UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2014
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number:000-54333
XCELMOBILITY INC.
(Exact name of registrant as specified in its charter)
| Nevada | 98-0561888 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 303 Twin Dolphins Drive | |
| Suite 600, Redwood City | |
| California | 94065 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(650) 632-4210
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
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¨ (Do not check if a smaller reporting company) | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014 was $5,889,659 based upon the closing price of $0.06 per share reported for such date on the OTCQB. Shares of common stock held by each officer and director and by each person who is known to own 10% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Common Stock | Outstanding at April 6, 2015 |
| Common Stock, $.001 par value per share | 234,682,756 shares |
DOCUMENTS INCORPORATED BY REFERENCE:None.
XCELMOBILITY INC.
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some discussions in this Annual Report on Form 10-K contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties and relate to future events or future financial performance. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this Form 10-K. Forward-looking statements are often identified by words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project,” “plans,” “seek” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” below that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In addition, you are directed to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section as well as those discussed elsewhere in this Form 10-K.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”), particularly the Company’s Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.
As used in this Annual Report on Form 10-K, references to “dollars” and “$” are to United States dollars and, unless otherwise indicated, references to “we,” “our,” “us,” “Xcel,” “XCLL,” the “Company” or the “Registrant” refer to XcelMobility Inc., a Nevada corporation and its wholly owned subsidiaries, CC Mobility Limited (“CC Mobility”), a company organized under the laws of Hong Kong, Shenzhen CC Power Investment Consulting Co. Ltd. (“CC Investment”), a company organized under the laws of the People’s Republic of China, and a wholly-owned subsidiary of CC Mobility, and Shenzhen CC Power Corporation (“CC Power”), a company organized under the laws of the People’s Republic of China.
Background and Overview
We were incorporated in the state of Nevada on December 27, 2007 under the name “Advanced Messaging Solutions, Inc.” On March 29, 2011, we amended our Articles of Incorporation to change our name from “Advanced Messaging Solutions, Inc.” to “XcelMobility Inc.” and we effected a 35-for-1 forward stock split of all of our issued and outstanding shares of common stock.
On July 5, 2011, we entered into a voluntary share exchange agreement (the “Exchange Agreement”) with Shenzhen CC Power Corporation, a company organized under the laws of the People’s Republic of China (PRC) (“CC Power”), CC Mobility Limited, a company organized under the laws of Hong Kong (“CC Mobility”) and the shareholders of CC Mobility. Pursuant to the closing of the transactions contemplated under the Exchange Agreement, on August 30, 2011, we issued 30,300,000 shares of our common stock to the shareholders of CC Mobility representing 50.5% of our issued and outstanding common stock in exchange for 100% of the issued and outstanding capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, CC Mobility became our wholly-owned subsidiary and we control the business and operations of CC Power.
On May 7, 2013, we entered into and consummated a stock purchase agreement (the “Purchase Agreement”) with CC Investment, Jifu and certain of its shareholders (the “Jifu Shareholders”). Pursuant to the terms of the Purchase Agreement, we issued an aggregate of 27,000,000 shares of our common stock to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements with CC Investment (the “Jifu Acquisition”). Through these controlling agreements, CC Investment will effectively own Jifu through a variable interest entity or VIE structure.
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release (the “Release”) with the Jifu Shareholders. Pursuant to the Release, the parties cancelled the Purchase Agreement and we returned control of Jifu to the Jifu Shareholders. In exchange, we have agreed to issue 1,000,000 shares of our common stock to the Jifu Shareholders.
On September 22, 2014, we entered into an asset purchase agreement with Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) pursuant to which we acquired certain assets of Silvercreek (the “Assets”) relating to an online sports lottery business in exchange for the issuance of up to 80,000,000 shares (“Shares”) of common stock of the Company.
Previously, our business was focused on wearable computing. Our new lottery business aggregates and processes lottery purchase orders, deriving revenue from service fees paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers. We offer a comprehensive and integrated suite of online lottery services in China. We believe that the merging of our lottery business with our existing mobile technologies, partners, and customers, will provide a platform for growth in this industry.
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Corporate Structure
The organizational structure of the Registrant is as follows:
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CC Mobility Limited (“CC Mobility”) was incorporated on May 3, 2011 under the laws of Hong Kong as a limited liability company.
Shenzhen CC Power Investment Consulting Co. Ltd., (“CC Investment”) a wholly-owned subsidiary of CC Mobility, was incorporated on July 27, 2011 under the laws of the People’s Republic of China as a wholly foreign owned limited liability company.
Shenzhen CC Power Corporation (“CC Power”) is a Chinese enterprise incorporated on March 13, 2003 under the laws of the PRC. CC Power is owned entirely by Xili Wang (the “CC Power Shareholder”), who is also our Chief Financial Officer and Secretary. CC Power maintains all the licenses and approvals necessary to operate its business in the PRC.
PRC law places certain restrictions on roundtrip investments through the acquisition of a PRC entity by PRC residents. To comply with these restrictions, in conjunction with the Exchange Transaction, we (via our wholly-owned subsidiary, CC Investment), entered into and consummated certain contractual arrangements with CC Power and/or the CC Power Shareholder pursuant to which we provide CC Power with exclusive technology consulting and management services. Through these contractual arrangements, we have the ability to substantially influence CC Power’s daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable us to control CC Power and operate our business in the PRC through CC Power and we are considered the primary beneficiary of CC Power. Accordingly, our consolidated financial statements reflect the results of operations, assets and liabilities of CC Power.
On August 22, 2011, our subsidiary, CC Investment, entered into the following contractual arrangements with CC Power and/or the CC Power Shareholder, each of which is enforceable and valid in accordance with the laws of the PRC:
Entrusted Management Agreement. Pursuant to the Entrusted Management Agreement among CC Power, CC Investment, and the CC Power Shareholder, CC Investment agrees to provide, and CC Power agrees to accept, exclusive management services provided by CC Investment. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of CC Power. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Technical Services Agreement. Pursuant to the Technical Services Agreement among CC Power, CC Investment, and the CC Power Shareholder, CC Investment agrees to provide, and CC Power agrees to accept, exclusive technical services provided by CC Investment. Such technical services include but are not limited to software, computer system, data analysis, training and other technical services. CC Investment shall be entitled to charge CC Power service fees equivalent to CC Power’s total net income. The Technical Service Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Exclusive Purchase Option Agreement. Under the Exclusive Purchase Option Agreement among CC Power, CC Investment, and the CC Power Shareholder, the CC Power Shareholder granted CC Investment an irrevocable and exclusive purchase option to acquire CC Power’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time.
Loan Agreement. Under the Loan Agreement between CC Investment and the CC Power Shareholder, CC Investment agreed to lend RMB 10,000,000 to the CC Power Shareholder, to be used solely for the operations of CC Power.
Equity Pledge Agreement. Under the Equity Pledge Agreement among CC Investment and the CC Power Shareholder, the CC Power Shareholder pledged all of its equity interests in CC Power, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of this Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s prior consent. The CC Power Shareholder covenants to CC Investment that among other things, it will only appoint/elect the candidates for the directors of CC Power nominated by CC Investment.
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Subsidiaries
As a result of the Exchange Transaction, CC Investment and (via a contractual relationship) CC Power are wholly-owned subsidiaries of our subsidiary CC Mobility. CC Power does not have any subsidiaries.
Strategy
We provide specialized lottery services to our users, which we believe solidify our reputation as a professional service provider dedicated to online lottery services. Our commitment to investment on research and development has enabled us to provide our users with innovative and proprietary tools with increasing utility and variety. Such tools are designed to address various aspects of users’ needs in the lottery purchase process, such as availability of information on a real-time basis, professional analysis on odds and trends, and the capability to combine purchases to increase payout amounts. As a result, we believe the combination of such tools enables our users to make informed and planned lottery purchases and enhance their purchase experience.
We strive to provide our users with the most comprehensive and up-to-date lottery related information, which is important to decision-making for most sports lottery products. We have a dedicated and direct data interface with China Sports Lottery Administration Center, which enables us to publish real-time sports match scores and odds for a sports match.
Customers
The majority of online lottery purchasers in China are young adults with relatively high individual disposable incomes. The average age of online lottery purchasers is approximately 30 years old.
Technology
We have developed an integrated fulfilment platform that enables us to service and support multi- provincial contracts for the fulfilment of welfare and sports lottery tickets through a single interface. Our mobile platform enables us to deliver white-label mobile application solutions to interested companies seeking to leverage their large client bases. The mobile platform allows users to seamlessly connect through our mobile cloud network throughout China. The network is connected to our application and processing servers to fulfill lottery orders.
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Intellectual Property
CC Power has developed or acquired unique intellectual property for its lottery business. Our intellectual property consists of application related software and solutions for our lottery business, including cloud computing software and other application specific software. CC Power is the owner of intellectual property that we believe provides a competitive advantage over competitors and new entrants to the market.
We will continue to evaluate the business benefits in pursuing patents and copyrights in the future. We currently protect all of our development work with confidentiality and trade secret agreements with our engineers, employees and any outside contractors. However, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property or technology or otherwise develop a product with the same functionality as our service. Policing unauthorized use of intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property, particularly in foreign countries where we do business or where our service is sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States or where the enforcement of such laws is not common or effective.
Services
Individual Lottery Purchase
We provide online purchase services for both sports lottery products and welfare lottery products. Users place purchase orders for lottery products through our websites after registering, opening and funding an online account.
Lottery Pool Purchase
Lottery pools enable individual users to purchase a share in a pooled lottery outcome or group of outcomes with other users. Lottery pool purchase is a service developed and first offered by us in China utilizing the unique advantages of the Internet, and it has become a standard feature on all websites that offer online lottery services.
Through our lottery pool service, an initiator starts a lottery pool by specifying a range of parameters, such as the lottery portfolio, total purchase amount and payout scheme. The initiator is required to commit a minimum of 5.0% of the total purchase amount when he initiates a pool. Other players may then join the pool by agreeing to the conditions set by the initiator and putting down commitment amounts of their choices. When the total purchase amount as specified by the initiator is reached, the system will close the pool and deliver the purchase order for the lottery portfolio in the manner as specified by the initiator.
A user familiar with a particular sport or experienced with sports lotteries in general may develop a reputation for having a more educated anticipation of the results of particular matches, or for picking a lottery portfolio with a combined winning probability that is higher than that of randomly selected combinations, thereby attracting other players to participate in pools he initiates. Our lottery pool service offers less experienced users a chance to join a more experienced user or a user with a track record of winning results. It also enables users who lack the time or resources to study the odds to join another user who has done relevant research, potentially enhancing their chances of winning. For number based lotteries, users can pool their commitment amounts together and purchase multiple numbers. This enables users to spread their commitments over a wide range of lottery numbers and thereby increase the pool’s probability of winning. Pooling small purchase orders provides us with a stable revenue flow as it generates purchase momentum among users.
Automatic Tag-along Purchase
Automatic tag-along purchase is another service we provide that distinguishes us from traditional offline lottery agents. Through this service, a user can choose to automatically and periodically join a lottery pool initiated by another user. A user can customize the automatic tag-along feature by specifying the pools he wishes to automatically join, the commitment to be put down for each automatic pool and other specifications. Users may also use the “following” feature to be notified of the pooling activities initiated by certain users without automatically tagging-along. We place the option to automatically join or follow a user’s pool on such user’s profile page. A profile page also contains a user’s basic information, such as winning record, number of pools initiated and consummated, number of followers and date of registration, to allow other users to judge whether to follow or join pools initiated by this particular user.
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Recurring Purchase
Users may select our recurring purchase service to repeatedly purchase a particular number or a combination of numbers. The user sets the combination once, and specifies the type and number of rounds or dates of lotteries he wants to purchase with the selected combination. We process the purchase orders automatically. Users may cancel a recurring purchase prior to the date of any particular lottery. We also offer a filtering tool that helps users set certain parameters in choosing the combination of numbers.
Distribution
The Company will expand distribution in China by continuously strengthening its collaboration with telecom operators, financial institutions and other partners.
Industry
Chinese Lottery Market
The Chinese lottery market has experienced strong growth in recent years as a result of positive macro trends in China, such as robust economic growth, increases in disposable income and a more positive shift in public perception towards the lottery business. Total lottery sales in China amounted to RMB166.3 billion, RMB221.6 billion and RMB261.5 billion (US$42.6 billion), in 2010, 2011 and 2012, respectively, representing a 33.3% and 18.0% increases in 2011 and 2012 as compared to 2010 and 2011, respectively, according to a report by the Ministry of Finance (“MOF”). According to the iResearch Report, although no accurate projection of the future growth of the Chinese lottery market can be guaranteed, the Chinese lottery market is expected to continue to grow at a comparable rate in the near future due to the continued growth of China’s GDP and individual disposable income and the increasingly favorable regulatory environment for the development of the lottery market in China. Total lottery sales in China is projected to be RMB450.3 billion in 2015 respectively, representing a 46.2% increase from 2013 to 2015 according to the iResearch Report.
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The following charts show the total online lottery sales amount and online sales amount for sports lottery products from 2005 to 2014(3 Quarters only) in China:
Source: the Ministry of finance
Drivers for the Growth of the Online Lottery Market
Online lottery sales are affected by many factors, including general economic conditions, individual disposable income, and lottery purchaser demography. We believe the growth of the online lottery market will be driven by:
Growth of GDP and individual disposable income. Growth of GDP and individual disposable income are among the main growth drivers of the online lottery market in China.
In recent years, growth of online lottery market sales in China has been much faster than the growth of GDP and individual disposable income. According to the National Bureau of Statistics of China, from 2010 to 2012, China’s GDP grew from RMB40.1 trillion to RMB51.9 trillion (US$8.5 trillion), representing a 29.4% increase, and the individual disposable income for urban population grew from RMB19,109 to RMB24,565 (US$4,003), representing a 28.5% increase. Total online lottery sales grew from RMB5.5 billion to RMB14.7 billion (US$2.4 billion) from 2010 to 2012 representing a 167% increase. Although there is no guarantee that the growth rate of the online lottery market in China will continue to be faster than that of China’s GDP and individual disposable income, online lottery sales are expected to continue to grow as China’s GDP and individual disposable income grow.
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Government regulations and evolving public acceptance of the lottery industry. The Chinese government has shown increasing support for the lottery market in general and the online lottery market in particular through a series of legislation. According to an announcement by the MOF, the MOF applied RMB8.5 billion of lottery income to a wide range of social welfare endeavors, including earthquake relief, medical care in rural and urban areas, education subsidy, handicapped assistance, and red-cross activities, in 2011. The MOF regards the development of the Chinese lottery market as healthy and beneficial. According to the “Twelfth Five-Year Plan” approved by the PRC National People’s Congress in March 2011, the central government will expand social security fund source by increasing lottery issuance. At the same time, the recent implementation of the Urgent Notice and the subsequent investigations and penalties on certain online lottery sales service provider who does not have the relevant approvals could have a significant impact on the competitive landscape of the online lottery market. The Urgent Notice and the subsequent government actions have brought significant risks and uncertainties to online lottery sales service providers who do not have the relevant approvals, and as a result may reduce competition for online lottery sales service providers that possess relevant approvals in the near future.
Increase in the number of lottery purchasers. The increase in the number of lottery purchasers in general and the increase in the number of online purchasers in particular are important factors in online lottery market growth. The number of general and online lottery purchasers are expected to continue to grow in the next few years. According to iResearch, the number of lottery purchasers grew from 250 million in 2010 to 338 million in 2012 and the number of purchasers is projected to grow to 531 million by the end of 2015. Similarly, according to the estimate in the iResearch Report, the number of active online lottery purchasers grew from 5.0 million in 2010 to 16.5 million in 2012, representing a 230% increase, and is expected to grow to 58.9 million by 2015.
Increasing Internet penetration in lottery distribution. The Internet and Internet applications have experienced significant growth in China in recent years. As a result, both the number of Internet users and the percentage of online lottery purchasers to the number of Internet users have grown. According to the iResearch Report, there were 250 million, 290 million and 338 million lottery purchasers in China in 2010, 2011 and 2012, respectively, among which 2.0%, 3.2% and 4.9% were online lottery purchasers, respectively. The increase in the number of online lottery purchasers was attributable to a variety of factors, including, among other things, the ease of online payment, the ease of access, the reliability of the prize collection process, the availability of information, and the popularity of lottery pool purchases.
Lottery Products
The government authority in charge of the Chinese lottery market is the MOF, which is responsible for drafting and enacting laws, rules and regulations on Chinese lottery sales and administration, as well as monitoring the sales and promotion of lottery products.
Lottery Products by Issuing Entities
Two categories of lottery products are currently approved by the MOF, namely sports lottery products and welfare lottery products, which are issued by China Sports Lottery Administration Center and China Welfare Lottery Issuance and Administration Center, respectively. National lottery products are sold through provincial lottery administration centers that are authorized to license the sales of national lottery products directly to lottery sales agents. Provincial lottery administration centers are also authorized to issue provincial-level sports or welfare lottery products upon the approval of the corresponding state lottery administration center.
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Welfare lottery products. In China, welfare lottery products are defined as lottery products issued by China Welfare Lottery Issuance and Administration Center and provincial welfare lottery administration centers.
Welfare lottery products were first issued in China in 1987. Most welfare lottery products are number-based lottery products, the outcomes of which depend on combinations of numbers.
Sports lottery products. In China, sports lottery products are defined as lottery products issued by China Sports Lottery Administration Center and provincial sports lottery administration centers. There are generally two types of sports lottery products: those based on outcomes of sports matches and those that are number-based.
Lottery Products by Type
There are three types of lottery products depending on the rules or outcomes: Lotto, sports match lottery, and instant lottery.
Lotto. Lotto is a type of lottery product whose outcome depends on combinations of numbers. A purchaser of a lotto ticket will select a combination of numbers at the time of purchase, and the result and payout depend on how well the selected number combination matches the prize winning number combination, which is randomly drawn at a set time. The grand prize of each lotto ticket in China is usually RMB10 million, although the issuing lottery administration centers have the discretion to add extra prize money amounts as incentives. High-frequency lottery is a new type of lotto product which is characterized by a high frequency of lottery draws, usually every few minutes. It has experienced rapid development since 2009. Given their nature, high frequency lottery products are currently only sold through online and mobile sales channels. According to a report by the MOF, sales of Lotto products accounted for 66.9%, 64.4% and 66.5% of total lottery sales in China in 2010, 2011 and 2012, respectively.
Sports Match Lottery. Sports match lottery is a type of lottery product whose outcome depends on the outcome of sports matches. The majority of sports match lottery products in China relate to soccer lottery products, where a lottery purchaser predicts one or more results of a soccer match or a combination of soccer matches, such as the winners and final scores, and the lottery result and payout amount depends on the outcome of the match or matches and the odds published by lottery administration centers. Sports match lottery products have greater information and knowledge requirements than other types of lotteries, and a purchaser needs to make a rational decision based on certain information, such as player status and official odds, which needs to be real-time or constantly updated to be meaningful references. As such, sports match lottery products are mostly suitable to be purchased online, where such information is readily available and updated. Benefiting from the introduction of popular sports match lottery products following a series of international sports matches, sales of sports match lottery products have grown significantly in recent years. According to the iResearch Report, sales amount of sports match lottery products accounted for 8.9%, 9.9% and 10.3% of total lottery sales amounts in China in 2010, 2011 and 2012, respectively, and is expected to continue to grow in the next few years.
Instant Lottery. Instant lottery is a type of lottery product for which the winning tickets and prize amounts are predetermined. The tickets are pre-printed and a ticket purchaser will know instantly if he or she has won a prize once the ticket is opened. Given their nature, instant lottery products are currently only sold through traditional sales channels.
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Instant lottery products accounted for 24.2%, 25.7% and 14.6% of total lottery sales amount in China in 2010, 2011 and 2012, respectively, according to a report by the MOF.
