10-K/A 1 form10ka.htm FORM 10-K/A XcelMobility Inc.: Form 10-K/A - Filed by newsfilecorp.com

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

FORM 10-K/A
(Amendment No. 1)

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

For the fiscal year ended December 31, 2012

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).
Yes [X]     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 company [X]

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012 was approximately $4,902,524 based upon the closing price of $0.16 per share reported for such date on the Over-the-Counter Bulletin Board maintained by the NASD. 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 August 6, 2013
Common Stock, $.001 par value per share 72,387,585 shares

DOCUMENTS INCORPORATED BY REFERENCE: None.


EXPLANATORY NOTE

This Amendment No. 1 to XcelMobility Inc.’s (the “Company”, “XCLL”) Annual Report on Form 10-K/A for the year ended December 31, 2012 (the “Amended 10-K”) is being made as a result of the Company’s recent discovery of misstatements in our previously reported financial statements for the year ended December 31, 2012 relating to the issued convertible notes.

The Amended 10-K is being filed to correct the improper accounting treatment used in connection with the issued convertible notes in the Balance Sheet as of December 31, 2012, the Consolidated Statements of Operations and Comprehensive Loss and the Statements of Shareholders’ Equity for the year ended December 31, 2012, and the related notes and disclosures, to comply with paragraph ASC 470. The Amended 10-K also includes an adjustment to the Company’s independent registered accountants’ audit report to reflect certain changes to Note 18 of the financial statements. In addition to the changes described above, we have also made minor revisions to various other sections of the Company’s original Annual Report on Form 10-K for the year ended December 31, 2012 (the “Original 10-K”).

For convenience and ease of reference, the Company is filing the annual report in its entirety with applicable changes. Unless otherwise stated, all information contained in this Amended 10-K is as of March 30, 2013, the filing date of the Original 10-K. Except as stated herein, this Amended 10-K does not reflect events or transactions occurring after such filing date and does not contain any modification or updates to the disclosure in the Annual Report that may have been affected by events or transactions occurring subsequent to such filing date. No information in the Original 10-K other than as set forth above is amended hereby.


XCELMOBILITY INC.

TABLE OF CONTENTS

    Page
Part I    
Item 1 Business 1
Item 1A Risk Factors 25
Item 1B Unresolved Staff Comments 40
Item 2 Properties 40
Item 3 Legal Proceedings 40
Item 4 Mine Safety Disclosures 40
Part II    
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 41
Item 6 Selected Financial Data 42
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation 43
Item 7A Quantitative and Qualitative Disclosures about Market Risk 50
Item 8 Financial Statements and Supplementary Data 51
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 51
Item 9A Controls and Procedures 51
Item 9B Other Information 52
Part III    
Item 10 Directors and Executive Officers and Corporate Governance 53
Item 11 Executive Compensation 56
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 59
Item 13 Certain Relationships and Related Transactions, and Director Independence 61
Item 14 Principal Accounting Fees and Services 62
Part IV    
Item 15 Exhibits, Financial Statement Schedules 64
Signatures   67


PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some discussions in this Annual Report on Form 10-K contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties and relate to future events or future financial performance. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this Form 10-K. Forward-looking statements are often identified by words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project,” “plans,” “seek” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology.

These forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” below that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In addition, you are directed to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section as well as those discussed elsewhere in this Form 10-K.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”), particularly the Company’s Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.

As used in this Annual Report on Form 10-K, references to “dollars” and “$” are to United States dollars and, unless otherwise indicated, references to “we,” “our,” “us,” “Xcel,” “XCLL,” the “Company” or the “Registrant” refer to XcelMobility Inc., a Nevada corporation and its wholly owned subsidiaries, CC Mobility Limited (“CC Mobility”), a company organized under the laws of Hong Kong, Shenzhen CC Power Investment Consulting Co. Ltd. (“CC Investment”), a company organized under the laws of the People’s Republic of China, and a wholly-owned subsidiary of CC Mobility, and Shenzhen CC Power Corporation (“CC Power”), a company organized under the laws of the People’s Republic of China.

