XcelMobility 10Q 2013 Q3 Quarterly report

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

FORM 10-Q

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

For the quarterly period ended: September 30, 2013

[ ]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	98-1102006
(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
		(Do not check if smaller	company
		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 November 4, 2013
Common stock, $.001 par value	73,127,686

XCELMOBILITY INC.
FORM 10-Q

INDEX

PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	5
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	6
	Condensed Consolidated Statement of Cash Flows for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	7
	Notes to Unaudited Consolidated Condensed Financial Statements	8-30

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations		31
Item 3. Qualitative and Quantitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		38
Item 4. Mine Safety Disclosures		38
Item 5. Other Information		38
Item 6. Exhibits		38

Signatures		39

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 April 1, 2013 and Form 10-K/A filed on August 15, 2013.

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	5
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)	7
Notes to Unaudited Consolidated Condensed Financial Statements	8-30

XCELMOBILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		September			December
		30,			31,
		2013			2012
		(Unaudited)			(Restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	205,757		$	98,739
Trade accounts receivable		1,001,676			19,309
Other receivables, net of allowance for doubtful accounts of $3,593 and $3,500, respectively		1,011,595			5,615
Inventory		2,088,069			348
Prepaid VAT		359,007			-
Prepaid expenses		-			8,887
Advances to suppliers		-			3,372

Total Current Assets		4,666,104			136,270

Property, Plant and Equipment, net of accumulated depreciation of $275,037 and $65,500, respectively		98,487			90,375
Goodwill		1,169,415			-

TOTAL ASSETS	$	5,934,006		$	226,645

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	2,718,961		$	76,594
Other payables and accrued expenses		3,581,739			109,147
Deferred revenue		28,923			78,811
Convertible notes, net of debt discount		60,703			46,040
Derivative liability		423,480			423,480
Accrued interest		5,222			140,520

Total Current Liabilities		6,819,028			874,592

Convertible notes		555,028			314,967
Accrued interest		126,117			-
Deferred revenue		-			20,130

Total Liabilities		7,500,173			1,209,689

Shareholders' Deficit:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding September 30, 2013 and December 31, 2012		-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 73,127,686 and 60,000,000 issued and outstanding September 30, 2013 and December 31, 2012 respectively		73,128			60,000
Additional paid in capital		713,620			131,562
Accumulated deficit		(2,396,351	)		(1,207,650	)
Accumulated other comprehensive income		43,436			33,044
Total Shareholders' Deficit		(1,566,167	)		(983,044	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	5,934,006		$	226,645

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

XCELMOBILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2013			2012			2013			2012
					(Restated)						(Restated)
Revenue	$	1,229,908		$	72,000		$	1,272,310		$	198,800

Cost of Revenue		358,881			4,000			358,892			11,900
Gross Profit		871,027			68,000			913,418			186,900

Operating Expenses:
Selling expense		140,712			6,100			149,346			35,400
General and administrative expense		1,009,019			262,500			1,716,420			823,200
Total Operating Expenses		1,149,731			268,600			1,865,766			858,600
Loss from Operations		(278,704	)		(200,600	)		(952,348	)		(671,700	)

Other Income (Expense):
Interest income		61			100			269			800
Interest expense		(28,289	)		-			(64,370	)		(13,429	)
Gain (loss) on derivative		(147,447	)		(451,309	)		162,240			(451,309	)
Amortization of debt discount		(77,869	)		-			(407,332	)		(76,479	)
Other income (expense)		57,316			173,557			72,840			108,800
Total Other Income (Expense)		(196,228	)		(277,652	)		(236,353	)		(431,617	)
Loss Before Taxes		(474,932	)		(478,252	)		(1,188,701	)		(1,103,317	)
Income tax expense		-			-			-			-
Net Loss		(474,932	)		(478,252	)		(1,188,701	)		(1,103,317	)
Foreign currency translation adjustment		(30,299	)		(600	)		10,392			1,700
Comprehensive (loss) income		(505,231	)		(478,852	)		(1,178,309	)		(1,101,617	)


Basic and diluted loss per share:
	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Basic and diluted weighted average number of shares outstanding		72,671,628			60,000,000			67,104,384			60,000,000

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

XCELMOBILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the Nine Months Ended
		September 30,
		2013			2012
Cash Flows from Operating Activities:					(Restated)
Net loss	$	(1,188,701	)	$	(1,103,317	)
*Adjustments to reconcile net loss to net cash used in operating activities*
Depreciation		29,075			14,300
Stock compensation expenses		582,058			88,900
Amortization of debt discount		407,332			76,479
Fair value adjustment on derivative liability		(162,240	)		451,309