Traditional Sales Channels
The majority of lottery products are sold through authorized lottery stations throughout China, in the form of physical lottery tickets.
Online Sales Channels
Internet users can also place purchase orders on online lottery service platforms, which in turn direct the purchase orders to the relevant provincial level lottery administration centers. The iResearch Report estimated that total lottery sales through online channels were approximately RMB5.5 billion, RMB11.0 billion and RMB14.7 billion (US$2.4 billion) in 2010, 2011 and 2012, respectively. Mobile devices are new lottery distribution channels that have been developing in recent years. Mobile phone users can place purchase orders on their handsets through services such as mobile Internet. According to the iResearch Report, lottery sales through mobile channels have increased significantly in recent years. The iResearch Report estimated total lottery sales through mobile devices to be approximately RMB530 million, RMB1.07 billion and RMB2.03 billion (US$331.7 million) in 2010, 2011 and 2012, respectively. Compared to traditional sales channels, online sales channels have the following advantages:
Easy access. Online users can submit purchase orders at lottery service websites at any time and from anywhere with an Internet connection. In comparison, traditional lottery stations can only sell lottery tickets to purchasers who physically come to the station during business hours. In addition, online lottery service websites have near-unlimited capacity to take multiple purchase orders at the same time, while lottery stations can only serve a certain number of purchasers at a given time. Purchasers at traditional lottery stations often have to wait in line to purchase new or popular lottery products for which transaction volumes are high.
Services and supports. Besides sales service, online sales channels provide a variety of services to users. Information services are valuable to online users at the time of purchase, especially for certain types of lottery products such as sports match lottery products. Online forum services provide venues for users to discuss lottery-related topics and socialize. Data services provide users valuable information to study and research lottery products. In comparison, only a limited number of larger and well equipped lottery stations in China have the capacity to provide information services such as news feeds and real-time information updates.
Lottery pool purchase is a purchase mode favored by many lottery purchasers. Online sales channels greatly facilitate the pool purchase process. Purchasers can initiate purchase pools or join existing pools online conveniently. In comparison, purchase pools formed offline usually involve participants having to meet in person. An online community is an ideal venue for pool initiators to advertise their pools and find pool participants. In addition, the transfer of individual purchase amounts and the allocation of prize money among participants can be handled electronically, which is fast and automated, reducing chances of error or misappropriation.
Convenient prize collection. Traditionally, winners of lottery draws needed to go to the lottery station from which they purchased the winning tickets and present the winning tickets as proof for prize collection. If the winning tickets were lost or severely damaged, the prize could not be collected. Users who purchase lottery products online are able to have the prize money wire-transferred to their online accounts, which reduces the chance of error and protects the anonymity of the winners. Purchase records are stored in the online service providers’ database and no physical lottery ticket is required to be presented by the purchaser in the process.
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Among the different types of lottery products, Lotto, sports match lottery products and high frequency lottery products are more suited to online purchase. According to the iResearch Report, in 2011, sales of Lotto, sports match lottery products and high frequency lottery products accounted for approximately 25%, 50% and 25% of total online lottery sales amount, respectively.
Government Regulation
Overview
The PRC government has imposed extensive and stringent measures to regulate the telecommunications and software development industries. The State Council of the PRC, or the State Council, the Ministry of Industry and Information Technology, or the MIIT (formerly the Ministry of Information Industry, or the MII), and other relevant authorities in the PRC have issued various regulations with respect to the telecommunications and software development industries. This section summarizes the principal PRC laws and regulations relevant to our business and operations.
Business license
Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present business to design, develop, and produce mobile Internet software. Prior to expanding our business beyond that of our business license, we are required to apply and receive approval from the PRC government.
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Employment laws
We are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which became effective on January 1, 2008, permit workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
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Regulations on Lottery Services Industry and Online Lottery Sales
Since 1991, the Chinese government has promulgated a series of rules and regulations to regulate the lottery industry in China. The major rules and regulations currently in effect and applicable to our online lottery services include Regulation on Administration of Lottery, promulgated by the State Council on May 4, 2009 and effective as of July 1, 2009, or the Lottery Regulation, and the Interim Measures for the Administration of Online Sales of Lottery, promulgated by the MOF on September 26, 2010, or the Lottery Measures, and effective upon the promulgation. On January 18, 2012, the MOF, the Ministry of Civil Affairs and the General Administration of Sports of China jointly promulgated the Implementing Rules, which became effective on March 1, 2012. On February 28, 2012, General Administration of Sports of China promulgated the Urgent Notice with regard to the Implementation of the Implementing Rules of Regulation on Administration of Lottery promulgated by the General Administration of Sports of China on February 28, 2012, or the Urgent Notice. Under currently effective rules and regulations, only qualified service providers approved by the MOF may engage in online lottery sales. Such qualified service providers will act as agencies for the relevant lottery administration centers and must obtain a Lottery Agency License from and enter into lottery agency agreements with the competent lottery administration centers before engaging in lottery sales on their behalf.
Certain rules and regulations previously promulgated by the MOF and other regulatory authorities had previously prohibited the sales of lotteries through the Internet, but after the promulgation of the Lottery Measures those rules and regulations have ceased to have legal effect.
Online Lottery Sales
The Lottery Measures set forth detailed requirements for the administration of online lottery sales as well as the requirements for qualified online lottery service providers. According to the Lottery Measures, the MOF is the supervisory and regulatory body of online lottery sales in the PRC, and China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center (collectively, “Lottery Issuance Agencies”) are responsible for the overall planning and management of online lottery sales for welfare lottery and sports lottery, respectively. The Lottery Issuance Agencies may collaborate with other entities or authorize relevant lottery sales agencies to conduct online lottery sales, or appoint qualified entities as their online lottery sales agents. The Lottery Measures require qualified online lottery service providers to meet certain criteria, including, among others, that (i) they have a minimum registered capital of RMB50 million, (ii) they maintain adequate organizational, internal control and risk management systems, (iii) they and their senior management have a clean criminal and credit history for the past five years, and (iv) they have obtained an Internet content provider license. The Lottery Issuance Agencies are required to selectively submit to the MOF information on the online lottery service providers that apply to become qualified to engage in online lottery business under the Lottery Measures.
Lottery Regulatory Authorities
Under the current regulations and provisions, the State Council is vested with the power to authorize the issuance of welfare lottery and sports lottery, and is also the highest authority for granting the right to issue lotteries. The MOF is responsible for administering, regulating and supervising the national lottery industry. The Ministry of Civil Affairs and the General Administration of Sport of China are responsible for administering and regulating welfare lottery and sports lottery, respectively, and have established China Welfare Lottery Issuance and Administration Center and China Sports Lottery Administration Center, respectively, pursuant to regulations for the issuance and sales of welfare lottery and sports lottery. The civil affairs departments and sports administration departments of provincial governments are responsible for the administration of welfare lotteries and sports lotteries within their respective administrative regions.
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Regulations on Lottery Administration
On May 4, 2009, the State Council promulgated the Lottery Regulations, which set forth general provisions for the issuance, sales and administration of lottery products. According to the Lottery Regulations, the welfare and sports lotteries sold in China must be issued by the lottery issuance authorities, established by the civil affairs’ department and sports administration department of the PRC State Council, or the Lottery Issuance Agencies, and must be sold through Lottery Issuance Agencies or lottery sales offices established by the civil affairs’ departments and sports administration departments of the people’s government at the provincial level (“Lottery Sales Agencies”). Lottery Issuance Agencies and Lottery Sales Agencies may, by entering into agency agreements, appoint other entities or individuals as their agents in distributing lotteries. The Lottery Regulation also listed circumstances where the Lottery Issuance Agencies and Lottery Sales Agencies may terminate such agency agreements, including situations where the agent subcontracts the sales of the lottery products to any other persons or entities or sells lottery products to underage buyers.
The Lottery Regulations prohibits the Lottery Issuance Agencies, the Lottery Sales Agencies and their sales agents from (i) advertising false or misleading information, (ii) competing unfairly by discrediting others in the same industry, (iii) selling lottery or paying lottery prizes to underage purchasers and (iv) selling lottery on credit. If the Lottery Issuance Agencies or the Lottery Sales Agencies fail to comply with these requirements, the MOF or its relevant branches will have the power to (i) require the Lottery Issuance Agencies or the Lottery Sales Agencies to correct or cease their operations; (ii) confiscate the illegal income received by the Lottery Issuance Agencies or the Lottery Sales Agencies and impose fines; and/or (iii) impose administrative sanctions against persons that are responsible. If any lottery sales agent sells lotteries to the underage buyers, its relevant income may be confiscated and it may be subject to administrative fines up to RMB10,000, and the Lottery Issuance Agencies or the Lottery Sales Agencies may have the right to terminate the agency agreement with the lottery sales agent. In addition, the Lottery Measures prohibits the opening of online lottery accounts for or the granting of lottery prizes to underage buyers.
Prior to the promulgation of the Lottery Regulation, the issuance and sales of the lottery products were governed by the Interim Provisions for the Administration of the Lottery Issuance and Sales, or the Interim Provisions, promulgated by the MOF on March 1, 2002. The Interim Provisions were replaced by the Administrative Measures for Lottery Issuance and Sales promulgated by the MOF on December 28, 2012. The Administrative Measures for Lottery Issuance and Sales provided that any Lottery Issuance Agency, which wishes to apply to create, change or abolish a specific type of welfare or sports lottery, is required to apply to the Ministry of Civil Affairs or the General Administration of Sport of China for creating, changing or abolishing a specific type of welfare or sports lottery. If the application has been approved by the Ministry of Civil Affairs or the General Administration of Sport of China, such application will be further submitted to the MOF for the MOF’s examination and approval before the implementation. After the creation or change of specific type of welfare or sports lottery has been approved by the MOF, the Lottery Issuance Agency receiving MOF approval or its related Lottery Sales Agencies shall submit sales implementation plans to the MOF or its provincial counterparts for approval prior to the sales of the specific type of lottery. The sales implementation plan shall include, among other things, the proposed sales commencement date, promotion plans and risk control measures. In order to sell the specific type of welfare or sports lottery so created or changed, the Lottery Issuance Agencies or the Lottery Sales Agencies may engage specific sales agents by entering into lottery sales agency agreements with such sales agents.
The Company currently has a sport lottery license from the Fujian Administration of Sport and Gaming.
Regulations Concerning the Software Development Industry
Software Products
On March 1, 2009, the MIIT issued the Administrative Measures for Software Products, or the Measures for Software Products, to regulate the development, production, sale, and import and export of software products, including computer software, software embedded in information systems and equipments, and computer software provided in conjunction with other information or technology services. Any entity or individual shall not develop, produce, sell and import or export any software product which infringes upon the intellectual property rights of third parties, contains computer viruses, endangers computer system security, is not in compliance with the software standard specification of the PRC, or contains contents prohibited under PRC laws and regulations. To that end, for any software products, the Measures for Software Products require registration and filing with the provincial level software registration institutions authorized to accept and review software products registration applications. Once accepted for review, the software product registration application shall be filed with and publicly announced by the MIIT, and if no objection is received within a seven-working-day publication period, a software registration number and a software product registration certificate will be granted. A software registration certificate is valid for five years and may be renewed upon expiration. We have obtained a Software Company Certification, as issued by the Technology and Information Bureau of Shenzhen City (R2007-0033).
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Software Enterprises
A PRC enterprise that develops one or more software products and meets the Certifying Standards and Administrative Measures for Software Enterprises (Proposed), promulgated by the MII, Ministry of Education, Ministry of Science and Technology and the State Administration of Taxation, or the SAT on October 16, 2000, can be certified as a “software enterprise.” The certification standards for software enterprises include the following:
| · | the applicant shall be an enterprise established in PRC which engages in the business of computer software development and production, system integration, application service, etc., and whose operating revenue is primarily derived from the above referenced business activities; |
| · | the enterprise develops one or more software products or possesses one or more intellectual property rights of software products, or provides technical services such as computer information system integration that has passed qualification and grade certification; |
| · | the proportion of technical staff in the work of software development and technical service shall be no less than 50% of the total staff in the enterprise; |
| · | the applicant shall possess relevant technical equipments and premises necessary for developing software and providing relevant services; |
| · | the applicant shall possess methods and ability to safeguard the qualify of the software products and the technical services; |
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| · | the development fund for software technique and products shall be above 8% of the enterprise’s annual software income; and |
| · | the annual sale income of software shall be more than 35% of the total annual income of the enterprise, with the income of self-developed software more than 50% of the software sales income; |
| · | the enterprise has clearly-established ownership, standardized management and complies with disciplines and laws. |
Enterprises that qualified as “software enterprises” are entitled to certain preferential treatments in the PRC. According to the Circular on Relevant Taxation Policies for Encouraging the Development of the Software and Integrate Circuit Industries (Circular No. 25) (2000) by the Ministry of Finance, the General Administration of Customs and the State Administration of Taxation, or the SAT, newly-established software manufacturing enterprises (i.e. those established after July 1, 2000) may be exempt from income tax in the first two years of profitability and enjoy 50% income taxes reduction for the next three years, such policy is known as the “Two Free, Three Half” preferential policy. On February 22, 2008, the Ministry of Finance and SAT promulgated the Notice on Several Preferential Policies in Respect of Enterprise Income Tax, or the Notice 2008 No. 1, which reiterated that a software production enterprise newly established within China may, upon certification, enjoy the Two Free, Three Half preferential treatment. On April 24, 2009, the Ministry of Finance and SAT promulgated the Notice on Several Issues Relevant to the Implementation of the Preferential Policies on Enterprise Income Tax, which states that, the software production enterprises and the integrated circuit production enterprises established prior to the end of 2007 may, upon certification, enjoy the preferential policies on the enterprise income tax reductions and exemptions within specified periods as provided in the Notice 2008 No. 1. An enterprise which became profitable in or before 2007 and started enjoying the enterprise income tax reductions and exemptions within specified periods may continue to enjoy the relevant preferential treatment from 2008 until the expiration of the specified periods. According to the Circular on Relevant Policies for Further Encouraging the Development of the Software and Integrate Circuit Industries (Circular No. 4) (2011) issued by the State Council on January 28, 2011, the software production enterprises and the integrated circuit production enterprises may, upon certification, enjoy the “Two Free, Three Half” preferential policy from the year of profitability prior to December 31, 2017, until the expiration of the specified periods.
Foreign Investments in Software Development Industry
According to the Catalogue of Industries for Guiding Foreign Investment amended in December 2011, foreign investment is encouraged in the software development and production sector. As such, there are no restrictions on foreign investment in the software development industry in the PRC aside from business licenses and other permits that every software development entity in the PRC must obtain.
Regulations on Internet Domain Name and Content
Internet Domain Name
Internet domain names in the PRC are regulated by the Administrative Measures on the PRC Internet Domain Name, which were promulgated by the MII and which came into effect on December 20, 2004, and the Implementation Rules of Registration of Domain Name, which were promulgated by PRC’s domain name registrar, China Internet Network Information Center, or CNNIC and which came into effect on December 1, 2002, and were amended by CNNIC on June 5, 2009. Domain name service organizations accept applications for network domain names; successful applicants become holders of the registered domain names after registration. A holder needs to pay operation fees on time to keep the registered domain names, otherwise the domain name registrar may revoke the domain names. In case there is any changes to the registration information of a domain name, the holder shall file the changes with the domain name registrar within 30 days after such changes. The CNNIC is responsible for the administration of .cn domain names and domain names in Chinese language. Disputes in respect of domain names are regulated by the Measures on Resolution of Disputes regarding Domain Names which were issued by CNNIC and revised on February 14, 2006, and shall be settled by organizations approved by the CNNIC. We have obtained an Internet Registration Certification from the Shenzhen Municipal Public Security Bureau, No. 3303101901203.
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Content of Internet Information
Provision of Internet information services in the PRC is regulated by the Administrative Measures on Internet Information Services adopted by the State Council on September 20, 2000. According to these measures, provision of Internet information services regarding news, publication, education, medical and health care, pharmacy and medical appliances are subject to examination, approval and regulation by relevant authorities responsible for regulating these sectors. Internet content providers are not allowed to provide services beyond the scope of an applicable license or registration. The measures also provide a list of prohibited content on the Internet. Internet information service providers are required to monitor and censor the information on their websites, and when prohibited content is found, they shall terminate the transmission immediately, keep the relevant record and report immediately to relevant authorities.
According to these measures, commercial Internet information service providers must obtain a License for Internet Content Providers, or ICP license, in order to engage in such business. Moreover, provision of ICP services in multiple provinces, autonomous regions and centrally administered municipalities may require a trans-regional ICP license. We have obtained an ICP license (ICP No. 07047476).
On November 6, 2000, the MII issued the Regulations for the Administration of Internet Electronic Notice Services to regulate the provision of information via Internet in the form of, among others, electronic bulletin boards, electronic whiteboards, electronic forums, Internet chat-rooms and message boards. The Internet electronic bulletin service providers are required to record the content and time of information released, the website or domain name in the electronic bulletin system, keep such records for at least 60 days, and to provide such information to the relevant authorities upon request.
Regulations on Technology Export
The Technology Import and Export Administrative Regulations of the PRC promulgated by the State Council on December 10, 2001 and the Regulations of Protection of Computer Software which came into effect on January 1, 2002, requires approval of imports and exports of restricted technology, and registration of contracts to import or export unrestricted technology. Software is part of the technology governed by this regime. To implement this requirement, the Administrative Measures for Registration of Technology Import and Export Contracts, or the Registration Measures, was promulgated by the Ministry of Commerce, or the MOFCOM and become effective on March 1, 2009; the Administrative Measures on Prohibited and Restricted Technology Exports, or the Technology Export Measures was jointly promulgated by the MOFCOM and the Ministry for Science and Technology and become effective on May 20, 2009, and the Administrative Measures on Prohibited and Restricted Technology Imports, or the Technology Import Measures was promulgated by the MOFCOM and become effective on March 1, 2009. Pursuant to these regulations, the technology within the prohibited list for import and/or export shall not be imported and/or exported, and a permit for import and/or export shall be obtained by the importer and/or exporter if the technology to be imported and/or exported are listed within the restricted list for import and/or export. For any import or export technology, the relevant department of commerce is responsible for the registration of contracts for such technology import or export.
Regulations on Intellectual Property Rights
The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also signatory to most of the world’s major intellectual property conventions, including:
| · | Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 3, 1980); |
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| · | Paris Convention for the Protection of Industrial Property (March 19, 1985); |
| · | Patent Cooperation Treaty (January 1, 1994); and |
| · | The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (December 11, 2001). |
Trademarks
Registered trademarks in the PRC are protected by the Trademark Law of the PRC which came into effect in 1982 and was revised in 1993 and 2001 and the Regulations for the Implementation of Trademark Law of PRC which came into effect in 2002. A trademark can be registered in the PRC with the Trademark Office under the State Administration for Industry and Commerce, or the SAIC. The protection period for a registered trademark in the PRC is ten years starting from the date of registration and may be renewed if an application for renewal is filed within six months prior to expiration.
Copyright
Copyright in the PRC is protected by the Copyright Law of the PRC which was promulgated in 1990 and revised in 2001 and February 2010 and the Regulation for the Implementation of the Copyright Law of the PRC which came into effect in September 2002 and revised in January 2011. Under the revised Copyright Law, copyright protections have been extended to information network and products transmitted on information network. Copyrights are reserved by the author, unless specified otherwise by the laws. According to Article 16 of the Copyright Law, if a work constitutes “work for hire”, the employer, instead of the employee, is considered the legal author of the work and will enjoy the copyrights of such “work for hire” other than rights of authorship. “Works for hire” include, (1) drawings of engineering designs and product designs, maps, computer software and other works for hire, which are created mainly with the materials and technical resources of the legal entity or organization with responsibilities being assumed by such legal entity or organization; (2) those works the copyrights of which are, in accordance with the laws or administrative regulations or under contractual arrangements, enjoyed by a legal entity or organization. The actual creator may enjoy the rights of authorship of such “work for hire.”