ITEM 1. BUSINESS.

Background & 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.

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Through CC Mobility and CC Power, we are developing and marketing mobile applications for mobile devices that utilize cellular networks to connect to the Internet and hardware/software products to increase the speed of Virtual Private Networks. Our strategy is global in scope, but we are focusing our efforts at this time on the large mobile market of China. CC Power’s principal activity is the design, testing sale and support of software to support mobile Internet applications on cellular phones, smartphones, tablets and mobile computers in China. The principal products marketed by CC Power include the Mach 5 Accelerator and Mach5 LBS for location based applications. In order to support CC Power products, we have built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via our Mach5.cn website and retail locations, through distribution agents and through all three mobile phone carriers in China.

In April 2012, we entered into an Exclusive Indonesian Supply Contract with ZTE Corp. (the “Supply Contract”). ZTE Corp. is a leading global provider and Original Equipment Manufacturer (OEM) of telecommunications equipment and network solutions. The Supply Contract provides that we will be the exclusive supplier of high speed USB modems for ZTE Corp. for sale in Indonesia. The initial order is for a minimum of 100,000 units with additional orders anticipated to follow once the initial test market is completed.

In July 2012, we surpassed over 1.5 million subscribers in Asia. In August 2012, we signed a strategic partnership agreement with Tokyo-based Unified Communications, Inc. (“UCI”), which includes the launch of its Mach 5 LBS (Location Based Service). The Mach 5 LBS is slated to become a featured product and optional component of our Mach 5 browser accelerator product line and offers a GPS tracking-based platform that enables application developers to collect and review significant user analytics that offer major impacts for retail marketing.

We are currently deriving revenue from the sale of licensing agreements, and we will increase our revenues by expanding marketing efforts to broaden our product offering to include software sales directly to mobile device manufacturers and to provide application sales and enhanced products directly to consumers.

In order to expand our sales efforts, we have created an enterprise portal branded under our flagship Mach 5 banner to offer our customers direct access to our products. The website, http://www.mach5.cn/en/, connects potential resellers, developers and consumers with our revenue-generating 3rd party applications, games and specialty content. As we introduce new products to the Greater China market, we can immediately share them with the industry through our online product portal and maximize our sales opportunities.

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Corporate Structure

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

 
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CC Mobility Limited was incorporated on May 3, 2011 under the laws of Hong Kong as a limited liability company.

Shenzhen CC Power Investment Consulting Co. Ltd., 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 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 are a provider of mobile internet software technology and application services. Our mission is to provide better mobile internet experience to billions of users around the world. We operate a mobile internet hub through CC Mobility and CC Power where we are developing mobile applications directly for mobile devices that utilize cellular networks to connect to the Internet and hardware/software products to increase the speed of Virtual Private Networks. Our primary market is the large and growing mobile internet market in China.

We have quickly grown our user base by offering our Mach 5 Xcelerator product free of charge to the growing number of mobile users in China. The Mach 5 product has the look and feel of a desktop browser but loads and processes material over the cellular Internet (e.g., websites, videos, pictures, etc.) significantly faster than conventional browsers that come with mobile devices. This enables us to develop and acquire other mobile software that will leverage off the speed and performance of the Mach 5 product line. In order to support CC Power’s products, we have built a series of server locations throughout China and have created an online product portal. Management believes it has the opportunity to grow significant revenues from operations in China if we successfully execute our business and financial objectives.

China Strategy

In China, CC Power is utilizing the license granted by the PRC to provide mobile Internet services to corporations and individuals. Since 2008, CC Power has been actively test marketing products throughout China. A large network of servers has been put in place to support all Mach 5 products. CC Power also has in place agreements with all three of China’s cellular carriers (China Mobile, China Telecom and China Unicom) in several of China’s provinces that allow CC Power to market to the carrier’s subscribers via mail, email, text messaging and other means to introduce CC Power products. These agreements are entered into in the ordinary course of CC Power’s business as each and every province in the PRC where CC Power operates requires a separate agreement with each of the three main cellular carriers. These three carriers currently have an estimated subscriber base of over 1 billion users, per the chart below. CC Power has established revenue sharing arrangements with each carrier in the ordinary course of business on a province by province basis.

