XOTC:XCLL Quarterly Report 10-Q Filing - 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2012

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________

Commission File Number 000-54333

XCELMOBILITY INC.
(Exact name of registrant as specified in its charter)

Nevada 98-0561888
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

303 Twin Dolphins Drive, Suite 600, Redwood City, CA, 94065
(Address of principal executive offices) (Zip Code)

(650) 632-4210
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes          [  ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

[X]Yes          [  ] No 

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.

[  ] Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company
    (Do not check if smaller  
    reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ]Yes          [X] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

                                  Class                                             Outstanding as of May 11, 2012          
Common stock, $.001 par value 60,000,000


XCELMOBILITY INC.
FORM 10-Q

INDEX

  PAGE
PART I. FINANCIAL INFORMATION 
   

Item 1. Financial Statements

4

         Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31,

5

         Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011 (unaudited)

6

         Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

7

         Notes to Unaudited Consolidated Condensed Financial Statements

8

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

25

Item 3. Qualitative and Quantitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

29

 

 

PART II. OTHER INFORMATION 

 

 

Item 1. Legal Proceedings

31

Item 1A. Risk Factors

31

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

31

Item 3. Defaults Upon Senior Securities

31

Item 4. Mine Safety Disclosures

31

Item 5. Other Information

31

Item 6. Exhibits

31

 

 

Signatures

32


FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth in our Annual Report on Form 10-K filed on March 30, 2012.

As used in this Form 10-Q, “we,” “us,” and “our” refer to XcelMobility Inc., which is also sometimes referred to as the “Company.”

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  Page
   
Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 5
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited) 7
Notes to Unaudited Consolidated Condensed Financial Statements 8-26


XCELMOBILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

    March 31     December 31  
    2012     2011  

ASSETS

  (unaudited)        

Current Assets:

           

Cash

$  340,800   $  615,200  

 

           

 Other receivables, net of allowance for doubtful accounts of $3,500 and $3,500, respectively

  5,500     5,400  

 Prepaid expenses

  8,900     8,800  

 

           

Total Current Assets

  355,200     629,400  

 

           

Property, Plant and Equipment, net of accumulated depreciation of $47,800 and $44,400, respectively

  80,200     66,200  

 

           

TOTAL ASSETS

$  435,400   $  695,600  

 

           

LIABILITIES AND SHAREHOLDERS’ DEFICIT

           

Current Liabilities:

           

Accounts payable

$  135,800   $  41,400  

Other payables and accrued expenses

  30,800     44,700  

Deferred revenue

  229,500     290,500  

 

           

 

           

Total Current Liabilities

  396,100     376,600  

 

           

Convertible notes

  950,000     900,000  

Accrued interest

  30,100     18,300  

Deferred revenue

  -     10,700  

 

           

Total Liabilities

  1,376,200     1,305,600  

 

           

Shareholders’ Deficit:

           

Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding March 31, 2012 and December 31, 2011

  -     -  

Common stock, $0.001 par value, 100,000,000 shares authorized; 60,000,000 issued and outstanding March 31, 2012 and December 31, 2011

  60,000     60,000  

Additional paid in capital

  72,200     72,200  

Accumulated deficit

  (1,105,700 )   (772,900 )

Accumulated other comprehensive income

  32,700     30,700  

Total Shareholders’ Deficit

  (940,800 )   (610,000 )

 

           

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT

$  435,400   $  695,600  

The accompanying notes are an integral part of the condensed consolidated financial statements

5


XCELMOBILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

 

  For the Three Months Ended  

 

  March 31,  

 

  2012     2011  

           

Revenue

$  63,200   $  34,600  

 

           

Cost of Revenue

  4,300     1,300  

 

           

Gross Profit

  58,900     33,300  

 

           

Operating Expenses:

           

Selling expense

  19,900     5,400  

General and administrative expense

  312,700     19,900  

Total Operating Expenses

  332,600     25,300  

Income (loss) from Operations

  (273,700 )   8,000  

 

           

