Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015 was $1,893,932 based upon the closing
price of $0.007 per share reported for such date on the OTCQB. Shares of common stock held by each officer and director and by
each person who is known to own 10% of more of the outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date.
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
Some discussions in this Annual Report
on Form 10-K contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties and relate to future events or future financial performance.
A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements
made by us in this Form 10-K. Forward-looking statements are often identified by words such as “believe,” “expect,”
“estimate,” “anticipate,” “intend,” “project,” “plans,” “seek”
and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking
statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,”
“potential” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are
only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled
“Risk Factors” below that may cause our or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements. In addition, you are directed to factors discussed in the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” section as well as those discussed elsewhere in this Form
10-K.
Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results. However, readers should carefully review the risk factors
set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”),
particularly the Company’s Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. All written and oral forward-looking
statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified
in their entirety by this section.
As used in this Annual Report on Form
10-K, references to “dollars” and “$” are to United States dollars and, unless otherwise indicated, references
to “we,” “our,” “us,” “Xcel,” “XCLL,” the “Company” or
the “Registrant” refer to XcelMobility Inc., a Nevada corporation and its wholly owned subsidiaries, CC Mobility Limited
(“CC Mobility”), a company organized under the laws of Hong Kong, Shenzhen CC Power Investment Consulting Co. Ltd.
(“CC Investment”), a company organized under the laws of the People’s Republic of China, and a wholly-owned subsidiary
of CC Mobility, and Shenzhen CC Power Corporation (“CC Power”), a company organized under the laws of the People’s
Republic of China.
ITEM 1.
BUSINESS
.
Background and Overview
We were incorporated in the state of Nevada
on December 27, 2007 under the name “Advanced Messaging Solutions, Inc.” On March 29, 2011, we amended our Articles
of Incorporation to change our name from “Advanced Messaging Solutions, Inc.” to “XcelMobility Inc.” and
we effected a 35-for-1 forward stock split of all of our issued and outstanding shares of common stock. On June 11, 2014, we increased
the total number of authorized shares of our common stock to 400,000,000. On July 9, 2015, our board of directors approved a new
class of preferred stock of the Company, to be known as Series A Convertible Preferred Stock. We are authorized to issue up to
5,000,000 shares of Series A Convertible Preferred Stock. Holders of Series A Convertible Preferred Stock shall be entitled to
the number of votes equal to 51% of the total number of votes entitled to be cast on any matters requiring a stockholder vote.
The shares of Series A Convertible Preferred are convertible at a one to one ratio into shares of our common stock. On September
18, 2015, we further amended our Articles of Incorporation to increase our number of authorized shares of our common stock from
400,000,000 shares to 800,000,000 shares.
On July 5, 2011, we entered into a voluntary
share exchange agreement (the “Exchange Agreement”) with Shenzhen CC Power Corporation, a company organized under the
laws of the People’s Republic of China (PRC) (“CC Power”), CC Mobility Limited, a company organized under the
laws of Hong Kong (“CC Mobility”), and the shareholders of CC Mobility. Pursuant to the closing of the transactions
contemplated under the Exchange Agreement, on August 30, 2011, we issued 30,300,000 shares of our common stock to the shareholders
of CC Mobility representing 50.5% of our issued and outstanding common stock in exchange for 100% of the issued and outstanding
capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, CC Mobility became
our wholly-owned subsidiary and we gained control over the business and operations of CC Power.
On May 7, 2013, we entered into and consummated
a stock purchase agreement (the “Purchase Agreement”) with CC Investment, Jifu and certain of its shareholders (the
“Jifu Shareholders”). Pursuant to the terms of the Purchase Agreement, we issued an aggregate of 27,000,000 shares
of our common stock to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements with CC Investment. On
October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release (the “Release”) with the Jifu Shareholders.
Pursuant to the Release, the parties cancelled the Purchase Agreement and we returned control of Jifu to the Jifu Shareholders.
In exchange, we agreed to deliver 1,000,000 newly shares of our common stock to the Jifu Shareholders.
On September 22, 2014, we entered into
an asset purchase agreement with Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) pursuant to which
we acquired certain assets of Silvercreek (the “Assets”) relating to an online sports lottery business in exchange
for the issuance of up to 80,000,000 shares (“Shares”) of common stock of the Company.
Previously, our business was focused on
wearable computing. Our new lottery business aggregates and processes lottery purchase orders, deriving revenue from service fees
paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers.
We offer a comprehensive and integrated suite of online lottery services in China. We believe that the merging of our lottery business
with our existing mobile technologies, partners, and customers, will provide a platform for growth in this growing industry.
On April 3, 2015, a joint announcement
of the Ministry of Finance, the Ministry of Public Security, the State Administration for Industry and Commerce, the Ministry of
Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration
of Sport of China, and the China Banking Regulatory Commission was made. These eight government bureaus and departments jointly
announced a prohibition on any unauthorized online lottery sales. Pursuant to the announcement, online lottery sales will need
to be officially approved by the Ministry of Finance (the “MOF”). Certain regulations and rules over online lottery
sales are being studied. CC Power is closely monitoring development of such online lottery regulations and rules, and we plan to
submit an application to the MOF once the rules and regulations are available. During the overhaul of the online lottery business,
we will use all of our resources to develop related technical services and data analysis services for other companies. We will
also develop visual analytical tools for our users. We expect such development efforts to create a greater source of revenue in
the future.
Corporate Structure
The organizational structure of the Registrant is as follows:
CC Mobility Limited (“CC Mobility”)
was incorporated on May 3, 2011 under the laws of Hong Kong as a limited liability company.
Shenzhen CC Power Investment Consulting
Co. Ltd., (“CC Investment”) a wholly-owned subsidiary of CC Mobility, was incorporated on July 27, 2011 under the laws
of the People’s Republic of China as a wholly foreign owned limited liability company.
Shenzhen CC Power Corporation (“CC
Power”) is a Chinese enterprise incorporated on March 13, 2003 under the laws of the PRC. CC Power is owned entirely by Xili
Wang (the “CC Power Shareholder”), who is also our Chief Financial Officer and Secretary. CC Power maintains all the
licenses and approvals necessary to operate its business in the PRC.
PRC law places certain restrictions on
roundtrip investments through the acquisition of a PRC entity by PRC residents. To comply with these restrictions, in conjunction
with the Exchange Transaction, we (via our wholly-owned subsidiary, CC Investment), entered into and consummated certain contractual
arrangements with CC Power and/or the CC Power Shareholder pursuant to which we provide CC Power with exclusive technology consulting
and management services. Through these contractual arrangements, we have the ability to substantially influence CC Power’s
daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or
shareholder approval. These contractual arrangements enable us to control CC Power and operate our business in the PRC through
CC Power and we are considered the primary beneficiary of CC Power. Accordingly, our consolidated financial statements reflect
the results of operations, assets and liabilities of CC Power.
On August 22, 2011, our subsidiary, CC
Investment, entered into the following contractual arrangements with CC Power and/or the CC Power Shareholder, each of which is
enforceable and valid in accordance with the laws of the PRC:
Entrusted Management Agreement
.
Pursuant to the Entrusted Management Agreement among CC Power, CC Investment, and the CC Power Shareholder, CC Investment agrees
to provide, and CC Power agrees to accept, exclusive management services provided by CC Investment. Such management services include
but are not limited to financial management, business management, marketing management, human resource management and internal
control of CC Power. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of
CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Technical Services Agreement
.
Pursuant to the Technical Services Agreement among CC Power, CC Investment, and the CC Power Shareholder, CC Investment agrees
to provide, and CC Power agrees to accept, exclusive technical services provided by CC Investment. Such technical services include
but are not limited to software, computer system, data analysis, training and other technical services. CC Investment shall be
entitled to charge CC Power service fees equivalent to CC Power’s total net income. The Technical Service Agreement will
remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described
in the Exclusive Purchase Option Agreement below).
Exclusive Purchase Option Agreement
.
Under the Exclusive Purchase Option Agreement among CC Power, CC Investment, and the CC Power Shareholder, the CC Power Shareholder
granted CC Investment an irrevocable and exclusive purchase option to acquire CC Power’s equity and/or assets at a nominal
consideration. CC Investment may exercise the purchase option at any time.
Loan Agreement
. Under the
Loan Agreement between CC Investment and the CC Power Shareholder, CC Investment agreed to lend RMB 10,000,000 to the CC Power
Shareholder, to be used solely for the operations of CC Power.
Equity Pledge Agreement
.
Under the Equity Pledge Agreement among CC Investment and the CC Power Shareholder, the CC Power Shareholder pledged all of its
equity interests in CC Power, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under
the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement.
Prior to termination of this Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s
prior consent. The CC Power Shareholder covenants to CC Investment that among other things, it will only appoint/elect the candidates
for the directors of CC Power nominated by CC Investment.
Subsidiaries
As a result of the Exchange Transaction,
CC Investment and (via a contractual relationship) CC Power are wholly-owned subsidiaries of CC Mobility, our wholly-owned subsidiary.
CC Power does not have any subsidiaries.
Strategy
We provide specialized lottery services
to our users, which we believe solidify our reputation as a professional service provider dedicated to online lottery services.
Our commitment to investment on research and development has enabled us to provide our users with innovative and proprietary tools
with increasing utility and variety. Such tools are designed to address various aspects of users’ needs in the lottery purchase
process, such as availability of information on a real-time basis, professional analysis on odds and trends, and the capability
to combine purchases to increase payout amounts. As a result, we believe the combination of such tools enables our users to make
informed and planned lottery purchases and enhance their purchase experience.
We strive to provide our users with the
most comprehensive and up-to-date lottery related information, which is important to decision-making for most sports lottery products.
We have a dedicated and direct data interface with China Sports Lottery Administration Center, which enables us to publish real-time
sports match scores and odds for a sports match.
Customers
The majority of online lottery purchasers
in China are young adults with relatively high individual disposable incomes. The average age of online lottery purchasers is approximately
30 years old.
Technology
We have developed an integrated fulfillment
platform that enables us to service and support multi- provincial contracts for the fulfillment of welfare and sports lottery tickets
through a single interface. Our mobile platform enables us to deliver white-label mobile application solutions to interested companies
seeking to leverage their large client bases. The mobile platform allows users to seamlessly connect through our mobile cloud network
throughout China. The network is connected to our application and processing servers to fulfill lottery orders.
Intellectual Property
CC Power has developed or acquired unique
intellectual property for its lottery business. Our intellectual property consists of application related software and solutions
for our lottery business, including cloud computing software and other application specific software. CC Power is the owner of
intellectual property that we believe provides a competitive advantage over competitors and new entrants to the market.
We will continue to evaluate the business
benefits in pursuing patents and copyrights in the future. We currently protect all of our development work with confidentiality
and trade secret agreements with our engineers, employees and any outside contractors. However, third parties may, in an unauthorized
manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property or technology or otherwise
develop a product with the same functionality as our service. Policing unauthorized use of intellectual property rights is difficult,
and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future
will prevent misappropriation of our technology or intellectual property, particularly in foreign countries where we do business
or where our service is sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States
or where the enforcement of such laws is not common or effective.
Services
Individual Lottery Purchase
We provide online purchase services for
both sports lottery products and welfare lottery products. Users place purchase orders for lottery products through
our websites after registering, opening and funding an online account.
Lottery Pool Purchase
Lottery pools enable individual users to
purchase a share in a pooled lottery outcome or group of outcomes with other users. Lottery pool purchase is a service developed
and first offered by us in China utilizing the unique advantages of the Internet, and it has become a standard feature on all websites
that offer online lottery services.
Through our lottery pool service, an initiator
starts a lottery pool by specifying a range of parameters, such as the lottery portfolio, total purchase amount and payout scheme.
The initiator is required to commit a minimum of 5.0% of the total purchase amount when he initiates a pool. Other players may
then join the pool by agreeing to the conditions set by the initiator and putting down commitment amounts of their choices. When
the total purchase amount as specified by the initiator is reached, the system will close the pool and deliver the purchase order
for the lottery portfolio in the manner as specified by the initiator.
A user familiar with a particular sport
or experienced with sports lotteries in general may develop a reputation for having a more educated anticipation of the results
of particular matches, or for picking a lottery portfolio with a combined winning probability that is higher than that of randomly
selected combinations, thereby attracting other players to participate in pools he initiates. Our lottery pool service offers less
experienced users a chance to join a more experienced user or a user with a track record of winning results. It also enables users
who lack the time or resources to study the odds to join another user who has done relevant research, potentially enhancing their
chances of winning. For number based lotteries, users can pool their commitment amounts together and purchase multiple numbers.
This enables users to spread their commitments over a wide range of lottery numbers and thereby increase the pool’s probability
of winning. Pooling small purchase orders provides us with a stable revenue flow as it generates purchase momentum among users.
Automatic Tag-along Purchase
Automatic tag-along purchase is another
service we provide that distinguishes us from traditional offline lottery agents. Through this service, a user can choose to automatically
and periodically join a lottery pool initiated by another user. A user can customize the automatic tag-along feature by specifying
the pools he wishes to automatically join, the commitment to be put down for each automatic pool and other specifications. Users
may also use the “following” feature to be notified of the pooling activities initiated by certain users without automatically
tagging-along. We place the option to automatically join or follow a user’s pool on such user’s profile page. A profile
page also contains a user’s basic information, such as winning record, number of pools initiated and consummated, number
of followers and date of registration, to allow other users to judge whether to follow or join pools initiated by this particular
user.
Recurring Purchase
Users may select our recurring purchase
service to repeatedly purchase a particular number or a combination of numbers. The user sets the combination once, and specifies
the type and number of rounds or dates of lotteries he wants to purchase with the selected combination. We process the purchase
orders automatically. Users may cancel a recurring purchase prior to the date of any particular lottery. We also offer a filtering
tool that helps users set certain parameters in choosing the combination of numbers.
Distribution
The
Company will expand distribution in China by continuously strengthening its collaboration with telecom operators, financial institutions
and other partners.
Industry
Chinese Lottery Market
The Chinese lottery market has experienced
strong growth in recent years as a result of positive macro trends in China, such as robust economic growth, increases in disposable
income and a more positive shift in public perception towards the lottery business. Total lottery sales in China amounted to RMB166.3
billion, RMB221.6 billion and RMB261.5 billion (US$42.6 billion), in 2010, 2011 and 2012, respectively, representing a 33.3% and
18.0% increases in 2011 and 2012 as compared to 2010 and 2011, respectively, according to a report by the MOF. According to the
iResearch Report, although no accurate projection of the future growth of the Chinese lottery market can be guaranteed, the Chinese
lottery market is expected to continue to grow at a comparable rate in the near future due to the continued growth of China’s
GDP and individual disposable income and the increasingly favorable regulatory environment for the development of the lottery market
in China.
The following charts show the total online
lottery sales amount and online sales amount for sports lottery products from 2005 to 2014(3 Quarters only) in China:
Source: the Ministry of Finance
Drivers for the Growth of the Online
Lottery Market
Online lottery sales are affected by many
factors, including general economic conditions, individual disposable income, and lottery purchaser demography. We believe the
growth of the online lottery market will be driven by:
Growth of GDP and
individual disposable income
. Growth of GDP and individual disposable income are among the main growth drivers of the online
lottery market in China.
In recent years, growth of online lottery
market sales in China has been much faster than the growth of GDP and individual disposable income. According to the National Bureau
of Statistics of China, from 2010 to 2012, China’s GDP grew from RMB40.1 trillion to RMB51.9 trillion (US$8.5 trillion),
representing a 29.4% increase, and the individual disposable income for urban population grew from RMB19,109 to RMB24,565 (US$4,003),
representing a 28.5% increase. Total online lottery sales grew from RMB5.5 billion to RMB14.7 billion (US$2.4 billion) from
2010 to 2012, representing a 167% increase. Although there is no guarantee that the growth rate of the online lottery market in
China will continue to be greater than that of China’s GDP and individual disposable income, online lottery sales are expected
to continue to grow as China’s GDP and individual disposable income grow.
Government regulations
and evolving public acceptance of the lottery industry
. The Chinese government has shown increasing support for the lottery
market in general and the online lottery market in particular through a series of legislation. According to an announcement by
the MOF, the MOF applied RMB8.5 billion of lottery income to a wide range of social welfare endeavors, including earthquake relief,
medical care in rural and urban areas, education subsidy, handicapped assistance, and red-cross activities, in 2011. The MOF regards
the development of the Chinese lottery market as healthy and beneficial. According to the “Twelfth Five-Year Plan”
approved by the PRC National People’s Congress in March 2011, the central government will expand social security fund source
by increasing lottery issuance. At the same time, however, the recent implementation of the Urgent Notice and the subsequent investigations
and penalties on certain online lottery sales service providers who do not have the relevant approvals could have a significant
impact on the competitive landscape of the online lottery market. Moreover, the Chinese government issued a Public Announcement
in April 2015 suspending and prohibiting any and all unauthorized online lottery sales services, and requiring approval from the
MOF for all future online lottery sales. These recent government actions have created significant risks and uncertainties for online
lottery sales service providers who do not have the relevant approvals, and as a result may reduce competition for online lottery
sales service providers that possess relevant approvals in the near future.
Increase in the
number of lottery purchasers
. The increase in the number of lottery purchasers in general and the increase in the number of
online purchasers in particular are important factors in online lottery market growth. The number of general and online lottery
purchasers is expected to continue to grow in the next few years. According to iResearch, the number of lottery purchasers grew
from 250 million in 2010 to 338 million in 2012 and the number of purchasers was projected to grow to 531 million by the end of
2015. Similarly, according to the estimate in the iResearch Report, the number of active online lottery purchasers grew from 5.0 million
in 2010 to 16.5 million in 2012, representing a 230% increase, and was expected to grow to 58.9 million by 2015.
Increasing Internet
penetration in lottery distribution
. The Internet and Internet applications have experienced significant growth in China in
recent years. As a result, both the number of Internet users and the percentage of online lottery purchasers to the number of Internet
users have grown. According to the iResearch Report, there were 250 million, 290 million and 338 million lottery purchasers in
China in 2010, 2011 and 2012, respectively, among which 2.0%, 3.2% and 4.9% were online lottery purchasers, respectively. The increase
in the number of online lottery purchasers was attributable to a variety of factors, including, among other things, the ease of
online payment, the ease of access, the reliability of the prize collection process, the availability of information, and the popularity
of lottery pool purchases.
Lottery Products
The government authority in charge of the
Chinese lottery market is the MOF, which is responsible for drafting and enacting laws, rules and regulations on Chinese lottery
sales and administration, as well as monitoring the sales and promotion of lottery products.
Lottery Products by Issuing Entities
Two categories of lottery products are
currently approved by the MOF, namely sports lottery products and welfare lottery products, which are issued by China Sports Lottery
Administration Center and China Welfare Lottery Issuance and Administration Center, respectively. National lottery products are
sold through provincial lottery administration centers that are authorized to license the sales of national lottery products directly
to lottery sales agents. Provincial lottery administration centers are also authorized to issue provincial-level sports or welfare
lottery products upon the approval of the corresponding state lottery administration center.
Welfare lottery
products.
In China, welfare lottery products are defined as lottery products issued by China Welfare Lottery Issuance and Administration
Center and provincial welfare lottery administration centers.
Welfare lottery products were first issued
in China in 1987. Most welfare lottery products are number-based lottery products, the outcomes of which depend on combinations
of numbers.
Sports lottery products.
In China, sports lottery products are defined as lottery products issued by China Sports Lottery Administration Center and provincial
sports lottery administration centers. There are generally two types of sports lottery products: those based on outcomes of sports
matches and those that are number-based.
Lottery Products
by Type
There are three types of lottery products
depending on the rules or outcomes: Lotto, sports match lottery, and instant lottery.
Lotto
. Lotto
is a type of lottery product whose outcome depends on combinations of numbers. A purchaser of a lotto ticket will select a
combination of numbers at the time of purchase, and the result and payout depend on how well the selected number combination matches
the prize winning number combination, which is randomly drawn at a set time. The grand prize of each lotto ticket in China is usually
RMB10 million, although the issuing lottery administration centers have the discretion to add extra prize money amounts as incentives.
High-frequency lottery is a new type of lotto product which is characterized by a high frequency of lottery draws, usually every
few minutes. It has experienced rapid development since 2009. Given their nature, high frequency lottery products are currently
only sold through online and mobile sales channels. According to a report by the MOF, sales of Lotto products accounted for 66.9%,
64.4% and 66.5% of total lottery sales in China in 2010, 2011 and 2012, respectively.
Sports Match Lottery
.
Sports match lottery is a type of lottery product whose outcome depends on the outcome of sports matches. The majority of sports
match lottery products in China relate to soccer lottery products, where a lottery purchaser predicts one or more results of a
soccer match or a combination of soccer matches, such as the winners and final scores, and the lottery result and payout amount
depends on the outcome of the match or matches and the odds published by lottery administration centers. Sports match lottery products
have greater information and knowledge requirements than other types of lotteries, and a purchaser needs to make a rational decision
based on certain information, such as player status and official odds, which needs to be real-time or constantly updated to be
meaningful references. As such, sports match lottery products are mostly suitable to be purchased online, where such information
is readily available and updated. Benefiting from the introduction of popular sports match lottery products following a series
of international sports matches, sales of sports match lottery products have grown significantly in recent years. According to
the iResearch Report, sales amount of sports match lottery products accounted for 8.9%, 9.9% and 10.3% of total lottery sales amounts
in China in 2010, 2011 and 2012, respectively, and is expected to continue to grow in the next few years.
Instant Lottery
.
Instant lottery is a type of lottery product for which the winning tickets and prize amounts are predetermined. The tickets are
pre-printed and a ticket purchaser will know instantly if he or she has won a prize once the ticket is opened. Given their nature,
instant lottery products are currently only sold through traditional sales channels.
Instant lottery products accounted for
24.2%, 25.7% and 14.6% of total lottery sales amount in China in 2010, 2011 and 2012, respectively, according to a report by the
MOF.
Traditional Sales Channels
The majority of lottery products are sold
through authorized lottery stations throughout China, in the form of physical lottery tickets.
Online Sales Channels
Internet users can also place purchase
orders on online lottery service platforms, which in turn direct the purchase orders to the relevant provincial level lottery administration
centers. The iResearch Report estimated that total lottery sales through online channels were approximately RMB5.5 billion, RMB11.0 billion
and RMB14.7 billion (US$2.4 billion) in 2010, 2011 and 2012, respectively. Mobile devices are new lottery distribution channels
that have been developing in recent years. Mobile phone users can place purchase orders on their handsets through services such
as mobile Internet. According to the iResearch Report, lottery sales through mobile channels have increased significantly in recent
years. The iResearch Report estimated total lottery sales through mobile devices to be approximately RMB530 million, RMB1.07 billion
and RMB2.03 billion (US$331.7 million) in 2010, 2011 and 2012, respectively. Compared to traditional sales channels, online sales
channels have the following advantages:
Easy access
.
Online users can submit purchase orders at lottery service websites at any time and from anywhere with an Internet connection.
In comparison, traditional lottery stations can only sell lottery tickets to purchasers who physically come to the station during
business hours. In addition, online lottery service websites have near-unlimited capacity to take multiple purchase orders at the
same time, while lottery stations can only serve a certain number of purchasers at a given time. Purchasers at traditional lottery
stations often have to wait in line to purchase new or popular lottery products for which transaction volumes are high.
Services and supports
.
Besides sales service, online sales channels provide a variety of services to users. Information services are valuable to online
users at the time of purchase, especially for certain types of lottery products such as sports match lottery products. Online forum
services provide venues for users to discuss lottery-related topics and socialize. Data services provide users valuable information
to study and research lottery products. In comparison, only a limited number of larger and well equipped lottery stations in China
have the capacity to provide information services such as news feeds and real-time information updates.