Changes in assets and liabilities:
Trade accounts receivable, net		415,736			(19,300	)
Other receivables and prepayment		37,800			(300	)
Advances to suppliers		3,420			(3,400	)
Inventory		(60,872	)		(300	)
Accounts payable	��	(267,366	)		64,100
Accrued interest		(9,180	)		13,429
Other payables and accrued expenses		375,511			(12,600	)
Deferred revenue		(71,775	)		(120,300	)

Net Cash Used In Operating Activities		90,798			(551,000	)

Cash Flows from Investing Activities:
Purchase of property, plant and equipment, net of value added tax refunds received		(11,679	)		(41,500	)
Net Cash Used In Investing Activities		(11,679	)		(41,500	)


Cash Flows from Financing Activities:
Proceeds from issuance of notes payable		22,760			213,000
Net Cash Provided By Financing Activities		22,760			213,000

Effect of Exchange Rate Changes on Cash and Cash Equivalents		5,139			3,200

Net Change in Cash and Cash Equivalents		107,018			(376,300	)

Cash and Cash Equivalents at Beginning of Period		98,739			615,200
Cash and Cash Equivalents at End of Period	$	205,757		$	238,900

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

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(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 September 30, 2013, $400,000 of the registered capital has been received.

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, 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 September 30, 2013 and December 31, 2012.

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.

CC Power had a 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 and after the disposition, CC Power has neither any ownership rights nor any involvement in Nanovision.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

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:

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.

Service and equipment agreement – Jifu

In January, 2013, Jifu entered into an agreement with Shenzhen Hong Di Industry Co., Ltd (“Hong Di”), a company incorporated in the PRC. Jifu will provide software and computer equipment with technical support services to Hong Di. The total consideration of this agreement is US$4,306,740 (equivalent to RMB27,169,500). The term of this agreement is 3 years. Ms. Sumin Su was the common director of both Jifu and Hong Di, before her resignation from the director of Hong Di became effective on June 19, 2013.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(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, 2013 and for the three months ended March 31, 2013 and 2012 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012. 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.

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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

2. Summary of Significant Accounting Policies - Continued

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.

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:

		September 30,		December 31,
		2013		2012

Total current assets	$	86,610	$	113,894
Total assets		158,401		190,199
Total current liabilities		451,591		320,873
Total liabilities		451,591		341,003

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

2. Summary of Significant Accounting Policies - Continued

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.

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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(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 nine months ended September 30, 2013 and 2012. Research and development expenses amounted to $448,829 and $47,000 for three months ended September 30, 2013 and 2012, respectively, and were included in general and administrative expense. Research and development expenses amounted to $545,669 and $192,500 for nine months ended September 30, 2013 and 2012, 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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(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:

September 30, 2013
Balance sheet	RMB 6.1364 to US $1.00
Statement of operations and other comprehensive loss	RMB 6.2132 to US $1.00

September 30, 2012
Balance sheet	RMB 6.3265 to US $1.00
Statement of operations and other comprehensive loss	RMB 6.3180 to US $1.00

December 31, 2012
Balance sheet	RMB 6.3011 to US $1.00
Statement of income and other comprehensive income	RMB 6.3034 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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(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 February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.

The new amendments will require an organization to:
- Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
- Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). A private company is required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated other comprehensive income for both interim and annual reporting periods. However, private companies are only required to provide the information about the effect of reclassifications on line items of net income for annual reporting periods, not for interim reporting periods. The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted.

In February 2013, FASB issued Accounting Standards Update (ASU) No. 2013-03, Financial Instruments (Topic 825). This ASU clarifies the scope and applicability of a disclosure exemption that resulted from the issuance of Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendment clarifies that the requirement to disclose"the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)" does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. This ASU is the final version of Proposed Accounting Standards Update 2013-200—Financial Instruments (Topic 825) which has been deleted. The amendments are effective upon issuance.

In March 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights)within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This ASU is the final version of Proposed Accounting Standards Update EITF11Ar—Foreign Currency Matters (Topic 830), which has been deleted.

The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption.

In July 2013, The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).