A copyright owner may transfer its copyrights to others or permit others to use its copyrighted works. Use of copyrighted works of others generally requires a licensing contract with the copyright owner. The protection period for copyrights in the PRC varies, with 50 years as the minimum. The protection period for a “work for hire” where a legal entity or organization owns the copyright (except for the right of authorship) is 50 years, expiring on December 31 of the fiftieth year after the first publication of such work.
Patent protection in China
Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2009 and 2010, respectively.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three kinds of patents—patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file; therefore, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.
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PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One broad exception to this rule, however, is that, where the patent holder has not exploited the patent or has not exploited the patent adequately without any reasonable reason in the statutory period of time, or the patent holder’s act of exploiting the patent is held to be monopolistic, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license to date. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.
PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one or more times the license fee under a contractual license. The infringing party may be also fined by the Administration of Patent Management in an amount of up to four times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB200,000, or approximately USD $31,250.
Measures for the Registration of Computer Software Copyright
In China, holders of computer software copyrights enjoy protections under the Copyright Law. China’s State Council and the State Copyright Administration have promulgated various regulations relating to the protection of software copyrights in China. Under these regulations, computer software that is independently developed and exists in a physical form is protected, and software copyright owners may license or transfer their software copyrights to others. Registration of software copyrights, exclusive licensing and transfer contracts with the Copyright Protection Center of China (previously, the State Copyright Administration) or its local branches is encouraged. Such registration is not mandatory under Chinese law, but can enhance the protections available to the registered copyrights holders. For example, the registration certificate is proof of protection.
Foreign Exchange Regulation
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 2008 and various regulations issued by the State Administration of Foreign Exchange (“SAFE”), and other relevant PRC government authorities, the Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investments, require the prior approval from the SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by the SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into Renminbi.
Under the Implementing Rules of Measures for the Administration of Individual Foreign Exchange, or the Implementation Rules, issued by the SAFE on January 5, 2007, PRC citizens who are granted shares or share options by an overseas listed company according to its share incentive plan are required, through a qualified PRC agent or the PRC subsidiary of such overseas listed company, to register with the SAFE and complete certain other procedures related to the share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company must be remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi.
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In addition, domestic wages and salaries of foreign employees outside of the PRC, as well as other rightful earnings, such as dividends, bonuses and profits, of shareholders outside of the PRC may be remitted freely out of the PRC after taxes have been paid in accordance with the provisions of the Chinese tax law with a tax certificate. Since we do not have any debt that is generated outside the PRC and do not have any employees located outside PRC, management is not aware of any material risk of paying in foreign currency in respect of those employee-related and debt-settlement amounts due to any other party located outside PRC.
Liquidation
According to the bankruptcy law of the PRC, CC Investment, as a WFOE, needs to have its debt to creditors settled in the priority as set forth in the relevant Bankruptcy law in China and its immediate equity holder, CC Mobility, located in Hong Kong, would be the last party to be entitled to any residual interest of the entity. Such priority of payment and distribution in the case of the liquidation of CC Investment does not have any different priority in respect of PRC nationals or foreigners. The priority is based on the status of being a creditor and other requirements as set forth in the bankruptcy law in China, which does not have any discrimination or preference in respect of whether the party is a PRC national or foreigner.
Taxation
Under the Enterprise Income Tax Law (“EIT”), effective January 1, 2008, China adopted a uniform tax rate of 25.0% for all enterprises (including foreign-invested enterprises) and revoke the current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatment granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25.0% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. However, the two-year exemption from enterprise income tax for foreign-invested enterprise will begin from January 1, 2008 instead of from when such enterprise first becomes profitable. Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises otherwise classified as “new and high technology enterprises strongly supported by the state” will be entitled to a 15.0% enterprise income tax rate even though the EIT Law does not currently define this term.
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
On August 8, 2006, six PRC regulatory agencies, including the Chinese Securities Regulatory Commission (“CSRC”), promulgated a rule entitled Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “new M&A rule”) to regulate foreign investment in PRC domestic enterprises. The new M&A rule provides that the Ministry of Commerce must be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exists:
| (i) | the transaction involves an important industry in China; |
| (ii) | the transaction may affect national “economic security;” or |
| (iii) | the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China. |
On September 21, 2006, the CSRC issued a clarification that sets forth the criteria and process for obtaining any required approval from the CSRC. To date, the application of this new M&A rule is unclear.
Employees
We currently employ 98 individuals amongst our various offices. All employees enter into confidentiality agreements.
Corporate Information
The principal executive offices for the Registrant are located at: 303 Twin Dolphins Drive, Suite 600, Redwood City, CA 94065. The Registrant’s main telephone number is: 650-632-4210 and its fax number is 650-551-9901. The Registrant’s website is located at: www.xcelmobility.com
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CC Power’s offices are located at: Room 706, Cyber Times Tower B, Tairan Road, Futian District, Shenzhen, PRC.
You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this document that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Industry
Our operating results are difficult to predict, and we may experience significant fluctuations in our operating results.
Our operating results may fluctuate significantly. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance. Factors causing these fluctuations include, among others:
| · | our ability to maintain and increase sales to existing customers, attract new customers and satisfy our customers’ demands; |
| · | the price we charge for our services or changes in our pricing strategies or the pricing strategies of our competitors; |
| · | timing and costs of marketing and promotional programs organized by us and/or our partners, including the extent to which we or our partners offer promotional discounts to their customers; |
| · | technical difficulties, system downtime or interruptions of our computer system, which we use to support our services; |
| · | the introduction by our competitors of new products and services; |
| · | the effects of strategic alliances, potential acquisitions and other business combinations, and our ability to successfully and timely integrate them into our business; |
| · | changes in government regulations with respect to the online lottery industry; and |
| · | economic and geopolitical conditions in China and elsewhere. |
In addition, a significant percentage of our operating expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue for any reason could result in substantial operating losses.
The rules and regulations on online lottery sales service market in China are relatively new and subject to interpretation, and their implementation involves uncertainty.
As the relevant rules and regulations relating to online lottery sales are relatively new, we face uncertainties in the implementation of such rules and regulations by the competent authorities. The competent authorities may establish certain management systems to supervise and monitor the online lottery sales, which systems may comprise a sales monitoring system, a back-office management system and an application service platform. The competent authorities may also ask the approved entities to adopt certain measures to meet specific regulatory requirements that may be adopted from time to time. For example, the competent authorities may monitor or adjust the categories of lottery products being sold online, and supervise the sales procedures and key data of our online lottery sales on a real-time basis, such as those relating to our customer account opening procedures, capital management, database information and risk controls. Any unfavorable new regulatory requirements could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our product portfolio depends on the offerings of the lottery administration centers and could change unfavorably for us as a result of decisions made by them.
The lottery products we service are issued and sold by lottery administration centers. We do not have the right to issue lottery products and cannot prevent the discontinuation of lottery products currently being offered. If the national lottery administration centers decide to discontinue one or more lottery products or to replace them with other products, this could lead to a decline in our purchase orders and thus have an adverse effect on our financial position and results of operations. In addition, if we want to provide services on newly issued lottery products, we have to enter into service agreements with the lottery administration centers that issue or sell such new lottery products. We cannot assure you that such service agreements can be entered into on terms favorable to us, or at all. If our competitors are able to enter into service agreements to service popular newly issued lottery products while we cannot, it could have an adverse effect on our revenue and brand name.
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Lottery products offered by provincial lottery administration centers may be discontinued or subject to restriction and regulations by the relevant national lottery administration centers. Due to the popularity of certain lottery products we service, those provincial lottery administration centers with which we do not have serviceagreements might choose to issue similar lottery products on more competitive terms. This may result in a decrease in the purchase orders of those lottery products we service and, in turn, result in a decrease in the revenue we are able to generate from those lottery products. We cannot assure you that we will be able to reach an agreement with a provincial lottery administration center to obtain the right to service its lottery products that compete with products we currently service. In addition, the relevant lottery authorities could mandate the change of the rules or prize scheme of our current lottery products or stop the issuance of those lottery products altogether due to social policy or other considerations, which could have an adverse effect on our results of operations.
We operate in an intensely competitive environment, which may lead to declining revenue growth or other circumstances that would negatively affect our results of operations.
We operate in the new and dynamically growing online market for lottery products. Going forward, we anticipate significant competition, primarily from other online lottery service providers that may obtain relevant approvals and licenses to provide online lottery sales services in China. When the approval and licensing system for online lottery service providers is fully implemented in China in the future, we may face increased competition from companies that do not currently operate in the online lottery services industry. For example, if major portal websites obtain relevant approvals and licenses to offer lottery sales services, they may be able to offer similar services at a lower cost or to a larger user group due to their larger operational scales and user bases, which will put us at a competitive disadvantage. We also face competition from traditional offline lottery agents. If we do not recognize market trends or user demand in a timely manner, we may lose our market share to our competitors, which would have a negative impact on our results of operations.
The lottery industry in China in general and the online lottery service industry in particular may not grow as quickly as expected, which may adversely affect our revenues and business prospects.
Our business and prospects depend on the continuing development and expansion of the lottery industry in China in general and the online lottery service industry in particular. Both China’s lottery industry and the online lottery service industry have experienced substantial growth in recent years in terms of both the number of people purchasing lottery products and revenue generated. We cannot assure you, however, that the lottery industry or the online lottery service industry in China will continue to grow as rapidly as it has in the past, or the current trend of a faster growth rate of the lottery market in comparison to the growth rates of China’s GDP and individual disposable income will continue in the future. Growth of China’s lottery industry and the online lottery services industry are affected by numerous factors, such as GDP growth, growth of individual disposable income, regulatory changes, public perception and receptiveness, users’ trust and confidence level in the online lottery market, users’ general online purchase experience, technological innovations, development of the Internet and Internet-based services, and the macroeconomic environment. If the lottery industry or online lottery service industry in China does not grow as quickly as expected or if we fail to benefit from such growth by failing to successfully implement our business strategies, our user base may decrease and our business and prospects may be adversely affected.
We depend on our technology and advanced information system, which may fail or be subject to disruption.
We are dependent on our IT systems for handling purchase orders, and the efficiency and reliability of our systems are in turn dependent on the functionality and stability of the underlying technical infrastructure. The functionality of the servers used by us and the related hardware and software infrastructure are of considerable significance to our business, our reputation and our ability to attract business partners and users. Our IT systems may be damaged or interrupted by increases in usage, human errors, unauthorized access, destruction of hardware, power cuts not covered by backup facilities, system crashes, software problems, virus attacks, natural hazards or disasters, or similar disruptions or disruptive events. Furthermore, our current IT systems may be unable to support a significant increase in online traffic or increased number of users, whether as a result of organic or inorganic growth of the business. We have in place security measures to protect against network or technical failures or disruptions. Despite such procedures, failures in computer processing and weakness in the existing software and hardware cannot be completely prevented or eliminated. Any failure of our IT system and infrastructure could lead to significant costs and disruptions that could reduce our revenues, harm our reputation and have a material adverse effect on our operations.
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In addition, we rely on bandwidth providers, communications carriers, data centers and other third parties for key aspects of the process in providing services to our users. Any failure or interruption in the services and products provided by these third parties could limit our ability to operate certain of our businesses, which could in turn have a material adverse effect on our business and financial condition.
We may not be able to develop and launch new services or new technologies in a timely manner or at all, and new services or technologies we manage to develop or provide may not be successful.
Our success in attracting new users and keeping existing users engaged depends on our ability to consistently develop and launch new and innovative services and technologies. Although we will continue to focus on research and development going forward, we cannot assure you that we will continue to be able to develop our technology to keep up-to-date with developments across the online lottery service industry and to launch new products or technologies in a timely manner or at all. New technologies and software are also less likely to be reliable, robust and resistant to viruses or failure. Given the fast growing online lottery service industry, we may not have enough time to fully test the new technologies and software we have developed before deploying them on our websites, which might cause service problems and negative user experience.
In particular, the number of people who access the Internet through non-PC devices such as mobile phones has increased in recent years. The software we have developed for these devices may not be widely adopted by users of such non-PC devices. The lower resolution, functionality and memory capacity associated with non-PC devices make the use of our services through such devices difficult. If we are unable to attract and retain a substantial number of non-PC device users to our services or if we are slow to develop services and technologies that are more compatible with non-PC devices relative to our competitors, we may fail to capture a significant share of new users or lose our existing users who switch to non-PC devices for their lottery purchase activities.
Our systems and controls to restrict access to our websites from persons located in the United States may not be adequate.
In the United States, some credit card companies have classified online purchase orders of U.S. state-issued lottery products as online gambling and thus denied such purchase orders, despite the fact that many such purchases are exempt from the Unlawful Internet Gambling Enforcement Act, or UIGEA, enacted in 2006. The UIGEA is silent on whether lottery products issued by non-U.S. state entities are exempt from the definition of online gambling. There are several other U.S. federal laws relevant to online gaming, including the Professional and Amateur Sports Protection Act, the Federal Interstate Wire Act, the Illegal Gambling Business Act, the Interstate Transportation of Wagering Paraphernalia Act and the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprising Act. In addition, laws and regulations exist in various individual U.S. states that limit or prohibit online games of chance. Although the services we provide to our users are solely related to lottery products issued and sold by national and authorized provincial lottery administration centers in China, we cannot assure you that the United States Department of Justice or other federal or state regulatory authorities will not deem our business as being in violation of the UIGEA or any of the laws mentioned above if purchase orders are placed on our platform from users in the United States not successfully blocked by our system. Violations of such laws can lead to criminal and civil penalties, including substantial fines, injunctions, damage claims and jail terms for persons accountable, and actions brought against us based on such violations, could have a material adverse effect on our operations, financial performance and prospects.
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Any extended periods in the future without our users winning substantial prizes could result in losses in revenues and profits for us.
Our users’ record of winnings is one of the factors contributing to our ability to attract new users and retain existing users. No assurance can be given that there will not be long periods in the future without any of our users winning a prize of significant amount, which could lead to a reduction in user activity and therefore a shortfall in our revenue and profit.
Negative publicity about our operations, or problems such as underage and compulsive lottery activities, fraud and corruption in sports matches may adversely affect our reputation and business.
Social responsibility policies are a key consideration in lottery laws and regulations. There are concerns as to the ability of online lottery service providers to effectively block minors from purchasing lottery products online and the possible increase in compulsive lottery activity due to the relative ease of making online lottery purchases. Publicity regarding such concerns could harm our brand and image. If the perception develops that online lottery operators or the lottery industry as a whole is failing to adequately protect minors and vulnerable lottery purchasers, we may face increased social resistance. Damage to the industry’s reputation could also lead to the withdrawal of support for the industry from the government or the tightening of regulations, which may have a material adverse effect on our business.
Negative publicity about potential fraud (including money laundering) and corruption in sports matches (including collusion and match-fixing), even if not directly or indirectly connected with us or our services, may adversely impact our reputation and the willingness of the public to participate in the purchase of sports lotteries. As a result, the number of potential users available to us could be adversely affected.
We may fail to detect fraudulent activities of our users or employees.
Online transactions may be subject to sophisticated schemes or collusion to defraud or other illegal activities, and there is a risk that our platform may be used for those purposes either by our users or our employees. While we make continuing efforts to protect our business and our users from such illegal activities, including a user identity verifying system and pre-payment procedures to protect against fictitious transactions, the controls and procedures we have implemented may not be effective in all cases. Failure to protect our operations and our users from fraudulent activity either by other users or our employees could result in reputational damage to us and could materially and adversely affect our results of operations.
Failure to adequately protect user account information could have a material adverse effect on us.
We process our users’ personal data (including name, address, age, bank details and lottery purchase history) as part of our business and therefore must comply with data protection laws in China. Data protection laws restrict our ability to collect and use personal information relating to our users and potential users. Notwithstanding our IT and data security and other systems, we may not be effective in detecting any intrusion or other security breaches, or safeguarding against sabotage, hackers, viruses and cyber crime. We are exposed to the risk that personal data could be wrongfully accessed and/or used, whether by employees, users or other third parties, or otherwise lost or disclosed or processed in breach of data protection laws. If we or any of the third party service providers whom we rely on fail to transmit users information and payment details online in a secure manner or if any such theft or loss of personal users data were to otherwise occur, it could subject us to liabilities under the data protection laws or result in the loss of the goodwill of our users.
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We are dependent on external service providers with respect to payment and settlement processing, and the provision of faulty services by these providers could lead to financial loss and damage to our reputation.
We are dependent on cooperation with external service providers with specialist knowledge and technology for processing lottery purchase orders. This includes, among other things, data and voice communication, procurement, installation, further development, maintenance and servicing of hardware and software, server housing and payment processing. It is possible that one or more of the external service providers do not perform the services, or that they do not perform them in a timely and accurate manner. It is therefore possible that, due to failures or omissions by the external service providers that we have engaged, we will not be in a position to perform our own services faultlessly or on time. This could lead to revenue losses, liability for damage, and substantial damage to our reputation.
We depend on payment processing for the success of our business.
We require our users to deposit funds in their registered accounts in advance of any lottery purchases. Users’ prize money are also deposited in and withdrawn from their respective accounts. Therefore, the provision of convenient, trusted and effective payment processing services to our users and potential users is critical to our business. If there is any deterioration or perceived deterioration in the quality of the payment processing services provided by us or any interruption to those services, or if our payment processing services are not performed in a timely manner, our users and potential users may be deterred from using our online lottery services, and we may be subject to user complaints and allegations concerning the mishandling of their funds, which may damage our reputation and have a material adverse effect on our business and results of operations.
We could be subject to administrative penalties or business losses if our current user identity verifying system cannot sufficiently prevent us from taking purchase orders from underage users.
According to the Regulation on Administration of Lottery issued by the State Council which came into effect on July 1, 2009, a lottery service provider may be subject to administrative penalties from the local civil affairs authority or the sports administration authorities if it takes lottery purchase orders from underage users. The lottery administration centers have the right to terminate their service agreements with a service provider if it becomes subject to administrative penalties. It is still unclear which security mechanisms have to be introduced for online service providers to protect minors. Although we have adopted a user identity verifying system which allows us to filter out underage users, we cannot assure you that our current system is sufficient for us to identify all underage users. If the relevant authorities determine that we are in violation of any relevant regulations, we may be subject to administrative penalties and we may lose our service agreements with the lottery operation centers.
In addition, a registration process that is as simple as possible and takes only a short time to complete is an important factor in our ability to attract new users. Currently, the age verification step of our registration process is relatively simple. If it becomes apparent that this measure is inadequate, the registration process might have to be made more lengthy and difficult for more in-depth checks, such as requiring users to provide a copy of their Chinese ID card or other identification documents as part of the registration process, which could decrease the number of new registrations or lead to a decrease in users. This could have a material adverse effect on our financial condition and results of operations.
Our failure to retain and attract qualified personnel could harm our business.
We believe that our success depends in part on our ability to attract, train and retain qualified personnel. Competition for qualified personnel is intense and we may not be able to hire sufficient personnel to achieve our goals or support the anticipated growth in our business. If we fail to attract and retain qualified personnel, our business will suffer.
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If we are not able to adequately protect our intellectual property, we may not be able to compete effectively.
Our ability to compete depends in part upon the strength of our proprietary rights in our technologies, brands and content. We expect to rely on a combination of Chinese, U.S. and other foreign patents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual property and proprietary rights. The efforts we have taken and expect to take to protect our intellectual property and proprietary rights may not be sufficient or effective at stopping unauthorized use of our intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country in which our products are made available. There may be instances where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter our markets and produce or sell the same or similar products. In addition, protecting our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If we are otherwise unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products may be reduced, and our business and financial results could be adversely affected.
If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. In addition, the possibility of extensive delays in the patent issuance process could effectively reduce the term during which a marketed product is protected by patents.