Cellular Carrier Subscribers
China Mobile 661 Million
China Unicom 298 Million
China Telecom 126 Million
Total 1,085 Million

CC Power has attracted over 1.7 million subscribers. CC Power has found that the best method of marketing to the price sensitive Chinese market is to offer a base product for free and a superior product for a small fee (equivalent to approximately $0.50 per month). For cell phone OEMs that preinstall the Mach 5 software in the phone, CC Power will provide a free trial version of Mach 5.

In addition to marketing products through China’s three cellular carriers, CC Power is also working with cell phone manufacturers to embed the Mach 5 product in phones at the factory. In 2011, CC Power entered into agreements to provide high-speed USB Modems with ZTE (to supply China Unicom) and Shenzhen Mobile (to supply China Mobile).

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Japan Strategy

We are in the process of expanding into Japan through the utilization of a strategic partner. CC Power has a strategic, contractual relationship with United Communications Inc., a Tokyo-based company with relationships throughout Japan, including with the largest cellular phone carriers, mobile device manufacturers and retailers.

South Korea Strategy

The South Korea market is very similar to the Japanese cellular market. In South Korea, we will follow the same sales and marketing strategy as used in Japan. We are actively looking for sales and marketing partner(s) in Korea.

Customers

The Company currently has a customer base of approximately 1.7 million end users within China using our service free of charge with approximately 30,000 fee-paying enterprise customers. With our key products fully tested and approved by large cellular carriers in China and Japan, the Company believes that it will be able to grow its customer base and revenues in 2013.

Technology

Utilizing our proprietary data compression technology, we provide products for mobile Internet users, which include products for traditional cell phones, smartphones and PC access to the Internet through mobile phones.

CC Power’s line of Mach 5 products are being used by over 1 million Chinese mobile phone users. The Mach 5 Web enables users to take their full PC web browsing experience to their mobile devices. Mach 5 L BS enables location-based services for smartphones equipped with GPS technology.

Many of our Mach 5 products require a large powerful network to run our applications. Powerful computer servers are strategically placed around the country to ensure consistent service and availability.

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We have spent considerable time, effort and financial resources building a powerful computer server network throughout China.

Intellectual Property

CC Power has developed unique intellectual property for its service. CC Power has significant intellectual property that we believe provides a competitive advantage over competitors and new entrants to the market:

  1.

Control of Source Code: CC Power protects its intellectual property by not allowing others to use its source code.

     
  2.

Trade Secret Agreements: All employees are bound by trade secret agreements.

Copyrights

CC Power has copyrights to the following software applications in China, where it believes the majority of its customer base will be generated in the next few years.

  1.

Software Copyright Applications: CC Power has registered 3 software applications for copyright in China.

       
  a.

Mach 5 Internet acceleration software V.6.0, Register number: 2007SR09253, by National copyright administration of People’s Public of China.

       
  b.

Mach 5 Enterprise acceleration software V.3.3, Register number: 2009SR058767, by National copyright administration of People’s Public of China.

       
  c.

Mach 5 Web Browser software V.1.1.44.13, Register number: 2010SR001089, by National copyright administration of People’s Public of China.

       
  d.

CCPower LBS (location based service) software V.1.0, Register number: 2013SR008345, by National copyright administration of People’s Public of China.

       
  2.

Licenses: CC Power also has obtained several licenses available only to Chinese companies from the PRC Ministry of Industry and technology and local Police Public Safety Departments (international website licenses). These licenses include the following:

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“Software Enterprise Recognition Certificate,” issued by Shenzhen Science Technology & Information Bureau on May 30, 2008, granted to Shenzhen CC Power Corporation.

     
 

“PRC Value-Added Telecommunication Service Operation License,” issued by the PRC Ministry of Industry and Information Technology on March 11, 2008 to Shenzhen CC Power Corporation, will be expired on January 7, 2018.