U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

3. Going Concern

The Company has incurred significant continuing losses during the nine months ended September 30, 2013 and has an accumulated deficit at September 30, 2013 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 September 30, 2013, 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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

4. Property and Equipment, net

Property and equipment, net consist of the following:

		September 30,			December 31,
		2013			2012

Equipment	$	135,198		$	132,017
Office equipment		229,332			13,617
Leasehold improvements		8,637			8,411
Software		1,946			1,895

		375,113			155,940
Less: Accumulated depreciation		(276,626	)		(65,565	)
Property and equipment, net	$	98,487		$	90,375

The depreciation expense was $14,700 and $5,200 for the three months ended September 30, 2013 and 2012, respectively. The depreciation expense was $29,075 and $14,300 for the nine months ended September 30, 2013 and 2012, 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 for periods through July 2014. 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 September 30, 2013 and December 31, 2012 is as follow:

		September 30,		December 31,
		2013		2012
Deferred revenue:
Current	$	28,923	$	78,811
Non-current		-		20,130
Total	$	28,923	$	98,941

The table below sets forth the deferred revenue activities during the nine months ended September 30, 2013 and 2012:

		For the nine months ended
		September 30,
		2013			2012

Deferred revenue, balance at beginning of period	$	98,941		$	301,200
Add: Payments received from customers during the period		-			94,700
Add: Government grant received during the period		-			95,000
Less: government grant earned during the period		(16,744	)		(111,200	)
Less: Revenue earned during the period		(53,274	)		(197,100	)
Deferred revenue, balance at end of period	$	28,923		$	182,600

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

6. Convertible Promissory Notes

Outstanding balances for the four convertible promissory notes as of September 30, 2013 and December 31, 2012 are as follow:

Lender	Date of	Maturity		Loan	Interest	Convertible		September 30,		December 31,
	Note	Date		Amount	Rate	Number of		2013		2012
					(p.a.)	stock

Vantage Associate s 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.	Septembe r 9, 2011	September 9, 2016		200,000	5%	800,000		200,000		200,000
Vantage Associate s SA	Septembe r 9, 2011	September 9, 2016		200,000	5%	800,000		200,000		200,000
Vantage Associate s 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%	1,223,990		100,000		100,000
Asher Enterprise s, Inc.	July 27, 2012	April 13, 2013		63,000	8%	-		-		63,000
Asher Enterprise s, Inc.	October 17,2012	July 17, 2013		53,000	8%	-		-		53,000


							$	1,050,000	$	1,166,000
						Less: Debt discount from beneficial conversion feature		434,269		804,993
								615,731		361,007

						Less: Current portion		60,703		46,040
						Non-current portion		$ 555,028		$ 314,967

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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

6. Convertible Promissory Notes - Continued

Interest expense for the three months ended September 30, 2013 and 2012 was $28,289 and $14,200, respectively. Interest expense for the nine months ended September 30, 2013 and 2012 was $64,370 and $38,700, respectively.

Amortization of the beneficial conversion feature for the quarter ended September 30, 2013 and 2012 were $210,737 and $9,311 respectively.

Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, and the convertible promissory notes issued to Asher Enterprises, Inc., 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.

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:

(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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

6. Convertible Promissory Notes - Continued

The convertible promissory note issued to Asher Enterprises, Inc., is convertible upon the occurrence of the following events:

1)	At any time during the period beginning on the date which is 180 days following the date of the convertible promissory note, and ending on the later of the maturity date and the date of payment in default, the remaining outstanding principal amount shall convert into fully paid and non-assessable shares of the company’s common stock. The conversion price shall equal the variable conversion price, which is 60% multiplied by the market price of the common stock, as defined in the promissory note agreement.

2)	In the event of a consolidation or merger with any other corporation (other than a merger in which the Company is the surviving corporation and its capital stock is unchanged), or asset sale, then the conversion price is subject to adjustment, as defined by the convertible promissory note agreement.

The fair value of the embedded conversion feature of these notes as at September 30, 2013 and December 31, 2012 was $ $423,480 and $423,480, respectively. Those fair values will be assessed as at December 31, 2013.

Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, and the convertible promissory notes issued to Asher Enterprises, Inc., the fair value of the convertible notes was calculated using the Black-Scholes model with the following assumptions: expected life of 5 year, expected dividend rate of 0%, volatility of 167.0% and interest rates ranged at 0.36% .

The fair value of the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, and the convertible promissory notes issued to Asher Enterprises, Inc., was calculated using the lattice valuation method as the conversion prices are variable for these notes.