Lottery pool purchase is a purchase mode
favored by many lottery purchasers. Online sales channels greatly facilitate the pool purchase process. Purchasers can initiate
purchase pools or join existing pools online conveniently. In comparison, purchase pools formed offline usually involve participants
having to meet in person. An online community is an ideal venue for pool initiators to advertise their pools and find pool participants.
In addition, the transfer of individual purchase amounts and the allocation of prize money among participants can be handled electronically,
which is fast and automated, reducing chances of error or misappropriation.
Convenient prize
collection
. Traditionally, winners of lottery draws needed to go to the lottery station from which they purchased the winning
tickets and present the winning tickets as proof for prize collection. If the winning tickets were lost or severely damaged, the
prize could not be collected. Users who purchase lottery products online are able to have the prize money wire-transferred to their
online accounts, which reduces the chance of error and protects the anonymity of the winners. Purchase records are stored in the
online service providers’ database and no physical lottery ticket is required to be presented by the purchaser in the process.
Among the different types of lottery products,
Lotto, sports match lottery products and high frequency lottery products are more suited to online purchase. According to the iResearch
Report, in 2011, sales of Lotto, sports match lottery products and high frequency lottery products accounted for approximately
25%, 50% and 25% of total online lottery sales amount, respectively.
Government Regulation
Overview
The PRC government has imposed extensive
and stringent measures to regulate the telecommunications and software development industries. The State Council of the PRC, or
the State Council, the Ministry of Industry and Information Technology, or the MIIT (formerly the Ministry of Information Industry,
or the MII), and other relevant authorities in the PRC have issued various regulations with respect to the telecommunications and
software development industries. The PRC government also recently announced that it will impose strict regulations on its growing
lottery sector, requiring online lottery sales to be officially approved by the MOF. This section summarizes the principal PRC
laws and regulations relevant to our business and operations.
Business License
Any company that conducts business in the
PRC must have a business license that covers a particular type of work. Our business license covers our present business to design,
develop, and produce mobile Internet software. Prior to expanding our business beyond that of our business license, we are required
to apply and receive approval from the PRC government.
Employment Laws
We are subject to laws and regulations
governing our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship
requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial
resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s National
Labor Contract Law, which became effective on January 1, 2008, permit workers in both state and private enterprises in China to
bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed
through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify
such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of
enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
Regulations
on Lottery Services Industry and Online Lottery Sales
Since 1991, the
Chinese government has promulgated a series of rules and regulations to regulate the lottery industry in China. The major
rules and regulations currently in effect and applicable to our online lottery services include Regulation on Administration of
Lottery, promulgated by the State Council on May 4, 2009 and effective as of July 1, 2009, or the Lottery Regulation, and the Interim
Measures for the Administration of Online Sales of Lottery, promulgated by the MOF on September 26, 2010, or the Lottery Measures,
and effective upon the promulgation. On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration
of Sports of China jointly promulgated the Implementing Rules, which became effective on March 1, 2012. On February 28, 2012,
General Administration of Sports of China promulgated the Urgent Notice with regard to the Implementation of the Implementing Rules
of Regulation on Administration of Lottery. Under currently effective rules and regulations, only qualified service providers approved
by the MOF may engage in online lottery sales. Such qualified service providers will act as agencies for the relevant lottery administration
centers and must obtain a Lottery Agency License from and enter into lottery agency agreements with the competent lottery administration
centers before engaging in lottery sales on their behalf.
Certain rules
and regulations previously promulgated by the MOF and other regulatory authorities had previously prohibited the sales of lotteries
through the Internet, but after the promulgation of the Lottery Measures those rules and regulations have ceased to have legal
effect.
Online Lottery
Sales
The Lottery Measures
set forth detailed requirements for the administration of online lottery sales as well as the requirements for qualified online
lottery service providers. According to the Lottery Measures, the MOF is the supervisory and regulatory body of online lottery
sales in the PRC, and China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center (collectively,
“Lottery Issuance Agencies”) are responsible for the overall planning and management of online lottery sales for welfare
lottery and sports lottery, respectively. The Lottery Issuance Agencies may collaborate with other entities or authorize relevant
lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The
Lottery Measures require qualified online lottery service providers to meet certain criteria, including, among others, that (i)
they have a minimum registered capital of RMB50 million, (ii) they maintain adequate organizational, internal control and risk
management systems, (iii) they and their senior management have a clean criminal and credit history for the past five years, and
(iv) they have obtained an Internet content provider license. The Lottery Issuance Agencies are required to selectively submit
to the MOF information on the online lottery service providers that apply to become qualified to engage in online lottery business
under the Lottery Measures.
On April 3, 2015,
a joint announcement of the MOF, the Ministry of Public Security, the State Administration for Industry and Commerce, the Ministry
of Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration
of Sport of China, and the China Banking Regulatory Commission was made, announcing a prohibition on any unauthorized online lottery
sales. Pursuant to the announcement, online lottery sales will need to be officially approved by the MOF. Certain regulations and
rules over online lottery sales are under review.
The recent government
action surrounding online lottery sales has created significant risks and uncertainties for online lottery sales service providers
who do not have the necessary approvals, and as a result may reduce competition for online lottery sales service providers that
possess such necessary approvals on a going-forward basis.
Lottery Regulatory
Authorities
Under the current
regulations and provisions, the State Council is vested with the power to authorize the issuance of welfare lottery and sports
lottery, and is also the highest authority for granting the right to issue lotteries. The MOF is responsible for administering,
regulating and supervising the national lottery industry. The Ministry of Civil Affairs and the General Administration of Sport
of China are responsible for administering and regulating welfare lottery and sports lottery, respectively, and have established
China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center, respectively, pursuant
to regulations for the issuance and sales of welfare lottery and sports lottery. The civil affairs departments and sports administration
departments of provincial governments are responsible for the administration of welfare lotteries and sports lotteries within their
respective administrative regions.
Regulations
on Lottery Administration
On May 4,
2009, the State Council promulgated the Lottery Regulations, which set forth general provisions for the issuance, sales and administration
of lottery products. According to the Lottery Regulations, the welfare and sports lotteries sold in China must be issued by the
lottery issuance authorities, established by the civil affairs’ department and sports administration department of the PRC
State Council, or the Lottery Issuance Agencies, and must be sold through Lottery Issuance Agencies or lottery sales offices established
by the civil affairs’ departments and sports administration departments of the people’s government at the provincial
level (“Lottery Sales Agencies”). Lottery Issuance Agencies and Lottery Sales Agencies may, by entering into agency
agreements, appoint other entities or individuals as their agents in distributing lotteries. The Lottery Regulation also listed
circumstances where the Lottery Issuance Agencies and Lottery Sales Agencies may terminate such agency agreements, including situations
where the agent subcontracts the sales of the lottery products to any other persons or entities or sells lottery products to underage
buyers.
The Lottery Regulations
prohibit the Lottery Issuance Agencies, the Lottery Sales Agencies and their sales agents from (i) advertising false or misleading
information, (ii) competing unfairly by discrediting others in the same industry, (iii) selling lottery or paying lottery prizes
to underage purchasers, and (iv) selling lottery on credit. If the Lottery Issuance Agencies or the Lottery Sales Agencies fail
to comply with these requirements, the MOF or its relevant branches will have the power to (i) require the Lottery Issuance Agencies
or the Lottery Sales Agencies to correct or cease their operations; (ii) confiscate the illegal income received by the Lottery
Issuance Agencies or the Lottery Sales Agencies and impose fines; and/or (iii) impose administrative sanctions against persons
that are responsible. If any lottery sales agent sells lotteries to the underage buyers, its relevant income may be confiscated
and it may be subject to administrative fines up to RMB10,000, and the Lottery Issuance Agencies or the Lottery Sales Agencies
may have the right to terminate the agency agreement with the lottery sales agent. In addition, the Lottery Measures prohibits
the opening of online lottery accounts for or the granting of lottery prizes to underage buyers.
Prior to the promulgation
of the Lottery Regulation, the issuance and sales of the lottery products were governed by the Interim Provisions for the Administration
of the Lottery Issuance and Sales, or the Interim Provisions, promulgated by the MOF on March 1, 2002. The Interim Provisions were
replaced by the Administrative Measures for Lottery Issuance and Sales promulgated by the MOF on December 28, 2012. The Administrative
Measures for Lottery Issuance and Sales provided that any Lottery Issuance Agency, which wishes to apply to create, change or abolish
a specific type of welfare or sports lottery, is required to apply to the Ministry of Civil Affairs or the General Administration
of Sport of China for creating, changing or abolishing a specific type of welfare or sports lottery. If the application has been
approved by the Ministry of Civil Affairs or the General Administration of Sport of China, such application will be further submitted
to the MOF for the MOF’s examination and approval before the implementation. After the creation or change of specific type
of welfare or sports lottery has been approved by the MOF, the Lottery Issuance Agency receiving MOF approval or its related Lottery
Sales Agencies shall submit sales implementation plans to the MOF or its provincial counterparts for approval prior to the sales
of the specific type of lottery. The sales implementation plan shall include, among other things, the proposed sales commencement
date, promotion plans and risk control measures. In order to sell the specific type of welfare or sports lottery so created or
changed, the Lottery Issuance Agencies or the Lottery Sales Agencies may engage specific sales agents by entering into lottery
sales agency agreements with such sales agents.
The Company currently
has a sport lottery license from the Fujian Administration of Sport and Gaming.
Regulations Concerning the Software
Development Industry
Software Products
On March 1, 2009, the MIIT issued the Administrative
Measures for Software Products, or the Measures for Software Products, to regulate the development, production, sale, and import
and export of software products, including computer software, software embedded in information systems and equipment, and computer
software provided in conjunction with other information or technology services. Any entity or individual shall not develop, produce,
sell and import or export any software product which infringes upon the intellectual property rights of third parties, contains
computer viruses, endangers computer system security, is not in compliance with the software standard specification of the PRC,
or contains contents prohibited under PRC laws and regulations. To that end, for any software products, the Measures for Software
Products require registration and filing with the provincial level software registration institutions authorized to accept and
review software products registration applications. Once accepted for review, the software product registration application shall
be filed with and publicly announced by the MIIT, and if no objection is received within a seven-working-day publication period,
a software registration number and a software product registration certificate will be granted. A software registration certificate
is valid for five years and may be renewed upon expiration. We have obtained a Software Company Certification, as issued by the
Technology and Information Bureau of Shenzhen City (R2007-0033).
Software Enterprises
A PRC enterprise that develops one or more
software products and meets the Certifying Standards and Administrative Measures for Software Enterprises (Proposed), promulgated
by the MII, Ministry of Education, Ministry of Science and Technology and the State Administration of Taxation, or the SAT on October
16, 2000, can be certified as a “software enterprise.” The certification standards for software enterprises include
the following:
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the applicant shall be an enterprise established
in PRC which engages in the business of computer software development and production, system integration, application service,
etc., and whose operating revenue is primarily derived from the above referenced business activities;
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the enterprise develops one or more software
products or possesses one or more intellectual property rights of software products, or provides technical services such as computer
information system integration that has passed qualification and grade certification;
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the proportion of technical staff in the
work of software development and technical service shall be no less than 50% of the total staff in the enterprise;
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the applicant shall possess relevant technical
equipment and premises necessary for developing software and providing relevant services;
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the applicant shall possess methods and
ability to safeguard the qualify of the software products and the technical services;
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the development fund for software technique
and products shall be above 8% of the enterprise’s annual software income; and
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the annual sale income of software shall
be more than 35% of the total annual income of the enterprise, with the income of self-developed software more than 50% of the
software sales income;
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the enterprise has clearly-established
ownership, standardized management and complies with disciplines and laws.
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Enterprises that qualified as “software
enterprises” are entitled to certain preferential treatments in the PRC. According to the Circular on Relevant Taxation Policies
for Encouraging the Development of the Software and Integrate Circuit Industries (Circular No. 25) (2000) by the MOF, the General
Administration of Customs and the State Administration of Taxation, or the SAT, newly-established software manufacturing enterprises
(i.e. those established after July 1, 2000) may be exempt from income tax in the first two years of profitability and enjoy 50%
income taxes reduction for the next three years, such policy is known as the “Two Free, Three Half” preferential policy.
On February 22, 2008, the MOF and SAT promulgated the Notice on Several Preferential Policies in Respect of Enterprise Income Tax,
or the Notice 2008 No. 1, which reiterated that a software production enterprise newly established within China may, upon certification,
enjoy the Two Free, Three Half preferential treatment. On April 24, 2009, the MOF and SAT promulgated the Notice on Several Issues
Relevant to the Implementation of the Preferential Policies on Enterprise Income Tax, which states that, the software production
enterprises and the integrated circuit production enterprises established prior to the end of 2007 may, upon certification, enjoy
the preferential policies on the enterprise income tax reductions and exemptions within specified periods as provided in the Notice
2008 No. 1. An enterprise which became profitable in or before 2007 and started enjoying the enterprise income tax reductions and
exemptions within specified periods may continue to enjoy the relevant preferential treatment from 2008 until the expiration of
the specified periods. According to the Circular on Relevant Policies for Further Encouraging the Development of the Software and
Integrate Circuit Industries (Circular No. 4) (2011) issued by the State Council on January 28, 2011, the software production enterprises
and the integrated circuit production enterprises may, upon certification, enjoy the “Two Free, Three Half” preferential
policy from the year of profitability prior to December 31, 2017, until the expiration of the specified periods.
Foreign Investments
in Software Development Industry
According to the Catalogue of Industries
for Guiding Foreign Investment amended in December 2011, foreign investment is encouraged in the software development and production
sector. As such, there are no restrictions on foreign investment in the software development industry in the PRC aside from business
licenses and other permits that every software development entity in the PRC must obtain.
Regulations on Internet Domain Name
and Content
Internet Domain
Name
Internet domain names in the PRC are regulated
by the Administrative Measures on the PRC Internet Domain Name, which were promulgated by the MII and which came into effect on
December 20, 2004, and the Implementation Rules of Registration of Domain Name, which were promulgated by PRC’s domain name
registrar, China Internet Network Information Center, or CNNIC and which came into effect on December 1, 2002, and were amended
by CNNIC on June 5, 2009. Domain name service organizations accept applications for network domain names; successful applicants
become holders of the registered domain names after registration. A holder needs to pay operation fees on time to keep a registered
domain name, otherwise the domain name registrar may revoke the domain name. In case there are any changes to the registration
information of a domain name, the holder shall file the changes with the domain name registrar within 30 days after such changes.
The CNNIC is responsible for the administration of .cn domain names and domain names in Chinese language. Disputes in respect of
domain names are regulated by the Measures on Resolution of Disputes regarding Domain Names which were issued by CNNIC and revised
on February 14, 2006, and shall be settled by organizations approved by the CNNIC. We have obtained an Internet Registration Certification
from the Shenzhen Municipal Public Security Bureau, No. 3303101901203.
Content of Internet
Information
Provision of Internet information services
in the PRC is regulated by the Administrative Measures on Internet Information Services adopted by the State Council on September
20, 2000. According to these measures, provision of Internet information services regarding news, publication, education, medical
and health care, pharmacy and medical appliances are subject to examination, approval and regulation by relevant authorities responsible
for regulating these sectors. Internet content providers are not allowed to provide services beyond the scope of an applicable
license or registration. The measures also provide a list of prohibited content on the Internet. Internet information service providers
are required to monitor and censor the information on their websites, and when prohibited content is found, they shall terminate
the transmission immediately, keep the relevant record and report immediately to relevant authorities.
According to these measures, commercial
Internet information service providers must obtain a License for Internet Content Providers, or ICP license, in order to engage
in such business. Moreover, provision of ICP services in multiple provinces, autonomous regions and centrally administered municipalities
may require a trans-regional ICP license. We have obtained an ICP license (ICP No. 07047476).
On November 6, 2000, the MII issued the
Regulations for the Administration of Internet Electronic Notice Services to regulate the provision of information via Internet
in the form of, among others, electronic bulletin boards, electronic whiteboards, electronic forums, Internet chat-rooms and message
boards. The Internet electronic bulletin service providers are required to record the content and time of information released,
the website or domain name in the electronic bulletin system, keep such records for at least 60 days, and to provide such information
to the relevant authorities upon request.
Regulations on Technology Export
The Technology Import and Export Administrative
Regulations of the PRC promulgated by the State Council on December 10, 2001 and the Regulations of Protection of Computer Software
which came into effect on January 1, 2002, requires approval of imports and exports of restricted technology, and registration
of contracts to import or export unrestricted technology. Software is part of the technology governed by this regime. To implement
this requirement, the Administrative Measures for Registration of Technology Import and Export Contracts, or the Registration Measures,
was promulgated by the Ministry of Commerce, or the MOFCOM and become effective on March 1, 2009; the Administrative Measures on
Prohibited and Restricted Technology Exports, or the Technology Export Measures was jointly promulgated by the MOFCOM and the Ministry
for Science and Technology and become effective on May 20, 2009, and the Administrative Measures on Prohibited and Restricted Technology
Imports, or the Technology Import Measures was promulgated by the MOFCOM and become effective on March 1, 2009. Pursuant to these
regulations, the technology within the prohibited list for import and/or export shall not be imported and/or exported, and a permit
for import and/or export shall be obtained by the importer and/or exporter if the technology to be imported and/or exported are
listed within the restricted list for import and/or export. For any import or export technology, the relevant department of commerce
is responsible for the registration of contracts for such technology import or export.
Regulations on Intellectual Property
Rights
The PRC’s intellectual property protection
regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets. The PRC is also signatory to most of the world’s major intellectual
property conventions, including:
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Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 3,
1980);
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Paris Convention for the Protection of Industrial Property (March 19, 1985);
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Patent Cooperation Treaty (January 1, 1994); and
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The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (December 11, 2001).
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Trademarks
Registered trademarks in the PRC are protected
by the Trademark Law of the PRC which came into effect in 1982 and was revised in 1993 and 2001 and the Regulations for the Implementation
of Trademark Law of PRC which came into effect in 2002. A trademark can be registered in the PRC with the Trademark Office under
the State Administration for Industry and Commerce, or the SAIC. The protection period for a registered trademark in the PRC is
ten years starting from the date of registration and may be renewed if an application for renewal is filed within six months prior
to expiration.
Copyright
Copyright in the PRC is protected by the
Copyright Law of the PRC which was promulgated in 1990 and revised in 2001 and February 2010 and the Regulation for the Implementation
of the Copyright Law of the PRC which came into effect in September 2002 and revised in January 2011. Under the revised Copyright
Law, copyright protections have been extended to information network and products transmitted on information network. Copyrights
are reserved by the author, unless specified otherwise by the laws. According to Article 16 of the Copyright Law, if a work constitutes
“work for hire”, the employer, instead of the employee, is considered the legal author of the work and will enjoy the
copyrights of such “work for hire” other than rights of authorship. “Works for hire” include, (1) drawings
of engineering designs and product designs, maps, computer software and other works for hire, which are created mainly with the
materials and technical resources of the legal entity or organization with responsibilities being assumed by such legal entity
or organization; (2) those works the copyrights of which are, in accordance with the laws or administrative regulations or under
contractual arrangements, enjoyed by a legal entity or organization. The actual creator may enjoy the rights of authorship of such
“work for hire.”
A copyright owner may transfer its copyrights
to others or permit others to use its copyrighted works. Use of copyrighted works of others generally requires a licensing contract
with the copyright owner. The protection period for copyrights in the PRC varies, with 50 years as the minimum. The protection
period for a “work for hire” where a legal entity or organization owns the copyright (except for the right of authorship)
is 50 years, expiring on December 31 of the fiftieth year after the first publication of such work.
Patent protection in China
Patents in the PRC are governed by the
China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent
Law and its Implementing Regulations came into effect in 2009 and 2010, respectively.
The PRC is signatory to the Paris Convention
for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in
one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed
in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents—patents
for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file; therefore, where more
than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the
application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess
the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical
with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad
or has been publicly used in the country, and should not be in conflict with any prior right of another.
PRC law provides that anyone wishing to
exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee.
One broad exception to this rule, however, is that, where the patent holder has not exploited the patent or has not exploited the
patent adequately without any reasonable reason in the statutory period of time, or the patent holder’s act of exploiting
the patent is held to be monopolistic, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where
the public interest so requires. SIPO, however, has not granted any compulsory license to date. The patent holder may appeal such
decision within three months from receiving notification by filing a suit in a people’s court.
PRC law defines patent infringement as
the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed
may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the
infringer to stop the infringing acts. A preliminary injunction may be issued by the People’s Court upon the patentee’s
or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case
of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit
gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably
determined in an amount ranging from one or more times the license fee under a contractual license. The infringing party may be
also fined by the Administration of Patent Management in an amount of up to four times the unlawful income earned by such infringing
party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB200,000, or approximately
USD $31,250.
Measures for the
Registration of Computer Software Copyright
In China, holders of computer software
copyrights enjoy protections under the Copyright Law. China’s State Council and the State Copyright Administration have promulgated
various regulations relating to the protection of software copyrights in China. Under these regulations, computer software that
is independently developed and exists in a physical form is protected, and software copyright owners may license or transfer their
software copyrights to others. Registration of software copyrights, exclusive licensing and transfer contracts with the Copyright
Protection Center of China (previously, the State Copyright Administration) or its local branches is encouraged. Such registration
is not mandatory under Chinese law, but can enhance the protections available to the registered copyrights holders. For example,
the registration certificate is proof of protection.
Foreign Exchange Regulation
Pursuant to the Foreign Currency Administration
Rules promulgated in 1996 and amended in 2008 and various regulations issued by the State Administration of Foreign Exchange (“SAFE”),
and other relevant PRC government authorities, the Renminbi is freely convertible only to the extent of current account items,
such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments,
loans and repatriation of investments, require the prior approval from the SAFE or its local counterpart for conversion of Renminbi
into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place
within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received
from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject
to a cap set by the SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign
currency receipts into Renminbi.
Under the Implementing Rules of Measures
for the Administration of Individual Foreign Exchange, or the Implementation Rules, issued by the SAFE on January 5, 2007, PRC
citizens who are granted shares or share options by an overseas listed company according to its share incentive plan are required,
through a qualified PRC agent or the PRC subsidiary of such overseas listed company, to register with the SAFE and complete certain
other procedures related to the share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed
by the overseas listed company must be remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi.
In addition, domestic wages and salaries
of foreign employees outside of the PRC, as well as other rightful earnings, such as dividends, bonuses and profits, of shareholders
outside of the PRC may be remitted freely out of the PRC after taxes have been paid in accordance with the provisions of the Chinese
tax law with a tax certificate. Since we do not have any debt that is generated outside the PRC and do not have any employees located
outside PRC, management is not aware of any material risk of paying in foreign currency in respect of those employee-related and
debt-settlement amounts due to any other party located outside PRC.
Liquidation
According to the bankruptcy law of the
PRC, CC Investment, as a WFOE, needs to have its debt to creditors settled in the priority as set forth in the relevant Bankruptcy
law in China and its immediate equity holder, CC Mobility, located in Hong Kong, would be the last party to be entitled to any
residual interest of the entity. Such priority of payment and distribution in the case of the liquidation of CC Investment does
not have any different priority in respect of PRC nationals or foreigners. The priority is based on the status of being a creditor
and other requirements as set forth in the bankruptcy law in China, which does not have any discrimination or preference in respect
of whether the party is a PRC national or foreigner.
Taxation
Under the Enterprise Income Tax Law (“EIT”),
effective January 1, 2008, China adopted a uniform tax rate of 25.0% for all enterprises (including foreign-invested enterprises)
and revoke the current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However,
there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential
tax treatment granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25.0%
may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of
the EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed
term may continue to enjoy such treatment until the fixed term expires. However, the two-year exemption from enterprise income
tax for foreign-invested enterprise will begin from January 1, 2008 instead of from when such enterprise first becomes profitable.
Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by
the state, and enterprises otherwise classified as “new and high technology enterprises strongly supported by the state”
will be entitled to a 15.0% enterprise income tax rate even though the EIT Law does not currently define this term.
Provisions Regarding Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors
On August 8, 2006, six PRC regulatory agencies,
including the Chinese Securities Regulatory Commission (“CSRC”), promulgated a rule entitled Provisions Regarding Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors (the “new M&A rule”) to regulate foreign investment
in PRC domestic enterprises. The new M&A rule provides that the Ministry of Commerce must be notified in advance of any change-of-control
transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exists:
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the transaction involves an important industry in China;
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the transaction may affect national “economic security;” or
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the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China.
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On September 21, 2006, the CSRC issued
a clarification that sets forth the criteria and process for obtaining any required approval from the CSRC. To date, the application
of this new M&A rule is unclear.
Employees
We currently employ 98 individuals amongst
our various offices. All employees enter into confidentiality agreements.
Corporate Information
The principal executive offices for the
Registrant are located at: 2225 East Bayshore Road, Suite 200, Palo Alto, CA 94303. The Registrant’s main telephone number
is: 650-320-1728 and its fax number is 650-551-9901. The Registrant’s website is located at: www.xcelmobility.com.
CC Power’s offices are located at:
Unit 1705, Tower A, Haisong Bldg., Tairan 9 Road, Futian District, Shenzhen, 518040, China
ITEM 1A.
RISK FACTORS
.
You should carefully consider the risks
described below together with all of the other information included in our public filings before making an investment decision
with regard to our securities. The statements contained in or incorporated into this document that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth
in or implied by forward-looking statements. If any of the following events described in these risk factors actually occurs, our
business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Related to Our Business and
Industry
Our operating results are difficult to predict, and we may
experience significant fluctuations in our operating results.
Our operating results may fluctuate significantly. As a result,
you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance.
Factors causing these fluctuations include, among others:
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our ability to maintain and increase sales to existing customers, attract new customers and satisfy
our customers’ demands;
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the price we charge for our services or changes in our pricing strategies or the pricing strategies
of our competitors;
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timing and costs of marketing and promotional programs organized by us and/or our partners, including
the extent to which we or our partners offer promotional discounts to their customers;
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technical difficulties, system downtime or interruptions of our computer system, which we use to
support our services;
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the introduction by our competitors of new products and services;
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the effects of strategic alliances, potential acquisitions and other business combinations, and
our ability to successfully and timely integrate them into our business;
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changes in government regulations with respect to the online lottery industry; and
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economic and geopolitical conditions in China and elsewhere.
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In addition, a significant percentage of
our operating expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue for any reason could
result in substantial operating losses.
The rules and regulations on online
lottery sales service market in China are relatively new and subject to interpretation, and their implementation involves uncertainty.
As the relevant rules and regulations relating
to online lottery sales are relatively new, we face uncertainties in the implementation of such rules and regulations by the competent
authorities. The competent authorities may establish certain management systems to supervise and monitor the online lottery sales,
which systems may comprise a sales monitoring system, a back-office management system and an application service platform. The
competent authorities may also ask the approved entities to adopt certain measures to meet specific regulatory requirements that
may be adopted from time to time. For example, the competent authorities may monitor or adjust the categories of lottery products
being sold online, and supervise the sales procedures and key data of our online lottery sales on a real-time basis, such as those
relating to our customer account opening procedures, capital management, database information and risk controls. The Chinese Government
brought a halt to unauthorized online lottery sales through a Public Announcement in April 2015, requiring express approval from
the MOF for businesses engaging in online lottery sales. This and any other unfavorable new regulatory requirements could have
a material adverse effect on our business, financial condition, results of operations and prospects.
Our product portfolio depends on the
offerings of the lottery administration centers and could change unfavorably for us as a result of decisions made by them.
The lottery products we service are issued
and sold by lottery administration centers. We do not have the right to issue lottery products and cannot prevent the discontinuation
of lottery products currently being offered. If the national lottery administration centers decide to discontinue one or more lottery
products or to replace them with other products, this could lead to a decline in our purchase orders and thus have an adverse effect
on our financial position and results of operations. In addition, if we want to provide services on newly issued lottery products,
we have to enter into service agreements with the lottery administration centers that issue or sell such new lottery products.
We cannot assure you that such service agreements can be entered into on terms favorable to us, or at all. If our competitors are
able to enter into service agreements to service popular newly issued lottery products while we cannot, it could have an adverse
effect on our revenue and brand name.
Lottery products offered by provincial
lottery administration centers may be discontinued or subject to restriction and regulations by the relevant national lottery administration
centers. Due to the popularity of certain lottery products we service, those provincial lottery administration centers with which
we do not have service agreements might choose to issue similar lottery products on more competitive terms. This may result in
a decrease in the purchase orders of those lottery products we service and, in turn, result in a decrease in the revenue we are
able to generate from those lottery products. We cannot assure you that we will be able to reach an agreement with a provincial
lottery administration center to obtain the right to service its lottery products that compete with products we currently service.
In addition, the relevant lottery authorities could mandate the change of the rules or prize scheme of our current lottery products
or stop the issuance of those lottery products altogether due to social policy or other considerations, which could have an adverse
effect on our results of operations.
We operate in an intensely competitive
environment, which may lead to declining revenue growth or other circumstances that would negatively affect our results of operations.
We operate in the new and dynamically growing
online market for lottery products. Going forward, we anticipate significant competition, primarily from other online lottery service
providers that may obtain relevant approvals and licenses to provide online lottery sales services in China. When the approval
and licensing system for online lottery service providers is fully implemented in China in the future, we may face increased competition
from companies that do not currently operate in the online lottery services industry. For example, if major portal websites obtain
relevant approvals and licenses to offer lottery sales services, they may be able to offer similar services at a lower cost or
to a larger user group due to their larger operational scales and user bases, which may put us at a competitive disadvantage. We
also face competition from traditional offline lottery agents. If we do not recognize market trends or user demand in a timely
manner, we may lose our market share to our competitors, which would have a negative impact on our results of operations.
The lottery industry in China in general
and the online lottery service industry in particular may not grow as quickly as expected, which may adversely affect our revenues
and business prospects.
Our business and prospects depend on the
continuing development and expansion of the lottery industry in China in general and the online lottery service industry in particular.
Both China’s lottery industry and the online lottery service industry have experienced substantial growth in recent years
in terms of both the number of people purchasing lottery products and revenue generated. We cannot assure you, however, that the
lottery industry or the online lottery service industry in China will continue to grow as rapidly as it has in the past, or that
the current trend of a faster growth rate of the lottery market in comparison to the growth rates of China’s GDP and individual
disposable income will continue in the future. Growth of China’s lottery industry and the online lottery services industry
are affected by numerous factors, such as GDP growth, growth of individual disposable income, regulatory changes, public perception
and receptiveness, users’ trust and confidence level in the online lottery market, users’ general online purchase experience,
technological innovations, development of the Internet and Internet-based services, and the macroeconomic environment. If the lottery
industry or online lottery service industry in China does not grow as quickly as expected or if we fail to benefit from such growth
by failing to successfully implement our business strategies, our user base may decrease and our business and prospects may be
adversely affected.
We depend on our technology and advanced
information system, which may fail or be subject to disruption.
We are dependent on our IT systems for
handling purchase orders, and the efficiency and reliability of our systems are in turn dependent on the functionality and stability
of the underlying technical infrastructure. The functionality of the servers used by us and the related hardware and software infrastructure
are of considerable significance to our business, our reputation and our ability to attract business partners and users. Our IT
systems may be damaged or interrupted by increases in usage, human errors, unauthorized access, destruction of hardware, power
cuts not covered by backup facilities, system crashes, software problems, virus attacks, natural hazards or disasters, or similar
disruptions or disruptive events. Furthermore, our current IT systems may be unable to support a significant increase in online
traffic or increased number of users, whether as a result of organic or inorganic growth of the business. We have in place security
measures to protect against network or technical failures or disruptions. Despite such procedures, failures in computer processing
and weakness in the existing software and hardware cannot be completely prevented or eliminated. Any failure of our IT system and
infrastructure could lead to significant costs and disruptions that could reduce our revenues, harm our reputation and have a material
adverse effect on our operations.
In addition, we rely on bandwidth providers,
communications carriers, data centers and other third parties for key aspects of the process in providing services to our users.
Any failure or interruption in the services and products provided by these third parties could limit our ability to operate certain
of our businesses, which could in turn have a material adverse effect on our business and financial condition.
We may not be able to develop and launch
new services or new technologies in a timely manner or at all, and new services or technologies we manage to develop or provide
may not be successful.
Our success in attracting new users and
keeping existing users engaged depends on our ability to consistently develop and launch new and innovative services and technologies.
Although we will continue to focus on research and development going forward, we cannot assure you that we will continue to be
able to develop our technology to keep up-to-date with developments across the online lottery service industry and to
launch new products or technologies in a timely manner or at all. New technologies and software are also less likely to be reliable,
robust and resistant to viruses or failure. Given the fast growing online lottery service industry, we may not have enough time
to fully test the new technologies and software we have developed before deploying them on our websites, which might cause service
problems and negative user experience.
In particular, the number of people who
access the Internet through non-PC devices such as mobile phones has increased in recent years. The software we have
developed for these devices may not be widely adopted by users of such non-PC devices. The lower resolution, functionality
and memory capacity associated with non-PC devices make the use of our services through such devices difficult. If we
are unable to attract and retain a substantial number of non-PC device users to our services or if we are slow to develop
services and technologies that are more compatible with non-PC devices relative to our competitors, we may fail to capture
a significant share of new users or lose our existing users who switch to non-PC devices for their lottery purchase activities.
Our systems and controls to restrict
access to our websites from persons located in the United States may not be adequate.
In the United States, some credit card
companies have classified online purchase orders of U.S. state-issued lottery products as online gambling and thus denied such
purchase orders, despite the fact that many such purchases are exempt from the Unlawful Internet Gambling Enforcement Act, or UIGEA,
enacted in 2006. The UIGEA is silent on whether lottery products issued by non-U.S. state entities are exempt from the definition
of online gambling. There are several other U.S. federal laws relevant to online gaming, including the Professional and Amateur
Sports Protection Act, the Federal Interstate Wire Act, the Illegal Gambling Business Act, the Interstate Transportation of Wagering
Paraphernalia Act and the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprising Act. In addition,
laws and regulations exist in various individual U.S. states that limit or prohibit online games of chance. Although the services
we provide to our users are solely related to lottery products issued and sold by national and authorized provincial lottery administration
centers in China, we cannot assure you that the United States Department of Justice or other federal or state regulatory authorities
will not deem our business as being in violation of the UIGEA or any of the laws mentioned above if purchase orders are placed
on our platform from users in the United States not successfully blocked by our system. Violations of such laws can lead to criminal
and civil penalties, including substantial fines, injunctions, damage claims and jail terms for persons accountable, and actions
brought against us based on such violations, could have a material adverse effect on our operations, financial performance and
prospects.
Any extended periods in the future without
our users winning substantial prizes could result in losses in revenues and profits for us.
Our users’ record of winnings is
one of the factors contributing to our ability to attract new users and retain existing users. No assurance can be given that there
will not be long periods in the future without any of our users winning a prize of significant amount, which could lead to a reduction
in user activity and therefore a shortfall in our revenue and profit.
Negative publicity about our operations,
or problems such as underage and compulsive lottery activities, fraud and corruption in sports matches may adversely affect our
reputation and business.
Social responsibility policies are a key
consideration in lottery laws and regulations. There are concerns as to the ability of online lottery service providers to effectively
block minors from purchasing lottery products online and the possible increase in compulsive lottery activity due to the relative
ease of making online lottery purchases. Publicity regarding such concerns could harm our brand and image. If the perception develops
that online lottery operators or the lottery industry as a whole is failing to adequately protect minors and vulnerable lottery
purchasers, we may face increased social resistance. Damage to the industry’s reputation could also lead to the withdrawal
of support for the industry from the government or the tightening of regulations, which may have a material adverse effect on our
business.
Negative publicity about potential fraud
(including money laundering) and corruption in sports matches (including collusion and match-fixing), even if not directly or indirectly
connected with us or our services, may adversely impact our reputation and the willingness of the public to participate in the
purchase of sports lotteries. As a result, the number of potential users available to us could be adversely affected.
We may fail to detect fraudulent activities
of our users or employees.
Online transactions may be subject to sophisticated
schemes or collusion to defraud or other illegal activities, and there is a risk that our platform may be used for those purposes
either by our users or our employees. While we make continuing efforts to protect our business and our users from such illegal
activities, including a user identity verifying system and pre-payment procedures to protect against fictitious transactions,
the controls and procedures we have implemented may not be effective in all cases. Failure to protect our operations and our users
from fraudulent activity either by other users or our employees could result in reputational damage to us and could materially
and adversely affect our results of operations.
Failure to adequately protect user account
information could have a material adverse effect on us.
We process our users’ personal data
(including name, address, age, bank details and lottery purchase history) as part of our business and therefore must comply with
data protection laws in China. Data protection laws restrict our ability to collect and use personal information relating to our
users and potential users. Notwithstanding our IT and data security and other systems, we may not be effective in detecting any
intrusion or other security breaches, or safeguarding against sabotage, hackers, viruses and cyber crime. We are exposed to the
risk that personal data could be wrongfully accessed and/or used, whether by employees, users or other third parties, or otherwise
lost or disclosed or processed in breach of data protection laws. If we or any of the third party service providers whom we rely
on fail to transmit users information and payment details online in a secure manner or if any such theft or loss of personal users
data were to otherwise occur, it could subject us to liabilities under the data protection laws or result in the loss of the goodwill
of our users.
We are dependent on external service
providers with respect to payment and settlement processing, and the provision of faulty services by these providers could lead
to financial loss and damage to our reputation.
We are dependent on cooperation with external
service providers with specialist knowledge and technology for processing lottery purchase orders. This includes, among other things,
data and voice communication, procurement, installation, further development, maintenance and servicing of hardware and software,
server housing and payment processing. It is possible that one or more of the external service providers do not perform the services,
or that they do not perform them in a timely and accurate manner. It is therefore possible that, due to failures or omissions by
the external service providers that we have engaged, we will not be in a position to perform our own services faultlessly or on
time. This could lead to revenue losses, liability for damage, and substantial damage to our reputation.
We depend on payment processing for
the success of our business.
We require our users to deposit funds in
their registered accounts in advance of any lottery purchases. Users’ prize money are also deposited in and withdrawn from
their respective accounts. Therefore, the provision of convenient, trusted and effective payment processing services to our users
and potential users is critical to our business. If there is any deterioration or perceived deterioration in the quality of the
payment processing services provided by us or any interruption to those services, or if our payment processing services are not
performed in a timely manner, our users and potential users may be deterred from using our online lottery services, and we may
be subject to user complaints and allegations concerning the mishandling of their funds, which may damage our reputation and have
a material adverse effect on our business and results of operations.
We could be subject to administrative
penalties or business losses if our current user identity verifying system cannot sufficiently prevent us from taking purchase
orders from underage users.
According to the Regulation on Administration
of Lottery issued by the State Council which came into effect on July 1, 2009, a lottery service provider may be subject to administrative
penalties from the local civil affairs authority or the sports administration authorities if it takes lottery purchase orders from
underage users. The lottery administration centers have the right to terminate their service agreements with a service provider
if it becomes subject to administrative penalties. It is still unclear which security mechanisms have to be introduced for online
service providers to protect minors. Although we have adopted a user identity verifying system which allows us to filter out underage
users, we cannot assure you that our current system is sufficient for us to identify all underage users. If the relevant authorities
determine that we are in violation of any relevant regulations, we may be subject to administrative penalties and we may lose our
service agreements with the lottery operation centers.
In addition, a registration process that
is as simple as possible and takes only a short time to complete is an important factor in our ability to attract new users. Currently,
the age verification step of our registration process is relatively simple. If it becomes apparent that this measure is inadequate,
the registration process might have to be made more lengthy and difficult for more in-depth checks, such as requiring
users to provide a copy of their Chinese ID card or other identification documents as part of the registration process, which could
decrease the number of new registrations or lead to a decrease in users. This could have a material adverse effect on our financial
condition and results of operations.
Our failure to retain and attract qualified
personnel could harm our business.
We believe that our success depends in
part on our ability to attract, train and retain qualified personnel. Competition for qualified personnel is intense and we may
not be able to hire sufficient personnel to achieve our goals or support the anticipated growth in our business. If we fail to
attract and retain qualified personnel, our business will suffer.
If we are not able to adequately protect
our intellectual property, we may not be able to compete effectively.
Our ability to compete depends in part
upon the strength of our proprietary rights in our technologies, brands and content. We expect to rely on a combination of Chinese,
U.S. and other foreign patents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual
property and proprietary rights. The efforts we have taken and expect to take to protect our intellectual property and proprietary
rights may not be sufficient or effective at stopping unauthorized use of our intellectual property and proprietary rights. In
addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country
in which our products are made available. There may be instances where we are not able to fully protect or utilize our intellectual
property in a manner that maximizes competitive advantage. Our inability to obtain appropriate protections for our intellectual
property may also allow competitors to enter our markets and produce or sell the same or similar products. In addition, protecting
our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If we are otherwise
unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products may be reduced,
and our business and financial results could be adversely affected.
If we are forced to resort to legal proceedings
to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights
could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. In addition, the possibility of extensive
delays in the patent issuance process could effectively reduce the term during which a marketed product is protected by patents.
We may also need to obtain licenses to
patents or other proprietary rights from third parties. We may not be able to obtain the licenses required under any patents or
proprietary rights or they may not be available on acceptable terms. If we do not obtain required licenses, we may encounter delays
in product development or find that the development, manufacture or sale of products requiring licenses could be foreclosed. We
may, from time to time, support and collaborate in research conducted by universities and governmental research organizations.
We may not be able to acquire exclusive rights to the inventions or technical information derived from these collaborations, and
disputes may arise over rights in derivative or related research programs conducted by us or our collaborators.
Confidentiality agreements with employees
and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
Our success depends upon the skills, knowledge
and experience of our technical personnel, our consultants and advisors as well as our licensors and contractors. Because we operate
in a highly competitive field, we rely almost wholly on trade secrets to protect our proprietary technology and processes. However,
trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our
corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally
require that the receiving party keep confidential and not disclose to third parties confidential information developed by us during
the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived
by the receiving party in the course of rendering services to us will be our exclusive property. However, these agreements may
be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered
by competitors, in which case we would not be able to prevent use of such trade secrets by our competitors. The enforcement of
a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming
and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
We depend substantially on the continuing
efforts of our executive officers, and our business and prospects may be severely disrupted if we lose their services.
Our future success is dependent on the
continued services of the key members of our management team, including Renyan Ge and Xili Wang. We do not maintain key man life
insurance on any of our executive officers and directors. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted,
and we may incur additional expenses to recruit and retain new management. The process of hiring suitably qualified personnel is
also often lengthy. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to
execute our business strategy.
We may not be able to manage our expansion
of operations effectively and failure to do so could strain our management, operational and other resources, which could materially
and adversely affect our business and growth potential.
We have grown since our inception and we
anticipate continued expansion of our business to address growth in demand for our products, as well as to capture new market opportunities.
The continued growth of our business has resulted in, and will continue to result in, substantial demands on our management, operational
and other resources. In particular, we believe that the management of our growth will require, among other things:
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our ability to expand our market reach in China, Japan and elsewhere;
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our ability to continue to identify new customers and distribution channels;
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our ability to control operating expenses;
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strengthening of financial and management controls;
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increased marketing, sales and sales support activities; and
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hiring, training and managing of new personnel, including sales personnel.
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If we are not able to manage our growth
successfully, our business and prospects would be materially and adversely affected.
We may need additional capital and may
not be able to obtain it on acceptable terms or at all, which could adversely affect our liquidity and financial position; the
issuance of additional equity would result in dilution to our shareholders.
We may need to raise additional capital
if our expenditures exceed our current expectations due to changed business conditions or other future developments. Our future
liquidity needs and other business reasons may require us to sell additional equity or debt securities or obtain a credit facility.
The sale of additional equity securities or securities convertible or exchangeable to our equity securities would result in additional
dilution to our shareholders. The incurrence of additional indebtedness would result in increased debt service obligations and
could result in operating and financing covenants that restrict our operational flexibility. Our ability to raise additional funds
in the future is subject to a variety of uncertainties, including:
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our future financial condition, results of operations and cash flows;
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general market conditions for capital-raising activities by technology companies; and
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economic, political and other conditions in China, Japan and elsewhere.
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No assurances can be given that we will
be able to obtain additional capital in a timely manner or on commercially acceptable terms or at all.
Future acquisitions are expected to
be a part of our growth strategy, and could expose us to significant business risks.
One of our strategies is to grow our business
through acquisition of other companies. However, no assurances can be given that we will be able to identify and secure suitable
acquisition opportunities. Our ability to consummate and integrate effectively any future acquisitions on terms that are favorable
to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary,
our ability to obtain financing on satisfactory terms for larger acquisitions, if at all.
Moreover, if an acquisition candidate is
identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not be able to
enter into arrangements on commercially reasonable terms or at all. The negotiation and completion of potential acquisitions, whether
or not ultimately consummated, could also require significant diversion of management’s time and resources and potential
disruption of our existing business. Furthermore, no assurances can be given that the expected synergies from future acquisitions
will actually materialize. In addition, future acquisitions could result in the incurrence of additional indebtedness, costs, and
contingent liabilities. Future acquisitions may also expose us to potential risks, including risks associated with:
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the integration of new operations, products, services and personnel;
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unforeseen or hidden liabilities;
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the diversion of financial or other resources from our existing businesses;
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our inability to generate sufficient revenue to recover costs and expenses of the acquisitions;
and
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the potential loss of, or harm to, relationships with employees or customers.
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Any of the above could significantly disrupt
our ability to manage our business and materially and adversely affect our business, financial condition and results of operations.
Risks Related to Our Corporate Structure
Transactions among our affiliates are
subject to scrutiny by the PRC tax authorities, and a finding that we or any of our consolidated entities owe additional taxes
could have a material adverse impact on our net income and the value of an investment in our common stock.
Under PRC law, arrangements and transactions
among related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered
into among our consolidated entities are challenged by the PRC tax authorities to be not on an arm’s-length basis, or to
result in an unreasonable reduction in our PRC tax obligations, the PRC tax authorities have the authority to disallow our tax
deduction claims, adjust the profits and losses of our respective PRC consolidated entities and assess late payment fees and other
penalties. Our net income may be materially reduced if our tax liabilities increase or if we are otherwise assessed late payment
fees or other penalties.
PRC regulations relating to acquisitions
of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our
failure to obtain the prior approval of the listing and trading of our common stock could have a material adverse effect on our
business, operating results, reputation and trading price of our common stock.
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council,
the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission
and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises
(the “Revised M&A Regulations”), which took effect September 8, 2006. Among other things, the Revised M&A Regulations
include provisions that purport to require that an offshore special purpose vehicle, or “SPV,” formed for listing purposes
and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing
and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official
website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas
listings. We believe that (i) CC Investment was incorporated as a foreign owned enterprise and that there was no acquisition of
the equity or assets of a “PRC domestic company” as such term is defined under the Revised M&A Regulations and
(ii) that no provision in the Revised M&A Regulations clearly classifies the contractual arrangements between CC Investment
and CC Power as a type of transaction falling within such rules. Therefore, we were and are not required to obtain the approval
of CSRC under the Revised M&A Regulations in connection with the Exchange Transaction.