Awards

CC Power has also received the following awards and/or special recognitions:

 

“Certificate of Honor,” issued by Beijing World of Telecommunication Magazine, Beijing Telecommunication Technology Magazine and Telecommunication Science Magazine in October 2007, granted to Shenzhen CC Power Corporation, indicating that the “MACH 5 Wireless Web Accelerator” Solution was awarded the Excellent Solution in the “Election of 2007 The 100 Most Successful Solutions in PRC Telecommunication Industry.”

     
 

“Certificate of Honor,” issued by Beijing World of Telecommunication Magazine, Beijing Telecommunication Technology Magazine and Telecommunication Science Magazine in October 2009, granted to Shenzhen CC Power Corporation, indicating that the “MACH 5 Mobile Browser” Solution was awarded the Excellent Solution in the “Election of 2009 The 100 Most Successful Solutions in PRC Telecommunication Industry – Judges Choice Award.”

     
 

Recognition by Information Week Magazine, noting Shenzhen CC Power Corporation was included on its 2008 list of “The 100 Best PRC Commercial Technology Companies.”

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 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.

Products and Distribution

Products for Mobile Devices

The Mach 5 Xcelerator product provides us with a unique opportunity in China. Currently there are a limited number of Chinese applications available to the Chinese market, with few in the Chinese language. In 2012, we opened an applications store (“App Store”), where Chinese applications, games and content can be downloaded and utilized by Mach 5 subscribers. We will work directly with proven application and game providers to modify applications to the Chinese language. Content will be provided from the existing Chinese media. Our App Store will resemble App Stores currently provided by Apple and Google but will be targeted at the growing mobile phone user market in China.

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Our current suite of products and services includes:

Mach 5 Accelerator for Mobile Phones or PC

The Mach 5 Accelerator accelerates internet access through proprietary text and image compression, content caching, and other network optimizations. It supports all wireless internet connections such as GPRS, CDMA, 2G, 3G and WiFi, etc. as well as, 56K dial-up and any other low-speed or unstable internet connections. A number of acceleration servers have been installed across China, Hong Kong and Japan. Without the need of any new hardware installation, customers can use our services by downloading and installing Mach 5 with a valid user account.

• fast web and email acceleration technology
• patented acceleration, compression and network optimization
• employed by more than 2,200 service providers in over 50 countries
• approved by independent testing provider VeriTest USA
• acceleration up to 5 times certified by China Unicom
• simple installation and user friendly interface

Mach 5 Web Browser for Mobile

Mach 5 Web for Mobile enables users to take their full PC web browsing experience to their mobile devices. Featured websites and Rich Internet Applications (RIA), such as YouTube, Facebook, Google Apps, Google Maps, Yellow Pages Map and many others with Flash, AJAX, JavaScript, ActiveX, Web 2.0 and more, are easily accessed. YouTube videos and other compatible videos are Full-Screen supported.

With the latest remote processing technologies, Mach 5 Web requires just minimal bandwidth and hardware resources to quickly access full websites and heavy web-based applications.

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Mach 5 Enterprise

Mach 5 for Enterprise offers a secure, customized total solution to corporations with mobility needs. Web-based Office Applications “OA”, such as, ERP, CRM and MIS etc. can be supported natively by our Mach 5 Web Browser without the need of additional porting process to different mobile platforms. Enterprises are able to deploy BYOD, “Bring Your Own Device” with confidence that Mach 5 connects to companies’ intra-networks via secured internet session or more secured VPN.

Mach 5 LBS

Mach 5 LBS is a GPS/GSM/LBS application that can plug in on social networks. The application collects friend information from every major social network to map locations, and allows a user to share location-based information, photographs, and personal content. But, unlike other applications, Mach 5 LBS gives a user the power of GPS/GSM/LBS technology on its mobile phone - yet, all of the location information is private and never available to anyone out of the user’s network. Family and friends can also find each other around the world without location drop-offs on the map.