We may also need to obtain licenses to patents or other proprietary rights from third parties. We may not be able to obtain the licenses required under any patents or proprietary rights or they may not be available on acceptable terms. If we do not obtain required licenses, we may encounter delays in product development or find that the development, manufacture or sale of products requiring licenses could be foreclosed. We may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. We may not be able to acquire exclusive rights to the inventions or technical information derived from these collaborations, and disputes may arise over rights in derivative or related research programs conducted by us or our collaborators.
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
Our success depends upon the skills, knowledge and experience of our technical personnel, our consultants and advisors as well as our licensors and contractors. Because we operate in a highly competitive field, we rely almost wholly on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties confidential information developed by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. However, these agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
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We depend substantially on the continuing efforts of our executive officers, and our business and prospects may be severely disrupted if we lose their services.
Our future success is dependent on the continued services of the key members of our management team, including Ronald Edward Strauss, Renyan Ge, and Xili Wang. We do not maintain key man life insurance on any of our executive officers and directors. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new management. The process of hiring suitably qualified personnel is also often lengthy. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our business strategy.
We may not be able to manage our expansion of operations effectively and failure to do so could strain our management, operational and other resources, which could materially and adversely affect our business and growth potential.
We have grown since our inception and we anticipate continued expansion of our business to address growth in demand for our products, as well as to capture new market opportunities. The continued growth of our business has resulted in, and will continue to result in, substantial demands on our management, operational and other resources. In particular, we believe that the management of our growth will require, among other things:
| · | our ability to expand our market reach in China, Japan and elsewhere; |
| · | our ability to continue to identify new customers and distribution channels; |
| · | our ability to control operating expenses; |
| · | strengthening of financial and management controls; |
| · | increased marketing, sales and sales support activities; and |
| · | hiring, training and managing of new personnel, including sales personnel. |
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If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
We may need additional capital and may not be able to obtain it on acceptable terms or at all, which could adversely affect our liquidity and financial position; the issuance of additional equity would result in dilution to our shareholders.
We may need to raise additional capital if our expenditures exceed our current expectations due to changed business conditions or other future developments. Our future liquidity needs and other business reasons may require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or securities convertible or exchangeable to our equity securities would result in additional dilution to our shareholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that restrict our operational flexibility. Our ability to raise additional funds in the future is subject to a variety of uncertainties, including:
| · | our future financial condition, results of operations and cash flows; |
| · | general market conditions for capital-raising activities by technology companies; and |
| · | economic, political and other conditions in China, Japan and elsewhere. |
No assurances can be given that we will be able to obtain additional capital in a timely manner or on commercially acceptable terms or at all.
Future acquisitions are expected to be a part of our growth strategy, and could expose us to significant business risks.
One of our strategies is to grow our business through acquisition of other companies. However, no assurances can be given that we will be able to identify and secure suitable acquisition opportunities. Our ability to consummate and integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms for larger acquisitions, if at all.
Moreover, if an acquisition candidate is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not be able to enter into arrangements on commercially reasonable terms or at all. The negotiation and completion of potential acquisitions, whether or not ultimately consummated, could also require significant diversion of management’s time and resources and potential disruption of our existing business. Furthermore, no assurances can be given that the expected synergies from future acquisitions will actually materialize. In addition, future acquisitions could result in the incurrence of additional indebtedness, costs, and contingent liabilities. Future acquisitions may also expose us to potential risks, including risks associated with:
| · | the integration of new operations, products, services and personnel; |
| · | unforeseen or hidden liabilities; |
| · | the diversion of financial or other resources from our existing businesses; |
| · | our inability to generate sufficient revenue to recover costs and expenses of the acquisitions; and |
| · | the potential loss of, or harm to, relationships with employees or customers. |
Any of the above could significantly disrupt our ability to manage our business and materially and adversely affect our business, financial condition and results of operations.
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Risks Related to Our Corporate Structure
Transactions among our affiliates are subject to scrutiny by the PRC tax authorities and a finding that we or any of our consolidated entities owe additional taxes could have a material adverse impact on our net income and the value of an investment in our common stock.
Under PRC law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered into among our consolidated entities are challenged by the PRC tax authorities to be not on an arm’s-length basis, or to result in an unreasonable reduction in our PRC tax obligations, the PRC tax authorities have the authority to disallow our tax deduction claims, adjust the profits and losses of our respective PRC consolidated entities and assess late payment fees and other penalties. Our net income may be materially reduced if our tax liabilities increase or if we are otherwise assessed late payment fees or other penalties.
PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the listing and trading of our common stock could have a material adverse effect on our business, operating results, reputation and trading price of our common stock.
On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the “Revised M&A Regulations”), which took effect September 8, 2006. Among other things, the Revised M&A Regulations include provisions that purport to require that an offshore special purpose vehicle, or “SPV,” formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. We believe that (i) CC Investment was incorporated as a foreign owned enterprise and that there was no acquisition of the equity or assets of a “PRC domestic company” as such term is defined under the Revised M&A Regulations and (ii) that no provision in the Revised M&A Regulations clearly classifies the contractual arrangements between CC Investment and CC Power as a type of transaction falling within such rules. Therefore, we were and are not required to obtain the approval of CSRC under the Revised M&A Regulations in connection with the Exchange Transaction.
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If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for the Exchange Transaction, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. Also, if the CSRC later requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our common stock.
It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the Revised M&A Regulations. It is anticipated that application of the rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure that our domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the rules, we may need to expend significant time and resources to maintain compliance.
We currently conduct of our business primarily through contractually controlled PRC operating entities, and our control of the day-to-day operations of such PRC entities pursuant to contracts, to comply with Chinese law, may not be as effective as conducting business through direct equity ownership of such PRC entities due to uncertainties with respect to the PRC legal system which could materially and adversely affect our results of operations.
We currently conduct a substantial portion of our business primarily through our contractually controlled PRC operating entities. PRC laws and regulations govern our operations in the PRC. Our contractually controlled PRC operating entities are generally subject to laws and regulations applicable to foreign investments in the PRC and, in particular, laws applicable to wholly foreign-owned enterprises (“WFOEs”). Although members of our executive management team and our shareholders include the executive officers and owners of our contractually controlled PRC operating entities, because we do not directly own our contractually controlled PRC operating entities, we may encounter problems enforcing our rights to control the business affairs and day-to-day operations of such entities. If we find it necessary to take legal action in the PRC to enforce our rights under our contracts with the PRC operating entities, we will be subject to the uncertainties of the PRC legal system, where prior court decisions have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in PRC. However, the PRC has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation, if any, of these policies and rules until sometime after the violation. In addition, any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management attention. Accordingly, notwithstanding our contractual control over our PRC operating entities, such control may not be as effective as if we conducted our business through direct equity owned PRC entities which could materially and adversely affect our results of operations.
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Our contractual arrangements with CC Power and its shareholders may not be as effective in providing control over these entities as direct ownership.
We have no equity ownership interest in CC Power as we rely on the contractual arrangements of the VIE agreements to control and operate CC Power. These contractual arrangements may not be as effective in providing control over CC Power as direct ownership. For example, CC Power could fail to take actions required for our business or fail to pay dividends to CC Investment despite their contractual obligations to do so. If CC Power fails to perform its obligation under its VIE agreements, we may have to rely on legal remedies under PRC law, which may not be effective.
Risks Related to Doing Business Internationally and in China
We are subject to market risk through our sales to international markets.
A portion of our sales are or will be derived from international markets. These operations are subject to risks that are inherent in operating in foreign countries, including the following:
| · | foreign countries could change regulations or impose currency restrictions and other restraints; |
| · | changes in foreign currency exchange rates and hyperinflation or deflation in the foreign countries in which we operate; |
| · | exchange controls; |
| · | some countries impose burdensome tariffs and quotas; |
| · | political changes and economic crises may lead to changes in the business environment in which we operate; |
| · | international conflict, including terrorist acts, could significantly impact our financial condition and results of operations; and |
| · | economic downturns, political instability and war or civil disturbances may disrupt distribution logistics or limit sales in individual markets. |
No assurance can be given that we will be able to continue selling our products in any of the foreign countries in which we currently or plan to do business. Any of the above-mentioned factors could detrimentally affect our sales, and impact our financial condition and results of operations.
Current global economic conditions may adversely affect our industry, business and results of operations.
The recent disruptions in the current global credit and financial markets has included diminished liquidity and credit availability, a decline in consumer confidence, a decline in economic growth, an increased unemployment rate, and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending. We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse global economic conditions. If the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be materially and adversely affected.
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Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to the countries or regions in which we operate, which could adversely affect our financial performance.
We currently conduct operations in the PRC and in Japan, and plan on expanding our operations to additional international markets. Our future operating results in international markets could be negatively affected by a variety of factors, most of which are beyond our control. These factors include political conditions, including political instability, economic conditions, legal and regulatory constraints, trade policies, currency regulations, and other matters in any of the countries or regions in which we operate, now or in the future.
Moreover, the economies of some of the countries in which we currently have, or plan to have operations, have in the past suffered from high rates of inflation and currency devaluations, which, if they occurred again, could adversely affect our financial performance. Other factors which may impact our operations include foreign trade, monetary and fiscal policies both of the United States and of other countries, laws, regulations and other activities of foreign governments, agencies and similar organizations, and risks associated with having numerous officers located in countries which have historically been less stable than the United States. Additional risks inherent in our international operations generally include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights in countries other than the United States.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
A significant portion of our current business operations are conducted in China and we anticipate that a majority of our sales will be made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
| · | the degree of government involvement; |
| · | the level of development; |
| · | the growth rate; |
| · | the control of foreign exchange; |
| · | access to financing; and |
| · | the allocation of resources. |
While the Chinese economy has grown significantly in the past 25 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. The Chinese government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice. Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, governmental control over capital investments or changes in tax regulations applicable to us, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since late 2003, the PRC government implemented a number of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks to make loans and raise interest rates, in order to decrease the growth rate of specific segments of China’s economy which it believed to be overheating. These actions, as well as future actions and policies of the PRC government, could materially affect our liquidity and access to capital and our ability to operate our business. Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of our shareholders’ investment.
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New labor laws in the PRC may adversely affect our results of operations.
On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.
If political relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing U.S. capital markets.
At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could adversely affect the market price of our common stock and our ability to access U.S. capital markets.
Uncertainties with respect to the PRC legal system could limit the protections available to you and us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system in the United States, prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. We conduct a significant portion of our current business through our subsidiary established in China. Thus we are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. However, since many laws, rules and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of Chinese administrative and court proceedings and the level of legal protection we enjoy in China than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Chinese telecommunications industry and software technology industry, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and our investors. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
The fluctuation of foreign currency exchange rates could materially impact our financial results.
Since we currently conduct a significant portion our operations in China, our business is subject to foreign currency risks, including currency exchange rates fluctuations and difficulties in converting Renminbis into U.S. dollars. The exchange rates between the Renminbi and the U.S. dollar, Euro and other foreign currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Currently the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 1% per day and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business, financial condition and results of operations.
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Because our assets are located outside of the United States and all of our directors and officers reside outside of the United States, it may be difficult for investors to enforce their rights based on United States federal securities laws or any United States court judgments against us and our officers and directors.
Our operating company and all of our assets are currently located in the PRC and Hong Kong. In addition, all of our current directors and officers reside outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States federal securities laws against us in the courts of either the United States, PRC or Hong Kong and, even if civil judgments are obtained in United States courts, to enforce such judgments in PRC or Hong Kong courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC and Hong Kong would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States federal securities laws or other United States laws.
Restrictions under PRC law on our PRC operating subsidiary’s ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or complete acquisitions that could benefit our business, pay dividends to, and otherwise fund and conduct our businesses.
Substantially all of our revenues are currently earned by our PRC operating subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.
All of CC Power’s sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, CC Power may purchase foreign currencies for settlement of current account transactions, including payments of dividends to the Company, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by our PRC operating subsidiary under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiary borrows foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiary by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign exchange through debt or equity financing.
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There are significant uncertainties under the EIT relating to the withholding tax liabilities of CC Investment, and dividends payable by CC Investment to CC Mobility may not qualify to enjoy the treaty benefits.
Under the EIT and its implementing rules, the profits of a foreign invested enterprise which are distributed to its immediate holding company outside the PRC will be subject to a withholding tax rate of 10%. Pursuant to a tax arrangement between Hong Kong and the PRC, such rate may be lowered to 5% if a Hong Kong resident enterprise owns over 25% of a PRC company. CC Investment is currently wholly-owned by CC Mobility. However, the 5% withholding tax rate does not automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy any benefits under the relevant taxation treaties. Moreover, according to theNotice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treatiespromulgated on February 20, 2009, for a tax treaty to be applicable, certain requirements must be satisfied, including: (1) the taxpayer must be the beneficial owner of the relevant dividends; (2) for corporate recipients to enjoy the favorable tax treatment under the tax treaty as direct owners of a PRC enterprise, such corporate recipients must satisfy the direct ownership thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. On August 24, 2009, the State Administration of Taxation issued theAdministrative Measures for Non-resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective on October 1, 2009, requiring non-resident enterprises to obtain an approval from the competent tax authority in order to enjoy the treatments under tax treaties. Further, the State Administration of Taxation promulgated theNotice on How to Understand and Recognize the “Beneficial Owner” in Tax Treatieson October 27, 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive operations, and set forth certain adverse factors on the recognition of such “Beneficial Owner.” CC Investment has not yet applied for such approvals because it has not declared or paid dividends, and does not intend to declare or pay dividends. CC Investment will apply for such approvals when it intends to declare and pay dividends. There is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received by CC Mobility from CC Investment.
Changes in economic conditions and consumer confidence in China may influence the industry in which we operate, consumer preferences and spending patterns.
A significant portion of our business and revenue growth depends on the size of the online lottery industry in China. As a result, our revenue and profitability may be negatively affected by changes in national, regional or local economic conditions and consumer confidence in China. We are susceptible to changes in economic conditions, consumer confidence and customer preferences of the Chinese population. External factors beyond our control that affect consumer confidence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions, natural disasters, extreme weather conditions, disease outbreaks and acts of war or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. In addition, natural disasters, extreme weather conditions, disease outbreaks and acts of war or terrorism may cause damage to our facilities, disrupt the supply of the products we offer or adversely impact consumer demand. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to our Common Stock and our Status as a Public Company
The relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience and is generally unfamiliar with the requirements of the United States securities laws, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior management team have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.
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We will be required to incur significant costs and require significant management resources to evaluate our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act, and any failure to comply or any adverse result from such evaluation may have an adverse effect on our stock price.
As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with the Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Failure to comply or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our equity securities. Management believes that its internal controls and procedures are currently not effective to detect the inappropriate application of U.S. GAAP rules. Management realize there are deficiencies in the design or operation of our internal control that adversely affect our internal controls which management considers to be material weaknesses including those described below:
| 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. |
Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we and our independent registered public accounting firm would be able to conclude that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.
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A limited public trading market exists for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.
Our common stock is currently traded under the symbol “XCLL” but currently with low volume, based on quotations on the OTCQB marketplace, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our stock until such time as we became more viable. Additionally, many brokerage firms may not be willing to effect transactions in the securities. As a consequence, there may be periods of several days or more when trading activity in our stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to the volatility of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.
Shareholders should also be aware that, according to SEC Release No. 34-29093, the market for “penny stock,” such as our common stock, has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
We do not anticipate paying any dividends in the foreseeable future. If and when we decide to pay dividends, any dividends or proceeds from liquidation will be subject to the approval of the relevant Chinese government agencies.
We currently intend to retain any future earnings for funding growth. We do not anticipate paying any dividends in the foreseeable future. As a result, shareholders should not rely on an investment in our securities if they require dividend income. A significant portion of our assets are located inside China. Under the laws governing foreign-invested enterprises in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. If and when made, any dividend payment will be subject to the decision of the board of directors of our Chinese operating company, CC Investment, and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.
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Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.
Our stock is categorized as a “penny stock.” The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $4.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our Articles of Incorporation and Bylaws contain a provision permitting us to eliminate the personal liability of our directors to our company and shareholders for damages for breach of fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
The audit report included in this annual report was prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as a result, you are deprived of the benefits of such inspection.
The independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the “PCAOB”, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditors are not currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
ITEM 1B.UNRESOLVED STAFF COMMENTS.
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.
The principal executive offices for the Registrant are located at: 303 Twin Dolphins Drive, Suite 600, Redwood City, CA 94065. The monthly rent for this property and related expenses is US$350 per month. The Registrant’s main telephone number is: 650-632-4210 and its fax number is 650-551-9901. The Registrant’s website is located at: www.xcelmobility.com
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CC Power’s offices are located at: 3F, West Block, M-8, Maqueling Industrial Park, Nanshan District, Shenzhen, PRC. The lease for CC Power’s offices is for a one year term from September 1, 2013 to August 30, 2015, with a payment of RMB 19,938.61 (USD 3,263) per month.
There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Registrant’s Common Equity
Our common stock is currently listed for trading on the OTCQB marketplace, operated by OTC Markets Group, Inc. under the symbol: “XCLL.” The table below lists the high and low closing prices per share of our common stock for each quarterly period during the past two fiscal years as quoted on the OTCQB.
| Fiscal Year Ending December 31, 2014 | High | Low | ||||||
| First Quarter - March 31, 2014 | $ | 0.15 | $ | 0.10 | ||||
| Second Quarter - June 30, 2014 | $ | 0.12 | $ | 0.05 | ||||
| Third Quarter - September 30, 2014 | $ | 0.06 | $ | 0.02 | ||||
| Fourth Quarter - December 31, 2014 | $ | 0.05 | $ | 0.02 | ||||
| Fiscal Year Ending December 31, 2013 | High | Low | ||||||
| First Quarter - March 31, 2013 | $ | 0.20 | $ | 0.07 | ||||
| Second Quarter - June 30, 2013 | $ | 0.17 | $ | 0.10 | ||||
| Third Quarter - September 30, 2013 | $ | 0.09 | $ | 0.04 | ||||
| Fourth Quarter - December 31, 2013 | $ | 0.17 | $ | 0.07 | ||||
Trading in our common stock has been sporadic and the quotations set forth above are not necessarily indicative of actual market conditions. All prices reflect inter-dealer prices without retail mark-up, mark-down, or commission and may not necessarily reflect actual transactions.
Approximate Number of Holders of Common Stock
As of March 23, 2015, there were 17 shareholders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name.”
Dividends
We have not declared any cash dividends in the two most recent fiscal years. The declaration of future cash dividends, if any, will be at the discretion of the Board of Directors and will depend on our earnings, if any, capital requirements and financial position, general economic conditions and other pertinent conditions. It is our present intention not to pay any cash dividends in the near future.
Securities Authorized for Issuance Under Equity Compensation Plans
There are no options, warrants or convertible securities outstanding pursuant to an equity compensation plan.
Recent Sales of Unregistered Securities
None.
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ITEM 6.SELECTED FINANCIAL DATA.
A registrant that qualifies as a “smaller reporting company” is not required to provide the information required by this Item.
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.
This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended December 31, 2014 and 2013. The discussion and analysis that follows should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report.
OVERVIEW
We were incorporated in the state of Nevada on December 27, 2007 under the name “Advanced Messaging Solutions, Inc.” On March 29, 2011, we amended our Articles of Incorporation to change our name from “Advanced Messaging Solutions, Inc.” to “XcelMobility Inc.” and we effected a 35-for-1 forward stock split of all of our issued and outstanding shares of common stock.
On July 5, 2011, we entered into the Exchange Agreement with CC Power, 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 “Purchase Agreement”) with CC Investment, Jifu and certain of its shareholders (the “Jifu Shareholders”). Pursuant to the terms of the Purchase Agreement, we issued an aggregate of 27,000,000 shares of our common stock to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements with CC Investment. On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release (the “Release”) with the Jifu Shareholders. Pursuant to the Release, the parties cancelled the Purchase Agreement and we returned control of Jifu to the Jifu Shareholders. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to the Jifu Shareholders.