If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval was required for the Exchange Transaction, we may face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the
PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. Also, if
the CSRC later requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if
and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval
requirement could have a material adverse effect on the trading price of our common stock.
It is uncertain how our business operations
or future strategy will be affected by the interpretations and implementation of the Revised M&A Regulations. It is anticipated
that application of the rules will be subject to significant administrative interpretation, and we will need to closely monitor
how MOFCOM and other ministries apply the rules to ensure that our domestic and offshore activities continue to comply with PRC
law. Given the uncertainties regarding interpretation and application of the rules, we may need to expend significant time and
resources to maintain compliance.
We currently conduct our business primarily
through contractually controlled PRC operating entities, and our control of the day-to-day operations of such PRC entities pursuant
to contracts, to comply with Chinese law, may not be as effective as conducting business through direct equity ownership of such
PRC entities due to uncertainties with respect to the PRC legal system which could materially and adversely affect our results
of operations.
We currently conduct a substantial portion
of our business primarily through our contractually controlled PRC operating entities. PRC laws and regulations govern our operations
in the PRC. Our contractually controlled PRC operating entities are generally subject to laws and regulations applicable to foreign
investments in the PRC and, in particular, laws applicable to wholly foreign-owned enterprises (“WFOEs”). Although
members of our executive management team and our shareholders include the executive officers and owners of our contractually controlled
PRC operating entities, because we do not directly own our contractually controlled PRC operating entities, we may encounter problems
enforcing our rights to control the business affairs and day-to-day operations of such entities. If we find it necessary to take
legal action in the PRC to enforce our rights under our contracts with the PRC operating entities, we will be subject to the uncertainties
of the PRC legal system, where prior court decisions have limited precedential value. Since 1979, PRC legislation and regulations
have significantly enhanced the protections afforded to various forms of foreign investments in PRC. However, the PRC has not developed
a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities
in the PRC. In particular, because these laws and regulations are relatively new, and because of the limited volume of published
decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.
In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on
a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation, if any, of these
policies and rules until sometime after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted
and result in substantial costs and diversion of resources and management attention. Accordingly, notwithstanding our contractual
control over our PRC operating entities, such control may not be as effective as if we conducted our business through direct equity
owned PRC entities which could materially and adversely affect our results of operations.
Our contractual arrangements with CC
Power and its shareholders may not be as effective in providing control over these entities as direct ownership.
We have no equity ownership interest in
CC Power as we rely on the contractual arrangements of the VIE agreements to control and operate CC Power. These contractual arrangements
may not be as effective in providing control over CC Power as direct ownership. For example, CC Power could fail to take actions
required for our business or fail to pay dividends to CC Investment despite their contractual obligations to do so. If CC Power
fails to perform its obligation under its VIE agreements, we may have to rely on legal remedies under PRC law, which may not be
effective.
Risks Related to Doing Business Internationally
and in China
We are subject to market risk through
our sales to international markets.
A portion of our sales are or will be derived
from international markets. These operations are subject to risks that are inherent in operating in foreign countries, including
the following:
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foreign countries could change regulations or impose currency restrictions and other restraints;
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changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries
in which we operate;
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some countries impose burdensome tariffs and quotas;
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political changes and economic crises may lead to changes in the business environment in which
we operate;
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international conflict, including terrorist acts, could significantly impact our financial condition
and results of operations; and
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economic downturns, political instability and war or civil disturbances may disrupt distribution
logistics or limit sales in individual markets.
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No assurance can be given that we will
be able to continue selling our products in any of the foreign countries in which we currently or plan to do business. Any of the
above-mentioned factors could detrimentally affect our sales, and impact our financial condition and results of operations.
Current global economic conditions may
adversely affect our industry, business and results of operations.
The recent disruptions in the current global
credit and financial markets has included diminished liquidity and credit availability, a decline in consumer confidence, a decline
in economic growth, an increased unemployment rate, and uncertainty about economic stability. There can be no assurance that there
will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties
affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities.
The current adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending.
We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse
global economic conditions. If the current uncertain economic conditions continue or further deteriorate, our business and results
of operations could be materially and adversely affected.
Our international operations subject
us to risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific
to the countries or regions in which we operate, which could adversely affect our financial performance.
We currently conduct operations in the
PRC and in Japan, and plan on expanding our operations to additional international markets. Our future operating results in international
markets could be negatively affected by a variety of factors, most of which are beyond our control. These factors include political
conditions, including political instability, economic conditions, legal and regulatory constraints, trade policies, currency regulations,
and other matters in any of the countries or regions in which we operate, now or in the future.
Moreover, the economies of some of the
countries in which we currently have, or plan to have operations, have in the past suffered from high rates of inflation and currency
devaluations, which, if they occurred again, could adversely affect our financial performance. Other factors which may impact our
operations include foreign trade, monetary and fiscal policies both of the United States and of other countries, laws, regulations
and other activities of foreign governments, agencies and similar organizations, and risks associated with having numerous officers
located in countries which have historically been less stable than the United States. Additional risks inherent in our international
operations generally include, among others, the costs and difficulties of managing international operations, adverse tax consequences
and greater difficulty in enforcing intellectual property rights in countries other than the United States.
Adverse changes in political and economic
policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce
the demand for our products and materially and adversely affect our competitive position.
A significant portion of our current business
operations are conducted in China and we anticipate that a majority of our sales will be made in China. Accordingly, our business,
financial condition, results of operations and prospects are affected significantly by economic, political and legal developments
in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
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•
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the degree of government involvement;
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•
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the level of development;
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•
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the control of foreign exchange;
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•
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access to financing; and
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•
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the allocation of resources.
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While the Chinese economy has grown significantly
in the past 25 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit
the overall Chinese economy, but may also have a negative effect on us. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time with little, if any, prior notice. Changes in policies,
laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to shareholders, governmental control over capital investments or changes in
tax regulations applicable to us, devaluations of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business.
The Chinese economy has been transitioning
from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is
still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The PRC government also exercises significant control over China’s economic
growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy
and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government implemented a number
of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks
to make loans and raise interest rates, in order to decrease the growth rate of specific segments of China’s economy which
it believed to be overheating. These actions, as well as future actions and policies of the PRC government, could materially affect
our liquidity and access to capital and our ability to operate our business. Nationalization or expropriation could even result
in the total loss of our investment in China and in the total loss of our shareholders’ investment.
New labor laws in the PRC may adversely
affect our results of operations.
On January 1, 2008, the PRC government
promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities
on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain
terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce,
the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our
business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results
of operations.
If political relations between the United
States and China worsen, our stock price may decrease and we may have difficulty accessing U.S. capital markets.
At various times during recent years, the
United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future
between these two countries. Any political or trade controversies between the United States and China, whether or not directly
related to our business, could adversely affect the market price of our common stock and our ability to access U.S. capital markets.
Uncertainties with respect to the PRC
legal system could limit the protections available to you and us.
The PRC legal system is a civil law system
based on written statutes. Unlike the common law system in the United States, prior court decisions may be cited for reference
but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. We conduct a significant portion of our current business through our subsidiary
established in China. Thus we are generally subject to laws and regulations applicable to foreign investment in China and, in particular,
laws applicable to wholly foreign-owned enterprises. However, since many laws, rules and regulations are relatively new and the
PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and
enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For
example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by
law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the outcome of Chinese administrative and court proceedings
and the level of legal protection we enjoy in China than in more developed legal systems. These uncertainties may impede our ability
to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties,
including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore,
intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other
countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to
the Chinese telecommunications industry and software technology industry, including the promulgation of new laws, changes to existing
laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties
could limit the legal protections available to us and our investors. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of our resources and management attention.
The fluctuation of foreign currency
exchange rates could materially impact our financial results.
Since we currently conduct a significant
portion our operations in China, our business is subject to foreign currency risks, including currency exchange rates fluctuations
and difficulties in converting Renminbis into U.S. dollars. The exchange rates between the Renminbi and the U.S. dollar, Euro and
other foreign currencies is affected by, among other things, changes in China’s political and economic conditions. On July
21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Currently the
Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 1% per day and the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange
rate. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could
result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
In addition, appreciation or depreciation
in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without
giving effect to any underlying change in our business, financial condition and results of operations.
Because our assets are located outside
of the United States and all of our directors and officers reside outside of the United States, it may be difficult for investors
to enforce their rights based on United States federal securities laws or any United States court judgments against us and our
officers and directors.
Our operating company and all of our assets
are currently located in the PRC and Hong Kong. In addition, all of our current directors and officers reside outside of the United
States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability
provisions of the United States federal securities laws against us in the courts of either the United States, PRC or Hong Kong
and, even if civil judgments are obtained in United States courts, to enforce such judgments in PRC or Hong Kong courts. Further,
it is unclear if extradition treaties now in effect between the United States and the PRC and Hong Kong would permit effective
enforcement against us or our officers and directors of criminal penalties, under the United States federal securities laws or
other United States laws.
Restrictions under PRC law on our PRC
operating subsidiary’s ability to make dividends and other distributions could materially and adversely affect our ability
to grow, make investments or complete acquisitions that could benefit our business, pay dividends to, and otherwise fund and conduct
our businesses.
Substantially all of our revenues are currently
earned by our PRC operating subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and
other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiary only out
of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary
is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance
with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations
to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances
or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise
fund and conduct our business.
Restrictions on currency exchange may
limit our ability to receive and use our sales revenue effectively.
All of CC Power’s sales revenue and
expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which
includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans. Currently, CC Power may purchase foreign currencies for settlement of current
account transactions, including payments of dividends to the Company, without the approval of the State Administration of Foreign
Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit
or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be
denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated
in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by our PRC
operating subsidiary under the capital account continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiary
borrows foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance
the subsidiary by means of additional capital contributions, these capital contributions must be approved by certain government
authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect
their ability to obtain foreign exchange through debt or equity financing.
There are significant uncertainties
under the EIT relating to the withholding tax liabilities of CC Investment, and dividends payable by CC Investment to CC Mobility
may not qualify to enjoy the treaty benefits.
Under the EIT and its implementing rules,
the profits of a foreign invested enterprise which are distributed to its immediate holding company outside the PRC will be subject
to a withholding tax rate of 10%. Pursuant to a tax arrangement between Hong Kong and the PRC, such rate may be lowered to 5% if
a Hong Kong resident enterprise owns over 25% of a PRC company. CC Investment is currently wholly-owned by CC Mobility. However,
the 5% withholding tax rate does not automatically apply and approvals from competent local tax authorities are required before
an enterprise can enjoy any benefits under the relevant taxation treaties. Moreover, according to the
Notice of the State Administration
of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties
promulgated on February 20, 2009,
for a tax treaty to be applicable, certain requirements must be satisfied, including: (1) the taxpayer must be the beneficial owner
of the relevant dividends; (2) for corporate recipients to enjoy the favorable tax treatment under the tax treaty as direct owners
of a PRC enterprise, such corporate recipients must satisfy the direct ownership thresholds at all times during the 12 consecutive
months preceding the receipt of the dividends. On August 24, 2009, the State Administration of Taxation issued the
Administrative
Measures for Non-resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation)
, which became effective
on October 1, 2009, requiring non-resident enterprises to obtain an approval from the competent tax authority in order to enjoy
the treatments under tax treaties. Further, the State Administration of Taxation promulgated the
Notice on How to Understand
and Recognize the “Beneficial Owner” in Tax Treaties
on October 27, 2009, which limits the “beneficial owner”
to individuals, enterprises or other organizations normally engaged in substantive operations, and set forth certain adverse factors
on the recognition of such “Beneficial Owner.” CC Investment has not yet applied for such approvals because it has
not declared or paid dividends, and does not intend to declare or pay dividends. CC Investment will apply for such approvals when
it intends to declare and pay dividends. There is no assurance that the PRC tax authorities will approve the 5% withholding tax
rate on dividends received by CC Mobility from CC Investment.
Changes in economic conditions and consumer
confidence in China may influence the industry in which we operate, consumer preferences and spending patterns.
A significant portion of our business and
revenue growth depends on the size of the online lottery industry in China. As a result, our revenue and profitability may be negatively
affected by changes in national, regional or local economic conditions and consumer confidence in China. We are susceptible to
changes in economic conditions, consumer confidence and customer preferences of the Chinese population. External factors beyond
our control that affect consumer confidence include unemployment rates, levels of personal disposable income, national, regional
or local economic conditions, natural disasters, extreme weather conditions, disease outbreaks and acts of war or terrorism. Changes
in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns.
In addition, natural disasters, extreme weather conditions, disease outbreaks and acts of war or terrorism may cause damage to
our facilities, disrupt the supply of the products we offer or adversely impact consumer demand. Any of these factors could have
a material adverse effect on our business, financial condition and results of operations.
Risks Relating to our Common Stock
and our Status as a Public Company
The relative lack of public company
experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company
experience and is generally unfamiliar with the requirements of the United States securities laws, which could impair our ability
to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute
our senior management team have never had responsibility for managing a publicly traded company. Such responsibilities include
complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able
to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory
compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines
and penalties and distract our management from attending to the growth of our business.
We will be required to incur significant
costs and require significant management resources to evaluate our internal control over financial reporting as required under
Section 404 of the Sarbanes-Oxley Act, and any failure to comply or any adverse result from such evaluation may have an adverse
effect on our stock price.
As a smaller reporting company as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an
internal control report with the Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness
of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of
any material weaknesses in internal control over financial reporting that we have identified. Failure to comply or any adverse
results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect
on the trading price of our equity securities. Management believes that its internal controls and procedures are currently not
effective to detect the inappropriate application of U.S. GAAP rules. Management realize there are deficiencies in the design or
operation of our internal control that adversely affect our internal controls which management considers to be material weaknesses
including those described below:
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i)
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We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing
and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur
and not be prevented or detected on a timely basis.
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ii)
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We do not have an audit committee. While not being legally obligated to have an audit committee,
it is the management’s view that to have an audit committee, comprised of independent board members, is an important entity-level
control over our financial statements.
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iii)
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We did not perform an entity level risk assessment to evaluate the implication of relevant risks
on financial reporting, including the impact of potential fraud-related risks and the risks related to non- routine transactions,
if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control
design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected,
and constituted a material weakness.
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Achieving continued compliance with Section
404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we
will be able to fully comply with Section 404 or that we and our independent registered public accounting firm would be able to
conclude that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose
confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as
well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting
firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating
effectively.
A limited public trading market exists
for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.
Our common stock is currently traded under
the symbol “XCLL” but currently with low volume, based on quotations on the OTCQB marketplace, meaning that the number
of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.
This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively
unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence
sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to
follow an unproven company such as ours or purchase or recommend the purchase of our stock until such time as we became more viable.
Additionally, many brokerage firms may not be willing to effect transactions in the securities. As a consequence, there may be
periods of several days or more when trading activity in our stock is minimal or non-existent, as compared to a seasoned issuer
which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect
on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will
develop or be sustained, or that trading levels will be sustained.
In the past, securities class action litigation
has often been brought against a company following periods of volatility in the market price of its securities. Due to the volatility
of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial
costs and divert management’s attention and resources.
Shareholders should also be aware that,
according to SEC Release No. 34-29093, the market for “penny stock,” such as our common stock, has suffered in recent
years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers;
and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware
of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate
the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical
limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns
or practices could increase the future volatility of our share price.
We do not anticipate paying any dividends
in the foreseeable future. If and when we decide to pay dividends, any dividends or proceeds from liquidation will be subject to
the approval of the relevant Chinese government agencies.
We currently intend to retain any future
earnings for funding growth. We do not anticipate paying any dividends in the foreseeable future. As a result, shareholders should
not rely on an investment in our securities if they require dividend income. A significant portion of our assets are located inside
China. Under the laws governing foreign-invested enterprises in China, dividend distribution and liquidation are allowed but subject
to special procedures under the relevant laws and rules. If and when made, any dividend payment will be subject to the decision
of the board of directors of our Chinese operating company, CC Investment, and subject to foreign exchange rules governing such
repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign
exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.
Our stock is categorized as a penny
stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s
ability to buy and sell our stock.
Our stock is categorized as a “penny
stock.” The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has
a market price (as defined) less than $4.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a
form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny
stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information,
must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject
to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.
We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may
also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock”
rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low
priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
The elimination of monetary liability
against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers
and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers
and employees.
Our Articles of Incorporation and Bylaws
contain a provision permitting us to eliminate the personal liability of our directors to our company and shareholders for damages
for breach of fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification
obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in the Company
incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may
be unable to recoup. These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors
and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders
against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
The audit report included in this annual
report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as a result, you are
deprived of the benefits of such inspection.
The independent registered public accounting
firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded
publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the
“PCAOB”, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance
with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where
the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not currently
inspected by the PCAOB.
Inspections of other firms that the PCAOB
has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China
prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors
may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections
of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our
reported financial information and procedures and the quality of our financial statements.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
.
As a smaller reporting company, as defined
in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.
ITEM 2.
PROPERTIES
.
The principal executive offices for the
Registrant are located at: 2225 East Bayshore Road, Suite 200, Palo Alto, CA 94303. The monthly rent for this property and related
expenses is US $350 per month. The Registrant’s main telephone number is: 650-320-1728 and its fax number is 650-551-9901.
The Registrant’s website is located at: www.xcelmobility.com.
CC Power’s offices are located at:
Unit 1705, Tower A, Haisong Bldg., Tairan 9 Road, Futian District, Shenzhen, 518040, China. The lease for CC Power’s offices
is for a three year term from January 4, 2015 to January 3, 2018, with a payment of RMB 55,061.42 (USD8,525) per month.
ITEM 3.
LEGAL PROCEEDINGS
.
There are no material pending legal proceedings
to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated
by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business
or has a material interest adverse to our business.
ITEM 4.
MINE SAFETY DISCLOSURES
.
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
.
Market for Registrant’s Common
Equity
Our common stock is currently listed for
trading on the OTCQB marketplace, operated by OTC Markets Group, Inc. under the symbol: “XCLL.” The table below lists
the high and low closing prices per share of our common stock for each quarterly period during the past two fiscal years as quoted
on the OTCQB.
Fiscal Year Ending December 31, 2015
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High
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Low
|
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First Quarter - March 31, 2015
|
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$
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0.03
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|
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$
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0.02
|
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Second Quarter - June 30, 2015
|
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$
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0.03
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|
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$
|
0.01
|
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Third Quarter - September 30, 2015
|
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$
|
0.01
|
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$
|
0.001
|
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Fourth Quarter - December 31, 2015
|
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$
|
0.003
|
|
|
$
|
0
|
|
Fiscal Year Ending December 31, 2014
|
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High
|
|
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Low
|
|
First Quarter - March 31, 2014
|
|
$
|
0.15
|
|
|
$
|
0.10
|
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Second Quarter - June 30, 2014
|
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$
|
0.12
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|
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$
|
0.05
|
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Third Quarter - September 30, 2014
|
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$
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0.06
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$
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0.02
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Fourth Quarter - December 31, 2014
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$
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0.05
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Trading in our common stock has been sporadic
and the quotations set forth above are not necessarily indicative of actual market conditions. All prices reflect inter-dealer
prices without retail mark-up, mark-down, or commission and may not necessarily reflect actual transactions.
Approximate Number of Holders of Common
Stock
As of April 11, 2016, there were 18 shareholders
of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name.”
Dividends
We have not declared any cash dividends
in the two most recent fiscal years. The declaration of future cash dividends, if any, will be at the discretion of the Board of
Directors and will depend on our earnings, if any, capital requirements and financial position, general economic conditions and
other pertinent conditions. It is our present intention not to pay any cash dividends in the near future.
Securities Authorized for Issuance Under
Equity Compensation Plans
There are no options, warrants or convertible
securities outstanding pursuant to an equity compensation plan.
Recent Sales of Unregistered Securities
On March 12, 2015, we issued a convertible
promissory note (the “March Note”) to an institutional investor for the amount of $48,000 in a private placement financing.
The March Note has a maturity date of March 16, 2016, is subject to 6% interest and may be converted into shares of our common
stock at a 30% discount to the publicly traded price of our common stock at the time of conversion based on a specific formula
under the June Note. The issuance of the convertible note was exempt from the registration requirements of the Securities Act pursuant
to the exemption for transactions by an issuer not involved in any public offering under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D.
On June 1, 2015, we issued a convertible
promissory note (the “June Note”) to an institutional investor for the amount of $48,000 in a private placement financing.
The June Note has a maturity date of June 3, 2016, is subject to 6% interest and may be converted into shares of our common stock
at a 30% discount to the publicly traded price of our common stock at the time of conversion based on a specific formula under
the June Note. The issuance of the convertible note was exempt from the registration requirements of the Securities Act pursuant
to the exemption for transactions by an issuer not involved in any public offering under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D.
ITEM 6.
SELECTED FINANCIAL DATA
.
A registrant that qualifies as a “smaller
reporting company” is not required to provide the information required by this Item.
ITEM 7.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
.
This discussion summarizes the significant
factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for
the fiscal years ended December 31, 2015 and 2014. The discussion and analysis that follows should be read together with our consolidated
financial statements and the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Except for historical information, the matters discussed in this section are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently,
and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ
materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider
the various disclosures made by us in this report.
OVERVIEW
We were incorporated in the state of Nevada
on December 27, 2007 under the name “Advanced Messaging Solutions, Inc.” On March 29, 2011, we amended our Articles
of Incorporation to change our name from “Advanced Messaging Solutions, Inc.” to “XcelMobility Inc.” and
we effected a 35-for-1 forward stock split of all of our issued and outstanding shares of common stock. On June 11, 2014, we increased
the total number of authorized shares of our common stock to 400,000,000. On July 9, 2015, our board of directors approved a new
class of preferred stock of the Company, to be known as Series A Convertible Preferred Stock. We are authorized to issue up to
5,000,000 shares of Series A Convertible Preferred Stock. Holders of Series A Convertible Preferred Stock shall be entitled to
the number of votes equal to 51% of the total number of votes entitled to be cast on any matters requiring a stockholder vote.
The shares of Series A Convertible Preferred are convertible at a one to one ratio into shares of our common stock. On September
18, 2015, we further amended our Articles of Incorporation to increase our number of authorized shares of common stock from 400,000,000
shares to 800,000,000 shares.
On July 5, 2011, we entered into a voluntary
share exchange agreement (the “Exchange Agreement”) with Shenzhen CC Power Corporation, a company organized under the
laws of the People’s Republic of China (PRC) (“CC Power”), CC Mobility Limited, a company organized under the
laws of Hong Kong (“CC Mobility”), and the shareholders of CC Mobility. Pursuant to the closing of the transactions
contemplated under the Exchange Agreement, on August 30, 2011, we issued 30,300,000 shares of our common stock to the shareholders
of CC Mobility representing 50.5% of our issued and outstanding common stock in exchange for 100% of the issued and outstanding
capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, CC Mobility became
our wholly-owned subsidiary and we gained control over the business and operations of CC Power.
On May 7, 2013, we entered into and consummated
a stock purchase agreement (the “Purchase Agreement”) with CC Investment, Jifu and certain of its shareholders (the
“Jifu Shareholders”). Pursuant to the terms of the Purchase Agreement, we issued an aggregate of 27,000,000 shares
of our common stock to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements with CC Investment. On
October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release (the “Release”) with the Jifu Shareholders.
Pursuant to the Release, the parties cancelled the Purchase Agreement and we returned control of Jifu to the Jifu Shareholders.
In exchange, we agreed to deliver 1,000,000 newly shares of our common stock to the Jifu Shareholders.