The following assumptions provide information regarding the convertible promissory note of $100,000 issued to Fist Capital A.G. as of December 31, 2012:

			December 31, 2012

	Common stock issuable upon conversion		935,760
	Market value of common stock on measurement date (1)		0.10
	Adjusted Exercise price		0.11
	Risk free interest rate (2)		0.21%
	Term in year		1.32
	Expected volatility (3)		137%
	Expected dividend yield (4)		0%

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

6. Convertible Promissory Notes - Continued

The following assumptions provide information regarding the convertible promissory notes issued to Asher Enterprises, Inc. as of December 31, 2012:

			December 31, 2012

	Common stock issuable upon conversion		2,164,179
	Market value of common stock on measurement date (1)		0.10
	Adjusted Exercise price		0.05
	Risk free interest rate (2)		0.14%
	Term in year		0.28-0.54
	Expected volatility (3)		166% - 172%
	Expected dividend yield (4)		0%

	(1)	The market value of common stock is the stock price at the close of trading on the date of December 31, 2012.

	(2)	The risk-free interest rate was determined by management using the Treasury Bill rates with maturity from 6-month to 1.5 years as of December 31, 2012.

	(3)	Expected volatility is based on average volatility of historical share trade information. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of the warrants.

	(4)	Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.

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 September 30, 2013:

	Fair Value Measurements at September 30, 2013
Descriptions	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total Carrying Value as of September 30, 2013
Derivative warrant instruments	$ -	$ -	$ 615,731	$ 615,731
Total	$ -	$ -	$ 615,731	$ 615,731

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

7. Income Tax

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

The Company’s subsidiaries, CC Power, CC Investment, and Jifu 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 2012 the statutory income tax rate is 24% and the rate will be 25% for 2013 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 nine months ended September 30, 2013 and 2012. The open tax year for CC Mobility in Hong Kong is 2011.

The Company has no income tax expense for the three and nine months ended September 30, 2013 and 2012 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 September 30, 2013 and December 31, 2012:

		September 30			December 31,
		2013			2012
Deferred tax assets:
Net operating losses - U.S.	$	268,645		$	129,630
Net operating losses - PRC and Hong Kong		27,125			68,625
Deferred revenue		28,923			19,703
Allowance for doubtful accounts		3,500			-

		328,193			217,958
Valuation allowance		(328,193	)		(217,958	)
Deferred tax assets, net	$	-		$	-

As of September 30, 2013, the Company has net operating losses carry forward of $833,077 in the U.S. and $449,122 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 $328,193 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 nine months ended September 30, 2013 and 2012 was an increase of $110,235 and an increase of $173,000, respectively.

The Company did not recognize any interest or penalties related to unrecognized tax benefits for the nine months ended September 30, 2013 and 2012.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

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 $24,454 and $2,000 for the three months ended September 30, 2013 and 2012, respectively. The compensation expense related to this plan was $27,040 and $4,600 for the nine months ended September 30, 2013 and 2012, respectively.

9. (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						For The Nine Months Ended
		September 30,						September 30
		2013			2012			2013			2012
					(restated)						(restated)

Net (loss) income available for common shareholders - basic	$	(474,932	)	$	(478,252	)	$	(1,188,701	)	$	(1,103,317	)
Interest expense on convertible notes		28,289			-			64,370			13,429

Net (loss) income available for common shareholders - diluted	$	(446,643	)	$	(478,252	)	$	(1,124,331	)	$	(1,089,888	)

Weighted average outstanding shares of common stock – basic and diluted		72,671,628			60,000,000			67,104,384			60,000,000

Loss per share - basic:	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)

Since the company is suffering losses, the dilutive loss per share is equal to the basic loss per share for the three months and nine months ended September 30, 2013 and 2012 because the convertible notes are anti-dilutive.

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:

2013	$	29,605
Thereafter		29,605
Total minimum payment	$	59,210

The Company incurred rental expenses of $44,910 and $21,300 for the three months ended September 30, 2013 and 2012, respectively.

The Company incurred rental expenses of $80,797 and $63,800 for the nine months ended September 30, 2013 and 2012, respectively.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

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:

	For The Three Months Ended		For The Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012

Customer A	-	82%	-	90%
Customer B	34%	-	33%	-
Customer C	24%	-	23%	-
Customer D	19%	-	19%	-
Customer E	17%	-	16%	-

* 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.

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.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

13. Acquisition of Shenzhen Jifu Communication Technology Co., Ltd.

The Company acquired Shenzhen Jifu Communication Technology Co., Ltd.on July 5, 2013. The Company will issue 27,000,000 shares of its common stock, which was valued at $0.07 per share (market value on the date of acquisition) if Jifu has achieved net revenue of $4,000,000 for the year ended December 31, 2013 (the “Target”). The total purchase price for the acquisition was approximately $1.9 million which was primarily allocated to working capital, tangible property and equipment, identifiable intangible assets and goodwill. 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 in accordance with a formula set forth in the Agreement.