Following are features available to subscribers of Mach 5 LBS service:

• Locate all friends on street/satellite maps and communicate with them directly.
• Find family, friends, objects, media or points of interest close to user location.
• Geotag and share photos, videos and Points of Interest with friends.
• Establish a “Net of Care” by adding trusted family and friends from all user social networks into a user network of care providers.
• Track the location history of people, pets and possession being cared for.
• Move and assign small tracking devices to different people and possessions as needed.
• Communicate instantly with care providers and the person having the problems. Track the location history of people, pets and possession being cared for.
• Care providers are alerted right-away in case of a problem via their mobile-phone, social network or SMS. (can show location on map for selected phones)
• Remote configuration and control of tracking devices.
• Send alert message to phone and display location on map.

Mach 5 Push Mail

We provide real push-event technology, making mobile email notification work similar to SMS. Emails are delivered directly into a user’s email inbox, no clients to install, and no periodic checking required.

CC Power Documents transcoding allows images to be scaled, optimized and compressed automatically to suit individual mobile phones while documents (.pdf, .doc) are converted to text, resulting in a quick, cost-efficient and reliable email service. All content that has been optimized and adjusted in any way is stored in its original format in the users’ web mail. There, users can access and download copies of their unaltered original documents and pictures when accessed from a computer.

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Virtual Private Network Product

A virtual private network (VPN) is a network that uses a public telecommunication infrastructure, such as the Internet, to provide remote offices or individual users with secure access to their organization’s network. A virtual private network can be contrasted with an expensive system of owned or leased lines that can only be used by one organization. The goal of a VPN is to provide the organization with the same capabilities, but at a much lower cost.

A VPN works by using the shared public infrastructure while maintaining privacy through security procedures and tunneling protocols, such as the Layer Two Tunneling Protocol. In effect, the protocols, by encrypting data at the sending end and decrypting it at the receiving end, send the data through a “tunnel” that cannot be “entered” by data that is not properly encrypted. An additional level of security involves encrypting, not only the data, but also the originating and receiving network addresses.

The XcelMobility Enterprise VPL - Mach 5 Intra Web

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We have developed an enterprise solution for VPN which is branded the Mach 5 Intra Web. We believe we have an opportunity to seize a significant portion of the enterprise VPN market as the demand for mobile and cloud computing capabilities is increasing significantly as companies adopt mobile technology in their operations to enhance efficiency, increase productivity and strengthen customer relationships. Companies are facing the following challenges in implementing and managing mobile platforms:

  • linking time critical work flow and information to existing internal operating systems that are not accessible from mobile devices;
  • the cost of frequent client application upgrades and the maintenance of current mobile solutions; and
  • reluctance to implement a mobile intranet platform adoption due to lack of IT resources.

We offer an enterprise solution for VPN owners that we believe provides the following benefits:

  • flexibility for various businesses by being more cost efficient, easy to implement (plug and play), high level of security and is expandable;
  • web based intranet applications through mobile devices with PC like experience;
  • various sub systems to support PC line UX on Mobile environment;
  • architecture offers easy integration and expandability;

  • various enterprise work force applications using its server-based full browser technology increasing speed and accuracy;
  • the flexibility to support various policies and environments (security, geographical regions, device platforms) set by users;
  • easy expandability through Sub Systems;
  • multimedia content support for videos, live broadcasts and social media; and
  • proven solutions with low maintenance.

Products in Development

We plan to enhance our technology for location-based services in 2013 and provide localization and marketing for 3rd party products including:

Mobile gaming: One of the largest and fastest growing areas of the mobile Internet is gaming. With the new devices with high resolution screens and power processors complex gaming has come to the mobile arena.

Mobile marketing: Location-based mobile marketing is a new and growing application for the mobile Internet.

Mobile Social Networking: One of the fastest growing applications of the mobile Internet is social networking.

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Distribution

We provide mobile phone and Internet products through monthly subscriptions to large cell phone carriers and OEM partners. We deliver our products through a powerful and sophisticated network of servers that are located throughout China and Hong Kong

We market our products through 3 distribution channels:

Data Packages and Application Add-ons for Cellular Carriers

The 3 largest cellular carriers in Japan and China have agreed to market Mach 5 Xcelerator and Security to their customers on a revenue-sharing basis (the revenue split is driven by how aggressively the carrier will market the Mach 5 product). Carriers can maintain the Xcel Mach 5 brand or private label the product as their own. We are currently in the process of negotiating test market arrangements with these 3 cellular carriers to determine the most effective way to promote and sell these products. In all of these scenarios, the cellular carrier will collect the fees from their subscribers and remit our portion monthly.