On September 22, 2014, we entered into
an asset purchase agreement with Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) pursuant to which
we acquired certain assets of Silvercreek (the “Assets”) relating to an online sports lottery business in exchange
for the issuance of up to 80,000,000 shares (“Shares”) of common stock of the Company.
Previously, our business was focused on
wearable computing. Our new lottery business aggregates and processes lottery purchase orders, deriving revenue from service fees
paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers.
We offer a comprehensive and integrated suite of online lottery services in China. We believe that the merging of our lottery business
with our existing mobile technologies, partners, and customers, will provide a platform for growth in this growing industry.
On April 3, 2015, a joint announcement
of the Ministry of Finance, the Ministry of Public Security, the State Administration for Industry and Commerce, the Ministry of
Industry and Information Technology, the Ministry of Civil Affairs, the People’s Bank of China, the General Administration
of Sport of China, and the China Banking Regulatory Commission was made. These eight government bureaus and departments jointly
announced a prohibition on any unauthorized online lottery sales. Pursuant to the announcement, online lottery sales will need
to be officially approved by the Ministry of Finance (the “MOF”). Certain regulations and rules over online lottery
sales are being studied. CC Power is closely monitoring development of such online lottery regulations and rules, and we plan to
submit an application to the MOF once the rules and regulations are available. During the overhaul of the online lottery business,
we will use all of our resources to develop related technical services and data analysis services for other companies. We will
also develop visual analytical tools for our users. We expect such development efforts to create a greater source of revenue in
the future.
Critical Accounting Policies and Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements
are reasonable and prudent. Actual results could differ from these estimates.
Certain of our accounting policies require
higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation
and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis. Select
significant accounting policies concerning revenue recognition and cost of revenue are listed as below:
Revenue recognition
Our source of revenues is from internet
accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements. During
the year ended December 31, 2012, we also have revenues derived from GPS system development and website development projects along
with maintenance arrangements.
We evaluate revenue recognition based on
the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (“SAB”) No.
101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
Revenue Recognition for Software
Products (Software Elements)
New software license revenues represent
fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed
of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the
accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant
modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a
legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed
or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized
at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not
include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element
Arrangements – Software Products and Software Related
Services(Software Arrangements)
We enter into arrangements with customers
that purchase software related products that include one to three year product support service and a short training session (referred
to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of
our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of
the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written
customer acceptance. The vast majority of our software license arrangements include software license updates and product support
contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the
support period. Product support includes telephone access to technical support personnel or on-site support. For those software
related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair
value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service
and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically
one year to three years.
Revenue Recognition for Multiple-Element
Arrangements – Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements
that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings
including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product
support. We adopted Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605)
:
Multiple-Deliverable
Revenue Arrangements
. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25,
Revenue Recognition-Multiple
Element Arrangements
, by allowing the use of the “best estimate of selling price” in addition to vendor-specific
objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This
guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific
objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement
consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the
relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element
considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element
and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the
lottery ticket is sold through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of business
tax and surcharges on revenue.
Research and development and Software
Development Costs
All research and development costs are
expensed as incurred. Software development costs eligible for capitalization under ASC 985-20,
Software-Costs of Software to
be Sold, Leased or Marketed
, were not material to our consolidated financial statements for the years ended December 31, 2012
and 2011. Other research and development expenses were included in general and administrative expense.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board
(“FASB”) has issued Accounting Standards Update (“ASU”) No. 2015-01 “Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items”. The objective is to reduce the cost and complexity of income
statement presentation by eliminating the concept of extraordinary items while maintaining or improving the usefulness of the information
provided to the users of financial statements. The extraordinary items must meet two criteria: unusual nature and infrequency of
occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate
the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax,
after income from continuing operations. The entity also is required to disclose applicable income taxes and either. This amendment
will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Board
decided to permit early adoption provided that the guidance is applied from the beginning of the fiscal year of adoption.
The FASB has issued ASU No. 2015-03 “Simplifying
the Presentation of Debt Issuance Costs”. The objective is to require that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with
debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.
For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are
effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal
years beginning after December 15, 2016. Early adoption of the amendments in this update is permitted for financial statements
that have not been previously issued.
The FASB has issued ASU No. 2015-05 “Intangibles-Goodwill
and Other-Internal-Use Software”. The objective is to provide a guidance about whether a cloud computing arrangement includes
a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. The amendment will
not change GAAP for a customer accounting for service contracts. In addition, the guidance in this update supersedes paragraph
350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other
licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the
amendment will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning
after December 15, 2016. Early adoption is permitted for all entities.
The FASB has issued ASU No. 2015-07 “Topic
820, Fair Value Measurement”, which permits a reporting entity, as a practical expedient, to measure the fair value of certain
investments using the net asset value per share of the investment. The amendments in this update remove the requirement to categorize
within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical
expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured
at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for
which the entity has elected to measure the fair value using that practical expedient. The amendments in this update apply to reporting
entities that elect to measure the fair value of an investment within the related scope by using the net asset value per share
(or its equivalent) practical expedient.
The FASB has issued No. 2015-10 “Technical
Corrections and Improvements”, which aims to address feedback received from stakeholders on the Codification and make improvements
to GAAP. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance,
or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice
or create a significant administrative cost to most entities. Some of the amendments will make the Codification easier to understand
and apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification.
The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. The amendments
in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted.
The FASB has issued No. 2015-11“Topic
330, Inventory”, which aims to simplify the measurement of inventory by changing the subsequent measurement guidance from
the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. The amendments
in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity
should measure inventory within the scope of this Update at the lower of cost and net realizable value. Subsequent measurement
is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in
this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim
periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-14“Topic
606, Revenue from Contracts with Customers”, which aims to respond to stakeholders’ requests to defer the effective
date of the guidance in Update 2014-09 and to consider feedback received through extensive outreach with preparers, practitioners,
and users of financial statements. The amendments in this update defer the effective date of Update 2014-09 for all entities by
one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance
in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period.
The FASB has issued No. 2015-15“Subtopic
835-30, Interest - Imputation of Interest”: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This amendment
adds SEC paragraphs pursuant to the SEC Staff Announcement on June 18, 2015, Emerging Issues Task Force meeting about the presentation
and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
The FASB has issued No. 2015-16“Topic
805, Business Combinations”: Simplifying the Accounting for Measurement-Period Adjustments, which aims to identify, evaluate,
and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information
provided to users of financial statements. The amendments in this Update require that an acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on
earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity
to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period
earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal
years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments
in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning
after December 15, 2017.
The FASB has issued No. 2015-17“Topic
740, Income Taxes”: Balance Sheet Classification of Deferred Taxes, which aims to identify, evaluate, and improve areas of
generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the
usefulness of the information provided to users of financial statements. The amendments in this update require that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update
apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities
and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments
in this Update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International
Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities,
the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017,
and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities
as of the beginning of an interim or annual reporting period.
Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated financial statements upon adoption.
Results of Operations
Comparison of the Years Ended December
31, 2015 and 2014
Revenue
Our revenue for the year ended December
31, 2015 totaled $384,520, as compared to $171,452 for the year ended December 31, 2014. This increase in revenue was primarily
due to new advertising income.
For the year ended December 31, 2015, the
revenues from software products and those related services were $167,105 as compared to $50,992 for the year ended December 31,
2014.
Cost of revenue
Cost of revenue for the year ended December
31, 2015 totaled $6,556, as compared to $5,550 for the year ended December 31, 2014. This increase in cost of revenue was primarily
due to tax surcharge on the revenue.
Gross profit
Gross profit for the year ended December
31, 2015 was $377,964, as compared to $165,902 for the year ended December 31, 2014. This increase in gross profit was primarily
due to the contribution of new advertising business.
Operating Expenses
Our operating expenses for the year ended
December 31, 2015 were $1,477,699, as compared to $1,913,303 for the year ended December 31, 2014. These expenses were comprised
of selling expenses of $211,522 and general & administrative expenses of $1,266,177 for the year ended December 31, 2015, while
the selling expenses and general & administrative for the year ended December 31, 2014 were $24,226 and $1,889,077 respectively.
This increase in operating expenses was primarily due to the increased of consultant expenses $123,480 for the year December 31,
2015 and the reduction of general and administrative expenses was derived from budget cutting.
Other Income (Expenses)
Other income (expense) for the year ended
December 31, 2015 was $134,217, as compared to ($753,382) for the year ended December 31, 2014. This decrease in other expense
was primarily due to the gain $414,230 on reduction in derivative of convertible notes for the year ended December 31, 2015, compared
to the loss on derivative of $(335,250) for the year ended December 31, 2014.
Net Loss
A net loss of ($965,518) resulted for the
year ended December 31, 2015 compared to net loss of ($3,551,887) for the year ended December 31, 2014. The decrease in net loss
was primarily due to increased revenue and reduction of general and administrative expenses for the year ended December 31, 2015.
Comprehensive Loss
Our
comprehensive loss was ($543,455) for the year ended December 31, 2015, as compared to ($3,451,639) for the year ended December
31, 2014. The decrease in loss is primarily due to
t
he increased
translation gain on currency exchanges from RMB to USD for the year ended December 31, 2015.
Liquidity
and Capital Resources
Overview
As of December 31, 2015, we had cash and
equivalents on hand of $37,774 and negative current working capital of $2,017,168. We believe that our cash on hand and working
capital will be sufficient to meet our anticipated cash requirements through December 31, 2016 with the following considerations.
To meet our future development plan and objectives, we will need to meet our revenue objectives and/or sell additional equity and
debt securities, which could result in dilution to current shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations.
Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds
on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business
prospects.
On March 12, 2015, we entered into a financing
with Vis Vires Group, Inc., pursuant to which we issued a convertible promissory note in the original principal amount of $48,000.
The convertible promissory note bears interest at 6% annually and is due on March 16, 2016. The conversion price for the convertible
promissory note is equal to 70% of the average of the lowest three trading prices for our common stock during the ten (10) trading
days prior to conversion. This convertible promissory note was fully converted in shares of our common stock by the investor.
On June 1, 2015, we entered into a financing
with Vis Vires Group, Inc., pursuant to which we issued a convertible promissory note in the original principal amount of $48,000.
The convertible promissory note bears interest at 6% annually and is due on June 3, 2016. The conversion price for the convertible
promissory note is equal to 70% of the average of the lowest three trading prices for our common stock during the ten (10) trading
days prior to conversion. Subsequent to our fiscal year ended December 31, 2015, on January 13, 2016, we entered into a settlement
agreement with Vis Vires whereby we paid $45,000 to settle the remaining outstanding debt under the note.
As of December 31, 2015, we have outstanding
indebtedness pursuant to convertible notes issued to various accredited investors in the aggregate principal amount of $993,505.
During the fiscal year ended December 31, 2015, an aggregate of $279,071 of outstanding indebtedness pursuant to convertible notes
was converted into shares of our common stock.
Substantially all of our current revenues
are earned by CC Power, our PRC subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends
and other payments to their offshore parent company. Pursuant to the law of PRC on foreign-capital enterprises, when CC Power decides
to distribute profits, reserve funds and bonus and welfare funds for workers and staff members shall be withdrawn from the profits
after a foreign-capital enterprise has paid income tax in accordance with the provisions of the Chinese tax law. The proportion
of reserve funds to be withdrawn shall not be lower than 10% of the total amount of profits after payment of tax; the withdrawal
of reserve funds may be stopped when the total cumulative reserve has reached 50% of the registered capital. The proportion of
bonus and welfare funds for workers and staff members to be withdrawn shall be determined by the foreign-capital enterprise of
its own accord. Companies may be subject to a fine up to 5,000 RMB as a result of non-compliance of such rules. The registered
capital of CC Power is $345,864 (RMB 2,526,000).
We are currently seeking both short term
working capital to finance current operations as well as significant amounts of long term capital to execute our business plan
and ultimately offer our products in the U.S. market. We project that to keep operations at our current level, approximately $500,000
in revenue and working capital will be required over the next 12 months to cover monthly expenses of $75,000. We anticipate generating
losses in the near term, and therefore may be unable to continue operations in the future. We require additional capital, and we
may need to issue debt or equity or enter into a strategic arrangement with a third party to obtain such capital. In order to meet
our planned strategic two to four acquisitions, we estimate requiring up to $3,000,000 in capital. We will consider debt or equity
offerings or institutional borrowings as potential means of financing; however, there are no assurances we will be successful in
obtaining favorable financing terms.
Net cash provided by (used in) operating
activities
Net cash provided by (used in) operating
activities for the year ended December 31, 2015 was ($93,147) compared to net cash provided by (used in) operating activities of
($675,775) for the year ended December 31, 2014. The change is mainly due to net loss of ($965,518) for the year ended December
31, 2015 compared to net loss of ($3,551,887).
Net cash provided by (used in) investing
activities
Net cash used in investing activities for
the year ended December 31, 2015 was $28,018 compared to net cash used in investing activities for the year ended December 31,
2014 of $1,070. This change is mainly due to the increased cash flow for acquisition of property, plant and equipment.
Net cash provided by financing activities
Net cash provided by financing activities
for the year ended December 31, 2015 was $19,363 compared to cash provided by financing activities for the year ended December
31, 2014 of $340,442. This change is mainly due to the decreasing proceeds from issuance of convertible notes.
Off-Balance Sheet Arrangements
We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative
contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development
services with it.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
.
Foreign Exchange Rates
Our financial instruments consist mainly
of cash, borrowings and accounts receivable. The objective of our policies is to mitigate potential income statement, cash flow
and fair value exposures resulting from possible future adverse fluctuations in exchange rates. We evaluate our exposure to market
risk by assessing the anticipated near-term and long-term fluctuations in foreign exchange rates. This evaluation includes the
review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic
conditions and the review of market projections as to the expected future rates.
The value of the RMB against the U.S. dollar
and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July
2005, the RMB has no longer been pegged to the U.S. dollar. The RMB may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions
on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings,
cash and assets are currently denominated in RMB, appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business
or results of operations. As a result, we face exposure to adverse movements in currency exchange rates as the financial results
of our Chinese operations are translated from local currency into U.S. dollar upon consolidation. If the U.S. dollar weakens against
the RMB, the translation of our foreign-currency-denominated balances will result in increased net assets, net revenues, operating
expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease
if the U.S. dollar strengthens against the RMB. Additionally, foreign exchange rate fluctuations on transactions denominated in
RMB other than the functional currency result in gains and losses that are reflected in our consolidated statement of operations.
Our operations are subject to risks typical of international business, including, but not limited to, differing economic conditions,
changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
Considering the RMB balance of our cash
as of December 31, 2015, which amounted to US $29,755 a 1.0% change in the exchange rates between the RMB and the U.S. dollar would
result in an increase or decrease of approximately US $298 of the balance.
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
.
The financial statements annexed to this
Form 10-K for the year ended December 31, 2015 begin on page F-1 and have been examined by our independent accountants, AWC (CPA)
Limited.
ITEM 9.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
.
None.
ITEM 9A.
CONTROLS AND PROCEDURES
.
Evaluation of Disclosure Controls and
Procedures
We carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer (who is our Principal Executive
Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness
of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of December
31, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial
Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015 in ensuring that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and
forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination
of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.
Management’s Report on Internal
Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria
established in the framework in
2013 Internal Control – Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Management
concluded, as of December 31, 2015, that our internal control over financial reporting was not effective. Management
realized there were deficiencies in the design or operation of the Company’s internal control that adversely affected the
Company’s internal controls, which management considers to be material weaknesses.
In performing the above-referenced assessment,
our management identified the following material weaknesses:
|
i)
|
We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.
|
|
|
|
|
ii)
|
We do not have an audit committee. While not being legally obligated to have an audit committee, it is the management’s view that to have an audit committee, comprised of independent board members, is an important entity-level control over our financial statements.
|
|
|
|
|
iii)
|
We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non- routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness. This control deficiency resulted in our failure to properly identify two convertible promissory notes with warrants issued on behalf of our Company in 2015 by Mr. Strauss, our former Executive Chairman and Director, without the approval of the rest of our Board and management team. We were unable to confirm or verify those issuances by regular or alternative means through Company records and the proceeds raised from those convertible notes were not deposited into our bank account.
|
|
|
|
|
iv)
|
We did not establish an effective process over the identification and disclosure of related parties and related party transactions. Specifically, controls necessary to identify, evaluate and monitor related parties and related party transactions were not designed effectively to ensure our related party disclosures are complete and accurate. This control deficiency resulted in our management’s failure to properly identify, evaluate and disclose Mr. Wei’s loan on September 1, 2014 of up to RMB 5,000,000 to our wholly owned subsidiary, CC Power, when Mr. Wei became CEO of CC Power in February 2015, in our quarterly reports during the 2015 fiscal year.
|
Our management feels the weaknesses identified
above may have had a material effect on our financial results. However, we are currently reviewing our disclosure controls and
procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific
areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these
material weaknesses.
Our management team will continue to monitor
and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an
ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary
and as funds allow.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Changes in Internal Control Over Financial
Reporting
There were no changes in our internal controls
over financial reporting that occurred during the quarterly period ended December 31, 2015 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter
how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been
detected.
ITEM 9B.
OTHER INFORMATION
.
On September 1, 2014, our indirect wholly-owned
subsidiary, CC Power, entered into a credit loan facility with Mr. Zhixiong Wei of up to RMB 5,000,000 at 15% simple interest.
Any loans are due within 15 days prior written notice. The loans may be paid in cash or in common stock of our Company at a conversion
price equal to 90% of the average closing price of our common stock for the ten days prior to conversion. Any loans under this
facility are guaranteed by our Company. To date, CC Power owes USD $599,318 under the facility.
On March 12, 2015, we issued a convertible
promissory note (the “March Note”) to an institutional investor for the amount of $48,000 in a private placement financing.
The March Note has a maturity date of March 16, 2016, is subject to 6% interest and may be converted into shares of our common
stock at a 30% discount to the publicly traded price of our common stock at the time of conversion based on a specific formula
under the June Note. The issuance of the convertible note was exempt from the registration requirements of the Securities Act pursuant
to the exemption for transactions by an issuer not involved in any public offering under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D.
On June 1, 2015, we issued a convertible
promissory note (the “June Note”) to an institutional investor for the amount of $48,000 in a private placement financing.
The June Note has a maturity date of June 3, 2016, is subject to 6% interest and may be converted into shares of our common stock
at a 30% discount to the publicly traded price of our common stock at the time of conversion based on a specific formula under
the June Note. The issuance of the convertible note was exempt from the registration requirements of the Securities Act pursuant
to the exemption for transactions by an issuer not involved in any public offering under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D.
Both the March Note and the June Note were
executed by Mr. Strauss, our former Executive Chairman and Director without the approval of the rest of our Board and management
team. We were unable to confirm or verify those issuances by regular or alternative means through Company records and the proceeds
raised from those convertible notes were not deposited into our bank account. We did not become aware of such notes until the investor
attempted to convert them. We are not aware of any other outstanding promissory notes that Mr. Strauss authorized and Mr. Strauss
has assured us that there are no other promissory notes that have not been disclosed to us. Mr. Strauss resigned all his positions
with our Company and our subsidiaries as of December 31, 2015. We have conducted and are continuing to conduct an internal investigation
into this matter and plan to adopt necessary policies to prevent these types of actions going forward
Subsequent to our fiscal year ended December
31, 2015, on January 13, 2016, we entered into a settlement agreement with Vis Vires whereby we paid $45,000 to settle the remaining
outstanding debt under the June Note. The settlement agreement included general releases by both parties related to any claims
under the March Note or June Note.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
.
Set forth below are the present directors
and executive officers of the Company. Note that there are no other persons who have been nominated or chosen to become directors
nor are there any other persons who have been chosen to become executive officers. Other than as set forth below, there are no
arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected
as a director or an officer.
Name
|
|
Age
|
|
Position
|
|
Since
|
|
|
|
|
|
|
|
Ronald Edward Strauss*
|
|
57
|
|
Executive Chairman of the Board of Directors
|
|
2011
|
Renyan Ge
|
|
53
|
|
Chairman**, Chief Executive Officer
|
|
2011
|
Xili Wang
|
|
47
|
|
Chief Financial Officer, Secretary
|
|
2011
|
Zhixiong Wei
|
|
44
|
|
Director
|
|
2015
|
* Resigned from the Board of Directors,
effective as of December 31, 2015
** Held since December 31, 2015
The Board of Directors is comprised of
only one class. All of the directors serve for a term of one year and until their successors are elected at the Company’s
Annual Shareholders’ Meeting and are qualified, subject to removal by the Company’s shareholders. Each executive officer
serves, at the pleasure of the Board of Directors, for a term of one year and until his successor is elected at a meeting of the
Board of Directors and is qualified.
Our Board of Directors believes that all
members of the Board and all executive officers encompass a range of talent, skill, and experience sufficient to provide sound
and prudent guidance with respect to our operations and interests. The information below with respect to our directors and executive
officers includes each individual’s experience, qualifications, attributes, and skills that led our Board of Directors to
the conclusion that he or she should serve as a director and/or executive officer.
On December 31, 2015, we entered into a
Separation Agreement with Mr. Ronald Edward Strauss, our former Executive Chairman, pursuant to which Mr. Strauss’ service
to the Company terminated, effective as of December 31, 2015. Effective as of December 31, 2015, Mr. Strauss resigned as Executive
Chairman of the Board and a member of the Board, and from all positions with the Company’s subsidiaries, including Shenzhen
CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., and CC Mobility Limited. On December 31, 2015, in connection
with the Separation Agreement, Mr. Strauss agreed to transfer 2,500,000 shares of our Series A Convertible Preferred Stock to Mr.
Zhixiong Wei in consideration for Mr. Wei’s service as a member of our Board of Directors.
Biographies
Set forth below are brief accounts of the
business experience during the past five years of each director, executive officer and significant employees of the Company.
Renyan Ge,
Chief Executive Officer,
Chairman of the Board of Directors
Mr. Ge became our Chairman in 2016 and
has served as a director and Chief Executive Officer since 2011. Mr. Ge has over 25 years of experience in engineering, R&D,
customer support and management. He is also a founding member of CC Power since its inception in 2003. Since 2007, Mr. Ge has served
as a director and chief executive officer of CC Power, positions he still holds. Prior to founding CC Power, Mr. Ge worked as the
business development director for General Electric (Fanuc) embedded systems in the Asia-Pacific region. In addition, he also worked
in Canada and Japan for a leading supplier to the semiconductor and FPD markets. Mr. Ge holds a masters degree in system design
from the University of Waterloo, and a BSc in photogrammetry and remote sensing from Wuhan University in the People’s Republic
of China. Mr. Ge has recently completed financial accounting management training at Harvard University. Mr. Ge speaks Chinese,
Japanese, and English. We believe that Mr. Ge’s knowledge and experience will help us achieve our goals of expanding our
business in China and throughout the Asia-Pacific region.
Xili Wang
, Chief Financial Officer,
Secretary
Ms. Wang has served as our Chief Financial
Officer and Secretary since 2011. Ms. Wang has 18 years of experience in financial and general management in both public and private
corporations in China. Ms. Wang is a founding member of CC Power and served as the chief financial officer of CC Power from 2003
to 2011. Ms. Wang began her career with publicly listed Sunrise Group Holdings as a senior financial manager. As a founding member
of CC Power, Ms. Wang has performed many important duties including managing the financial activities of CC Power as well as working
closely with CC Power’s chief executive officer in human and operational management. Ms. Wang graduated from Huazhong Technical
and Science University in 1990 with a BSc in accounting and finance management. We believe that Ms. Wang’s knowledge, financial
background, and experience will help us to achieve our business goals.