The Company anticipates finalizing our purchase accounting for the acquisition no later than the end of 2013, upon the finalization of appraisals primarily related to fixed assets and intangible assets.

14. Subsequent Events

The Company has evaluated all other subsequent events through November 5, 2013, 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.

15. Restatement

During the course of internal evaluation, our accounting staff discovered some misstatements in our previously reported financial statements for the year ended December 31, 2012 and for the quarter ended September 30, 2012, that required correction relating to: (1) the improper accounting treatments for the issued convertible notes.

		December 31,			December 31,
		2012			2012
		Original			Restated
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	76,594		$	76,594
Other payables and accrued expenses		109,147			109,147
Deferred revenue		78,811			78,811
Derivative liability		-			423,480
Accrued interest		-			140,520
Convertible notes		63,000			46,040

Total Current Liabilities		327,552			874,592

Convertible notes, net of debt discount		1,050,000			314,967
Accrued interest		71,415			-
Deferred revenue		20,130			20,130

Total Liabilities		1,469,097			1,209,689

Shareholders’ Deficit:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding December 31, 2012 and 2011		-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 60,000,000 issued and outstanding December 31, 2012 and 2011		60,000			60,000
Additional paid in capital		131,562			131,562
Accumulated deficit		(1,467,058	)		(1,207,650	)
Accumulated other comprehensive income		33,044			33,044

Total Shareholders’ Deficit		(1,242,452	)		(983,044	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	226,645		$	226,645

As a result of the restatement of the consolidated balance sheet as of December 31, 2012, the $547,040 increment of current liabilities derived from derivative liabilities increase by $423,480, accrued interest increase by $140,520, short-term convertible note decrease by $16,960; were offset by the reduction of $806,448 long term liabilities which were comprised of $735,033 reduction in long-term convertible debt and $71,415 reduction in accrued interest. The total liabilities were reduced by $259,408. The total accumulated deficit was also reduced by $259,408 and rendered the total liabilities and shareholders’ equity the same as $226,645.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

		For the Three Months			For the Three Months
		Ended			Ended
		September 30,			September 30,
		2012			2012
		Original			Restated
Revenue	$	72,000		$	72,000
Cost of Revenue		4,000			4,000
Gross Profit		68,000			68,000

Operating Expenses:
Selling expense		6,100			6,100
General and administrative expense		262,500			262,500
Total Operating Expenses		268,600			268,600
Loss from Operations		(200,600	)		(200,600	)

Other Income (Expense):
Interest income		100			100
Interest expense		(14,200	)		-
Gain (loss) on derivative		-			(451,309	)
Amortization of debt discount		-			-
Other income (expense)		89,600	)		173,557
Total Other Income (Expense)		75,500			(277,652	)
Loss Before Taxes		(125,100	)		(478,252	)
Income tax expense		-			-
Loss from continuing operation	$	(125,100	)	$	(478,252	)

Foreign currency translation adjustment		(600	)		(600	)
Comprehensive loss		(125,700	)		(478,852	)

Basic and diluted loss per share:	$	(0.00	)	$	(0.01	)

Basic and diluted weighted average number of shares outstanding		60,000,000			60,000,000

As a result of the restatement of the consolidated statement of operation for the three months ended September 30, 2012, the other income increased by $83,957, the loss on derivative increased by $451,309, and the interest expense decreased by $14,200.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

		For the Nine Months			For the Nine Months
		Ended			Ended
		September 30,			September 30,
		2012			2012
		Original			Restated
Revenue	$	198,800		$	198,800
Cost of Revenue		11,900			11,900
Gross Profit		186,900			186,900

Operating Expenses:
Selling expense		35,400			35,400
General and administrative expense		823,200			823,200
Total Operating Expenses		858,600			858,600
Loss from Operations		(671,700	)		(671,700	)

Other Income (Expense):
Interest income		800			800
Interest expense		(38,700	)		(13,429	)
Gain (loss) on derivative		-			(451,309	)
Amortization of debt discount		-			(76,479	)
Other income (expense)		108,800			108,800
Total Other Income (Expense)		70,900			(431,617	)
Loss Before Taxes		(600,800	)		(1,103,317	)
Income tax expense		-			-
Loss from continuing operation	$	(600,800	)	$	(1,103,317	)

Foreign currency translation adjustment		1,700			1,700
Comprehensive loss		(599,100	)		(1,101,617	)

Basic and diluted loss per share:	$	(0.01	)	$	(0.02	)

Basic and diluted weighted average number of shares outstanding		60,000,000			60,000,000

As a result of the restatement of the consolidated statement of operation for the nine months ended September 30, 2012, the interest expense decreased by $25,271, the amortization of debt discount increased by $76,479, and the loss on derivative increased by $451,309.

XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE PERIODS ENDED SEPTEMBER 30, 2013 AND 2012

(UNAUDITED)

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Nine Months Ended
		September 30,
		2012		2012
Cash Flows from Operating Activities:		Original		Restated
Net loss	$	(600,800	) $	(1,103,317	)
*Adjustments to reconcile net loss to net cash used in operating activities*
Depreciation		14,300		14,300
Stock compensation expenses		88,900		88,900
Amortization of debt discount		-		76,479
Fair value adjustment on derivative liability		-		451,309

Changes in assets and liabilities:
Trade accounts receivable, net		(19,300	)	(19,300
Other receivables and prepayment		(300	)	(300	)
Advances to suppliers		(3,400	)	(3,400	)
Inventory		(300	)	(300	)
Accounts payable		64,100		64,100
Accrued interest		38,700		13,429
Other payables and accrued expenses		(12,600	)	(12,600	)
Deferred revenue		(120,300	)	(120,300	)
Net Cash Used In Operating Activities		(551,000	)	(551,000	)

As a result of the restatement of the consolidated statement of cash flow for the nine months ended September 30, 2012, the net loss increased by $502,517, the amortization of debt discount increased by $76,479, the fair value adjustment on derivative liability increased by $451,309, and the changes in accrued interest decreased by $25,271.

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.

On May 7, 2013, we entered into and consummated a stock purchase agreement (the “Stock Purchase Agreement”) with Shenzhen CC Power Investment Consulting Co., Ltd. (our indirect wholly-owned subsidiary), Shenzhen Jifu Communication Technology Co., Ltd. a company organized under the laws of the People’s Republic of China (“Jifu”) the shareholders of Jifu and Hui Luo. As a result of the transactions related to the Stock Purchase Agreement, we control the business and operations of Jifu. Through Jifu, we will develop and distribute optical transmitters and receivers, electronic surveillance equipment, and other communications equipment. We will also engage in the purchase and sale of electronic products, network products, and communication equipment and engage in software research and development.

We develop mobile applications for mobile devices that utilize cellular networks to connect to the Internet and hardware/software products to increase the speed of virtual private networks. We recently made a strategic decision to change our primary business focus to becoming a wearable computing company, with two main business divisions: the wearable computing group and the video and security group. As electronic miniaturization has moved us from mainframes to cellular phones, we believe that in the coming years wearable computing will replace or augment cellular phones on a growing basis. We believe this will include cellular phones and their related technology being embedded in wearable items, such as watches, belts, shoes, shirts, or glasses. We plan to focus on certain applications for wearable computing, including:

	1.	Location-based services: core applications include finding friends/family/assets, location-based marketing, and security-related applications.
	2.	Medical monitoring: for patients with heart disease, epilepsy, alzheimer's, and other aged-related maladies.
	3.	Security force monitoring and deployment: wearable computing with video, sound, and location which allows for remote monitoring and deployment of security forces over the internet and in the cloud.
	4.	Secure and touchless payment systems: near field communication-enabled wearable devices have the potential to become the wallets of the future.

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 April 1, 2013 and Amendment No. 1 to our Annual Report on Form 10-K/A filed on August 15, 2013.

Comparison of the Three Months Ended September 30, 2013 and 2012

Revenue

Our revenue for the three months ended September 30, 2013 totaled US$1,229,908, an increase of US$1,157,908, or 1,608.2% from US$72,000 for the three months ended September 30, 2012. This increase in revenue was primarily due to the acquisition of Jifu in the third quarter of 2013, which generated revenue of US$1,206,377 for the three months ended September 30, 2013.

Cost of revenue

Cost of revenue for the three months ended September 30, 2013 totaled US$358,881, an increase of US$354,881, or 8,872.0%, from US$4,000 for the three months ended September 30, 2012. This increase in cost of revenue was primarily due to the acquisition of Jifu, which incurred cost of revenue of US$358,853 for the three months ended September 30, 2013.

Gross profit

Gross profit for the three months ended September 30, 2013 was US$871,027, an increase of US$803,027, or 1,180.9% from US$68,000 for the three months ended September 30, 2012. This increase in gross profit was primarily due to the acquisition of Jifu, which generated gross profit of US$847,524 for the three months ended September 30, 2013.