Other Income (Expense):

           

Interest income

  300     -  

Interest expense

  (11,800 )   -  

Other income (expense)

  (47,600 )   (500 )

Total Other Income (Expense)

  (59,100 )   (500 )

Loss Before Taxes

  (332,800 )   7,500  

Income tax expense

  -     -  

 

           

Loss from continuing operation

$  (332,800 ) $  7,500  

 

           

Discontinued Operation:

           

Income (loss) from discontinued operation

  -     (1,100 )

Net income from discontinued operation

  -     (1,100 )

 

           

 Net Loss

  (332,800 )   6,400  

Less: income attributable to non-controlling interest

  -     (400 )

Net loss attributable to XcelMobility

$  (332,800 ) $  6,800  

 

           

Net Loss

  (332,800 )   6,400  

     Foreign currency translation adjustment

  2,000     4,200  

Comprehensive loss

  (330,800 )   10,600  

   Less: Comprehensive Income attributable to Non-controlling interest

  -     (3,600 )

Comprehensive loss attributable to XcelMobility

  (330,800 )   7,000  

 

           

Basic and diluted loss per share attributable to XcelMobility shareholders:

           

   Continuing Operation

$  (0.01 ) $  -  

   Discontinued Operation

  -     -  

Basic and diluted loss per share attributable to XcelMobility shareholders:

$  (0.01 ) $  -  

Basic and diluted weighted average number of shares outstanding

  60,000,000     77,700,000  

The accompanying notes are an integral part of the condensed consolidated financial statements

6


XCELMOBILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

  For the Three Months Ended  

 

  March 31,  

 

  2012     2011  

Cash Flows from Operating Activities:

           

Net loss

$  (332,800 ) $  6,400  

Adjustments to reconcile net income to net cash provided by operating activities

           

Depreciation

  4,300     3,100  

 

           

Changes in assets and liabilities:

           

Trade accounts receivable, net

        (11,600 )

Other receivable and prepayment

  (100 )   31,700  

Accounts payable

  94,400     -  

Accrued interest

  11,800     -  

Other payables and accrued expenses

  (14,200 )   3,000  

Deferred revenue

  (73,800 )   (22,300 )

Net cash used in continuing operating activities

  (310,400 )   10,300  

Net cash provided by discontinued operating activities

  -     4,100  

Net Cash (Used In) Operating Activities

  (310,400 )   14,400  

 

           

Cash Flows from Investing Activities:

           

Purchase of property, plant and equipment, net of value added tax refunds received

  (17,800 )   -  

Net Cash Used In Investing Activities

  (17,800 )   -  

 

           

Cash Flows from Financing Activities:

           

Proceeds from issuance of notes payable

  50,000     -  

Net Cash Provided By Financing Activities

  50,000     -  

 

           

Effect of Exchange Rate Changes on Cash

  3,800     300  

 

           

Net Change in Cash

  (274,400 )   14,700  

 

           

Cash and Cash Equivalents at Beginning of Period

  615,200     46,300  

 Cash and Cash Equivalent included in discontinued operations

  -     (40,700 )

Cash and Cash Equivalents at End of Period

$  340,800   $  20,300  

 

           

Supplement Cash Flow Information

           

 Cash paid during the period for interest

$  -   $  -  

 Cash paid during the period for income taxes

$  -   $  -  

The accompanying notes are an integral part of the condensed consolidated financial statements

7


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Organization and Nature of Business

XcelMobility Inc.

XcelMobility Inc. (a development stage company) ("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 has generated no revenues since inception.

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 March 31, 2012, $400,000 of the registered capital has been received.

Shenzhen CC Power Corporation

Shenzhen CC Power Corporation (“CC Power’, the Company) 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 the Company was approximately $1,547,000 (RMB 10,000,000) and as of December 31, 2011, the Company 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 March 31, 2012 and December 31, 2011.

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.