Three marketing techniques that have been proven in the U.S. will be utilized and tested by these carriers. These include:

  • Free 2 to 3 month trial of the Mach 5 Xcelerator. Once the trial period is over, the user will be presented the option to purchase the product for a term or on a month by month basis (negative billing option - the user will have to unsubscribe).

  • Offering users an advanced “speed data package” which utilizes the Mach 5 Xcelerator and sells at a slight premium ($1.00 to $5.00 per month or discounted for a fixed term) over data packages without the product.

  • Offering Mach 5 Xcelerator or Security as an add-on product as many U.S. carriers do with data packages, call display, voice mail and other options. As an add-on to a monthly package, Mach 5 Xcelerator or Security would be made available for a monthly fee of $1.00 to $5.00.

Embedded Software on Mobile Devices Shipped from the Factory

While this option is not as profitable to us, it does ensure that the product is widely distributed. Cellular manufacturers can embed Mach 5 Xcelerator or Security on the mobile device at the factory so that it comes pre-installed with the product. Manufacturers can maintain the Xcel Mach 5 brand or private label the product as their own. As the average life of a smartphone is approximately 30 months, the revenue cycle is assumed to be the same. We are now in discussions with several manufacturers to embed the Mach 5 software in their mobile devices.

Websites and Prepayment Cards

We currently have test websites to offer our products in Japan, China and Hong Kong. These sites offer the Mach 5 range of products. These websites along with pre-paid Mach 5 Xcelerator cards (available in test locations of Chinese cellular carriers) have generated over 1.7 million users. As this was primarily a test of the product, the vast majority of the 1.5 million users are utilizing the Mach 5 Xcelertaor free of charge. The Company’s Chinese, Japanese and Hong Kong websites are in the process of being upgraded and re-formatted for a more contemporary look and image.

Industry

Personal mobile communications and computing have advanced dramatically with the continuous build out of advanced mobile infrastructure and the introduction of increasingly sophisticated portable smart devices. Wireless technology and mobile Internet have allowed for increased interaction and collaboration among users beyond what can be achieved through the traditional Internet. This increased level of connectivity has created increasing demand for advanced mobile Internet services particularly in China, which has the largest mobile user population in the world. According to the Shanghai Daily which cited the report from Ministry of Industry and Information Technology, China mobile phone users hit 1 billion at the end of February 2012. With this large user population, consumer trends in the mobile industry in China often lead those in the rest of the world. The popularity of mobile services in China and globally has led to the development of a broad ecosystem of industry participants, including content providers, application developers, platform providers and device manufacturers, as users increasingly seek to enhance their mobile experience beyond voice communication.

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Drivers of Demand for Mobile Internet Services

Early mobile services were primarily based on SMS technology and were largely focused on user entertainment. These included ring tones, games, screen wallpapers and other applications and such services have been widely popular, particularly in China. Advancements in 3G adoption and mobile technology have led to the development of a new generation of advanced services based on mobile Internet technology which address the need for more effective and efficient use of mobile devices. With the increasing adoption of smartphones, tablets and other 3G-enabled networked devices, mobile Internet services will become increasingly popular in users’ daily lives.

Adoption of 3G Networks

Advances in bandwidth provided by 3G mobile networks have created the necessary infrastructure for mass adoption of mobile Internet services. As mobile users increasingly adopting 3G networks worldwide the market opportunity for mobile services continues to expand. The number of 3G subscribers worldwide is projected to grow at a CAGR of 18% from 2009 to 2014 to reach over 2.0 billion users. In China, the number of Internet users has reached 564 million users, 75% on a mobile device as of December 2012, according to CNNIC.