Operating Expenses

Our operating expenses for the three months ended September 30, 2013 was US$1,149,731, an increase of US$881,131, or 328.1%, from US$268,600 for the three months ended September 30, 2012. This increase in operating expenses was primarily due to the acquisition of Jifu, which incurred operating expenses of US$758,178 for the three months ended September 30, 2013.

Other Income

Other income of $57,316 represents income recognized from the grant from the Science, Industry, Trade and Information Technology Commission of the Shenzhen Municipality.

Net loss

A net loss of (US$474,932) resulted for the three months ended September 30, 2013 compared to net loss of (US$478,252) for the three months ended September 30, 2012, a decrease of US$3,320. Our net loss decreased primarily due to profits generated from newly acquired subsidiary, Jifu.

Comprehensive loss

Our comprehensive loss increased by (US$26,379) from (US$478,852) for the three months ended September 30, 2012 to (US$505,231) for the three months ended September 30, 2013. The increase is primarily due to the foreign currency translation adjustment during this latest quarter.

Comparison of the Nine Months Ended September 30, 2013 and 2012

Revenue

Our revenue for the nine months ended September 30, 2013 totaled US$1,272,310, an increase of US$1,073,510 or 540.0% from US$198,800 for the nine months ended September 30, 2012. This increase in revenue was primarily due to the acquisition of Jifu in the third quarter of 2013, which generated revenue of US$1,206,377.

Cost of revenue

Cost of revenue increased by US$346,992, or 2,915.9%, from US$11,900 for the nine months ended September 30, 2012. This increase in cost of revenue was primarily due to the acquisition of Jifu, which incurred cost of revenue of US$358,853.

Gross profit

Gross profit for the nine months ended September 30, 2013 was US$913,418, an increase of US$726,518, or 388.7% from US$186,900 for the nine months ended September 30, 2012. This increase in gross profit was primarily due to the acquisition of Jifu, which generated gross profit of US$847,524.

Operating Expenses

Our operating expenses for the nine months ended September 30, 2013 increased by US$1,007,166, or 117.3% from US$858,600 for the nine months ended September 30, 2012. This increase in operating expenses was primarily due to the acquisition of Jifu, which incurred operating expenses of US$758,178.

Other Income

Other income of $72,840 represents income recognized from the grant from the Science, Industry, Trade and Information Technology Commission of the Shenzhen Municipality.

Net loss

A net loss of (US$1,188,701) resulted for the nine months ended September 30, 2013 compared to net loss of (US$1,103,317) for the nine months ended September 30, 2012, an increase of US$85,384. Our net loss increased primarily due to significant increases in operating expenses.

Comprehensive loss

Our comprehensive loss increased by (US$76,692) from (US$1,101,617) for the nine months ended September 30, 2012 to (US$1,178,309) for the nine months ended September 30, 2013. The increase is primarily due to significant increases in operating expenses.

Liquidity and Capital Resources

Overview

As of September 30, 2013, we had cash and equivalents on hand of US$205,757 and negative current liabilities of US$2,152,924. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through December 31, 2013. 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.

On March 9, 2013, we issued 6,000,000 shares of our common stock to an accredited investor in a private placement for an aggregate purchase price of $300,000.

On April 23, 2013, we entered into an Investment Agreement (the “Investment Agreement”) with Dutchess Opportunity Fund II, LP, a Delaware limited partnership (“Dutchess”). Under the terms of the Investment Agreement, Dutchess will purchase, at our election, up to $2,000,000 of our registered common stock (the “Shares”). During the term of the Investment Agreement, we may at any time deliver a “put notice” to Dutchess thereby requiring Dutchess to purchase up to the lesser of (i) two hundred percent (200%) of the average daily volume of our common stock for the three trading days prior to the put notice or (ii) $100,000. Subject to certain restrictions, the purchase price for the Shares shall be equal to ninety-five percent (95%) of the lowest closing bid price for our common stock during the five-day trading period beginning on the date of delivery of the put notice.

On July 16, 2013, we issued 2,400,000 shares of our common stock to an accredited investor in a private placement for an aggregate purchase price of $120,000.

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 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 nine months ended September 30, 2013 was US$90,798 compared to net cash used in operating activities of (US$551,000) for the nine months ended September 30, 2012. This decrease in cash used in operating activities was primarily due to the decrease in trade account receivables.

Net cash provided by (used in) investing activities

Net cash used in investing activities for the nine months ended September 30, 2013 was (US$11,679) compared to net cash used in investing activities for the nine months ended September 30, 2012 of (US$41,500). This decrease in cash used in investing activities was primarily due to decrease investing of fixed assets.