8


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CC Power had 60% equity interest in Shenzhen Nanovision Technology Ltd. (“Nanovision”) as of December 31, 2010. On June 15, 2011, CC Power sold 25% of its ownership in Nanovision. In August 2011, CC Power sold its remaining 35% interest in Nanovision, after the disposition, CC Power has neither ownership nor involvement in Nanovision.

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 acquiree 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.

As a result of the Exchange Transaction, the organizational structure of the Company is as follows:

9


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at March 31, 2012 and for the three months ended March 31, 2012 and 2010 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2011. The Company follows the same accounting policies in the preparation of interim reports. The Company’s accounting policies used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United States of America ("US GAAP")

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.

All dollars are rounded to nearest hundred except for share data.

Reclassification

Cost of revenue –Cost of revenue totaled $14,200 for the three months ended March 31, 2011 has been reclassified from cost of revenue to selling expense and general and administrative expense to conform to current presentation.

10


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

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.

11


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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:

    March 31,     December 31,  
    2012     2011  
             
Total current assets $  249,900   $  326,600  
Total assets   313,700     390,000  
Total current liabilities   485,000     460,200  
Total liabilities   485,000     470,900  

As of March 31, 2012 and December 31, 2011, the Company has provided $950,000 and $900,000 of support to the VIE, CC Power, respectively.

Revenue recognition

Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and 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.

12


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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.

Cost of Revenue

Cost of revenue on internet accelerator software sales primarily consists of business tax and surcharges on revenue.

13


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Summary of Significant Accounting Policies - Continued

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.

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 three months ended March 31, 2012 and 2011. Research and development expenses amounted to $112,100 and $3,600 for three months ended March 31, 2012 and 2011, 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.

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.

14


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Summary of Significant Accounting Policies - Continued

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:

March 31, 2012  
Balance sheet RMB 6.3180 to US $1.00
Statement of income and other comprehensive income RMB 6.3088 to US $1.00
   
March 31, 2011  
Balance sheet RMB 6.5701 to US $1.00
Statement of income and other comprehensive income RMB 6.5894 to US $1.00
   
December 31, 2011  
Balance sheet RMB 6.3585 to US $1.00
Statement of income and other comprehensive income RMB 6.4640 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.

15


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Summary of Significant Accounting Policies - Continued

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.

Statutory surplus reserve

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, CC Power is required to allocate 10% of its net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 enhances disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The new guidance will be effective for us beginning January 1, 2013. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.

16


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. Going Concern

The Company has incurred significant continuing losses during the three months ended March 31, 2012 and has an accumulated deficit at March 31, 2012 and has relied on the Company’s 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 March 31, 2012, 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, plant and equipment, net consist of the following:

    March 31,     December 31,  
    2012     2011  
             
Equipment $  105,000   $  86,900  
Office equipment   13,900     13,500  
Leasehold improvements   8,400     8,300  
Software   1,900     1,900  
    129,200     110,600  
Less: Accumulated depreciation   (49,000 )   (44,400 )
Property and equipment, net $  80,200   $  66,200  

During the three months ended March 31, 2012 and 2011, depreciation expense was approximately $4,300 and $5,500, respectively.

5. Equity Investment in Affiliated Company and Deconsolidation of Subsidiary

On June 15, 2011, CC Power sold 25% of its ownership in Nanovision to an unrelated party for RMB 250,000. After the disposition, CC Power retains 35% ownership interest in Nanovision as of June 30, 2011. The fair value of our 35% retained interest approximates the pro-rata share of the net asset value of Nanovision as of the date of disposal, which is approximately $35,000.

During the three months period ended September 30, 2011, despite CC Power has no continue involvement in the operation of Nanovision, it retains voting rights and 35% ownership interest in Nanovision and therefore has significant influence on Nanovision. As such, CC Power accounts for its investment in Nanovision under the equity method during the three months ended September 30, 2011.

Prior to the disposition of the 25% equity interest in Nanovision, CC Power held 60% equity interest in Nanovision. As of December 31, 2010 and for the three and six months ended June 30, 2010, and for the period from April 1, 2011 to June 15, 2011, January 1, 2011 to June 15, 2011, Nanovision was consolidated with CC Power.