On September 22, 2014, we entered into an asset purchase agreement with Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) pursuant to which we acquired certain assets of Silvercreek (the “Assets”) relating to an online sports lottery business in exchange for the issuance of up to 80,000,000 shares (“Shares”) of common stock of the Company.
Previously, our business was focused on wearable computing. Our new lottery business aggregates and processes lottery purchase orders, deriving revenue from service fees paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers. We offer a comprehensive and integrated suite of online lottery services in China. We hope that the merging of our lottery business with our existing mobile technologies, partners, and customers, will provide a platform for growth in this industry.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
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Certain of our accounting policies require higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis. Select significant accounting policies concerning revenue recognition and cost of revenue are listed as below:
Revenue recognition
Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements. During the year ended December 31, 2012, we also have revenues derived from GPS system development and website development projects along with maintenance arrangements.
We evaluate revenue recognition based on the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
Revenue Recognition for Software Products (Software Elements)
New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element Arrangements – Software Products and Software RelatedServices(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.
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Revenue Recognition for Multiple-Element Arrangements – Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (“ASU”) 2009-13,Revenue Recognition (Topic 605):Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of business tax and surcharges on revenue.
Research and development and Software Development Costs
All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 985-20,Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements for the years ended December 31, 2012 and 2011. Other research and development expenses were included in general and administrative expense.
Recently Issued Accounting Pronouncements
In January 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification) or subject to a master netting arrangement or similar agreement. The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11.
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.
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In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. 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 ending after December 15, 2014, and interim periods and annual periods thereafter. The amendments in this ASU should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this ASU) and should disclose that fact. Early adoption is permitted.
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.
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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.
In March 2014, FASB has issued Accounting Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The guidance addresses the consolidation of lessors in certain common control leasing arrangements and is based on a consensus reached by the Private Company Council (PCC). Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model. In a variable interest entity model, the company has a controlling financial interest when it has: (a) the power to direct the activities that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses or the right to receive benefits of the entity that could be potentially significant to the entity. To determine which model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for consolidation and whether that entity is a variable interest entity. If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance.
In August 2014, FASB has issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements— Going Concern (Subtopic 205-40). In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.
Results of Operations
Comparison of the Years Ended December 31, 2014 and 2013
Revenue
Our revenue for the year ended December 31, 2014 totaled $171,452, as compared to $76,449 the year ended December 31, 2013. This increase in revenue was primarily due to the new lottery business.
For the year ended December 31, 2014, the revenues from software products and those related services were $50,992 as compared to $76,449 for the year ended December 31, 2013.
Cost of revenue
Cost of revenue for the year ended December 31, 2014 totaled $5,550, as compared to $39 for the year ended December 31, 2013. This increase in cost of revenue was primarily due to the tax surcharge on the revenue for the new lottery business.
Gross profit
Gross profit for the year ended December 31, 2014 was $165,902, as compared to $76,410 for the year ended December 31, 2013. This increase in gross profit was primarily due to the contribution of the new lottery business.
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Operating Expenses
Our operating expenses for the year ended December 31, 2014 were $1,913,303, as compared to $1,263,146 for the year ended December 31, 2013. These expenses were comprised of selling expenses of $24,226 and general & administrative expenses of $1,889,077 for the year ended December 31, 2014, while the selling expenses and general & administrative for the year ended December 31, 2013 were $26,285 and $1,236,861 respectively. This increase in operating expenses was primarily due to the increase of stock based compensation from $189,000 for the year ended December 31, 2013 to $1,250,000 in December 31, 2014.
Other Income (Expenses)
Other income (expense) for the year ended December 31, 2014 was ($753,382), as compared to ($342,589) for the year ended December 31, 2013. This increase in other expense was primarily due to the loss on derivative of $(335,250) for the year ended December 31, 2014, compared to the gain on derivative of $188,176 for the year ended December 31, 2013.
Net Loss
A net loss of ($3,551,887) resulted for the year ended December 31, 2014 compared to net loss of ($504,848) for the year ended December 31, 2013. The increase in net loss was primarily due to the increased operating expenses and other expenses for the year ended December 31, 2014.
Comprehensive Loss
Our comprehensive loss was ($2,197,639) for the year ended December 31, 2014, as compared to ($687,488) for the year ended December 31, 2013. The increase is primarily due to the increased net loss for the year ended December 31, 2014.
Liquidity and Capital Resources
Overview
As of December 31, 2014, we had cash and equivalents on hand of $159,628 and negative current liabilities of $991,011. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through December 31, 2015. 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 August 14, 2014, we entered into a financing with KBM Worldwide, Inc., pursuant to which we issued a convertible promissory note in the original principal amount of $110,000. The convertible promissory note bears interest at 8% annually and is due on August 21, 2015. The conversion price for the convertible promissory note is equal to 75% of the average of the lowest three trading prices for our common stock during the ten (10) trading days prior to conversion.
On November 17, 2014, we entered into a second financing with KBM Worldwide, Inc., pursuant to which we issued a convertible promissory note in the original principal amount of $61,000. The convertible promissory note bears interest at 8% annually and is due on November 17, 2015. The conversion price for the convertible promissory note is equal to 75% of the average of the lowest three trading prices for our common stock during the ten (10) trading days prior to conversion.
As of December 31, 2014, we have outstanding indebtedness pursuant to convertible notes issued to various accredited investors in the aggregate principal amount of $1,471,000. During the fiscal year ended December 31, 2014, an aggregate of $282,618 of outstanding indebtedness pursuant to convertible notes was converted into shares of our common stock.
We are currently seeking both short term working capital to finance current operations as well as significant amounts of long term capital to execute our business plan and ultimately offer our products in the U.S. market. We project that to keep operations at our current level, approximately $900,000 in revenue and working capital will be required over the next 12 months to cover monthly expenses of $75,000. In order to meet our planned strategic two to four acquisitions, we estimate requiring up to $3,000,000 in capital.
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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).
Net cash provided by (used in) operating activities
Net cash provided by (used in) operating activities for the year ended December 31, 2014 was ($675,775) compared to net cash provided by operating activities of $301,190 for the year ended December 31, 2013. The change is mainly due to net loss of ($3,551,887) for the year ended December 31, 2014 compared to net loss of ($504,848)
Net cash provided by (used in) investing activities
Net cash used in investing activities for the year ended December 31, 2014 was $1,070 compared to net cash used in investing activities for the year ended December 31, 2013 of $13,192. This decrease is mainly due to the decreased cash flow for acquisition of property, plant and equipment.
Net cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2014 was $340,442 compared to cash provided by financing activities for the year ended December 31, 2013 of $37,500. This increase is mainly due to the increased proceeds from issuance of convertible notes.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it.
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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange Rates
Our financial instruments consist mainly of cash, borrowings and accounts receivable. The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in exchange rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to the expected future rates.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. The RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings, cash and assets are currently denominated in RMB, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our Chinese operations are translated from local currency into U.S. dollar upon consolidation. If the U.S. dollar weakens against the RMB, the translation of our foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against the RMB. Additionally, foreign exchange rate fluctuations on transactions denominated in RMB other than the functional currency result in gains and losses that are reflected in our consolidated statement of operations. Our operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
Considering the RMB balance of our cash as of December 31, 2014, which amounted to US$108,454, 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$1,075 of the balance.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements annexed to this Form 10-K for the year ended December 31, 2014 begin on page F-1 and have been examined by our independent accountants, AWC (CPA) Limited.
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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.
None.
ITEM 9A.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of December 31, 2014 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2014 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the framework in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Management concluded, as of December 31, 2014, that our internal control over financial reporting was not effective. Management realized there were deficiencies in the design or operation of the Company’s internal control that adversely affected the Company’s internal controls which management considers to be material weaknesses.
In performing the above-referenced assessment, our management identified the following material weaknesses:
| i) | We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis. | |
| ii) | We do not have an audit committee. While not being legally obligated to have an audit committee, it is the management’s view that to have an audit committee, comprised of independent board members, is an important entity-level control over our financial statements. | |
| iii) | We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non- routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness. |
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 Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended December 31, 2014 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.
On January 13, 2015, our independent public accounting firm, Albert Wong & Co. was succeeded by AWC (CPA) Limited, and the registration status was updated accordingly with the Public Company Accounting Oversight Board (“PCAOB”). AWC (CPA) Limited is not a separately registered entity with the PCAOB and therefore we are not required to file a Current Report on Form 8-K under Item 4.01.
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ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Set forth below are the present directors and executive officers of the Company. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. Other than as set forth below, there are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.
| Name | Age | Position | Since | |||
| Ronald Edward Strauss | 56 | Executive Chairman of the Board of Directors | 2011 | |||
| Renyan Ge | 52 | Director, Chief Executive Officer | 2011 | |||
| Xili Wang | 46 | Chief Financial Officer, Secretary | 2011 |
The Board of Directors is comprised of only one class. All of the directors serve for a term of one year and until their successors are elected at the Company’s Annual Shareholders’ Meeting and are qualified, subject to removal by the Company’s shareholders. Each executive officer serves, at the pleasure of the Board of Directors, for a term of one year and until his successor is elected at a meeting of the Board of Directors and is qualified.
Our Board of Directors believes that all members of the Board and all executive officers encompass a range of talent, skill, and experience sufficient to provide sound and prudent guidance with respect to our operations and interests. The information below with respect to our directors and executive officers includes each individual’s experience, qualifications, attributes, and skills that led our Board of Directors to the conclusion that he or she should serve as a director and/or executive officer.
Biographies
Set forth below are brief accounts of the business experience during the past five years of each director, executive officer and significant employees of the Company.
Ronald Edward Strauss, Executive Chairman of the Board of Directors, Director
Mr. Strauss is a serial entrepreneur with 20 years of experience in founding and leading computer hardware and software related technology start-ups. Mr. Strauss has been an active advisor and director for CC Power since 2008. In 1987, Mr. Strauss founded his first company Focus Automation Systems Inc.. Focus spun out Mitra Imaging Inc., acquired by Agfa Gervaert, and Focus Systems, acquired by V Technology Corporation. In 2001, Mr. Strauss founded Avvida Systems a leading supplier of embedded computing technology to military, telecom, and transportation industries. Avvida was ultimately acquired by a division of GE Fanuc USA. Following the acquisition, Mr. Strauss worked for 3 years ending his career at GE Fanuc as VP/GM Canada and Asia Integration Leader. Mr. Strauss is a Computer Systems Technologist and has completed software development, human resource, and financial accounting management training at University of Waterloo, GE Jack Welsh Management Training Center and Harvard University. Most recently, Mr. Strauss completed Chinese Mandarin language and culture training at Sinoland College in Beijing China. Today he speaks and understands Intermediate level Mandarin Chinese. He has sat on the board of directors for all three of the high tech companies he founded, the board of directors of the Automated Imaging Association in the USA, a Canadian division of GE Fanuc, and was a past member of the Board of Governors of Conestoga College of Applied Arts and Technology. The Company believes that Mr. Strauss’ prior business experience and familiarity with our industry represent an invaluable resource to achieving the business goals of the Company.
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Renyan Ge,Chief Executive Officer, Director
Mr. Ge has over 25 years of experience in engineering, R&D, customer support and management. He is also a founding member of CC Power since its inception in 2003. Since 2007, Mr. Ge has served as a director and chief executive officer of CC Power, positions he still holds. Prior to founding CC Power, Mr. Ge worked as the business development director for General Electric (Fanuc) embedded systems in the Asia-Pacific region. In addition, he also worked in Canada and Japan for a leading supplier to the semiconductor and FPD markets. Mr. Ge holds a masters degree in system design from the University of Waterloo, and a BSc in photogrammetry and remote sensing from Wuhan University in the People’s Republic of China. Mr. Ge has recently completed financial accounting management training at Harvard University. Mr. Ge speaks Chinese, Japanese, and English. The Company believes that Mr. Ge’s knowledge and experience will help the Company achieve its goals of expanding its business in China and throughout the Asia-Pacific region.
Xili Wang, Chief Financial Officer, Secretary
Ms. Wang has 18 years of experience in financial and general management in both public and private corporations in China. Ms. Wang is a founding member of CC Power and served as the chief financial officer of CC Power from 2003 to 2011. Ms. Wang began her career with publicly listed Sunrise Group Holdings as a senior financial manager. As a founding member of CC Power, Ms. Wang has performed many important duties including managing the financial activities of CC Power as well as working closely with CC Power’s chief executive officer in human and operational management. Ms. Wang graduated from Huazhong Technical and Science University in 1990 with a BSc in accounting and finance management.
Family Relationships
There are no family relationships between or among any of our directors, executive officers and incoming directors or executive officers.
Involvement in Certain Legal Proceedings
No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.
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Committees of the Board
Our Board of Directors held no formal meetings in the prior fiscal year. All proceedings of the Board of Directors were conducted by resolutions consented to in writing by the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada Revised Statutes and the bylaws of our Company, as valid and effective as if they had been passed at a meeting of the directors duly called and held. We do not presently have a policy regarding director attendance at meetings.
We do not currently have a standing audit, nominating or compensation committee of the Board of Directors, or any committee performing similar functions. Our Board of Directors performs the functions of audit, nominating and compensation committees.
Audit Committee
Our Board of Directors has not established a separate audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Instead, the entire Board of Directors acts as the audit committee within the meaning of Section 3(a)(58)(B) of the Exchange Act and will continue to do so until such time as a separate audit committee has been established.
Audit Committee Financial Expert
We currently have not designated anyone as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K as we have not yet created an audit committee of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings.
Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2014, our officers, directors and greater than 10% percent beneficial owners complied with all applicable filing requirements, except for the following:
Renyan Ge: Failure to timely file Form 4 in connection with acquisition of shares of common stock on October 1, 2014.
Ronald Strauss: Failure to timely file Form 4 in connection with acquisition of shares of common stock on October 1, 2014
Xili Wang: Failure to timely file Form 4 in connection with acquisition of shares of common stock on October 1, 2014
Nominations to the Board of Directors
Our directors take a critical role in guiding our strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of the stockholders, diversity, and personal integrity and judgment.
In addition, directors must have time available to devote to Board activities and to enhance their knowledge in the growing business. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities to the Company.
In carrying out its responsibilities, the Board will consider candidates suggested by stockholders. If a stockholder wishes to formally place a candidate’s name in nomination, however, he or she must do so in accordance with the provisions of the Company’s Bylaws. Suggestions for candidates to be evaluated by the proposed directors must be sent to the Board of Directors, c/o XcelMobility Inc., 303 Twin Dolphins Drive, Suite 600, Redwood City, CA, 94065.
Director Nominations
As of December 31, 2014, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our Board of Directors.
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Board Leadership Structure and Role on Risk Oversight
Renyan Ge currently serves as the Company’s principal executive officer and a director. The Company determined this leadership structure was appropriate for the Company due to our small size and limited operations and resources. The Board of Directors will continue to evaluate the Company’s leadership structure and modify as appropriate based on the size, resources and operations of the Company. It is anticipated that the Board of Directors will establish procedures to determine an appropriate role for the Board of Directors in the Company’s risk oversight function.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Code of Ethics
The Company has adopted a Code of Ethics applicable to all Company directors, officers and employees which is available on our website at: http://www.xcelmobility.com/about/governance/code-of-ethics.
ITEM 11.EXECUTIVE COMPENSATION.
General Philosophy
Our Board of Directors is responsible for establishing and administering the Company’s executive and director compensation.
Executive Compensation
The following summary compensation table indicates the cash and non-cash compensation earned from the Company during the fiscal years ended December 31, 2014 and 2013 by the current and former executive officers of the Company and each of the other two highest paid executives or directors, if any, whose total compensation exceeded $100,000 during those periods.
| Summary Compensation | ||||||||||||||||||||||||||||||||
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | All Other Compensation | Total | ||||||||||||||||||||||||
| Ronald Edward Strauss, | 2014 | - | - | $ | 584,390 | (1) | - | - | - | $ | 584,390 | |||||||||||||||||||||
| Executive Chairman of the Board | 2013 | - | - | - | - | - | ||||||||||||||||||||||||||
| Renyan Ge, Director, Chief | 2014 | - | - | $ | 448,620 | (2) | - | - | - | $ | 448,620 | |||||||||||||||||||||
| Executive Officer | 2013 | $ | 7,835 | - | - | - | - | $ | 7,835 | |||||||||||||||||||||||
| Xili Wang, Chief Financial | 2014 | - | - | $ | 373,146 | (3) | - | - | - | $ | 373,146 | |||||||||||||||||||||
| Officer & Secretary | 2013 | $ | 17,427 | - | - | - | - | $ | 17,427 | |||||||||||||||||||||||
| (1) | Pursuant to a letter agreement dated October 1, 2014, Ronald Strauss received 43,911,115 shares of common stock of the Company in lieu of accrued and unpaid compensation of $584,290. |
| (2) | Pursuant to a letter agreement dated October 1, 2014, Renyan Ge received 33,776,539 shares of common stock of the Company in lieu of accrued and unpaid compensation of $448,620. |
| (3) | Pursuant to a letter agreement dated October 1, 2014, Xili Wang received 28,094,112 shares of common stock of the Company in lieu of accrued and unpaid compensation of $373,146. |
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Potential Payments Upon Termination or Change-in-Control
SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the Company. Please see the section entitled “Employment Agreements” below for a discussion of management compensation in the event of a termination of employment or change in control of the Company.
Employment Agreements
We have entered into employment agreements with Ronald Strauss, Renyan Ge and Xili Wang, per the following:
Ronald Edward Strauss- The Company is party to an Amended and Restated Management Service Agreement with Ronald Edward Strauss in connection with his service as Executive Chairman of the Board of Directors, dated August 28, 2014 and continuing for an indefinite term. Mr. Strauss is entitled to a payment of $180,000 per year as a base management fee, to be paid in bi-monthly installments, and options to purchase 500,000 shares of common stock on an annual basis. Mr. Strauss is also entitled to purchase equity in lieu of base salary at a price equal to the lower of the lowest publicly traded share price for the Company’s common stock during the thirty (30) days prior to issuance, or the per share price paid by a third party investor during the past twelve (12) months. Mr. Strauss is eligible for an annual bonus in an amount to be determined by the board of directors.
In the event the Company terminates Mr. Strauss’ service agreement without cause (as defined in his management service agreement), Mr. Strauss shall be entitled to certain payments in lieu of notice depending on Mr. Strauss’ length of service. Specifically, if Mr. Strauss’ service period is less than 36 months, he shall be entitled to receive 18 monthly payments equal to his monthly management fee at the time of termination in lieu of an 18 month notice period; and where Mr. Strauss’ service is more than 36 months, he shall be entitled to receive 30 monthly payments equal to his monthly management fee at the time of termination in lieu of a 30 month notice. If the Company elects to give Mr. Strauss notice of termination, in the absence of just cause, Mr. Strauss may choose to receive payments due in either a lump sum, or on a continuance basis or a combination of both. During the notice period, Mr. Strauss will not be required to perform the responsibilities of his position. Where there is just cause for termination or if Mr. Strauss is in material breach of his management service agreement, Mr. Strauss will not be entitled to notice, bonus payment or payment in lieu of notice.
In the event there is a change in control of the Company, and within eighteen (18) months, Mr. Strauss is terminated without cause, the Company will provide Mr. Strauss a cash payment equal to 1.5 times his annual salary, or $75,000.