Net cash provided by financing activities

Net cash provided by financing activities for the nine months ended September 30, 2013 was US$22,760 compared to cash provided by financing activities for the nine months ended September 30, 2012 of US$213,000. The decrease in cash provided by financing activities was as a result of the decrease in the proceeds from 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 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.

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 expect 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 September 30, 2013, which amounted to US$205,757, 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$2,508 of the balance.

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 September 30, 2013, 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 September 30, 2013 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. 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.

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.

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

We have eliminated the following material weakness with respect to our internal controls over financial reporting: “we have not achieved the optimal level of segregation of duties relative to key reporting financial functions.” Otherwise, there were no other changes in our internal controls over financial reporting that occurred during the quarterly period ended September 30, 2013 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

The following additional risk factors should be read in conjunction with the Risk Factors section included in our Annual Report on Form 10-K filed on April 1, 2013 and Amendment No. 1 to our Annual Report on Form 10-K/A filed on August 15, 2013.

If wearable computing devices do not gain some reasonable level of acceptance in the consumer market, our business strategy may fail.

It is difficult to assess or predict with any certainty the potential size, timing and viability of market opportunities for our wearable computing products or their market acceptance. Market acceptance of our wearable computing products will depend, in part, upon consumer acceptance of wearable computing technology providing benefits comparable to or greater than those provided by other non-wearable computing products, such as cellular phones or tablet computers. Such acceptance may depend on the relative complexity, reliability, usefulness and cost-effectiveness of our wearable computing products compared to other non-wearable computing products available in the market or that may be developed by our competitors. Potential customers may be reluctant to adopt our wearable computing products because of concerns surrounding perceived risks relating to use and the fact that it is a new technology. If consumers fail to purchase our wearable computing products in the numbers we anticipate or as soon as we anticipate, the sales of our products and our results of operations would be adversely affected and our business strategy may fail.

There are a number of competing providers of wearable computing products and we may fail to capture a substantial portion of the wearable computing market.

In addition to competing with wearable computing products, we also compete with wearable computing products that have been developed by other companies. Our primary competitors include HTC Corp., Huawei, ZTE, Lenovo, and Xiaomi in the China market. In addition, Sony and Samsung have both released their own smartwatch products and other companies such as Google, Apple and Microsoft have been rumored to be developing wearable computing products. Most of our competitors have greater financial, marketing, distribution and technical resources than we do. Moreover, our competitors may succeed in developing new wearable computing products and technology that are more affordable or have more or more desirable features than our technology. If our products are unable to capture a reasonable portion of the wearable computing market, our business strategy may fail.

If we fail to accurately forecast seasonal demand for our wearable computing products, our results of operations for the entire fiscal year may be materially adversely affected.

Historically, a high percentage of consumer sales in electronics and computing products is attributable to the winter holiday selling season. Like many manufacturers of consumer electronics products, we must make merchandising and inventory decisions for the winter holiday selling season well in advance of actual sales. Inaccurate projections of demand or deviations in the demand for our products may cause large fluctuations in our fourth quarter results and could have a material adverse effect on our results of operations for the entire fiscal year.

We depend on third parties to provide technology and critical components for use in our products.

We do not manufacture the electronic components which are used in our products. Instead, we have arrangements with or purchase them from third party suppliers or rely on third party independent contractors for these critical components, some of which are customized or specially made for us. We also may use third parties to assemble all or portions of our products. Some of these third party contractors and suppliers are small companies with limited financial resources. If any of these third party contractors or suppliers were unable or unwilling to supply these critical components to us, we would be unable to manufacture and sell our products until a replacement supplier could be found. We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner. Any interruption in our ability to manufacture and distribute our products could cause our business to be unsuccessful and the value of investors’ investment in us may decline.

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

On July 16, 2013, we consummated a sale of shares of our common stock in a private placement to a foreign accredited investor. The private placement was conducted in connection with a Securities Purchase Agreement dated as of July 16, 2013 (the “SPA”) under which we issued 2,400,000 shares of our common stock to the investor for an aggregate purchase price of $120,000.

The shares of common stock issued pursuant to the SPA were exempt from registration in reliance upon Regulation S of the Securities Act or 1933, as amended (the “Securities Act”) in offshore transactions (as defined in Rule 902 under Regulation S of the Securities Act), such determination based upon representations made by the investor.

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
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).
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.

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: November 6, 2013	/s/ Xili Wang
	By: Xili Wang
	Its: Chief Financial Officer and Secretary (Principal Financial
	Officer and Principal Accounting Officer)

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XcelMobility (XCLL) Inactive 10-Q2013 Q3 Quarterly report

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