17


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5. Equity Investment in Affiliated Company and Deconsolidation of Subsidiary - Continued

In August 2011, CC Power disposed its remaining 35% ownership interest in Nanovision to Xili Wang, sole shareholder of CC Power for proceeds totaled RMB 350,000. After the disposition, CC Power has no ownership interest and no involvement in Nanovision.

The results of operations for Nanovision for the three months ended March 31, 2011, which includes the calibration panel sales segment and the technical consulting service segment, are reported as a discontinued operation and the accompanying consolidated statements of operations have been reclassified for all prior periods to report the operating results of Nanovision.

The following are the summarized results of discontinued operations for Nanovision attributable to the Company for the three months ended March 31, 2011.

    For the Three  
    Months Ended  
    March 31, 2011  
       
Net revenues $  37,100  
Total cost of sales and expenses   35,200  
Income before tax   1,900  
Income tax expense   3,000  
Loss from discontinued operation $  (1,100 )

As of March 31, 2012 and December 31, 2011, the Company has no ownership interest in Nanovision and therefore the balance sheet of the discontinued operations is not included in the condensed consolidated balance sheet of the Company.

18


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. 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, during the year 2011, the Company received a $77,351 (RMB 500,000) grant from the Science, Industry, Trade and Information Technology Commission of Shenzhen Municipally for use in research and development for the period from June 2011 to April 2013. The grant is deferred and recognize as other income over the 22 months agreement period.

Deferred revenue included on the balance sheets as of March 31, 2012 and December 31, 2011 is as follow:

    March 31,     December 31,  
    2012     2011  
Deferred revenue:            
Current $  229,500   $  290,500  
Non-current   -     10,700  
Total $  229,500   $  301,200  

The table below sets forth the deferred revenue activities during the three months ended March 31, 2012 and 2011:

    For the three months ended March 31,  
    2012     2011  
             
Deferred revenue, balance at beginning of period $  301,200   $  44,400  
Add: Payments received from customers during the three months   -     16,600  
Add: Government grant received during the three months   -     -  
Less: government grant earned during the three months   (10,800 )   -  
Less: Revenue earned during the three months   (60,900 )   (38,700 )
Deferred revenue, balance at end of period $  229,500   $  22,300  

19


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. Convertible Promissory Notes

Outstanding balances for the four convertible promissory notes as of March 31, 2012 and December 31, 2011 are as follow:

Lender   Date of Note     Maturity
Date
    Loan
Amount
    Interest
Rate (p.a.)
    March 31,
2012
    December 31,
2011
 
                                     
Vantage Associates SA   April 15, 2011     April 15, 2016   $  150,000     5%   $  150,000   $  150,000  
Empa Trading Ltd.   June 5, 2011     June 5, 2016     100,000     5%     100,000     100,000  
First Capital A.G.   July 14, 2011     July 14, 2016     150,000     5%     150,000     150,000  
First Capital A.G.   September 9, 2011     September 9, 2016     200,000     5%     200,000     200,000  
Vantage Associates SA        September 9, 2011       September 9, 2016       200,000     5%     200,000     200,000  
Vantage Associates SA   October 27, 2011     October 27, 2016     50,000     5%     50,000     50,000-  
First Capital A.G.   December 1, 2011     December 1, 2016     50,000     5%     50,000     50,000-  
First Capital A.G.   January 23, 2012     January 23, 2017     50 000     5%     50,000     -  
                                     
                          $  950,000   $  900,000  

Interest expense for the three months ended March 31, 2012 and 2011 was $11,800 and $0, respectively.

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 one common share to be purchased at a price of $0.5, and 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 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.

20


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Income Tax

We are subject to income tax in the United States, Hong Kong and PRC.

The Company’s subsidiaries, 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. The Company’s statutory income tax rate was 22% and 20% for 2010 and 2009, respectively. For 2011 the statutory income tax rate is 24% and the rate will be 25% for 2012 and thereafter. The open tax years in PRC are 2009-2011.