Zhixiong Wei
, Director
Mr. Wei was appointed to our board at the
end of 2015. Mr. Wei is an experienced entrepreneur and executive in China’s internet and mobile lottery industry. He is
the Chief Executive Officer of the Company’s indirectly owned Chinese subsidiary, Shenzhen CC Power Corporation, and has
held that position since February 2015. Prior to becoming the Chief Executive Officer of Shenzhen CC Power Corporation, Mr. Wei
served as the Chief Executive Officer of Shenzhen Silvercreek Digital Technology Co., a leading mobile lottery business in China
which he founded in 2001. Following the acquisition of Silvercreek Digital Technology Co. by AGTech in 2001, Mr. Wei continued
to serve as a director of Silvercreek Digital Technology Co. until February 2015. Mr. Wei holds a master’s degree in Industrial
Economics from the Chinese Academy of Social Sciences and a bachelor’s degree in business administration from Hunan University.
We believe Mr. Wei’s knowledge and experience in the mobile lottery industry will help us to expand our lottery business
and achieve our business goals.
Ronald Edward Strauss
, Former Executive
Chairman of the Board of Directors
Mr. Strauss is a serial entrepreneur with
20 years of experience in founding and leading computer hardware and software related technology start-ups. Mr. Strauss has been
an active advisor and director for CC Power since 2008. In 1987, Mr. Strauss founded his first company Focus Automation Systems
Inc.. Focus spun out Mitra Imaging Inc., acquired by Agfa Gervaert, and Focus Systems, acquired by V Technology Corporation. In
2001, Mr. Strauss founded Avvida Systems a leading supplier of embedded computing technology to military, telecom, and transportation
industries. Avvida was ultimately acquired by a division of GE Fanuc USA. Following the acquisition, Mr. Strauss worked for 3 years
ending his career at GE Fanuc as VP/GM Canada and Asia Integration Leader. Mr. Strauss is a Computer Systems Technologist and has
completed software development, human resource, and financial accounting management training at University of Waterloo, GE Jack
Welsh Management Training Center and Harvard University. Most recently, Mr. Strauss completed Chinese Mandarin language and culture
training at Sinoland College in Beijing China. Today he speaks and understands Intermediate level Mandarin Chinese. He has sat
on the board of directors for all three of the high tech companies he founded, the board of directors of the Automated Imaging
Association in the USA, a Canadian division of GE Fanuc, and was a past member of the Board of Governors of Conestoga College of
Applied Arts and Technology. Mr. Strauss resigned all his executive and directorship positions with the Company and its subsidiaries
on December 31, 2015.
Family Relationships
There are no family relationships between
or among any of our directors, executive officers and incoming directors or executive officers.
Involvement in Certain Legal Proceedings
No director, executive officer, significant
employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in
the past 10 years.
Committees of the Board
Our Board of Directors held no formal meetings
in the prior fiscal year. All proceedings of the Board of Directors were conducted by resolutions consented to in writing by the
directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors
entitled to vote on that resolution at a meeting of the directors are, according to the Nevada Revised Statutes and the bylaws
of our Company, as valid and effective as if they had been passed at a meeting of the directors duly called and held. We do not
presently have a policy regarding director attendance at meetings.
We do not currently have a standing audit,
nominating or compensation committee of the Board of Directors, or any committee performing similar functions. Our Board of Directors
performs the functions of audit, nominating and compensation committees.
Audit Committee
Our Board of Directors has not established
a separate audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Instead, the entire Board of Directors acts as the audit committee within the meaning of Section 3(a)(58)(B) of the
Exchange Act and will continue to do so until such time as a separate audit committee has been established.
Audit Committee Financial Expert
We currently have not designated anyone
as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K as we have not yet created
an audit committee of the Board of Directors.
Compliance with Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange
Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding
ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of
those filings.
Based solely on our review of the copies
of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended
December 31, 2015, our officers, directors and greater than 10% percent beneficial owners complied with all applicable filing requirements,
except for the following:
Mr. Strauss failed to file his Form 4 in
connection with the disposition of shares of Series A Convertible Preferred Stock on December 31, 2015.
Nominations to the Board of Directors
Our directors take a critical role in guiding
our strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria,
such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for
the long-term interests of the stockholders, diversity, and personal integrity and judgment.
In addition, directors must have time available
to devote to Board activities and to enhance their knowledge in the growing business. Accordingly, we seek to attract and retain
highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities to the Company.
In carrying out its responsibilities, the
Board will consider candidates suggested by stockholders. If a stockholder wishes to formally place a candidate’s name in
nomination, however, he or she must do so in accordance with the provisions of the Company’s Bylaws. Suggestions for candidates
to be evaluated by the proposed directors must be sent to the Board of Directors, c/o XcelMobility Inc., 2225 East Bayshore Road,
Suite 200, Palo Alto, CA, 94303.
Director Nominations
As of December 31, 2015, we did not effect
any material changes to the procedures by which our shareholders may recommend nominees to our Board of Directors.
Board Leadership Structure and Role
on Risk Oversight
Renyan Ge currently serves as the Company’s
principal executive officer and director. The Company determined this leadership structure was appropriate for the Company due
to our small size and limited operations and resources. The Board of Directors will continue to evaluate the Company’s leadership
structure and modify as appropriate based on the size, resources and operations of the Company. It is anticipated that the Board
of Directors will establish procedures to determine an appropriate role for the Board of Directors in the Company’s risk
oversight function.
Compensation Committee Interlocks and
Insider Participation
No interlocking relationship exists between
our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship
existed in the past.
Code of Ethics
The Company has adopted a Code of Ethics
applicable to all Company directors, officers and employees which is available on our website at: http://www.xcelmobility.com/about/governance/code-of-ethics.
ITEM 11.
EXECUTIVE COMPENSATION
.
General Philosophy
Our Board of Directors is responsible for
establishing and administering the Company’s executive and director compensation.
Executive Compensation
The following summary compensation table
indicates the cash and non-cash compensation earned from the Company during the fiscal years ended December 31, 2015 and 2014 by
the current and former executive officers of the Company and each of the other two highest paid executives or directors, if any,
whose total compensation exceeded $100,000 during those periods.
Summary
Compensation
|
|
Name
and Principal
Position
|
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan
Compensation
|
|
|
All
Other
Compensation
|
|
|
Total
|
|
Ronald Edward Strauss,
|
|
|
2015
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Executive Chairman of the Board
|
|
|
2014
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
584,390
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
584,390
|
|
Renyan Ge, Director, Chief
|
|
|
2015
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Executive Officer
|
|
|
2014
|
|
|
$
|
|
|
|
|
-
|
|
|
$
|
448,620
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
448,620
|
|
Xili Wang, Chief Financial
|
|
|
2015
|
|
|
|
18,044
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
18,044
|
|
Officer & Secretary
|
|
|
2014
|
|
|
$
|
|
|
|
|
-
|
|
|
$
|
373,146
|
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
373,146
|
|
|
(1)
|
Pursuant to a letter agreement dated October 1, 2014, Ronald Strauss received 43,911,115 shares of common stock of the Company in lieu of accrued and unpaid compensation of $584,290.
|
|
(2)
|
Pursuant to a letter agreement dated October 1, 2014, Renyan Ge received 33,776,539 shares of common stock of the Company in lieu of accrued and unpaid compensation of $448,620.
|
|
(3)
|
Pursuant to a letter agreement dated October 1, 2014, Xili Wang received 28,094,112 shares of common stock of the Company in lieu of accrued and unpaid compensation of $373,146.
|
Potential Payments Upon Termination
or Change-in-Control
SEC regulations state that we must disclose
information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection
with any termination of employment or change in control of the Company. Please see the section entitled “Employment Agreements”
below for a discussion of management compensation in the event of a termination of employment or change in control of the Company.
Employment Agreements
We have entered into employment agreements
with Ronald Strauss, Renyan Ge and Xili Wang, per the following:
Ronald Edward Strauss
- The Company
is party to an Amended and Restated Management Service Agreement with Ronald Edward Strauss in connection with his service as Executive
Chairman of the Board of Directors, dated August 28, 2014 and continuing for an indefinite term. Mr. Strauss is entitled to a payment
of $180,000 per year as a base management fee, to be paid in bi-monthly installments, and options to purchase 500,000 shares of
common stock on an annual basis. Mr. Strauss is also entitled to purchase equity in lieu of base salary at a price equal to the
lower of the lowest publicly traded share price for the Company’s common stock during the thirty (30) days prior to issuance,
or the per share price paid by a third party investor during the past twelve (12) months. Mr. Strauss is eligible for an annual
bonus in an amount to be determined by the board of directors.
In the event the Company terminates Mr.
Strauss’ service agreement without cause (as defined in his management service agreement), Mr. Strauss shall be entitled
to certain payments in lieu of notice depending on Mr. Strauss’ length of service. Specifically, if Mr. Strauss’ service
period is less than 36 months, he shall be entitled to receive 18 monthly payments equal to his monthly management fee at the time
of termination in lieu of an 18 month notice period; and where Mr. Strauss’ service is more than 36 months, he shall be entitled
to receive 30 monthly payments equal to his monthly management fee at the time of termination in lieu of a 30 month notice. If
the Company elects to give Mr. Strauss notice of termination, in the absence of just cause, Mr. Strauss may choose to receive payments
due in either a lump sum, or on a continuance basis or a combination of both. During the notice period, Mr. Strauss will not be
required to perform the responsibilities of his position. Where there is just cause for termination or if Mr. Strauss is in material
breach of his management service agreement, Mr. Strauss will not be entitled to notice, bonus payment or payment in lieu of notice.
In the event there is a change in control
of the Company, and within eighteen (18) months, Mr. Strauss is terminated without cause, the Company will provide Mr. Strauss
a cash payment equal to 1.5 times his annual salary, or $75,000.
On December 31, 2015, we entered into a
Separation Agreement with Mr. Strauss, pursuant to which Mr. Strauss’ service to the Company and all of our subsidiaries
terminated and all service agreements between Mr. Strauss and the Company terminated. Effective as of December 31, 2015, Mr. Strauss
resigned as Executive Chairman of the Board and a member of the Board, and from all positions with the Company’s subsidiaries,
including Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., and CC Mobility Limited. On December
31, 2015, in connection with the Separation Agreement, Mr. Strauss agreed to transfer 2,500,000 shares of our Series A Convertible
Preferred Stock to Mr. Wei in consideration for Mr. Wei’s service as a member of our Board of Directors and we agreed to
pay Mr. Strauss severance in the aggregate amount of $15,000.
Renyan Ge
- The Company is a party
to an Amended and Restated Management Service Agreement with Renyan Ge in connection with his service as Chief Executive Officer
of the Company, dated August 28, 2014 and continuing for an indefinite term. Mr. Ge is entitled to a payment of $180,000 per year
as a base management fee, to be paid in bi-monthly installments, and options to purchase 500,000 shares of common stock on an annual
basis. Mr. Ge is also entitled to purchase equity in lieu of base salary at a price equal to the lower of the lowest publicly traded
share price for the Company’s common stock during the thirty (30) days prior to issuance, or the per share price paid by
a third party investor during the past twelve (12) months. Mr. Ge is eligible for an annual bonus in an amount to be determined
by the board of directors.
In the event the Company terminates Mr.
Ge’s service agreement without cause (as defined in his management service agreement), Mr. Ge shall be entitled to certain
payments in lieu of notice depending on Mr. Ge’s length of service. Specifically, if Mr. Ge’s service period is less
than 36 months, he shall be entitled to receive 18 monthly payments equal to his monthly management fee at the time of termination
in lieu of an 18 month notice period; and where Mr. Ge’s service is more than 36 months, he shall be entitled to receive
30 monthly payments equal to his monthly management fee at the time of termination in lieu of a 30 month notice. If the Company
elects to give Mr. Ge notice of termination, in the absence of just cause, Mr. Ge may choose to receive payments due in either
a lump sum, or on a continuance basis or a combination of both. During the notice period, Mr. Ge will not be required to perform
the responsibilities of his position. Where there is just cause for termination or if Mr. Ge is in material breach of his management
service agreement, Mr. Ge will not be entitled to notice, bonus payment or payment in lieu of notice.
In the event there is a change in control
of the Company, and within eighteen (18) months, Mr. Ge is terminated without cause, the Company will provide Mr. Ge a cash payment
equal to 1.5 times his annual salary, or $75,000.
Xili Wang
- The Company is a party
to an Amended and Restated Management Service Agreement with Xili Wang in connection with her service as Chief Financial Officer
of the Company, dated August 28, 2014 and continuing for an indefinite term. Ms. Wang is entitled to a payment of $150,000 per
year as a base management fee, to be paid in bi-monthly installments, and options to purchase 250,000 shares of common stock on
an annual basis. Ms. Wang is also entitled to purchase equity in lieu of base salary at a price equal to the lower of the lowest
publicly traded share price for the Company’s common stock during the thirty (30) days prior to issuance, or the per share
price paid by a third party investor during the past twelve (12) months. Ms. Wang is eligible for an annual bonus in an amount
to be determined by the board of directors.
In the event the Company terminates Ms.
Wang’s service agreement without cause, Ms. Wang shall be entitled to certain payments in lieu of notice depending on Ms.
Wang’s length of service. Specifically, if Ms. Wang’s service period is less than 36 months, she shall be entitled
to receive 18 monthly payments equal to her monthly management fee at the time of termination in lieu of an 18 month notice period;
and where Ms. Wang’s service is more than 36 months, she shall be entitled to receive 30 monthly payments equal to her monthly
management fee at the time of termination in lieu of a 30 month notice. If the Company elects to give Ms. Wang notice of termination,
in the absence of just cause, Ms. Wang may choose to receive payments due in either a lump sum, or on a continuance basis or a
combination of both. During the notice period, Ms. Wang will not be required to perform the responsibilities of her position. Where
there is just cause for termination or if Ms. Wang is in material breach of her management service agreement, Ms. Wang will not
be entitled to notice, bonus payment or payment in lieu of notice.
In the event there is a change in control
of the Company, and within eighteen (18) months, Ms. Wang is terminated without cause, the Company will provide Ms. Wang a cash
payment equal to 1.5 times his annual salary, or $58,000.
Other than as noted above, none of our
executive officers or directors received, nor do we have any arrangements to pay out, any bonus, stock awards, option awards, non-equity
incentive plan compensation, or non-qualified deferred compensation.
Compensation of Directors
We have no standard arrangement to compensate
directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to
review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters
are reimbursed by us, if and when incurred.
Stock Option Plans - Outstanding Equity
Awards at Fiscal Year End
None.
Pension Table
The Company contributes to a state pension
plan organized by municipal and provincial governments in respect of its employees in PRC. The compensation expense related to
this plan was $40,061 and $17,669 for the years ended December 31, 2015 and 2014, respectively.
Retirement Plans
We do not offer any annuity, pension, or
retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory
plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement,
or any other termination of employment with our company, or from a change in the control of our Company.
Compensation Committee
The Company does not have a separate Compensation
Committee. Instead, the Company’s Board of Directors reviews and approves executive compensation policies and practices,
reviews salaries and bonuses for other officers, administers the Company’s stock option plans and other benefit plans, if
any, and considers other matters.
Risk Management Considerations
We believe that our compensation policies
and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material
adverse effect on our Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
.
Security Ownership
The following table sets forth certain information as of April
11, 2016, with respect to the beneficial ownership of our common stock and our Series A Preferred Stock for (i) each director and
officer, (ii) all of our directors and officers as a group, and (iii) each person known to us to own beneficially five percent
(5%) or more of the outstanding shares of our common stock. As of April 11, 2016, there were 660,533,090 shares of common stock
outstanding and 5,000,000 shares of Series A Preferred Stock outstanding.
To our knowledge, except as indicated in the footnotes to this
table or pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with
respect to the shares of common stock or preferred stock indicated.
Name and Address of
|
|
|
Shares Beneficially
|
|
Percentage Beneficially
|
Beneficial Owner(1)
|
Class of Securities
|
|
Owned
|
|
Owned
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
Wei Zhixiong
Unit 1005A, Tower B, Haisong Bldg
Tairan 9 Road, Futian District
Shenzhen, 518040
China
|
Common Stock
Series A Preferred Stock
|
|
22,500,000(4)
2,500,000
|
|
6.90%
50.00%
|
|
|
|
|
|
|
Renyan Ge (3)
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065
|
Common Stock
Series A Preferred Stock
|
|
53,244,539 (4)
2,500,000
|
|
18.37%
50.00%
|
|
|
|
|
|
|
Xili Wang
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065
|
Common Stock
|
|
28,094,112
|
|
11.97%
|
|
|
|
|
|
|
All Officers and Directors as a Group
|
Common Stock
Series A Preferred Stock
|
|
141,161,766 (4)
5,000,000
|
|
48.71%
100%
|
|
|
|
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
Sheen Ventures Limited (2)
8th Floor, Henley Building,
5 Queen’s Road,
Central, Hong Kong
|
Common Stock
|
|
13,332,000
|
|
4.60%
|
|
|
|
|
|
|
CC Wireless Limited (3)
Room 15A, 17/F,
Mai On Industrial Building,
17-21 Kung Yip Street,
Kwai Chung, Hong Kong
|
Common Stock
|
|
16,968,000
|
|
5.85%
|
|
|
|
|
|
|
Wei Zhixiong
Unit 1005A, Tower B, Haisong Bldg
Tairan 9 Road, Futian District
Shenzhen, 518040
China
|
Common Stock
Series A Preferred Stock
|
|
22,500,000(4)
2,500,000
|
|
6.90%
50.00%
|
|
|
|
|
|
|
Ronald Edward Strauss
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065
|
Common Stock
|
|
46,491,115 (4)
|
|
16.04%
|
|
|
|
|
|
|
Renyan Ge
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065
|
Common Stock
Series A Preferred Stock
|
|
36,276,539 (4)
2,500,000
|
|
12.52%
50%
|
(1)
|
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
|
(2)
|
Ms. Guo Jie has direct ownership over the 13,332,000 shares held by Sheen Ventures Limited, a company organized under the laws of Hong Kong. Ms. Guo Jie is the wife of Mr. Strauss. As such, Mr. Strauss may be deemed to be the indirect beneficial owner of the securities by reason of his influence or control over Ms. Guo Jie’s voting and disposition decisions.
|
|
|
(3)
|
Mr. Renyan Ge holds voting and dispositive control over the 16,968,000 shares held by CC Wireless Limited, a company organized under the laws of Hong Kong.
|
(4)
|
Includes shares of common stock of the Company issuable upon conversion of shares of Series A Preferred Stock.
|
Securities Authorized for Issuance Under
Equity Compensation Plans
On May 9, 2014, our Board of Directors
approved and adopted our 2014 Equity Incentive Plan (the “Plan”) and authorized management to submit the Plan to our
stockholders for approval. A majority of our stockholders approved the Plan on May 9, 2014.
The proposed Plan permits us to grant a
variety of forms of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance
shares, performance units and dividend equivalent rights, to allow us to adapt our incentive compensation program to meet our needs.
The number of shares of our common stock that may be issued under the Plan to employees, directors and/or consultants in such awards
is 40,000,000 shares. Our Board of Directors currently serves as the administrator of the Plan. As of December 31, 2015, 673,495
stock options to purchase shares of our common stock have been granted under the Plan.
Non-Cumulative Voting
The holders of our shares of common stock
do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares, voting for the
election of Directors, can elect all of the Directors to be elected, if they so choose. In such event, the holders of the remaining
shares will not be able to elect any of our Directors.
Transfer Agent
Our transfer agent is Securities Transfer
Corp., and is located at 2591 Dallas Parkway, Suite 102, Frisco, Texas, 75034. Their telephone number is (469) 633-0101.
ITEM 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships
There are no family relationships between
any of our directors or executive officers.
Related Party Transactions
On September 1, 2014, our indirect wholly-owned
subsidiary, CC Power, entered into a credit loan facility with Mr. Wei, our Director and CEO of CC Power, of up to RMB 5,000,000
at 15% simple interest. Any loans are due within 15 days prior written notice. The loans may be paid in cash or in common stock
of our Company at a conversion price equal to 90% of the average closing price of our common stock for the ten days prior to conversion.
Any loans under this facility are guaranteed by our Company. To date, CC Power owes Mr. Wei USD $599,318 under the facility.
On December 31, 2015, we entered into a
Separation Agreement with Mr. Strauss, our former Chairman, pursuant to which Mr. Strauss’ service to the Company and all
of our subsidiaries terminated and all service agreements between Mr. Strauss and the Company terminated. Effective as of December
31, 2015, Mr. Strauss resigned as Executive Chairman of the Board and a member of the Board, and from all positions with the Company’s
subsidiaries, including Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., and CC Mobility Limited.
On December 31, 2015, in connection with the Separation Agreement, Mr. Strauss agreed to transfer 2,500,000 shares of our Series
A Convertible Preferred Stock to Mr. Wei, in consideration for Mr. Wei’s service as a member of our Board of Directors and
we agreed to pay Mr. Strauss severance in the aggregate amount of $15,000.
None of our current officers or directors
have been involved in any material proceeding adverse to the Company or any transactions with the Company or any of its directors,
executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
Review, Approval or Ratification of
Transactions with Related Persons
Although we have adopted a Code of Ethics,
we still rely on our Board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our Board
reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person’s
immediate family. Transactions are presented to our Board for approval before they are entered into or, if this is not possible,
for ratification after the transaction has occurred. If our Board finds that a conflict of interest exists, then it will determine
the appropriate remedial action, if any. Our Board approves or ratifies a transaction if it determines that the transaction is
consistent with the best interests of the Company.
Director Independence
During the year ended December 31, 2015,
we had no independent directors on our board. We evaluate independence by the standards for director independence established by
applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established
by The New York Stock Exchange, Inc., the NASDAQ National Market, and the Securities and Exchange Commission.
Subject to some exceptions, these standards
generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee
of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of
ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct
compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director
or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity
by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of
the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where
one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate
family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month
period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated
gross revenues.
ITEM 14.
PRINCIPAL ACCOUNTING FEES
AND SERVICES
.
The following table shows the fees paid
or accrued by us for the audit and other services provided by AWC (CPA) Limited (formerly, Albert Wong & Co.) for the fiscal
periods shown.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Audit Fees
|
|
$
|
57,000
|
|
|
$
|
48,000
|
|
Audit Related Fees
|
|
|
-
|
|
|
|
-
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
57,000
|
|
|
$
|
48,000
|
|
In the absence of a formal audit committee,
the full Board of Directors pre-approves all audit and non-audit services to be performed by the independent registered public
accounting firm in accordance with the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended.
The Board of Directors pre-approved 100% of the audit, audit-related and tax services performed by the independent registered public
accounting firm for the fiscal years ended December 31, 2015 and 2014. The percentage of hours expended on the principal accountant’s
engagement to audit the Company’s financial statements for the most recent fiscal year that were attributed to work performed
by persons other than the principal accountant’s full-time, permanent employees was 0%.
The accompanying notes are an integral part
of the consolidated financial statements
The accompanying notes are an integral part
of the consolidated financial statements
The accompanying notes are an integral part
of the consolidated financial statements
The accompanying notes are an integral part
of the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
1. Organization and Nature of Business
XcelMobility Inc.
XcelMobility Inc. (“Xcel”
or the “Company”) was incorporated under the laws of the State of Nevada on December 27, 2007. Initial operations have
included organization and incorporation, target market identification, marketing plans, and capital formation. The Company was
no longer a development stage company after the Company started to generate revenues from various application of mobile device.
Share Cancellation
On August 11, 2011,
Moses Carlo Supera Paez, a director and shareholder of the Company, surrendered 17,700,000 shares of common stock for cancellation.
