the investing activities used cash of $387,322 for purchase of property and equipment.

On January 12, 2009, the Company remitted $2.8 million to set up a 51.6% owned subsidiary, Moderation Limited.  Of the $2.8 million remitted, $2,063,185 were the Company’s capital investment to Moderation for 51.6% of the equity interest in Moderation, the remaining $736,815, which was eliminated in consolidation, was provided to Moderation as working capital at an interest rate of 8% per year.

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.

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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.

Going Concern

The Company started current operations in 2009 and has not been profitable to date. It has financed operations principally through equity investments, and its ability to generate sufficient revenues to fund operations is uncertain. For the six months ended June 30, 2010, the Company incurred a net loss of $449,671, and has accumulated a total deficit of $803,155 as of June 30, 2010. There can be no assurance that it will ever operate profitably, and if the losses continue, the Company’s ability to operate may be severely impacted or alternatively it may be forced to terminate operations.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

Item 4 (T).  Controls and Procedures

(a) Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that, as of June 30, 2010, our disclosure controls and procedures were effective at providing reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our controls and procedures are effective in timely alerting them to material information required to be included in this report.

(b) Changes in control over financial reporting

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A.  Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

Item 6.  Exhibits

(a)    Exhibits:

Exhibit No.                                                Title of Document

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

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

SIGNATURES

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

CREDIT ONE FINANCIAL, INC.

By: /s/ Dicky Cheung

Dicky Cheung

President, Chief Executive Officer and Chief Financial Officer

August 13, 2010

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