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 three months ended March 31, 2012 and 2011. The open tax year for CC Mobility in Hong Kong is 2011.

The Company has no income tax expense for the three months ended March 31, 2012 and 2011 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 March 31, 2012 and December 31, 2011:

    March 31,     December 31,  
    2012     2011  
Deferred tax assets:            
 Net operating losses - U.S. $  134,800   $  83,100  
 Net operating losses - PRC and Hong Kong   118,200     59,100  
 Deferred revenue   57,400     75,300  
 Allowance for doubtful accounts   900     900  
             
    311,300     218,400  
Valuation allowance   (311,300 )   (218,400 )
Deferred tax assets, net $  -   $  -  

As of March 31, 2012, the Company has net operating losses carry forward of $396,500 in the U.S. and $472,800 in Hong Kong and PRC available to offset future taxable income. They will begin to expire in 2030 and 2012, respectively. We provided for a full valuation allowance against the deferred tax assets of $311,252 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 change in valuation allowance for the three months ended March 31, 2012 and 2011 was an increase of $92,900 and a decrease of $1,500, respectively.

21


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company did not recognize any interest or penalties related to unrecognized tax benefits for the three months ended March 31, 2012 and 2011.

9. 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 $1,500 and $1,100 for the three months ended March 31, 2012 and 2011, respectively.

10. (Loss) earnings per Share

Basic (loss) earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the if-converted method for the convertible notes and preferred stock and the treasury stock method for warrants and options. The following table sets forth the computation of basic and diluted net loss per share:

    For The Three Months Ended  
    March 31,  
    2012     2011  
             

Net (loss) income available for common shareholders - basic

$  (332,800 ) $  6,400  

Interest expense on convertible notes

  11,800     -  

Net (loss) income available for common shareholders - diluted

$  (321,000 ) $  6,400  

 

           

Weighted average outstanding shares of common stock – basic and diluted

  60,000,000     77,700,000  

 

           

Loss per share - basic and diluted:

           

Continuing Operations

$  (0.01 ) $  0.00  

Discontinued Operations

$  0.00   $  0.00  

 

$  (0.01 ) $  0.00  

11. Commitments and Contingencies

Operating commitments:

Operating commitment consists of the lease for office space under operating lease agreement which expire in 2012.

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:

Remainder of 2012 $  36,800  
Thereafter   -  
Total minimum payment $  36,800  

The Company incurred rental expenses of $21,300 and $5,800 for the three months ended March 31, 2012 and 2011, respectively.

22


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

12. 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:

    For The Three Months Ended  
    March 31,  
    2012     2011  
             
Customer A   94%     -  
Customer B   -     86%  
Customer C   *     10%  

* Constitutes less than 10% of the Company’s gross sales.

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.

13. 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.

23


XCELMOBILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

14. Unaudited Pro-Forma Financial Information

The accompanying unaudited pro forma financial information for the financial statements for the three months ended March 31, 2011 present the historical financial information of the accounting acquirer. The pro forma financial information is presented for information purposes only. Such information is based upon the standalone historical results of each company and does not reflect the actual results that would have been reported had the acquisition been completed when assumed, nor is it indicative of the future results of operations for the combined enterprise.

The following represents pro forma revenue and earnings information for the three months ended March 31, 2011 as if the acquisition of XcelMobility Inc. and the recapitalization had occurred on the beginning of each of the periods.

    Unaudited, Pro forma  
    Three Months Ended  
    March 31,  
    2011  
Revenues $  34,600  
Net Loss applicable to common shareholders $  (295,900 )
Loss per share $  (0.00 )
       
Weighted Average Shares Outstanding   60,000,000  

The unaudited, pro forma information for the three months ended March 31, 2011 depicted above reflect the impacts of expenses for a total of $300,000 incurred in connection with the recapitalization.