Renyan Ge- The Company is a party to an Amended and Restated Management Service Agreement with Renyan Ge in connection with his service as Chief Executive Officer of the Company, dated August 28, 2014 and continuing for an indefinite term. Mr. Ge is entitled to a payment of $180,000 per year as a base management fee, to be paid in bi-monthly installments, and options to purchase 500,000 shares of common stock on an annual basis. Mr. Ge is also entitled to purchase equity in lieu of base salary at a price equal to the lower of the lowest publicly traded share price for the Company’s common stock during the thirty (30) days prior to issuance, or the per share price paid by a third party investor during the past twelve (12) months. Mr. Ge is eligible for an annual bonus in an amount to be determined by the board of directors.
In the event the Company terminates Mr. Ge’s service agreement without cause (as defined in his management service agreement), Mr. Ge shall be entitled to certain payments in lieu of notice depending on Mr. Ge’s length of service. Specifically, if Mr. Ge’s service period is less than 36 months, he shall be entitled to receive 18 monthly payments equal to his monthly management fee at the time of termination in lieu of an 18 month notice period; and where Mr. Ge’s service is more than 36 months, he shall be entitled to receive 30 monthly payments equal to his monthly management fee at the time of termination in lieu of a 30 month notice. If the Company elects to give Mr. Ge notice of termination, in the absence of just cause, Mr. Ge may choose to receive payments due in either a lump sum, or on a continuance basis or a combination of both. During the notice period, Mr. Ge will not be required to perform the responsibilities of his position. Where there is just cause for termination or if Mr. Ge is in material breach of his management service agreement, Mr. Ge will not be entitled to notice, bonus payment or payment in lieu of notice.
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In the event there is a change in control of the Company, and within eighteen (18) months, Mr. Ge is terminated without cause, the Company will provide Mr. Ge a cash payment equal to 1.5 times his annual salary, or $75,000.
Xili Wang- The Company is a party to an Amended and Restated Management Service Agreement with Xili Wang in connection with her service as Chief Financial Officer of the Company, dated August 28, 2014 and continuing for an indefinite term. Ms. Wang is entitled to a payment of $150,000 per year as a base management fee, to be paid in bi-monthly installments, and options to purchase 250,000 shares of common stock on an annual basis. Ms. Wang is also entitled to purchase equity in lieu of base salary at a price equal to the lower of the lowest publicly traded share price for the Company’s common stock during the thirty (30) days prior to issuance, or the per share price paid by a third party investor during the past twelve (12) months. Ms. Wang is eligible for an annual bonus in an amount to be determined by the board of directors.
In the event the Company terminates Ms. Wang’s service agreement without cause, Ms. Wang shall be entitled to certain payments in lieu of notice depending on Ms. Wang’s length of service. Specifically, if Ms. Wang’s service period is less than 36 months, she shall be entitled to receive 18 monthly payments equal to her monthly management fee at the time of termination in lieu of an 18 month notice period; and where Ms. Wang’s service is more than 36 months, she shall be entitled to receive 30 monthly payments equal to her monthly management fee at the time of termination in lieu of a 30 month notice. If the Company elects to give Ms. Wang notice of termination, in the absence of just cause, Ms. Wang may choose to receive payments due in either a lump sum, or on a continuance basis or a combination of both. During the notice period, Ms. Wang will not be required to perform the responsibilities of her position. Where there is just cause for termination or if Ms. Wang is in material breach of her management service agreement, Ms. Wang will not be entitled to notice, bonus payment or payment in lieu of notice.
In the event there is a change in control of the Company, and within eighteen (18) months, Ms. Wang is terminated without cause, the Company will provide Ms. Wang a cash payment equal to 1.5 times his annual salary, or $58,000.
Other than as noted above, none of our executive officers or directors received, nor do we have any arrangements to pay out, any bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified deferred compensation.
Compensation of Directors
We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.
Stock Option Plans - Outstanding Equity Awards at Fiscal Year End
None.
Pension Table
The Company contributes to a state pension plan organized by municipal and provincial governments in respect of its employees in PRC. The compensation expense related to this plan was $17,669 and $20,073 for the years ended December 31, 2014 and 2013, respectively.
Retirement Plans
We do not offer any annuity, pension, or retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement, or any other termination of employment with our company, or from a change in the control of our Company.
Compensation Committee
The Company does not have a separate Compensation Committee. Instead, the Company’s Board of Directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for other officers, administers the Company’s stock option plans and other benefit plans, if any, and considers other matters.
Risk Management Considerations
We believe that our compensation policies and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.
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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS.
Security Ownership
The following table sets forth certain information as of March 23, 2015, with respect to the beneficial ownership of our common stock for (i) each director and officer, (ii) all of our directors and officers as a group, and (iii) each person known to us to own beneficially five percent (5%) or more of the outstanding shares of our common stock. As of March 23, 2015, there were 234,682,756 shares of common stock outstanding.
To our knowledge, except as indicated in the footnotes to this table or pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to the shares of common stock indicated.
| Name and Address of | Percentage Beneficially | |||||||
| Beneficial Owner(1) | Shares Beneficially Owned | Owned | ||||||
| Directors and Executive Officers | ||||||||
| Ronald Edward Strauss(2) 303 Twin Dolphins Drive, Suite 600 Redwood City, CA 94065 | 57,323,115 | 24.43 | % | |||||
| Renyan Ge(3) 303 Twin Dolphins Drive, Suite 600 Redwood City, CA 94065 | 50,744,539 | 21.62 | % | |||||
| Xili Wang 303 Twin Dolphins Drive, Suite 600 Redwood City, CA 94065 | 28,094,112 | 11.97 | % | |||||
| All Officers and Directors as a Group | 136,161,766 | 58.02 | % | |||||
| 5% Shareholders | ||||||||
| Sheen Ventures Limited(2) 8th Floor, Henley Building, 5 Queen’s Road, Central, Hong Kong | 13,332,000 | 5.68 | % | |||||
| CC Wireless Limited(3) Room 15A, 17/F, Mai On Industrial Building, 17-21 Kung Yip Street, Kwai Chung, Hong Kong | 16,968,000 | 7.23 | % | |||||
| Wei Zhixiong Unit 1005A, Tower B, Haisong Bldg Tairan 9 Road, Futian District Shenzhen, 518040 China | 20,000,000 | 8.52 | % | |||||
| (1) | Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table. |
| (2) | Ms. Guo Jie has direct ownership over the 13,332,000 shares held by Sheen Ventures Limited, a company organized under the laws of Hong Kong. Ms. Guo Jie is the wife of Mr. Strauss. As such, Mr. Strauss may be deemed to be the indirect beneficial owner of the securities by reason of his influence or control over Ms. Guo Jie’s voting and disposition decisions. |
| (3) | Mr. Renyan Ge holds voting and dispositive control over the 16,968,000 shares held by CC Wireless Limited, a company organized under the laws of Hong Kong. |
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Securities Authorized for Issuance Under Equity Compensation Plans
On May 9, 2014, our Board of Directors approved and adopted our 2014 Equity Incentive Plan (the “Plan”) and authorized management to submit the Plan to our stockholders for approval. A majority of our stockholders approved the Plan on May 9, 2014.
The proposed Plan permits us to grant a variety of forms of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and dividend equivalent rights, to allow us to adapt our incentive compensation program to meet our needs. The number of shares of our common stock that may be issued under the Plan to employees, directors and/or consultants in such awards is 40,000,000 shares. Our Board of Directors currently serves as the administrator of the Plan. As of December 31, 2014, 1,000,000 stock options to purchase shares of our common stock have been granted under the Plan.
Non-Cumulative Voting
The holders of our shares of common stock do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares, voting for the election of Directors, can elect all of the Directors to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of our Directors.
Transfer Agent
Our transfer agent is Securities Transfer Corp., and is located at 2591 Dallas Parkway, Suite 102, Frisco, Texas, 75034. Their telephone number is (469) 633-0101.
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ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships
There are no family relationships between any of our directors or executive officers.
Related Party Transactions
None of our current officers or directors have been involved in any material proceeding adverse to the Company or any transactions with the Company or any of its directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
Review, Approval or Ratification of Transactions with Related Persons
Although we have adopted a Code of Ethics, we still rely on our Board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our Board reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person’s immediate family. Transactions are presented to our Board for approval before they are entered into or, if this is not possible, for ratification after the transaction has occurred. If our Board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our Board approves or ratifies a transaction if it determines that the transaction is consistent with the best interests of the Company.
Director Independence
During the year ended December 31, 2014, we had one independent director on our board – Gregory Tse. Mr. Tse resigned from our board on September 22, 2014. We currently have no independent directors on our board. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., the NASDAQ National Market, and the Securities and Exchange Commission.
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Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the fees paid or accrued by us for the audit and other services provided by AWC (CPA) Limited (formerly, Albert Wong & Co.) for the fiscal periods shown.
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Audit Fees | $ | 48,000 | $ | 37,000 | ||||
| Audit Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 48,000 | $ | 37,000 | ||||
In the absence of a formal audit committee, the full Board of Directors pre-approves all audit and non-audit services to be performed by the independent registered public accounting firm in accordance with the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors pre-approved 100% of the audit, audit-related and tax services performed by the independent registered public accounting firm for the fiscal years ended December 31, 2014 and 2013. The percentage of hours expended on the principal accountant’s engagement to audit the Company’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%.
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ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this Annual Report:
| (a) | Financial Statements: |
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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To: The board of directors and stockholders of
XcelMobility, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of XcelMobility, Inc., ("the Group") as of December 31, 2014 and 2013 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2014 and 2013. These consolidated financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2014 and 2013 and the results of its operations and its cash flows for the years ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted in the United States of America.
The Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has accumulated deficits as at December 31, 2014 and net losses for the year ended December 31, 2014. These factors as discussed in Note 3 to the financial statements, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ AWC (CPA) Limited | |
| Hong Kong, China | AWC (CPA) Limited |
| April 8, 2015 | Certified Public Accountants |
| F-1 |
XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 159,628 | $ | 431,707 | ||||
| Trade accounts receivable | 40,144 | 1,662,760 | ||||||
| Other receivables, net of 3,592 and 3,500 allowance for doubtful accounts | 95,412 | 431,824 | ||||||
| Inventory | 357 | 2,101,585 | ||||||
| Prepaid VAT | - | 188,586 | ||||||
| Advances to suppliers | - | 913 | ||||||
| Total Current Assets | 295,541 | 4,817,375 | ||||||
| Property and equipment, net of accumulated depreciation of $119,328 and $285,796, respectively | 49,226 | 92,393 | ||||||
| Intangible assets, net | - | 1,294,017 | ||||||
| Goodwill | - | 446,419 | ||||||
| TOTAL ASSETS | $ | 344,767 | $ | 6,650,204 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | - | $ | 2,814,906 | ||||
| Other payables and accrued expenses | 510,762 | 1,247,549 | ||||||
| Other taxes payable | 9,254 | 319 | ||||||
| Deferred revenue | 19,135 | 19,223 | ||||||
| Convertible notes, net of debt discount | 48,875 | 60,703 | ||||||
| Derivative liability | 693,303 | 384,598 | ||||||
| Accrued interest | 5,223 | 5,223 | ||||||
| Deferred tax liability | - | 323,503 | ||||||
| Total Current Liabilities | 1,286,552 | 4,856,024 | ||||||
| Convertible notes, net of debt discount | 974,142 | 621,872 | ||||||
| Accrued interest | 330,426 | 147,654 | ||||||
| Total Liabilities | 2,591,120 | 5,625,550 | ||||||
| Commitments and Contingencies (Note 11) | - | - | ||||||
| Shareholders’ (Deficit) Equity: | ||||||||
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding December 31, 2014 and 2013 | - | - | ||||||
| Common stock, $0.001 par value, 400,000,000 shares authorized; 207,414,781 and 73,127,686 shares issued and outstanding December 31, 2014 and 2013 respectively | 207,415 | 73,128 | ||||||
| Shares unissued | 1,049,000 | 2,100,000 | ||||||
| Additional paid in capital | 1,810,965 | 713,620 | ||||||
| Accumulated deficit | (5,264,385 | ) | (1,712,498 | ) | ||||
| Accumulated other comprehensive income (loss) | (49,348 | ) | (149,596 | ) | ||||
| Total Shareholders’ (Deficit) Equity | (2,246,353 | ) | 1,024,654 | |||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 344,767 | $ | 6,650,204 | ||||
The accompanying notes are an integral part of the consolidated financial statements
| F-2 |
XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenue | $ | 171,452 | $ | 76,449 | ||||
| Cost of Revenue | 5,550 | 39 | ||||||
| Gross Profit | 165,902 | 76,410 | ||||||
| Operating Expenses: | ||||||||
| Selling expense | 24,226 | 26,285 | ||||||
| General and administrative expense | 1,889,077 | 1,236,861 | ||||||
| Total Operating Expenses | 1,913,303 | 1,263,146 | ||||||
| Loss from Operations | (1,747,401 | ) | (1,186,736 | ) | ||||
| Other Income (Expense): | ||||||||
| Interest income | 137 | 274 | ||||||
| Interest expense | (46,452 | ) | (42,025 | ) | ||||
| Amortisation of debt discount | (335,250 | ) | (504,195 | ) | ||||
| Gain (loss) on derivative | (373,850 | ) | 188,176 | |||||
| Other income-government grant | - | 15,647 | ||||||
| Other income | 2,657 | 408 | ||||||
| Other expenses | (624 | ) | (874 | ) | ||||
| Total Other Income (Expense) | (753,382 | ) | (342,589 | ) | ||||
| Loss Before Taxes | (2,500,783 | ) | (1,529,325 | ) | ||||
| Income tax expense | - | - | ||||||
| Loss from continuing operation | $ | (2,500,783 | ) | $ | (1,529,325 | ) | ||
| Discontinued Operation: | ||||||||
| Income from discontinued operation | 739,181 | 1,024,477 | ||||||
| Loss on disposal of interest in subsidiary | (1,790,285 | ) | - | |||||
| Net income (loss) from discontinued operation | (1,051,104 | ) | 1,024,477 | |||||
| Net loss | (3,551,887 | ) | (504,848 | ) | ||||
| Foreign currency translation adjustment | 100,248 | (182,640 | ) | |||||
| Comprehensive loss | (3,451,639 | ) | (687,488 | ) | ||||
| Basic and diluted loss per share: | ||||||||
| Continuing Operation | $ | (0.0239 | ) | $ | (0.0223 | ) | ||
| Discontinued Operation | (0.0100 | ) | 0.0149 | |||||
| (0.0339 | ) | (0.0074 | ) | |||||
| Basic and diluted weighted average number of shares outstanding | 104,626,234 | 68,606,084 | ||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-3 |
XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
| Common Stock | ||||||||||||||||||||||||||||
| Number of | Shares Subscribed But | Additional Paid in | Accumulated | Accumulated Other Comprehensive | Total Equity | |||||||||||||||||||||||
| shares | Amount | Unissued | Capital | Deficit | Income | (Deficit) | ||||||||||||||||||||||
| Balance, December 31, 2012 | 60,000,000 | $ | 60,000 | $ | - | $ | 131,562 | $ | (1,207,650 | ) | $ | 33,044 | $ | (983,044 | ) | |||||||||||||
| Stock issued in private placements | 6,000,000 | 6,000 | - | 294,000 | - | - | 300,000 | |||||||||||||||||||||
| Stock based compensation to director | 150,000 | 150 | - | (47,464 | ) | - | - | (47,314 | ) | |||||||||||||||||||
| Stock issued for service | 2,700,000 | 2,700 | - | 186,300 | - | - | 189,000 | |||||||||||||||||||||
| Conversion of convertible notes into common stock | 4,277,686 | 4,278 | - | 149,222 | - | - | 153,500 | |||||||||||||||||||||
| Acquisition of a subsidiary | - | - | 2,100,000 | - | - | - | 2,100,000 | |||||||||||||||||||||
| Net (loss) income for the year | - | - | - | - | (504,848 | ) | - | (504,848 | ) | |||||||||||||||||||
| Foreign currency translation difference | - | - | - | - | - | (182,640 | ) | (182,640 | ) | |||||||||||||||||||
| Balance, December 31, 2013 | 73,127,686 | 73,128 | 2,100,000 | 713,620 | (1,712,498 | ) | (149,596 | ) | 1,024,654 | |||||||||||||||||||
| Stock issued for debt settlement | 106,141,766 | 106,142 | - | 567,872 | - | - | 674,014 | |||||||||||||||||||||
| Stock based compensation | 10,000,000 | 10,000 | 1,000,000 | 265,000 | - | - | 1,275,000 | |||||||||||||||||||||
| Convertible notes exercised | 18,145,329 | 18,145 | - | 264,473 | - | - | 282,618 | |||||||||||||||||||||
| Disposal of subsidiary | - | - | (2,051,000 | ) | - | - | - | (2,051,000 | ) | |||||||||||||||||||
| Net loss for the year | - | - | - | - | (3,551,887 | ) | - | (3,551,887 | ) | |||||||||||||||||||
| Foreign currency translation difference | - | - | - | - | - | 100,248 | 100,248 | |||||||||||||||||||||
| Balance, December 31, 2014 | 207,414,781 | 207,415 | 1,049,000 | 1,810,965 | (5,264,385 | ) | (49,348 | ) | (2,246,353 | ) | ||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
| F-4 |
XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (3,551,887 | ) | $ | (504,848 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation | 23,331 | 36,990 | ||||||
| Stock compensation expenses | 1,275,000 | 141,686 | ||||||
| Amortisation of debt discount | 373,850 | 504,195 | ||||||
| Fair value adjustment on derivative liability | 335,250 | (188,176 | ) | |||||
| Loss on disposal of interests in a subsidiary | 1,790,285 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | (648,779 | ) | (230,219 | ) | ||||
| Other receivables and prepayment | 525,911 | (965,660 | ) | |||||
| Advances to suppliers | - | 2,522 | ||||||
| Inventory | 1,299,186 | (65,427 | ) | |||||
| Accounts payable | (1,552,754 | ) | (184,386 | ) | ||||
| Accrued interest | 182,772 | 12,357 | ||||||
| Other taxes payable | 8,935 | 119,991 | ||||||
| Other payables and accrued expenses | (736,787 | ) | 1,703,601 | |||||
| Deferred revenue | (88 | ) | (81,436 | ) | ||||
| Net Cash Provided By (Used In) Operating Activities | (675,775 | ) | 301,190 | |||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property, plant and equipment, net of value added tax refunds received | (1,070 | ) | (13,192 | ) | ||||
| Net Cash ( Used In) Provided By Investing Activities | (1,070 | ) | (13,192 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of notes payable | 340,442 | 37,500 | ||||||
| Net Cash Provided By Financing Activities | 340,442 | 37,500 | ||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 64,324 | 7,470 | ||||||
| Net Change in Cash and Cash Equivalents | (272,079 | ) | 332,968 | |||||
| Cash and Cash Equivalents at Beginning of Year | 431,707 | 98,739 | ||||||
| Cash and Cash Equivalents at End of Year | $ | 159,628 | $ | 431,707 | ||||
| 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 consolidated financial statements
| F-5 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
1. Organization and Nature of Business
XcelMobility Inc.
XcelMobility Inc. (“Xcel” or the “Company”) was incorporated under the laws of the State of Nevada on December 27, 2007. Initial operations have included organization and incorporation, target market identification, marketing plans, and capital formation. The Company was no longer a development stage company after the Company started to generate revenues from various application of mobile device.
Share Cancellation
On August 11, 2011, Moses Carlo Supera Paez, a director and shareholder of the Company, surrendered 17,700,000 shares of common stock for cancellation. Further, on August 30, 2011, Mr. Paez surrendered an additional 7,350,000 shares of our common stock for cancellation and Mr. Jaime Brodeth, one of our former directors and a shareholder, surrendered 22,950,000 shares of our common stock for cancellation. As such, immediately prior to the Exchange Transaction as further discussed in detail later and after giving effect to the foregoing cancellations, the Company had 29,700,000 shares of common stock issued and outstanding. Immediately after the Exchange Transaction, the Company had 60,000,000 shares of common stock issued and outstanding.