Further, on August 30, 2011, Mr. Paez surrendered an additional 7,350,000 shares of our common stock for cancellation and Mr. Jaime
Brodeth, one of our former directors and a shareholder, surrendered 22,950,000 shares of our common stock for cancellation. As
such, immediately prior to the Exchange Transaction as further discussed in detail later and after giving effect to the foregoing
cancellations, the Company had 29,700,000 shares of common stock issued and outstanding. Immediately after the Exchange Transaction,
the Company had 60,000,000 shares of common stock issued and outstanding.
CC Mobility Limited
CC Mobility Limited
(“CC Mobility”), a company organized under the laws of Hong Kong, was formed on May 3, 2011 and has authorized capital
of 10,000 shares with registered capital of HK$1,000 at HK$1 per share. At formation, CC Mobility Limited has issued 560 shares
to CC Wireless Limited, a company organized under the laws of Hong Kong, and 440 shares to Sheen Ventures Limited, a company organized
under the laws of Hong Kong. The Company is a holding company formed for the purpose of acquiring a target company to effect a
reverse merger with a U.S. reporting company. The reverse merger was completed on August 30, 2011.
CC Power Investment Consulting Co. Ltd.
Shenzhen CC Power Investment
Consulting Co. Ltd. (“CC Investment”), a wholly-owned subsidiary of CC Mobility, was incorporated on July 27, 2011
under the laws of the People’s Republic of China (“PRC”) as a wholly foreign owned limited liability company.
The required registered capital is $2,000,000 and as of December 31, 2015, $400,000 of the registered capital has been contributed.
Shenzhen CC Power Corporation
Shenzhen CC Power Corporation (“CC
Power”) is a Chinese enterprise organized in the PRC on March 13, 2003 in accordance with the Laws of the People’s
Republic of China. The required registered capital of CC Power was approximately $1,547,000 (RMB 10,000,000) and as of December
31, 2014, CC Power has paid up approximately $346,000 (RMB2,526,000). In March 2011, Mr. Ryan Ge sold his 5% ownership in CC Power
to the other shareholder, Xili Wang (“CC Power Shareholder”). Ms. Wang holds 100% ownership interest in CC Power as
of December 31, 2015 and 2014.
CC Power is primarily engaged in the research,
development and commercialization of applications for mobile devices that access the Internet utilizing mobile phone networks.
CC Power’s principal activity is the design, testing sale and support of software to support mobile internet applications
on cellular phones, smart phones, tablets and mobile computers in China. The principal product designed and built by CC Power is
its Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the internet
5 times faster than with other mobile browsers. The speed of the Mach 5 browser enables CC Power to develop other mobile software
that can leverage off the Mach 5 products speed of processing. In order to support CC Power products the Company has built a series
of server locations throughout China. CC Power sells its products to corporations directly, to individual users via the company’s
website and retail locations, through distribution agents and through all three mobile phone carriers in China.
As noted above, the primary purpose of
CC Power is to develop software that allows user faster access to the Internet. CC Power’s primary focus is in the mobile
Internet market, with a focus on providing software that significantly increases the speed that users of smartphones, tablets and
laptops can access the Internet over cellular phone networks. CC Power also uses their technology to increase the speed at which
users of Virtual Private Networks can access data from their networks.
On September 22, 2014, XcelMobility Inc.
entered into an Asset Purchase Agreement with CC Power, Xianjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”)
and the shareholders of Silvercreek (the “Selling Shareholders”). Pursuant to the terms of the Agreement, CC Power
will acquire certain assets of Silvercreek relating to its online sports lottery business unit in exchange for the issuance of
up to 80,000,000 shares of common stock of the Company to the Selling Shareholders. No Shares will be issued upon the closing date
of the transaction. The Shares will be issued to the Selling Shareholders on a pro rata basis and upon achievement of the following
milestones: (i) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue (“Lottery
Revenue”) of over 10,000 RMB per month from the business developed in connection with the Assets on or before October 1,
2014; (ii) 10,000,000 Shares to be issued in the event that CC Power derives Lottery Revenue of over 3,000,000 RMB per month from
the business developed in connection with the Assets on or before March 31, 2015; (iii) 10,000,000 Shares to be issued in the event
that CC Power derives initial online lottery sales revenue of over 20,000,000 RMB per month from the business developed in connection
with the Assets on December 31, 2015; (iv) 40,000,000 Shares to be issued in the event that CC power obtains a lottery gaming license
from the People’s Republic of China; and (v) 10,000,000 Shares to be issued based on the achievement of certain incentives
as determined by the board of directors of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2015
AND 2014
1. Organization and Nature of Business
- Continued
Share Exchange Agreement
On August 30, 2011, the Company completed
a voluntary share exchange transaction with Shenzhen CC Power Corporation, CC Mobility Limited and the shareholders of CC Mobility
(“Selling Shareholders”) pursuant to a Share Exchange Agreement dated July 5, 2011 (the “Exchange Agreement”).
In accordance with the terms of Exchange Agreement, on the Closing Date, Xcel issued 30,300,000 shares of its common stock to the
Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of CC Mobility (the “Exchange Transaction”).
As a result of the Exchange Transaction, there was a change of control in the Company as the Selling Shareholders of CC Mobility
acquired 50.5% of Xcel’s issued and outstanding common stock, CC Mobility became Xcel’s wholly-owned subsidiary, and
Xcel acquired the business and operations of CC Mobility and CC Power.
For accounting purposes, the merger transaction
is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of CC Mobility and its subsidiaries,
with Xcel (the legal acquirer of CC Mobility and its subsidiaries) considered the accounting acquiree and CC Mobility whose management
took control of Xcel (the legal acquire of CC Mobility) considered the accounting acquirer.
CC Power is owned by an individual but
controlled by CC Investment through a series of contractual arrangements that transferred all of the benefits and responsibilities
for the operations of CC Power to CC Investment. CC Investment accounts for CC Power as a Variable Interest Entity (“VIE”)
under ASC 810 “Consolidation.” Accordingly, CC Investment consolidates CC Power’s results, assets and liabilities.
Shenzhen Jifu Communication Technology Co., Ltd.
Shenzhen Jifu Communication Technology
Co., Ltd (“Jifu”), was incorporated on April 16, 2001 under the laws of the People’s Republic of China (“PRC”)
as a limited liability company. The required registered capital is RMB3,000,000 and all of the required registered capital has
been contributed.
Jifu is primarily engaged in develops and
distributes optical transmitters and receivers, electronic surveillance equipment, and other communications equipment. Jifu also
engages in the purchase and sale of electronic products, network products, and communications equipment. In order to bolster its
business, Jifu also engages in software research and development.
On May 7, 2013, the Company entered into
and consummated a Stock Purchase Agreement (the “Agreement”) with Shenzhen CC Power Investment Consulting Co., Ltd.,
a company organized under the laws of the People’s Republic of China and an indirect wholly-owned subsidiary of the Company
(“CC Power”), Shenzhen Jifu Communication Technology Co., Ltd. a company organized under the laws of the People’s
Republic of China (“Jifu”) the shareholders of Jifu set forth in the signature page to the Agreement (the “Jifu
Shareholders”) and Hui Luo.
Pursuant to the terms and conditions of
the Agreement, the Company will issue an aggregate of 27,000,000 shares of the Company’s common stock (the “Purchase
Shares”) to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements (the “VIE
Agreement”) with CC Power. CC Power will effectively own Jifu through the various conditions prescribed in the VIE Agreements.
The Company will also grant 3,000,000 shares (the “Luo Shares”, together with the Purchase Shares, the “Shares’”)
to Mr. Luo.
The Shares will be released to the Jifu
Shareholders and Mr. Luo after the Company has reviewed Jifu’s audited financial statements for the year ended December 31,
2013. If Jifu has achieved net revenue of $4,000,000 for the year ended December 31, 2013 (the “Target”), then the
Company will release the Shares to the Jifu Shareholders and Mr. Luo in their full respective amounts. If Jifu has not achieved
the Target by the end of the calendar year, the Company will decrease the amount of shares of common stock issued to the Jifu Shareholders
and Mr. Luo in accordance with a formula set forth in the Agreement and release the Shares to the Jifu Shareholders and Mr. Luo
in their respective decreased amounts. The Agreement has been approved by the boards of directors of the Company, CC Power, and
Jifu, and the Jifu Shareholders.
On October 1, 2014, we entered into a Settlement
Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We
have completely transferred back the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual
accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
The organizational structure of the Company
before disposal of Jifu is as follows:
The organizational structure of the Company after disposal of
Jifu is as follows:
2. Summary of Significant Accounting
Policies
Basis of presentation
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America and have
been consistently applied. The functional currency is the Chinese Renminbi, however the accompanying condensed consolidated financial
statements have been translated and presented in United States Dollars ($). All significant inter-company balances and transactions
have been eliminated in consolidation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Use of estimates
In preparing financial statements in conformity
with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during
the reported periods. Actual results could differ from those estimates.
Significant Estimates
These financial statements include some
amounts that are based on management’s best estimates and judgments. The most significant estimates relate to depreciation
of property, plant and equipment, the valuation allowance for deferred taxes. It is reasonably possible that the above-mentioned
estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in
future reporting periods.
Variable Interest Entity
CC Power
The accounts of CC Power have been consolidated
with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned
subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with CC Power Shareholder and with
CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services. In summary,
the five agreements contain the following terms:
Entrusted Management Agreement.
This agreement provides that CC Investment will provide exclusive management services to CC Power. Such management services include
but are not limited to financial management, business management, marketing management, human resource management and internal
control of CC Power. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of
CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Technical Services Agreement.
This agreement provides that CC Investment will provide exclusive technical services to CC Power. Such technical services include
but are not limited to software, computer system, data analysis, training and other technical services. CC Investment shall be
entitled to charge CC Power service fees equivalent to CC Power’s total net income. The Technical Service Agreement will
remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described
in the Exclusive Purchase Option Agreement below).
Exclusive Purchase Option Agreement.
Under the Exclusive Purchase Option Agreement, the CC Power Shareholder granted CC Investment an irrevocable and exclusive purchase
option to acquire CC Power’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option
at any time.
Loan Agreement. Under the Loan
Agreement, CC Investment agreed to lend RMB 10,000,000 to the CC Power Shareholder, to be used solely for the operations of CC
Power.
Equity Pledge Agreement. Under
the Equity Pledge Agreement, the CC Power Shareholder pledged all of its equity interests in CC Power, including the proceeds thereof,
to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement,
the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of this Equity Pledge Agreement, the pledged
equity interests cannot be transferred without CC Investment’s prior consent. The CC Power Shareholder covenants to CC Investment
that among other things, it will only appoint/elect the candidates for the directors of CC Power nominated by CC Investment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
In sum, the agreements transfer to CC Investment
all of the benefits and all of the risk arising from the operations of CC Power, as well as complete managerial authority over
the operations of CC Power. Through these contractual arrangements, the Company has the ability to substantially influence CC Power’s
daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or
shareholder approval. These contractual arrangements enable the Company to control CC Power and operate our business in the PRC
through CC Investment. By reason of the relationship described in these agreements, CC Power is a variable interest entity with
respect to CC Investment and CC Investment is considered the primary beneficiary of CC Power because the following characteristics
identified in ASC 810-10-15-14 are present:
|
|
The holder of the equity investment in CC Power lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of CC Power, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)).
|
|
|
|
|
|
The holder of the equity investment in CC Power lacks the obligation to absorb the expected losses of CC Power, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2).
|
|
|
|
|
|
The holder of the equity investment in CC Power lacks the right to receive the expected residual returns of CC Power, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).
|
Accordingly, the Company’s condensed
consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and
classification of CC Power’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2014
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
1,825,197
|
|
|
$
|
188,942
|
|
Total assets
|
|
|
1,422,400
|
|
|
|
236,166
|
|
Total current liabilities
|
|
|
1,316,298
|
|
|
|
801,511
|
|
Total liabilities
|
|
|
1,316,298
|
|
|
|
801,511
|
|
Jifu
The accounts of Jifu have been consolidated
with the accounts of the Company because Jifu is a variable interest entity with respect to CC Investment, which is a wholly-owned
subsidiary of the Company. CC Investment entered into five agreements dated May 7, 2013 with Jifu Shareholder and with Jifu pursuant
to which CC Investment provides Jifu with exclusive technology consulting and management services. In summary, the five agreements
contain the following terms:
Entrusted Management Agreement. Effective
on May 7, 2013, CC Investment entered into an Entrusted Management Agreement with Jifu and the Jifu Shareholders, pursuant to which
CC Investment agreed to provide, and Jifu agreed to accept, exclusive management services provided by CC Investment. Such management
services include but are not limited to financial management, business management, marketing management, human resource management
and internal control of Jifu. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee will be a percentage
of Jifu’s total operational income. The Entrusted Management Agreement will remain in effect until the acquisition of all
the assets or equity of Jifu by CC Investment.
Technical Services Agreement. Effective
on May 7, 2013, CC Investment entered into a Technical Services Agreement with Jifu and the Jifu Shareholders, pursuant to which
CC Investment agreed to provide, and Jifu agreed to accept, exclusive technical services provided by CC Investment. Such technical
services include but are not limited to software services, computer systems services, data analysis, training and other technical
services. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee shall be a percentage of Jifu’s total
operational income. The Technical Service Agreement will remain in effect until the acquisition of all the assets or equity of
Jifu by CC Investment.
Exclusive Purchase Option Agreement. Effective
on May 7, 2013, CC Investment entered into an Exclusive Purchase Option Agreement with Jifu and the Jifu Shareholders, pursuant
to which the Jifu Shareholders granted CC Investment an irrevocable and exclusive purchase option to acquire all of Jifu’s
equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time. Until CC Investment
has exercised its purchase option, Jifu is required to conduct its business in accordance with certain covenants as further described
in the Exclusive Purchase Option Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Loan Agreement
Effective on May 7, 2013, CC Investment
entered into a Loan Agreement with the Jifu Shareholders, pursuant to which CC Investment agreed to lend RMB 3,000,000 to the Jifu
Shareholders, to be used solely for the operations of Jifu. The loan is interest free, unless the deemed value of the consideration
for the equity purchase of Jifu or asset purchase of Jifu under the Exclusive Purchase Option Agreement is higher than the principal
amount of the loan, in which case the excess will be deemed to be interest on the loan.
Equity Pledge Agreement
Effective on May 7, 2013, CC Investment
entered into an Equity Pledge Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders pledged all
of their equity interests in Jifu, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits
under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan
Agreement. Prior to termination of the Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s
prior consent. The Jifu Shareholders covenant to CC Investment that among other things, they will only appoint/elect candidates
for the board of directors of Jifu and supervisor office of Jifu that were nominated by CC Investment.
In sum, the agreements transfer to CC Investment
all of the benefits and all of the risk arising from the operations of Jifu, as well as complete managerial authority over the
operations of Jifu. Through these contractual arrangements, the Company has the ability to substantially influence Jifu’s
daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or
shareholder approval. These contractual arrangements enable the Company to control Jifu and operate our business in the PRC through
CC Investment. By reason of the relationship described in these agreements, Jifu is a variable interest entity with respect to
CC Investment and CC Investment is considered the primary beneficiary of Jifu because the following characteristics identified
in ASC 810-10-15-14 are present:
|
|
The holder of the equity investment in Jifu lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Jifu, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)).
|
|
|
|
|
|
The holder of the equity investment in Jifu lacks the obligation to absorb the expected losses of Jifu, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2).
|
|
|
|
|
|
The holder of the equity investment in Jifu lacks the right to receive the expected residual returns of Jifu, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).
|
On October 1, 2014, we entered into a Settlement
Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We
have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual
accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
Revenue recognition
Our source of revenues is from internet
accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements, and
the source of revenue of Jifu is from developing and distributing optical transmitters and receivers, electronic surveillance equipment,
and other communications equipment; and trading of electronic products, network products, and communications equipment. We also
engage in software research and development. During the year ended December 31, 2015, we also have revenues derived from GPS system
development and website development projects along with maintenance arrangements.
We evaluate revenue recognition based on
the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (“SAB”) No.
101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Revenue Recognition for Software
Products (Software Elements)
New software license revenues represent
fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed
of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the
accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant
modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a
legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed
or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized
at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not
include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element
Arrangements – Software Products and Software Related Services(Software Arrangements)
We enter into arrangements with customers
that purchase software related products that include one to three year product support service and a short training session (referred
to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of
our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of
the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written
customer acceptance. The vast majority of our software license arrangements include software license updates and product support
contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the
support period. Product support includes telephone access to technical support personnel or on-site support. For those software
related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair
value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service
and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically
one year to three years.
Revenue Recognition for Multiple-Element
Arrangements – Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements
that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings
including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product
support. We adopted Accounting Standards Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605)
:
Multiple-Deliverable
Revenue Arrangements
. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25,
Revenue Recognition-Multiple
Element Arrangements
, by allowing the use of the “best estimate of selling price” in addition to vendor-specific
objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This
guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific
objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement
consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the
relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element
considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element
and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold
through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of direct
costs of products, direct labor of technical staff, depreciation of computer equipment, and overhead associated with the technical
department.
Economic and political risks
The Company’s operations are mainly
conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations in the PRC may be
influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC.
The Company’s major operations in
the PRC are subject to special considerations and significant risks not typically associated with companies in North America. These
include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s
results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in government administration,
governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad,
and rates and methods of taxation, among other things.
Credit risk
The Company may be exposed to credit risk from its cash and
fixed deposits at bank. No allowance has been made for estimated irrecoverable amounts determined by reference to past default
experience and the current economic environment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation.
Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant
and equipment are as follows:
Equipment
|
5 years
|
Office equipment
|
5 years
|
Leasehold improvements
|
Over the lease terms
|
Software
|
5 years
|
The cost and related accumulated depreciation of assets sold
or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of
maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Accounting
for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated
for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with ASC 360-10 “Impairments of Long-Lived Assets”. An asset is considered
impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair
market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered
through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected
discounted future net cash flows using a discount rate reflecting the Company's average cost of capital.
Goodwill,
Customer-relationship, and Trade-name Intangibles
Goodwill represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. In accordance
with Accounting Standards Codification ASC 350 “Intangibles - Goodwill and Other”, goodwill is no longer subject to
amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.
Customer-relationship and trade-name acquired
as part of the Merger account for the majority of our intangible assets recognized in the Consolidated Balance Sheet. These assets
are expected to generate cash flows indefinitely, do not have estimable or finite useful lives and, therefore, are accounted for
as indefinite-lived assets not subject to amortization. We consider the income approach when testing intangible assets with indefinite
lives for impairment on an annual basis. We utilize the income approach, specifically the relief from royalty method, for analyzing
our indefinite-lived assets. This method is based on the assumption that, in lieu of ownership, a firm would be willing to pay
a royalty in order to exploit the related benefits of this asset class.
Inventories
Inventories are stated at the lower of
cost or market value. Substantially all inventory costs are determined using the weighted average basis. The management regularly
evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs
are required.
Accounts receivable
Accounts receivable consists of amounts
due from customers. An allowance for doubtful accounts is established and determined based on management’s assessment of
known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment.
As of December 31, 2015 and 2014, no allowance for doubtful accounts was deemed necessary based on management’s assessment.
Fair Value of Financial Instruments
FASB accounting standards require disclosing
fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled,
nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including
cash, accounts payable, accruals and other payables, the carrying amounts approximate fair value because of the near term maturities
of such obligations.
Patents
The Company has three patents as listed
in the table below relating to its internet accelerator software products. Fees related to registering these patents were insignificant
and have been expensed as incurred.
Patent
|
|
Register Number
|
|
Issued By
|
Mach5 Internet Acceleration Software V.6.0
|
|
2007SR09253
|
|
National Copyright Administration of PRC
|
Mach5 Enterprise Acceleration Software V.3.3
|
|
2009SR058767
|
|
National Copyright Administration of PRC
|
Mach5 Web Browser Software
|
|
2010SR001089
|
|
National Copyright Administration of PRC
|
Research and development and Software
Development Costs
All research and development costs are
expensed as incurred. Software development costs eligible for capitalization under ASC 985-20,
Software-Costs of Software to
be Sold, Leased or Marketed
, were not material to our consolidated financial statements for the years ended December 31, 2015
and 2014. Other research and development expenses amounted to $3,808 and $236,368 for years ended December 31, 2015 and 2014, respectively,
and were included in general and administrative expense.
Comprehensive income
Comprehensive income is defined as the
change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting
from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes
net income and foreign currency translation adjustments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Income taxes
Income taxes are provided on an asset and
liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary
activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates
that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded
to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting
amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred
tax asset will not be realized.
Foreign currency translation
Assets and liabilities of the Company’s
subsidiaries with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense
items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included
as a component of Accumulated Other Comprehensive Income in Shareholders’ Equity.
The exchange rates used to translate amounts
in RMB into USD for the purposes of preparing the financial statements were as follows:
December 31, 2015
|
|
|
Balance sheet
|
|
RMB 6.4904 to US $1.00
|
Statement of operations and other comprehensive loss
|
|
RMB 6.2175 to US $1.00
|
|
|
|
December 31, 2014
|
|
|
Balance sheet
|
|
RMB 6.1384 to US $1.00
|
Statement of operations and other comprehensive loss
|
|
RMB 6.1438 to US $1.00
|
The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Post-retirement and post-employment
benefits
The Company contributes to a state pension
plan in respect of its PRC employees. Other than the state pension plan, the Company does not provide any other post-retirement
or post-employment benefits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board
(“FASB”) has issued Accounting Standards Update (“ASU”) No. 2015-01 “Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items”. The objective is to reduce the cost and complexity of income
statement presentation by eliminating the concept of extraordinary items while maintaining or improving the usefulness of the information
provided to the users of financial statements. The extraordinary items must meet two criteria: unusual nature and infrequency of
occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate
the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax,
after income from continuing operations. The entity also is required to disclose applicable income taxes and either. This amendment
will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Board
decided to permit early adoption provided that the guidance is applied from the beginning of the fiscal year of adoption.
The FASB has issued ASU No. 2015-03 “Simplifying
the Presentation of Debt Issuance Costs”. The objective is to require that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with
debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.
For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are
effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal
years beginning after December 15, 2016. Early adoption of the amendments in this update is permitted for financial statements
that have not been previously issued.
The FASB has issued ASU No. 2015-05 “Intangibles-Goodwill
and Other-Internal-Use Software”. The objective is to provide a guidance about whether a cloud computing arrangement includes
a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. The amendment will
not change GAAP for a customer accounting for service contracts. In addition, the guidance in this update supersedes paragraph
350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other
licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the
amendment will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning
after December 15, 2016. Early adoption is permitted for all entities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Recently Issued Accounting Pronouncements
The FASB has issued ASU No. 2015-07 “Topic
820, Fair Value Measurement”, which permits a reporting entity, as a practical expedient, to measure the fair value of certain
investments using the net asset value per share of the investment. The amendments in this update remove the requirement to categorize
within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical
expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured
at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for
which the entity has elected to measure the fair value using that practical expedient. The amendments in this update apply to reporting
entities that elect to measure the fair value of an investment within the related scope by using the net asset value per share
(or its equivalent) practical expedient.
The FASB has issued No. 2015-10 “Technical
Corrections and Improvements”, which aims to address feedback received from stakeholders on the Codification and make improvements
to GAAP. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance,
or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice
or create a significant administrative cost to most entities. Some of the amendments will make the Codification easier to understand
and apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification.
The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. The amendments
in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted.
The FASB has issued No. 2015-11“Topic
330, Inventory”, which aims to simplify the measurement of inventory by changing the subsequent measurement guidance from
the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. The amendments
in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity
should measure inventory within the scope of this Update at the lower of cost and net realizable value. Subsequent measurement
is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in
this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim
periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-14“Topic
606, Revenue from Contracts with Customers”, which aims to respond to stakeholders’ requests to defer the effective
date of the guidance in Update 2014-09 and to consider feedback received through extensive outreach with preparers, practitioners,
and users of financial statements. The amendments in this update defer the effective date of Update 2014-09 for all entities by
one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance
in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period.