15. Subsequent Events

On April 20, 2012, the Board of Directors of the Company appointed Jack Zwick as the independent director of the Company and granted to Mr. Zwick 360,000 shares of the Company’s common stock. The restricted stock shall vest with respect to 1/8th of the total number of restricted stock per quarter from vesting commencement date of April 1, 2012. In addition, the Company will pay to Mr. Zwick $2,500 in cash per month once the Company has obtained total funding of at least $2 million. Until the Company has obtained $2 million in funding the $2,500 will be accrued.

24


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

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.

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 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. As a result of the Exchange Transaction, CC Mobility became our wholly-owned subsidiary and we control the business and operations of CC Power.

Through CC Mobility and CC Power, we are developing mobile applications directly for the mobile devices that utilize cellular networks to connect to the Internet and hardware/software products to increase the speed of Virtual Private Networks. Our strategy is global in scope, but we are focusing our efforts at this time on the large mobile markets of Asia. CC Power’s principal activity is the design, testing sale and support of software to support mobile Internet applications on cellular phones, smartphones, tablets and mobile computers in China. The principal product designed and built by CC Power is the Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the Internet significantly 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 product’s speed of processing. In order to support CC Power products, we have built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via our website and retail locations, through distribution agents and through all three mobile phone carriers in China.

Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation.

Results of Operations

The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed on March 30, 2012.

Comparison of the Three Months Ended March 31, 2012 and 2011

Revenue

Our revenue for the three months ended March 31, 2012 totaled US$63,200, an increase of 83% from US$34,600 for the three months ended March 31, 2011. This increase in revenue was primarily due to revenue recognized from our on-going service contracts.

25


Cost of revenue

Cost of revenue for the three months ended March 31, 2012 was US$4,300 and consists primarily of business tax and the related tax surcharges associated with our service contracts. Cost of revenue increased US$3,000, or 231%, from US$1,300 for the three months ended March 31, 2011. This increase in cost of revenue was primarily due to an increase in revenue.

Gross profit

Gross profit for the three months ended March 31, 2012 was US$58,900, an increase of US$25,600, or 77% from US$33,300 for the three months ended March 31, 2011. This increase in gross profit was primarily due to increased revenue as noted above.

Operating Expenses

Our operating expenses for the three months ended March 31, 2012 increased by US$307,300, or 1215%, from the three months ended March 31, 2011. This increase in operating expenses was primarily due to increased in R & D expenses, and costs associated with running the public company activities.

Net income (loss)

A net loss of US$332,800 resulted for the three months ended March 31, 2012 compared to net income of US$7,500 for the three months ended March 31, 2011, a decrease of US$340,300. Our net loss increased primarily due to significant increases in operating expenses and R & D expenses.

Comprehensive income

Our comprehensive income decreased by US$340,300 from US$7,500 for the three months ended March 31, 2011 to US$-332,800 for the three months ended March 31, 2012. The decrease is primarily due to significant increases in operating expenses and R & D expenses.

Liquidity and Capital Resources

Overview

As of March 31, 2012, we had cash and equivalents on hand of US$340,800 and working capital of US$-40,900. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through June 30, 2012. To meet our future 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 January 23, 2012, we issued our standard convertible promissory note to an accredited investor in the amount of $50,000 at an interest rate of 5.00% per annum, maturing five years from the date of issuance.

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).

26


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 have 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 US$3,000,000 in capital. We will consider debt or equity offerings or institutional borrowing as potential means of financing, however, there are no assurances that we will be successful or that we will obtain terms that are favorable to us.

Net cash provided by (used in) operating activities

Net cash provided by (used in) operating activities for the three months ended March 31, 2012 was US$-310,400 compared to net cash used in operating activities of US$14,400 for the three months ended March 31, 2011. This decrease in cash used in operating activities was primarily due net operating loss for the period, and a decrease of deferred revenue as we are recognizing revenue on our service contracts.

Net cash provided by (used in) investing activities

Net cash used in investing activities for the three months ended March 31, 2012 was US$-17,800 compared to net cash used in investing activities for the three months ended March 31, 2011 of US$0. The majority of these funds were used to add to the server configuration in China and Hong Kong.