CC Mobility Limited
CC Mobility Limited (“CC Mobility”), a company organized under the laws of Hong Kong, was formed on May 3, 2011 and has authorized capital of 10,000 shares with registered capital of HK$1,000 at HK$1 per share. At formation, CC Mobility Limited has issued 560 shares to CC Wireless Limited, a company organized under the laws of Hong Kong, and 440 shares to Sheen Ventures Limited, a company organized under the laws of Hong Kong. The Company is a holding company formed for the purpose of acquiring a target company to effect a reverse merger with a U.S. reporting company. The reverse merger was completed on August 30, 2011.
CC Power Investment Consulting Co. Ltd.
Shenzhen CC Power Investment Consulting Co. Ltd. (“CC Investment”), a wholly-owned subsidiary of CC Mobility, was incorporated on July 27, 2011 under the laws of the People’s Republic of China (“PRC”) as a wholly foreign owned limited liability company. The required registered capital is $2,000,000 and as of December 31, 2014, $400,000 of the registered capital has been contributed.
Shenzhen CC Power Corporation
Shenzhen CC Power Corporation (“CC Power”) is a Chinese enterprise organized in the PRC on March 13, 2003 in accordance with the Laws of the People’s Republic of China. The required registered capital of CC Power was approximately $1,547,000 (RMB 10,000,000) and as of December 31, 2014, CC Power has paid up approximately $346,000 (RMB2,526,000). In March 2011, Mr. Ryan Ge sold his 5% ownership in CC Power to the other shareholder, Xili Wang (“CC Power Shareholder”). Ms. Wang holds 100% ownership interest in CC Power as of December 31, 2014 and 2013.
CC Power is primarily engaged in the research, development and commercialization of applications for mobile devices that access the Internet utilizing mobile phone networks. CC Power’s principal activity is the design, testing sale and support of software to support mobile internet applications on cellular phones, smart phones, tablets and mobile computers in China. The principal product designed and built by CC Power is its Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the internet 5 times faster than with other mobile browsers. The speed of the Mach 5 browser enables CC Power to develop other mobile software that can leverage off the Mach 5 products speed of processing. In order to support CC Power products the Company has built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via the company’s website and retail locations, through distribution agents and through all three mobile phone carriers in China.
As noted above, the primary purpose of CC Power is to develop software that allows user faster access to the Internet. CC Power’s primary focus is in the mobile Internet market, with a focus on providing software that significantly increases the speed that users of smartphones, tablets and laptops can access the Internet over cellular phone networks. CC Power also uses their technology to increase the speed at which users of Virtual Private Networks can access data from their networks.
On September 22, 2014, XcelMobility Inc. entered into an Asset Purchase Agreement with CC Power, Xianjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) and the shareholders of Silvercreek (the “Selling Shareholders”). Pursuant to the terms of the Agreement, CC Power will acquire certain assets of Silvercreek relating to its online sports lottery business unit in exchange for the issuance of up to 80,000,000 shares of common stock of the Company to the Selling Shareholders. No Shares will be issued upon the closing date of the transaction. The Shares will be issued to the Selling Shareholders on a pro rata basis and upon achievement of the following milestones: (i) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue (“Lottery Revenue”) of over 10,000 RMB per month from the business developed in connection with the Assets on or before October 1, 2014; (ii) 10,000,000 Shares to be issued in the event that CC Power derives Lottery Revenue of over 3,000,000 RMB per month from the business developed in connection with the Assets on or before March 31, 2015; (iii) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue of over 20,000,000 RMB per month from the business developed in connection with the Assets on or before December 31, 2015; (iv) 40,000,000 Shares to be issued in the event that CC power obtains a lottery gaming license from the People’s Republic of China; and (v) 10,000,000 Shares to be issued based on the achievement of certain incentives as determined by the board of directors of the Company.
| F-6 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
1. Organization and Nature of Business - Continued
Share Exchange Agreement
On August 30, 2011, the Company completed a voluntary share exchange transaction with Shenzhen CC Power Corporation, CC Mobility Limited and the shareholders of CC Mobility (“Selling Shareholders”) pursuant to a Share Exchange Agreement dated July 5, 2011 (the “Exchange Agreement”). In accordance with the terms of Exchange Agreement, on the Closing Date, Xcel issued 30,300,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, there was a change of control in the Company as the Selling Shareholders of CC Mobility acquired 50.5% of Xcel’s issued and outstanding common stock, CC Mobility became Xcel’s wholly-owned subsidiary, and Xcel acquired the business and operations of CC Mobility and CC Power.
For accounting purposes, the merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of CC Mobility and its subsidiaries, with Xcel (the legal acquirer of CC Mobility and its subsidiaries) considered the accounting acquiree and CC Mobility whose management took control of Xcel (the legal acquire of CC Mobility) considered the accounting acquirer.
CC Power is owned by an individual but controlled by CC Investment through a series of contractual arrangements that transferred all of the benefits and responsibilities for the operations of CC Power to CC Investment. CC Investment accounts for CC Power as a Variable Interest Entity (“VIE”) under ASC 810 “Consolidation.” Accordingly, CC Investment consolidates CC Power’s results, assets and liabilities.
Shenzhen Jifu Communication Technology Co., Ltd.
Shenzhen Jifu Communication Technology Co., Ltd (“Jifu”), was incorporated on April 16, 2001 under the laws of the People’s Republic of China (“PRC”) as a limited liability company. The required registered capital is RMB3,000,000 and all of the required registered capital has been contributed.
Jifu is primarily engaged in develops and distributes optical transmitters and receivers, electronic surveillance equipment, and other communications equipment. Jifu also engages in the purchase and sale of electronic products, network products, and communications equipment. In order to bolster its business, Jifu also engages in software research and development.
On May 7, 2013, the Company entered into and consummated a Stock Purchase Agreement (the “Agreement”) with Shenzhen CC Power Investment Consulting Co., Ltd., a company organized under the laws of the People’s Republic of China and an indirect wholly-owned subsidiary of the Company (“CC Power”), Shenzhen Jifu Communication Technology Co., Ltd. a company organized under the laws of the People’s Republic of China (“Jifu”) the shareholders of Jifu set forth in the signature page to the Agreement (the “Jifu Shareholders”) and Hui Luo.
Pursuant to the terms and conditions of the Agreement, the Company will issue an aggregate of 27,000,000 shares of the Company’s common stock (the “Purchase Shares”) to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements (the “VIE Agreement”) with CC Power. CC Power will effectively own Jifu through the various conditions prescribed in the VIE Agreements. The Company will also grant 3,000,000 shares (the “Luo Shares”, together with the Purchase Shares, the “Shares’”) to Mr. Luo.
| F-7 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
1. Organization and Nature of Business - Continued
The Shares will be released to the Jifu Shareholders and Mr. Luo after the Company has reviewed Jifu’s audited financial statements for the year ended December 31, 2013. If Jifu has achieved net revenue of $4,000,000 for the year ended December 31, 2013 (the “Target”), then the Company will release the Shares to the Jifu Shareholders and Mr. Luo in their full respective amounts. If Jifu has not achieved the Target by the end of the calendar year, the Company will decrease the amount of shares of common stock issued to the Jifu Shareholders and Mr. Luo in accordance with a formula set forth in the Agreement and release the Shares to the Jifu Shareholders and Mr. Luo in their respective decreased amounts. The Agreement has been approved by the boards of directors of the Company, CC Power, and Jifu, and the Jifu Shareholders.
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred back the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
The organizational structure of the Company before disposal of Jifu is as follows:
The organizational structure of the Company after disposal of Jifu is as follows:
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and have been consistently applied. The functional currency is the Chinese Renminbi, however the accompanying condensed consolidated financial statements have been translated and presented in United States Dollars ($). All significant inter-company balances and transactions have been eliminated in consolidation.
| F-8 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Use of estimates
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.
Significant Estimates
These financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, the valuation allowance for deferred taxes. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Variable Interest Entity
CC Power
The accounts of CC Power have been consolidated with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with CC Power Shareholder and with CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:
Entrusted Management Agreement. This agreement provides that CC Investment will provide exclusive management services to CC Power. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of CC Power. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Technical Services Agreement. This agreement provides that CC Investment will provide exclusive technical services to CC Power. Such technical services include but are not limited to software, computer system, data analysis, training and other technical services. CC Investment shall be entitled to charge CC Power service fees equivalent to CC Power’s total net income. The Technical Service Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).
Exclusive Purchase Option Agreement. Under the Exclusive Purchase Option Agreement, the CC Power Shareholder granted CC Investment an irrevocable and exclusive purchase option to acquire CC Power’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time.
Loan Agreement. Under the Loan Agreement, CC Investment agreed to lend RMB 10,000,000 to the CC Power Shareholder, to be used solely for the operations of CC Power.
Equity Pledge Agreement. Under the Equity Pledge Agreement, the CC Power Shareholder pledged all of its equity interests in CC Power, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of this Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s prior consent. The CC Power Shareholder covenants to CC Investment that among other things, it will only appoint/elect the candidates for the directors of CC Power nominated by CC Investment.
| F-9 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
In sum, the agreements transfer to CC Investment all of the benefits and all of the risk arising from the operations of CC Power, as well as complete managerial authority over the operations of CC Power. Through these contractual arrangements, the Company has the ability to substantially influence CC Power’s daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control CC Power and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, CC Power is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of CC Power because the following characteristics identified in ASC 810-10-15-14 are present:
| The holder of the equity investment in CC Power lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of CC Power, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)). | ||
| The holder of the equity investment in CC Power lacks the obligation to absorb the expected losses of CC Power, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2). | ||
| The holder of the equity investment in CC Power lacks the right to receive the expected residual returns of CC Power, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)). |
Accordingly, the Company’s condensed consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and classification of CC Power’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Total current assets | $ | 188,942 | $ | 86,173 | ||||
| Total assets | 236,166 | 153,178 | ||||||
| Total current liabilities | 801,511 | 551,012 | ||||||
| Total liabilities | 801,511 | 551,012 | ||||||
Jifu
The accounts of Jifu have been consolidated with the accounts of the Company because Jifu is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated May 7, 2013 with Jifu Shareholder and with Jifu pursuant to which CC Investment provides Jifu with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:
Entrusted Management Agreement. Effective on May 7, 2013, CC Investment entered into an Entrusted Management Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive management services provided by CC Investment. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of Jifu. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee will be a percentage of Jifu’s total operational income. The Entrusted Management Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Technical Services Agreement. Effective on May 7, 2013, CC Investment entered into a Technical Services Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive technical services provided by CC Investment. Such technical services include but are not limited to software services, computer systems services, data analysis, training and other technical services. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee shall be a percentage of Jifu’s total operational income. The Technical Service Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Exclusive Purchase Option Agreement. Effective on May 7, 2013, CC Investment entered into an Exclusive Purchase Option Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders granted CC Investment an irrevocable and exclusive purchase option to acquire all of Jifu’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time. Until CC Investment has exercised its purchase option, Jifu is required to conduct its business in accordance with certain covenants as further described in the Exclusive Purchase Option Agreement.
Loan Agreement
Effective on May 7, 2013, CC Investment entered into a Loan Agreement with the Jifu Shareholders, pursuant to which CC Investment agreed to lend RMB 3,000,000 to the Jifu Shareholders, to be used solely for the operations of Jifu. The loan is interest free, unless the deemed value of the consideration for the equity purchase of Jifu or asset purchase of Jifu under the Exclusive Purchase Option Agreement is higher than the principal amount of the loan, in which case the excess will be deemed to be interest on the loan.
| F-10 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Equity Pledge Agreement
Effective on May 7, 2013, CC Investment entered into an Equity Pledge Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders pledged all of their equity interests in Jifu, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of the Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s prior consent. The Jifu Shareholders covenant to CC Investment that among other things, they will only appoint/elect candidates for the board of directors of Jifu and supervisor office of Jifu that were nominated by CC Investment.
In sum, the agreements transfer to CC Investment all of the benefits and all of the risk arising from the operations of Jifu, as well as complete managerial authority over the operations of Jifu. Through these contractual arrangements, the Company has the ability to substantially influence Jifu’s daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control Jifu and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, Jifu is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of Jifu because the following characteristics identified in ASC 810-10-15-14 are present:
| The holder of the equity investment in Jifu lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Jifu, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)). |
| The holder of the equity investment in Jifu lacks the obligation to absorb the expected losses of Jifu, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2). | ||
| The holder of the equity investment in Jifu lacks the right to receive the expected residual returns of Jifu, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)). |
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred back the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
Accordingly, the Company’s condensed consolidated financial statements reflect the results of operations, assets and liabilities of Jifu. The carrying amount and classification of Jifu’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Total current assets | $ | - | $ | 5,138,384 | ||||
| Total assets | - | 5,161,150 | ||||||
| Total current liabilities | - | 3,405,746 | ||||||
| Total liabilities | - | 3,405,746 | ||||||
Revenue recognition
Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements, and the source of revenue of Jifu is from developing and distributing optical transmitters and receivers, electronic surveillance equipment, and other communications equipment; and trading of electronic products, network products, and communications equipment. We also engage in software research and development. During the year ended December 31, 2014, we also have revenues derived from GPS system development and website development projects along with maintenance arrangements.
We evaluate revenue recognition based on the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
| F-11 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Revenue Recognition for Software Products (Software Elements)
New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element Arrangements – Software Products and Software Related Services(Software Arrangements)
We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.
Revenue Recognition for Multiple-Element Arrangements – Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements . This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of direct costs of products, direct labor of technical staff, depreciation of computer equipment, and overhead associated with the technical department.
Economic and political risks
The Company’s operations are mainly conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations in the PRC may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC.
The Company’s major operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in government administration, governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Credit risk
The Company may be exposed to credit risk from its cash and fixed deposits at bank. No allowance has been made for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment.
| F-12 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
| Equipment | 5 years |
| Office equipment | 5 years |
| Leasehold improvements | Over the lease terms |
| Software | 5 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Accounting for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10 “Impairments of Long-Lived Assets”. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Company's average cost of capital.
Goodwill, Customer-relationship, and Trade-name Intangibles
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. In accordance with Accounting Standards Codification ASC 350 “Intangibles - Goodwill and Other”, goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.
Customer-relationship and trade-name acquired as part of the Merger account for the majority of our intangible assets recognized in the Consolidated Balance Sheet. These assets are expected to generate cash flows indefinitely, do not have estimable or finite useful lives and, therefore, are accounted for as indefinite-lived assets not subject to amortization. We consider the income approach when testing intangible assets with indefinite lives for impairment on an annual basis. We utilize the income approach, specifically the relief from royalty method, for analyzing our indefinite-lived assets. This method is based on the assumption that, in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset class.
Inventories
Inventories are stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
Accounts receivable
Accounts receivable consists of amounts due from customers. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. As of December 31, 2014 and 2013, no allowance for doubtful accounts was deemed necessary based on management’s assessment.
| F-13 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Fair Value of Financial Instruments
FASB accounting standards require disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts payable, accruals and other payables, the carrying amounts approximate fair value because of the near term maturities of such obligations.
Patents
The Company has three patents as listed in the table below relating to its internet accelerator software products. Fees related to registering these patents were insignificant and have been expensed as incurred.
| Patent | Register Number | Issued By | ||
| Mach5 Internet Acceleration Software V.6.0 | 2007SR09253 | National Copyright Administration of PRC | ||
| Mach5 Enterprise Acceleration Software V.3.3 | 2009SR058767 | National Copyright Administration of PRC | ||
| Mach5 Web Browser Software | 2010SR001089 | National Copyright Administration of PRC |
Research and development and Software Development Costs
All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements for the years ended December 31, 2014 and 2013. Other research and development expenses amounted to $236,368 and $1,611,826 for years ended December 31, 2014 and 2013, respectively, and were included in general and administrative expense.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
| F-14 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Income taxes
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
Foreign currency translation
Assets and liabilities of the Company’s subsidiaries with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Shareholders’ Equity.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
| December 31, 2014 | |
| Balance sheet | RMB 6.1384 to US $1.00 |
| Statement of operations and other comprehensive loss | RMB 6.1438 to US $1.00 |
| December 31, 2013 | |
| Balance sheet | RMB 6.1104 to US $1.00 |
| Statement of operations and other comprehensive loss | RMB 6.1905 to US $1.00 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Post-retirement and post-employment benefits
The Company contributes to a state pension plan in respect of its PRC employees. Other than the state pension plan, the Company does not provide any other post-retirement or post-employment benefits.
| F-15 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Recently Issued Accounting Pronouncements
In January 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification) or subject to a master netting arrangement or similar agreement. The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11.
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.
| F-16 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Recently Issued Accounting Pronouncements
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 February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. 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 ending after December 15, 2014, and interim periods and annual periods thereafter. The amendments in this ASU should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this ASU) and should disclose that fact. Early adoption is permitted.
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.
| F-17 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2. Summary of Significant Accounting Policies - Continued
Recently Issued Accounting Pronouncements
In March 2014, FASB has issued Accounting Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The guidance addresses the consolidation of lessors in certain common control leasing arrangements and is based on a consensus reached by the Private Company Council (PCC). Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model. In a variable interest entity model, the company has a controlling financial interest when it has: (a) the power to direct the activities that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses or the right to receive benefits of the entity that could be potentially significant to the entity. To determine which model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for consolidation and whether that entity is a variable interest entity. If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance.
In August 2014, FASB has issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements— Going Concern (Subtopic 205-40). In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans) b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.
| F-18 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
3. Going Concern
The Company has incurred significant continuing losses during the years ended December 31, 2014 and 2013, and has accumulated deficits at December 31, 2014 and 2013. The Company has relied on its registered capital and issuance of convertible notes to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2014 and 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.
4. Disposal of subsidiary
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred back the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
A summary of the balance sheet, income statement and loss on disposal of above subsidiary upon the date of disposal is presented as follow:
(i) Summary of balance sheet:
| October 1, 2014 (date | December 31, | |||||||
| of disposal) | 2013 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 47,666 | $ | 359,066 | ||||
| Trade accounts receivable | 2,551,238 | 1,633,414 | ||||||
| Other receivables | 743,199 | 856,092 | ||||||
| Inventory | 802,747 | 2,101,226 | ||||||
| Prepaid VAT | 190,553 | 188,586 | ||||||
| Total Current Assets | 4,335,403 | 5,138,384 | ||||||
| Total Non-current Assets | 1,763,469 | 1,763,202 | ||||||
| TOTAL ASSETS | $ | 6,098,872 | $ | 6,901,586 | ||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | (1,263,262 | ) | $ | (2,814,906 | ) | ||
| Other payables and accrued expenses | (994,325 | ) | (914,343 | ) | ||||
| Total Current Liabilities | (2,257,587 | ) | (3,729,249 | ) | ||||
| Total Liabilities | (2,257,587 | ) | (3,729,249 | ) | ||||
| Net Assets | $ | 3,841,285 | $ | 3,172,337 | ||||
| F-19 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
4. Disposal of subsidiary - Continued
(ii) Summary of income statement:
| 2014 | 2013 | |||||||
| Revenue | $ | 1,822,970 | $ | 2,705,296 | ||||
| Gross Profit | 1,461,284 | 2,210,850 | ||||||
| Net Income | 739,181 | 1,024,477 | ||||||
(iii) Summary of loss on disposal
| 2014 | ||||
| Net assets of the subsidiary | $ | 3,841,285 | ||
| Add: Fair value of shares agreed to deliver | 49,000 | |||
| Less: Fair value of unissued shares being cancelled | (2,100,000 | ) | ||
| Loss on disposal of interests in subsidiary | 1,790,285 | |||
5. Property and Equipment, net
Property and equipment, net consist of the following:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Equipment | $ | 120,287 | $ | 249,543 | ||||
| Office equipment | 39,633 | 118,018 | ||||||
| Leasehold improvements | 8,634 | 8,674 | ||||||
| Software | - | 1,954 | ||||||
| 168,554 | 378,189 | |||||||
| Less: Accumulated depreciation | (119,328 | ) | (285,796 | ) | ||||
| Property and equipment, net | $ | 49,226 | $ | 92,393 | ||||
The depreciation expense was $16,332 and $22,128 for the years ended December 31, 2014 and 2013, respectively.
| F-20 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
6. Intangible Assets, net
Intangible assets, net consist of the following:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Customer relationship | $ | - | $ | 793,547 | ||||
| Trade name | - | 500,470 | ||||||
| - | 1,294,017 | |||||||
| Less: Accumulated amortization | - | - | ||||||
| Intangible assets, net | $ | - | $ | 1,294,017 | ||||
7. Deferred Revenue
Deferred revenue represents deferred internet accelerator license revenue over the maintenance period of one to three years for our multiple element arrangements (Note 2).