The FASB has issued No. 2015-15“Subtopic
835-30, Interest - Imputation of Interest”: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This amendment
adds SEC paragraphs pursuant to the SEC Staff Announcement on June 18, 2015, Emerging Issues Task Force meeting about the presentation
and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
2. Summary of Significant Accounting
Policies - Continued
Recently Issued Accounting Pronouncements
The FASB has issued No. 2015-16“Topic
805, Business Combinations”: Simplifying the Accounting for Measurement-Period Adjustments, which aims to identify, evaluate,
and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information
provided to users of financial statements. The amendments in this Update require that an acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.
The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on
earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity
to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period
earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal
years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments
in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning
after December 15, 2017.
The FASB has issued No. 2015-17“Topic
740, Income Taxes”: Balance Sheet Classification of Deferred Taxes, which aims to identify, evaluate, and improve areas of
generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the
usefulness of the information provided to users of financial statements. The amendments in this update require that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update
apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities
and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments
in this Update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International
Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities,
the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017,
and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities
as of the beginning of an interim or annual reporting period.
Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated financial statements upon adoption.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
3. Going Concern
The Company has incurred significant continuing
losses during the years ended December 31, 2015 and 2014, and has accumulated deficits at December 31, 2015 and 2014. The Company
has relied on its registered capital and issuance of convertible notes to fund operations. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern.
The financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from
the outcome of this uncertainty. As of December 31, 2015 and 2014, the Company had limited cash resources and management plans
to continue its efforts to raise additional funds through debt or equity offerings which will be used to fund operations.
4. Property and Equipment, net
Property and equipment, net consist of
the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
148,305
|
|
|
$
|
120,287
|
|
Office equipment
|
|
|
39,633
|
|
|
|
39,633
|
|
Leasehold improvements
|
|
|
8,634
|
|
|
|
8,634
|
|
Software
|
|
|
-
|
|
|
|
-
|
|
|
|
|
196,572
|
|
|
|
168,554
|
|
Less: Accumulated depreciation
|
|
|
(127,902
|
)
|
|
|
(119,328
|
)
|
Property and equipment, net
|
|
$
|
68,670
|
|
|
$
|
49,226
|
|
The depreciation expense was $8,574 and
$16,332 for the years ended December 31, 2015 and 2014, respectively.
5. Deferred Revenue
Deferred revenue represents deferred internet
accelerator license revenue over the maintenance period of one to three years for our multiple element arrangements (Note 2).
In addition, deferred revenue includes
two government grants for use in research and development related expenditures. The portion of the grants that has not been spent
is deferred and recognize as other income as the funds are spent on research and development related expenditures.
Deferred revenue included on the balance
sheets as of December 31, 2014 and 2013 is as follow:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred revenue:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
19,135
|
|
Non-current
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
19,135
|
|
The table below sets forth the deferred
revenue activities during the years ended December 31, 2015 and 2014:
|
|
For the years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Deferred revenue, balance at beginning of year
|
|
$
|
-
|
|
|
$
|
19,223
|
|
Less: government grant earned during the year
|
|
|
-
|
|
|
|
-
|
|
Less: Revenue earned during the year
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange difference
|
|
|
-
|
|
|
|
(88
|
)
|
Deferred revenue, balance at end of year
|
|
$
|
-
|
|
|
$
|
19,135
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
6. Convertible Promissory Notes
Outstanding balances for the four convertible
promissory notes as of December 31, 2015 and 2014 are as follow:
|
|
|
|
Maturity
|
|
Loan
|
|
|
Interest
Rate
|
|
|
Convertible
Number of
|
|
|
December
31,
|
|
|
December
31,
|
|
Lender
|
|
Date of Note
|
|
Date
|
|
Amount
|
|
|
(p.a.)
|
|
|
stock
|
|
|
2014
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vantage Associates SA
|
|
April 15, 2011
|
|
April 15, 2016
|
|
$
|
150,000
|
|
|
|
5
|
%
|
|
|
600,000
|
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Empa Trading Ltd.
|
|
June 5, 2011
|
|
June 5, 2016
|
|
|
100,000
|
|
|
|
5
|
%
|
|
|
400,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
First Capital A.G.
|
|
July 14, 2011
|
|
July 14, 2016
|
|
|
150,000
|
|
|
|
5
|
%
|
|
|
600,000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
First Capital A.G.
|
|
September 9, 2011
|
|
September 9, 2016
|
|
|
200,000
|
|
|
|
5
|
%
|
|
|
800,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Vantage Associates SA
|
|
September 9, 2011
|
|
September 9, 2016
|
|
|
200,000
|
|
|
|
5
|
%
|
|
|
800,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Vantage Associates SA
|
|
October 27, 2011
|
|
October 27, 2016
|
|
|
50,000
|
|
|
|
5
|
%
|
|
|
200,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
First Capital A.G.
|
|
December 1, 2011
|
|
December 1, 2016
|
|
|
50,000
|
|
|
|
5
|
%
|
|
|
200,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
First Capital A.G.
|
|
January 23, 2012
|
|
January 23, 2017
|
|
|
50 000
|
|
|
|
5
|
%
|
|
|
200,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
First Capital A.G.
|
|
April 25, 2012
|
|
April 25,2014
|
|
|
100,000
|
|
|
|
5
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hanover Holdings I, LLC
|
|
May 30, 2014
|
|
May 30, 2016
|
|
|
350,000
|
|
|
|
8
|
%
|
|
|
120,682,412
|
|
|
|
350,000
|
|
|
|
350,000
|
|
KBM Worldwide, Inc.
|
|
August 14, 2014
|
|
August 21, 2015
|
|
|
110,000
|
|
|
|
8
|
%
|
|
|
9,300,584
|
|
|
|
-
|
|
|
|
110,000
|
|
KBM Worldwide, Inc.
|
|
November 17, 2014
|
|
November 17, 2015
|
|
|
61,000
|
|
|
|
8
|
%
|
|
|
10,639,076
|
|
|
|
-
|
|
|
|
61,000
|
|
Vis Vires Group Inc.
|
|
June 1, 2015
|
|
June 3, 2016
|
|
|
48,000
|
|
|
|
8
|
%
|
|
|
50,732,143
|
|
|
|
48,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,348,000
|
|
|
$
|
1,471,000
|
|
Less:
|
|
|
|
|
|
|
Debt discount
|
|
|
|
|
|
|
from beneficial
|
|
|
|
|
|
|
conversion feature
|
|
|
354,394
|
|
|
|
447,983
|
|
|
|
|
993,606
|
|
|
|
1,023,017
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
101
|
|
|
|
48,875
|
|
Non-current portion
|
|
$
|
993,505
|
|
|
$
|
974,142
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
6. Convertible Promissory Notes- Continued
The debt discount was the beneficial conversion
feature of the notes. It is being accreted as additional interest expense ratably over the term of the convertible notes.
Interest expenses for the years ended December
31, 2015 and 2014 were $40,000 and $46,452 respectively.
Amortization of the beneficial conversion
feature for the year ended December 31, 2015 and 2014 were $329,545 and $373,850 respectively.
Except for the convertible promissory note
of $100,000 issued to First Capital A.G. on April 25, 2012, the $350,000 issued to Hanover Holdings I, LLC on May 30, 2014, and
the $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014 respectively, all the convertible
promissory notes (the “Notes”) are convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity
date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares
of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
|
(i)
|
one common share to be purchased at a price of $0.5,
and
|
|
(ii)
|
one warrant that is convertible into one common share at a price of $1.00, and expires two years
from the date of the Exchange Transaction is completed, and
|
|
(iii)
|
one warrant that is convertible into one common share at a price of $1.5, and expires three years
from the date the Exchange Transaction is completed.
|
(2) Unless earlier converted into common
stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the
respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such
Qualified Financing as follows:
(a) In the event of a debt Qualified
Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory
note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified
Debt Financing and in a principal amount equal to the then outstanding Debt.
(b) In the event of an equity
Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital
stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity
Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.
Convertible promissory note of $100,000 issued to First Capital
A.G. on April 25, 2012
The convertible promissory note of $100,000
issued to First Capital A.G. on April 25, 2012, is convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity
date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares
of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
(i) one common share to be purchased
at a price of based on the moving average share price over the preceding 20 trading days, and
(ii) one warrant that is convertible
into one common share at a price based on the moving average share price over the preceding 20 trading days and expires two years
from the date of the Exchange Transaction is completed, and
(iii) one warrant that is convertible
into one common share at a price based on the moving average share price over the preceding 20 trading days and expires three years
from the date the Exchange Transaction is completed.
(2) Unless earlier converted into common
stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the
respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such
Qualified Financing as follows:
(a) In the event of a debt Qualified
Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory
note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified
Debt Financing and in a principal amount equal to the then outstanding Debt.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
6. Convertible Promissory Notes- Continued
(b) In the event of an equity
Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital
stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity
Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.
Convertible promissory note of $350,000 issued to Hanover
Holdings I, LLC on May 30, 2014
On May 30, 2014, or the Closing Date, we
entered into a securities purchase agreement dated as of the Closing Date (the “Purchase Agreement”) with Hanover Holdings
I, LLC, a New York limited liability company (“Hanover”). Pursuant to the terms of the Purchase Agreement, Hanover
purchased from us on the Closing Date (i) a senior convertible note with an initial principal amount of $350,000 (the “Convertible
Note”) and (ii) a warrant to acquire up 3,716,091 shares of our common stock (the “Warrant”), for a total purchase
price of $250,000. The Convertible Note was issued with an original issue discount of approximately 28.57%.
$40,000 of the outstanding principal amount
of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall
be automatically extinguished (without any cash payment by us) if (i) we have properly filed a registration statement with the
Securities and Exchange Commission, or SEC, on or prior to July 14, 2014, or the Filing Deadline, covering the resale by Hanover
of the shares of common Stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event
that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date. Moreover,
$60,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect
to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) the registration
statement has been declared effective by the SEC on or prior to the earlier of (i) the 120th calendar day after the Closing Date
and (ii) the fifth business day after the date we are notified by the SEC that such registration statement will not be reviewed
or will not be subject to further review (the “Effectiveness Deadline”), and the prospectus contained therein is available
for use by Hanover for the resale by Hanover of the shares of common stock issued or issuable upon conversion of the Convertible
Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default
has occurred on or prior to such date.
The Convertible Note matures on May 30,
2016 (subject to extension as provided in the Convertible Note) and, in addition to the approximately 28.57% original issue discount,
accrues interest at the rate of 8.0% per annum. The Convertible Note is convertible at any time, in whole or in part, at Hanover’s
option into shares of our common stock, par value $0.001 per share at a conversion price equal to the lesser of (i) the product
of (x) the arithmetic average of the lowest three (3) trade prices of our common stock during the 10 consecutive trading days ending
and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.12 (as adjusted for
stock splits, stock dividends, stock combinations or other similar transactions). The Warrant entitles Hanover to purchase up to
3,716,091 shares of our common stock (the “Share Amount”) at any time for a period of one year from the Closing Date
at an exercise price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) VWAPs of the
common stock during preceding ten (10) consecutive trading days and (y) sixty-five percent (65%), and (B) $0.12 (as adjusted for
any stock split, stock dividend, stock combination or other similar transaction) (the “Exercise Price”). The Warrant
may only be exercised for cash and we have the right to accept or decline any exercise of the Warrant by Hanover. If at any time
the Share Amount is less than the quotient of $150,000 and the Exercise Price (the “Required Share Amount”), then the
number of shares issuable upon exercise of the warrant shall automatically be increased by such number of shares equal to the difference
of the Required Share Amount less the Share Amount.
At no time will Hanover be entitled to
convert any portion of the Convertible Note or exercise any portion of the Warrant to the extent that after such conversion or
exercise, Hanover (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of our common
stock as of such date (the “Maximum Percentage”). The Maximum Percentage may be raised to any other percentage not
in excess of 9.99% at the option of Hanover upon at least 61 days’ prior notice to us, or lowered to any other percentage,
at the option of Hanover, at any time.
The Convertible Note includes customary
event of default provisions. Upon the occurrence of an event of default, Hanover may require us to pay in cash the greater of (i)
the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency related event of default) and (ii)
the product of (X) the conversion price in effect at that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency
related event of default) multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period
commencing on the date immediately preceding such event of default and ending on the date we make the entire payment required to
be made under this provision.
We have the right at any time to redeem
all, but not less than all, of the total outstanding amount then remaining under the Convertible Note in cash at a price equal
to 135% of the total amount of such Convertible Note then outstanding. If at any time after the Closing Date, (i) the closing bid
price of our common stock is equal to or greater than 140% of the Exercise Price for a period of 30 consecutive trading days (the
“Measuring Period”), (ii) no Equity Conditions Failure (as defined in the Warrant) shall have occurred, and (iii) the
aggregate dollar trading volume of the Common Stock for each trading day during the Measuring Period exceeds $3,000 per day, then
we shall have the right to require Hanover to exercise all, or any part, of the Warrant (up to the Maximum Forced Exercise Amount
(defined below)) (the “Forced Exercise”) at the then applicable Exercise Price. We will not be permitted to effect
a Forced Exercise if, after giving effect to such Forced Exercise, we have received more than $150,000 in cash, in the aggregate,
from one or more exercises of the Warrant. “Maximum Forced Exercise Amount” means, as of any given date, the lesser
of (x) the number of shares of our common stock issuable upon exercise of the Warrant as of such given date and (y) 500% of the
average trading volume (as reported on Bloomberg) of our common stock on our principal market on each of the 10 consecutive trading
days ending and including the trading day immediately prior to such given date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
6. Convertible Promissory Notes- Continued
The Note will completely convert on first
quarter 2016.
Convertible promissory notes of $110,000 and $61,000 issued
to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014
On August 14, 2014 and November 17, 2014,
we and KBM Worldwide, Inc. (“KBM”) completed a financing pursuant to which the Company issued Convertible Promissory
Notes in the original principal amounts of $110,000 and $61,000 respectively (the “Notes”). The Notes bear 8% interest
and is due on August 21, 2015 and November 17, 2015 respectively. The Notes become convertible 180 days after the date of the Note.
The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock
at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock
during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date.
Convertible promissory notes of $48,000 issued to Vis Vires
Group Inc. on June 1, 2015
On June 1, 2015, we and Vis Vires Group
Inc. (“Vis Vires”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original
principal amounts of $48,000 (the “Note”). The Note bear 8% interest and is due on June 3, 2015. The Notes become convertible
180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares
of the Company’s common stock at a rate of 70% multiplied by the market price, which is the average of the lowest three (3)
trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the
conversion date. The Note will cancel on first quarter 2016.
The fair value of the embedded conversion
feature of these notes as at December 31, 2015 and 2014 was $279,071 and $693,303, respectively.
Except for the convertible promissory note
of $100,000 issued to First Capital A.G. on April 25, 2012, the fair value of the convertible notes was calculated using the Black-Scholes
model with the following assumptions: expected life of 1-3 years, expected dividend rate of 0%, volatility of 246.8% and interest
rate at 0.25%-0.67%.
The fair value of the convertible promissory
note of $100,000 issued to First Capital A.G. on April 25, 2012, was calculated using the lattice valuation method as the conversion
prices are variable for these notes.
Fair Value on a Recurring Basis
The following table sets forth, by level
within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on
a recurring basis as of December 31, 2015:
|
|
Fair Value Measurements at December 31, 2015
|
|
|
|
Quoted Prices In
Active Markets
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
Total Carrying
|
|
|
|
for
Identical Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
Value as of
December 31,
|
|
Descriptions
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
279,071
|
|
|
|
279,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
279,071
|
|
|
|
279,071
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
XCELMOBILITY INC. AND SUBSIDIARIES
|
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
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7. Income Tax
We are subject to income tax in the United
States, Hong Kong and PRC.
The Company’s subsidiaries, Jifu,
CC Power and CC Investment are incorporated in PRC and are subjected to PRC enterprises income tax at the applicable tax rates
on the taxable income as reported in their Chinese statutory accounts in accordance with the relevant enterprises income tax laws
(“EIT Law”). The subsidiaries locate in Shenzhen, a special economic region, where companies are allowed to gradually
phase into the 25% statutory tax rate. For 2014 the statutory income tax rate is 25%. The open tax years in PRC are 2010-2015.
CC Mobility is incorporated in Hong Kong
and is subjected to Hong Kong corporate income tax at 16.5% statutory income tax rate. No Hong Kong profits tax has been provided
in the financial statements, as the Company did not have any assessable profits for the years ended December 31, 2015 and 2014.
The open tax year for CC Mobility in Hong Kong are 2013-2015.
The Company has no income tax expense for
the years ended December 31, 2015 and 2014 because it has incurred loss before tax from continuing operation.
The Company applied the provisions of ASC
740.10.50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated
with accounting for uncertain tax positions recognized in our financial statements. ASC 740.10.50 prescribes a more-likely-than-not
threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return.
ASC 740.10.50 also provides guidance related to, among other things, classification, accounting for interest and penalties associated
with tax positions, and disclosure requirements. The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in the provision for income taxes in the statements of operation. The Company’s policy for recording interest
and penalties associated with audits is to record such items as a component of income tax expense.
The following table sets forth the components
of deferred income taxes as of December 31, 2015 and 2014:
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December 31,
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December 31,
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2015
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|
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2014
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Deferred tax assets:
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|
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|
|
|
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Net operating losses - U.S.
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$
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440,250
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|
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$
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2,319,834
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Net operating losses - PRC and Hong Kong
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525,268
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|
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276,836
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|
|
|
|
|
|
|
|
-
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|
|
|
|
|
|
|
|
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Deferred revenue
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|
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965,518
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|
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2,596,670
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Valuation allowance
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|
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(965,518
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)
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(2,596,670
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)
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Deferred tax assets, net
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$
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—
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$
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-
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As of December 31, 2015, the Company has
net operating losses carry forward of $529,530 in the U.S. and $525,270 in Hong Kong and PRC available to offset future taxable
income. They will begin to expire in 2030 and 2016, respectively. We provided for a full valuation allowance against the deferred
tax assets of $358,632 on the expected future tax benefits from the net operating loss carry forwards as management believes it
is more likely than not that these assets will not be realized in the future.
The Company did not recognize any interest
or penalties related to unrecognized tax benefits for the years ended December 31, 2015 and 2014.
8. Employee Benefits
The Company contributes to a state pension
plan organized by municipal and provincial governments in respect of its employees in PRC. The compensation expense related to
this plan was $40,061 and $17,669 for the years ended December 31, 2015 and 2014, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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XCELMOBILITY INC. AND SUBSIDIARIES
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FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
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9. (Loss) earnings per Share
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For The Years Ended
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December 31,
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2015
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2014
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|
|
|
|
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Loss from continuing operations-basic
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$
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(965,518
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)
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$
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(2,500,783
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)
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Interest expense on convertible notes
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40,000
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46,452
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Loss from continuing operations – diluted
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$
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(925,518
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)
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$
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(2,454,331
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)
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(Loss) income from discontinued operations
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-
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(1,051,104
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)
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Weighted average outstanding shares of common stock – basic
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287,008,887
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104,626,234
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Effect of dilutive securities – convertible notes
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|
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-
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|
|
|
-
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Weighted average outstanding shares of common stock –diluted
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287,008,887
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|
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104,626,234
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|
|
|
|
|
|
|
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Profit (loss) per share – from continuing operations
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$
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(0.00189
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)
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$
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(0.0239
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)
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Profit (loss) per share – from discontinued operations
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|
-
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|
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(0.0100
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)
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|
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|
|
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Profit (loss) per share – basic and diluted
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$
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(0.00189
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)
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$
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(0.0339
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)
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For the fiscal years ended December 31,
2015 and 2014, there are 0 potentially dilutive common shares because the Company recorded net losses in 2015 and 2014.
10. Commitments and Contingencies
Operating commitments:
Operating lease agreement generally contains
renewal options that may be exercised at the Company’s discretion after the completion of the terms. The Company’s
obligations under operating lease are as follows:
2016
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$
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117,420
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Thereafter
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-
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Total minimum payment
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$
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117,420
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The Company incurred rental expenses of
$117,417 and $38,944 for the years ended December 31, 2015 and 2014, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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XCELMOBILITY INC. AND SUBSIDIARIES
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FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
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11. Concentrations, Risks, and Uncertainties
Customer Concentrations
The Company has the following concentrations
of business with each customer constituting greater than 10% of the Company’s gross sales:
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For The Years Ended
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December 31,
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2015
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|
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2014
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|
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Customer A
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55
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%
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36
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%
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Customer B
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|
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23
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%
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|
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34
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%
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Customer C
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10
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%
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20
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%
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The Company has not experienced any significant
difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by
its major customers.
12. Operating Risk
The Company’s operations are all
carried out in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced
by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy.
The Company’s operations in the PRC
are subject to specific considerations and significant risks not typically associated with companies in the North America and Western
Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency
exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
13. Related Party Transactions
As of December 31, 2015, the appointment of Mr. Zhixiong Wei
as director rendered a loans amount $599,318 became loans from director. The $599,318 did bear of interest at 15%, have no collateral
and be repayable on demand.
14. Subsequent Events
The Company has evaluated all other subsequent events through
April 14, 2016, the date these consolidated financial statements were issued, and determined that there were no other subsequent
events or transactions that require recognition or disclosures in the financial statements.
Exhibit No.
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Description
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2.1
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Asset Purchase Agreement, dated September 22, 2014, between XcelMobility, Inc., Shenzhen CC Power Corporation, Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) and the shareholders of Silvercreek set forth in the signature pages thereto (incorporated by reference to our Current Report on Form 8-K filed on October 9, 2014).
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2.2
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Stock Purchase Agreement, dated May 7, 2013, by and among the Company, Shenzhen CC Power Investment Consulting Co., Ltd., Jifu, the Jifu Shareholders and Hui Luo (incorporated by reference to our Current Report on Form 8-K filed on May 13, 2013).
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3.1(a)
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Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1 originally filed on October 14, 2009).
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3.1(b)
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Amendment to Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on March 29, 2011).
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3.1(c)
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Amendment to Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on June 11, 2014).
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3.1(d)
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Amendment to Articles of Incorporation (incorporated by reference
to our Current Report on Form 8-K filed on September 24, 2015).
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3.2
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Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on April 27, 2011).
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4.1
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Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to our Current Report on Form 8-K filed on July 15, 2015).
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10.1
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Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Ron Strauss (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014).
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10.2
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Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Renyan Ge (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014).
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10.3
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Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Xili Wang (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014).
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10.4
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Separation Agreement and Release of Claims, dated December 31, 2015, between XcelMobility, Inc. and Ronald Edward Strauss (incorporated by reference to our Current Report on Form 8-K filed on January 5, 2016).
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10.5*
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Loan Agreement and Guaranty, dated September 1, 2014, between
Shenzhen CC Power Corporation (China), XcelMobility, Inc. and Mr. Zhixiong Wei.
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14.1
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Code of Ethics (incorporated by reference to our Current Report on Form 8-K filed on September 28, 2011).
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21*
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CC Mobility Limited, a company incorporated under the laws of Hong Kong as a limited liability company; Shenzhen CC Power Investment Consulting Co. Ltd., a company incorporated under the laws of the People’s Republic of China; Shenzhen CC Power Corporation, a Chinese enterprise incorporated under the laws of the People’s Republic of China.
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23*
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Consent of AWC (CPA) Limited
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31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1*
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101 *
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Interactive Data Files
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* Filed herewith.