Net cash provided by financing activities

Net cash provided by financing activities for the three months ended March 31, 2012 was US$50,000. Cash provided by financing activities for the three months ended March 31, 2011 was US$0. The increase in cash provided by financing activities was as a result of the issuance of our convertible promissory 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.

Critical Accounting 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 the cost allocation, the 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.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.

27


Item 3. 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 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 March 31, 2012, which amounted to US$340,800, 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$3,408 of the balance.

28


Item 4. 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 March 31, 2012, 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 March 31, 2012 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.

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 or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert 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.

     
  iv)

We lack personnel with formal training to properly analyze and record complex transactions in accordance with U.S. GAAP. Our current Chief Financial Officer, Ms. Wang, has 18 years of experience in financial management in private and public companies in China. She graduated from Huazhong Technical and Science University in 1990 with a Bachelor of Science degree in accounting and finance management; however, she is not familiar with U.S. GAAP. We have retained Audit Prep, a Hong Kong based accounting firm that is fully versant in U.S. GAAP and SEC reporting requirements to assist us with preparing our financial statements in accordance with U.S. GAAP and SEC rules and regulations. Accountants from Audit Prep assisting us are U.S. Certified Public Accountants.

     
  v)

We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.

Our management feels the weaknesses identified above have not had any material affect 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. To that end, on September 26, 2011, our board of directors approved the adoption of an insider trading policy, code of ethical conduct, and disclosure controls and procedures.

In addition, subsequent to our quarter ended March 31, 2012, on April 18, 2012, we appointed Mr. Jack Zwick as a member of the Board of Directors. Mr. Zwick is a certified public accountant and founding member of Zwick Maddox & Banyai PLLC, certified public accountants, in Michigan. Mr. Zwick holds a Bachelor of Arts degree in Accountancy and a Masters of Science in Taxation from Wayne State University. He is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants, and previously taught accounting and audit related classes for the Michigan Association of CPAs and Ohio Society of CPAs. As such, Mr. Zwick is very knowledgeable on U.S. GAAP.

29


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 Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended March 31, 2012 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.

30


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Not applicable.

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

On April 18, 2012, we issued 360,000 shares of Company common stock to Mr. Jack Zwick in connection with Mr. Zwick’s service on our Board of Directors and in accordance with Mr. Zwick’s Board Advisory Agreement. The issuance of the shares to Mr. Zwick was effected without registration in reliance on the exemption afforded by Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended, and the rules promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No. Description
2.1 Share Exchange Agreement, dated July 5, 2011(incorporated by reference to our Current Report on Form 8-K filed on July 6, 2011).
3.1(a) Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1 originally filed on October 14, 2009).
3.1(b) Amendment to Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on March 29, 2011).
3.2 Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on April 27, 2011).
10.1 Form of Convertible Promissory Note (incorporated by reference to our Quarterly Report on Form 10-Q filed on August 19, 2011).
10.2 Board Advisory Agreement with Jack Zwick, dated April 18, 2012 (incorporated by reference to our Current Report on Form 8-K filed on April 24, 2012).
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document**
101.SCH XBRL Taxonomy Extension Schema**
101.CAL XBRL Taxonomy Extension Calculation Linkbase**
101.DEF XBRL Taxonomy Extension Definition Linkbase**
101.LAB XBRL Taxonomy Extension Label Linkbase**
101.PRE XBRL Taxonomy Extension Presentation Linkbase**

* Filed herewith.

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

31


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  XCELMOBILITY INC.
   
   
Dated: May 15, 2012 /s/ Xili Wang                           
  By: Xili Wang
  Its: Chief Financial Officer and Secretary (Principal Financial
  Officer and Principal Accounting Officer)

32


XOTC:XCLL Quarterly Report 10-Q Filling

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XOTC:XCLL Quarterly Report 10-Q Filing - 3/31/2012
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