In addition, deferred revenue includes two government grants for use in research and development related expenditures. The portion of the grants that has not been spent is deferred and recognize as other income as the funds are spent on research and development related expenditures.
Deferred revenue included on the balance sheets as of December 31, 2014 and 2013 is as follow:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Deferred revenue: | ||||||||
| Current | $ | 19,135 | $ | 19,223 | ||||
| Non-current | - | - | ||||||
| Total | $ | 19,135 | $ | 19,223 | ||||
The table below sets forth the deferred revenue activities during the years ended December 31, 2014 and 2013:
| For the years ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Deferred revenue, balance at beginning of year | $ | 19,223 | $ | 98,941 | ||||
| Less: government grant earned during the year | - | (15,931 | ) | |||||
| Less: Revenue earned during the year | - | (63,787 | ) | |||||
| Foreign exchange difference | (88 | ) | - | |||||
| Deferred revenue, balance at end of year | $ | 19,135 | $ | 19,223 | ||||
| F-21 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
8. Convertible Promissory Notes
Outstanding balances for the four convertible promissory notes as of December 31, 2014 and 2013 are as follow:
| Loan | Interest | Convertible | December 31, | December 31, | ||||||||||||||||||
| Lender | Date of Note | Maturity Date | Amount | Rate (p.a.) | Number of stock | 2014 | 2013 | |||||||||||||||
| Vantage Associates SA | April 15, 2011 | April 15, 2016 | $ | 150,000 | 5 | % | 600,000 | $ | 150,000 | $150,000 | ||||||||||||
| Empa Trading Ltd. | June 5, 2011 | June 5, 2016 | 100,000 | 5 | % | 400,000 | 100,000 | 100,000 | ||||||||||||||
| First Capital A.G. | July 14, 2011 | July 14, 2016 | 150,000 | 5 | % | 600,000 | 150,000 | 150,000 | ||||||||||||||
| First Capital A.G. | September 9, 2011 | September 9, 2016 | 200,000 | 5 | % | 800,000 | 200,000 | 200,000 | ||||||||||||||
| Vantage Associates SA | September 9, 2011 | September 9, 2016 | 200,000 | 5 | % | 800,000 | 200,000 | 200,000 | ||||||||||||||
| Vantage Associates SA | October 27, 2011 | October 27, 2016 | 50,000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||
| First Capital A.G. | December 1, 2011 | December 1, 2016 | 50,000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||
| First Capital A.G. | January 23, 2012 | January 23, 2017 | 50 000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||
| First Capital A.G. | April 25, 2012 | April 25,2014 | 100,000 | 5 | % | - | - | 100,000 | ||||||||||||||
| Hanover Holdings I, LLC | May 30, 2014 | May 30, 2016 | 350,000 | 8 | % | 26,119,403 | 350,000 | - | ||||||||||||||
| KBM Worldwide, Inc. | August 14, 2014 | August 21, 2015 | 110,000 | 8 | % | - | 110,000 | - | ||||||||||||||
| KBM Worldwide, Inc. | November 17, 2014 | November 17, 2015 | 61,000 | 8 | % | - | 61,000 | - | ||||||||||||||
| $ | $ | 1,471,000 | $1,050,000 | |||||||||||||||||||
| Less: | ||||||||||||||||||||||
| Debt discount | ||||||||||||||||||||||
| from beneficial | ||||||||||||||||||||||
| conversion feature | 447,983 | 367,425 | ||||||||||||||||||||
| 1,023,017 | 682,575 | |||||||||||||||||||||
| Less: | ||||||||||||||||||||||
| Current portion | 48,875 | 60,703 | ||||||||||||||||||||
| Non-current portion | $ | 974,142 | $621,872 | |||||||||||||||||||
| F-22 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
8. Convertible Promissory Notes- Continued
The debt discount was the beneficial conversion feature of the notes. It is being accreted as additional interest expense ratably over the term of the convertible notes.
Interest expenses for the years ended December 31, 2014 and 2013 were $46,452 and $42,025 respectively.
Amortization of the beneficial conversion feature for the year ended December 31, 2014 and 2013 were $373,850 and $504,195 respectively.
Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, the $350,000 issued to Hanover Holdings I, LLC on May 30, 2014, and the $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014 respectively, all the convertible promissory notes (the “Notes”) are convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
| (i) | one common share to be purchased at a price of $0.5, and |
| (ii) | one warrant that is convertible into one common share at a price of $1.00, and expires two years from the date of the Exchange Transaction is completed, and |
| (iii) | one warrant that is convertible into one common share at a price of $1.5, and expires three years from the date the Exchange Transaction is completed. |
(2) Unless earlier converted into common stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such Qualified Financing as follows:
(a) In the event of a debt Qualified Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified Debt Financing and in a principal amount equal to the then outstanding Debt.
(b) In the event of an equity Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.
Convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012
The convertible promissory note of $100,000issued to First Capital A.G. on April 25, 2012, is convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
(i) one common share to be purchased at a price of based on the moving average share price over the preceding 20 trading days, and
(ii) one warrant that is convertible into one common share at a price based on the moving average share price over the preceding 20 trading days and expires two years from the date of the Exchange Transaction is completed, and
(iii) one warrant that is convertible into one common share at a price based on the moving average share price over the preceding 20 trading days and expires three years from the date the Exchange Transaction is completed.
(2) Unless earlier converted into common stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such Qualified Financing as follows:
(a) In the event of a debt Qualified Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified Debt Financing and in a principal amount equal to the then outstanding Debt.
| F-23 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
8. Convertible Promissory Notes- Continued
(b) In the event of an equity Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.
Convertible promissory note of $350,000 issued to Hanover Holdings I, LLC on May 30, 2014
On May 30, 2014, or the Closing Date, we entered into a securities purchase agreement dated as of the Closing Date (the “Purchase Agreement”) with Hanover Holdings I, LLC, a New York limited liability company (“Hanover”). Pursuant to the terms of the Purchase Agreement, Hanover purchased from us on the Closing Date (i) a senior convertible note with an initial principal amount of $350,000 (the “Convertible Note”) and (ii) a warrant to acquire up 3,716,091 shares of our common stock (the “Warrant”), for a total purchase price of $250,000. The Convertible Note was issued with an original issue discount of approximately 28.57%.
$40,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) we have properly filed a registration statement with the Securities and Exchange Commission, or SEC, on or prior to July 14, 2014, or the Filing Deadline, covering the resale by Hanover of the shares of common Stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date. Moreover, $60,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) the registration statement has been declared effective by the SEC on or prior to the earlier of (i) the 120th calendar day after the Closing Date and (ii) the fifth business day after the date we are notified by the SEC that such registration statement will not be reviewed or will not be subject to further review (the “Effectiveness Deadline”), and the prospectus contained therein is available for use by Hanover for the resale by Hanover of the shares of common stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date.
The Convertible Note matures on May 30, 2016 (subject to extension as provided in the Convertible Note) and, in addition to the approximately 28.57% original issue discount, accrues interest at the rate of 8.0% per annum. The Convertible Note is convertible at any time, in whole or in part, at Hanover’s option into shares of our common stock, par value $0.001 per share at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) trade prices of our common stock during the 10 consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.12 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Warrant entitles Hanover to purchase up to 3,716,091 shares of our common stock (the “Share Amount”) at any time for a period of one year from the Closing Date at an exercise price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) VWAPs of the common stock during preceding ten (10) consecutive trading days and (y) sixty-five percent (65%), and (B) $0.12 (as adjusted for any stock split, stock dividend, stock combination or other similar transaction) (the “Exercise Price”). The Warrant may only be exercised for cash and we have the right to accept or decline any exercise of the Warrant by Hanover. If at any time the Share Amount is less than the quotient of $150,000 and the Exercise Price (the “Required Share Amount”), then the number of shares issuable upon exercise of the warrant shall automatically be increased by such number of shares equal to the difference of the Required Share Amount less the Share Amount.
At no time will Hanover be entitled to convert any portion of the Convertible Note or exercise any portion of the Warrant to the extent that after such conversion or exercise, Hanover (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of our common stock as of such date (the “Maximum Percentage”). The Maximum Percentage may be raised to any other percentage not in excess of 9.99% at the option of Hanover upon at least 61 days’ prior notice to us, or lowered to any other percentage, at the option of Hanover, at any time.
The Convertible Note includes customary event of default provisions. Upon the occurrence of an event of default, Hanover may require us to pay in cash the greater of (i) the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency related event of default) and (ii) the product of (X) the conversion price in effect at that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the date we make the entire payment required to be made under this provision.
We have the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the Convertible Note in cash at a price equal to 135% of the total amount of such Convertible Note then outstanding. If at any time after the Closing Date, (i) the closing bid price of our common stock is equal to or greater than 140% of the Exercise Price for a period of 30 consecutive trading days (the “Measuring Period”), (ii) no Equity Conditions Failure (as defined in the Warrant) shall have occurred, and (iii) the aggregate dollar trading volume of the Common Stock for each trading day during the Measuring Period exceeds $3,000 per day, then we shall have the right to require Hanover to exercise all, or any part, of the Warrant (up to the Maximum Forced Exercise Amount (defined below)) (the “Forced Exercise”) at the then applicable Exercise Price. We will not be permitted to effect a Forced Exercise if, after giving effect to such Forced Exercise, we have received more than $150,000 in cash, in the aggregate, from one or more exercises of the Warrant. “Maximum Forced Exercise Amount” means, as of any given date, the lesser of (x) the number of shares of our common stock issuable upon exercise of the Warrant as of such given date and (y) 500% of the average trading volume (as reported on Bloomberg) of our common stock on our principal market on each of the 10 consecutive trading days ending and including the trading day immediately prior to such given date.
| F-24 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
8. Convertible Promissory Notes- Continued
Convertible promissory notes of $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014
On August 14, 2014 and November 17, 2014, we and KBM Worldwide, Inc. (“KBM”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $110,000 and $61,000 respectively (the “Notes”). The Notes bear 8% interest and is due on August 21, 2015 and November 17, 2015 respectively. The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date.
The fair value of the embedded conversion feature of these notes as at December 31, 2014 and 2013 was $693,303 and $384,598, respectively.
Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, the fair value of the convertible notes was calculated using the Black-Scholes model with the following assumptions: expected life of 1-3 years, expected dividend rate of 0%, volatility of 246.8% and interest rate at 0.25%-0.67%.
The fair value of the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, was calculated using the lattice valuation method as the conversion prices are variable for these notes.
Fair Value on a Recurring Basis
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014:
| Fair Value Measurements at December 31, 2014 | ||||||||||||||||
| Quoted Prices In Active Markets for | Significant Other | Significant Unobservable | Total Carrying | |||||||||||||
| Identical Assets | Observable Inputs | Inputs | Value as of | |||||||||||||
| Descriptions | (Level 1) | (Level 2) | (Level 3) | December 31, 2014 | ||||||||||||
| Derivative warrant instruments | - | - | 693,303 | 693,303 | ||||||||||||
| Total | - | - | 693,303 | 693,303 | ||||||||||||
| F-25 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
9. Income Tax
We are subject to income tax in the United States, Hong Kong and PRC.
The Company’s subsidiaries, Jifu, CC Power and CC Investment are incorporated in PRC and are subjected to PRC enterprises income tax at the applicable tax rates on the taxable income as reported in their Chinese statutory accounts in accordance with the relevant enterprises income tax laws (“EIT Law”). The subsidiaries locate in Shenzhen, a special economic region, where companies are allowed to gradually phase into the 25% statutory tax rate. For 2014 the statutory income tax rate is 25%. The open tax years in PRC are 2010-2014.
CC Mobility is incorporated in Hong Kong and is subjected to Hong Kong corporate income tax at 16.5% statutory income tax rate. No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the years ended December 31, 2014 and 2013. The open tax year for CC Mobility in Hong Kong are 2013-2014.
The Company has no income tax expense for the years ended December 31, 2014 and 2013 because it has incurred loss before tax from continuing operation.
The Company applied the provisions of ASC 740.10.50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. ASC 740.10.50 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740.10.50 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the statements of operation. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.
The following table sets forth the components of deferred income taxes as of December 31, 2014 and 2013:
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Net operating losses - U.S. | $ | 2,319,834 | $ | 1,195,355 | ||||
| Net operating losses - PRC and Hong Kong | 276,836 | - | ||||||
| Deferred revenue | - | 19,223 | ||||||
| 2,596,670 | 1,214,578 | |||||||
| Valuation allowance | (2,596,670 | ) | (1,214,578 | ) | ||||
| Deferred tax assets, net | $ | - | $ | - | ||||
As of December 31, 2014, the Company has net operating losses carry forward of $2,865,895 in the U.S. and $1,063,422 in Hong Kong and PRC available to offset future taxable income. They will begin to expire in 2030 and 2015, respectively. We provided for a full valuation allowance against the deferred tax assets of $1,321,670 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 years ended December 31, 2014 and 2013 was an increase of $1,382,092 and an increase of $996,620, respectively.
The Company did not recognize any interest or penalties related to unrecognized tax benefits for the years ended December 31, 2014 and 2013.
10. 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 $17,669 and $20,073 for the years ended December 31, 2014 and 2013, respectively.
| F-26 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
11. (Loss) earnings per Share
| For The Years Ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Loss from continuing operations-basic | $ | (2,500,783 | ) | $ | (1,529,325 | ) | ||
| Interest expense on convertible notes | 46,452 | 42,025 | ||||||
| Loss from continuing operations - diluted | $ | (2,454,331 | ) | $ | (1,487,300 | ) | ||
| (Loss) income from discontinued operations | (1,051,104 | ) | 1,024,477 | |||||
| Weighted average outstanding shares of common stock – basic | 104,626,234 | 68,606,084 | ||||||
| Effect of dilutive securities – convertible notes | - | - | ||||||
| Weighted average outstanding shares of common stock –diluted | 104,626,234 | 68,606,084 | ||||||
| Profit (loss) per share – from continuing operations | $ | (0.0239 | ) | $ | (0.0223 | ) | ||
| Profit (loss) per share – from discontinued operations | (0.0100 | ) | 0.0149 | |||||
| Profit (loss) per share – basic and diluted | $ | (0.0339 | ) | $ | (0.0074 | ) | ||
For the fiscal years ended December 31, 2014 and 2013, there are 0 potentially dilutive common shares because the Company recorded net losses in 2014 and 2013.
12. 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:
| 2015 | $ | 38,978 | ||
| Thereafter | - | |||
| Total minimum payment | $ | 38,978 |
The Company incurred rental expenses of $38,944 and $32,080 for the years ended December 31, 2014 and 2013, respectively.
| F-27 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
13. 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 Years Ended | ||||||||
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Customer A | 36 | % | * | |||||
| Customer B | 34 | % | * | |||||
| Customer C | 20 | % | * | |||||
* 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.
14. 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.
15. Subsequent Events
The Company has evaluated all other subsequent events through April 6, 2015, 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.
| F-28 |
| (b) | Exhibits: |
| Exhibit No. | Description |
| 2.1 | Asset Purchase Agreement, dated September 22, 2014, between XcelMobility, Inc., Shenzhen CC Power Corporation, Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) and the shareholders of Silvercreek set forth in the signature pages thereto (incorporated by reference to our Current Report on Form 8-K filed on October 9, 2014). |
| 2.2 | Stock Purchase Agreement, dated May 7, 2013, by and among the Company, Shenzhen CC Power Investment Consulting Co., Ltd., Jifu, the Jifu Shareholders and Hui Luo (incorporated by reference to our Current Report on Form 8-K filed on May 13, 2013). |
| 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). |
| 3.1(c) | Amendment to Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on June 11, 2014). |
| 3.2 | Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on April 27, 2011). |
| 10.1 | Termination Agreement, dated September 22, 2014, between XcelMobility, Inc. and Gregory Tse (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014) |
| 10.2 | Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Ron Strauss (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014) |
| 10.3 | Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Renyan Ge (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014) |
| 10.4 | Amended and Restated Management Service Agreement, dated August 28, 2014, between XcelMobility, Inc. and Xili Wang (incorporated by reference to our Current Report on Form 8-K filed on September 30, 2014) |
| 10.5 | Convertible Promissory Note between Xcelmobility, Inc. and KBM Worldwide, Inc. dated August 14, 2014 (incorporated by reference to our Current Report on Form 8-K filed on March 12, 2015) |
| 10.6 | Convertible Promissory Note between Xcelmobility, Inc. and KBM Worldwide, Inc. dated November 17, 2014 (incorporated by reference to our Current Report on Form 8-K filed on March 12, 2015) |
| 10.7 | Mutual Settlement Agreement between XcelMobility, Inc. and the Jifu Shareholders, dated October 14, 2014 (incorporated by reference to our Current Report on Form 8-K filed on March 12, 2015) |
| 10.8 | Securities Purchase Agreement, dated May 30, 2014, by and between Hanover Holdings I, LLC and Xcelmobility, Inc. (incorporated by reference to our Current Report on Form 8-K filed on June 05, 2014). |
| 10.9 | Registration Rights Agreement, dated May 30, 2014, by and between Hanover Holdings I, LLC and Xcelmobility, Inc. (incorporated by reference to our Current Report on Form 8-K filed on June 05, 2014). |
| 10.10 | Senior Convertible Note, issued to Hanover Holdings I, LLC, dated May 30, 2014 (incorporated by reference to our Current Report on Form 8-K filed on June 05, 2014). |
| 10.11 | Warrant issued to Hanover Holdings I, LLC, dated May 30, 2014 (incorporated by reference to our Current Report on Form 8-K filed on June 05, 2014). |
| 14.1 | Code of Ethics (incorporated by reference to our Current Report on Form 8-K filed on September 28, 2011). |
| 63 |
| Exhibit No. | Description |
| 21* | CC Mobility Limited, a company incorporated under the laws of Hong Kong as a limited liability company; Shenzhen CC Power Investment Consulting Co. Ltd., a company incorporated under the laws of the People’s Republic of China; Shenzhen CC Power Corporation, a Chinese enterprise incorporated under the laws of the People’s Republic of China |
| 23* | Consent of AWC (CPA) Limited |
| 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 * | Interactive Data Files |
* Filed herewith.
| 64 |
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| (Registrant) | ||
| Date: April 8, 2015 | By: | /s/ Renyan Ge |
| Renyan Ge | ||
| Chief Executive Officer (Principal | ||
| Executive Officer) | ||
| Date: April 8, 2015 | By: | /s/ Xili Wang |
| Xili Wang | ||
| Chief Financial Officer (Principal | ||
| Financial Officer and Principal | ||
| Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signatures | Title(s) | Date | |
| /s/ Renyan Ge | Chief Executive | ||
| Renyan Ge | Officer and Director | ||
| (Principal Executive Officer) | April 8, 2015 | ||
| /s/ Xili Wang | Chief Financial Officer | April 8, 2015 | |
| Xili Wang | (Principal Financial Officer and | ||
| Principal Accounting Officer) | |||
| /s/ Ronald Edward Strauss | Director | April 8, 2015 | |
| Ronald Edward Strauss |
| 65 |