Popularity of Mobile Devices with Increased Functionality Based on Multiple Platforms

User adoption of 3G networks has generated increasing demand for advanced mobile devices with the necessary features to leverage mobile Internet services. As mobile devices evolve, they incorporate an ever-increasing range of functions at lower cost, which address a broadening array of users’ business and personal needs. Examples of such mobile devices include wireless-enabled personal computers, tablets and smartphones which provide a converging range of functionality. Smartphones, in particular, which offer advanced computing and networking capability in compact form factors, have gained increasing popularity. The worldwide shipments of smartphones are expected to exceed that of personal computers in 2013, according to Gartner.

The Mobile Internet Services Industry

With the introduction of 3G networks, wireless carriers have actively promoted cooperation among mobile industry participants to develop mobile Internet services. A number of significant industry advancements have helped to define the mobile Internet computing paradigm. Users are increasingly accessing mobile Internet services through specially designed mobile applications installed on devices which provide users with convenient access to specific services. Given the form factors of mobile devices, mobile applications provide user-friendly interfaces through which users can interact with mobile Internet services. In addition, many mobile applications incorporate a cloud platform as a means to expand the capability of mobile Internet services beyond the computing power available from individual mobile devices.

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Smartphones And Mobile Applications

In order to fully leverage the increasing computing power of smartphones and other mobile devices, developers have created a large universe of mobile applications to fulfill growing user requirements. The emergence of mobile application stores, such as those run by Apple, Research in Motion, Nokia, Google and GetJar, also provide direct channels for developers to distribute mobile applications.

Flurry Mobile Data

Growth in mobile application products and services is directly related to the growth in the Smartphone market. Today China is the largest smartphone market with a growth rate of over 400% in 2012(Flurry Mobile).

Popular mobile applications include the following:

(i)

Connectivity applications, such as email, instant messenger, GPS navigation, remote access.

   
(ii)

Business applications, such as mobile banking, stock monitoring and trading, document processing and calendar planning.

   
(iii)

Life-style applications, such as ecommerce, bill payment, health monitoring, digital reading, and social- networking.

   
(iv)

Entertainment applications, such as news, games, multimedia player, photo and video editor.

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Competition

There are three main competitors in China for high speed data services and products:

I-accele Corporation www.i-accele.com
I-accele Corporation, which was established in Japan in 2002, is a global provider of software solutions that accelerate and optimize data services over wireless and wire line networks. I-accele range of products for Wireless operators, ISPs, and Enterprises, allows corporate customers and individual end-users of all networks to benefit from accelerated and rich data services, without changing the applications or devices they use, and without compromising their security needs. Several carriers and vendors in Japan, China and Malaysia have selected I-accele products to optimize their data applications, and I-accele is currently extending its product distribution in the Asia market.

UC Web www.ucweb.com
UC focuses on serving faster, more stable and flexible Internet experience to users. In April 2004, UC launched its core product UC Browser, which now runs on almost any mobile platform - Android, iOS, BlackBerry OS, Symbian, WinCE, bada, Java, MTK, Brew etc. More than 3000 phone models in 200 brands can perfectly support UC Browser. With UC Browser, mobile users can easily get online service, such as web news, web games, e-commerce, and so forth. By March 2011, UC Browser have served more than 150 countries and areas, and got more than 700 million downloads. Per month, 200 million users visits 60 billion pages through UC Browser, which ranked 1st in the world.

Onayo
Onayo is a direct competitor with a core product centered on compression software for mobile devices to increase speed and reduce bandwidth. It was founded in 2010 and has its head office in Ramat, Israel. It focuses on reducing the cost of data plans for retail customers by utilizing data compression technology. It currently uses a free revenue model.

Seasonality

Our business is not subject to seasonality.

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.

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.

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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.

Regulation on the Telecommunications Industry

Types of Telecommunications Services

On September 25, 2000, the State Council issued the Regulations on Telecommunications of the PRC, or the Regulations on Telecommunications, which became effective on September 25, 2000 and which regulates the telecommunications industry and other related activities and services within the PRC. The MIIT regulates the telecommunications industry on a national level while the provincial-level communications administrative bureaus, or the CABs, supervise and regulate the telecommunications industry in their respective administrative regions. The Regulations on Telecommunications classifies telecommunications services into two main categories: (1) core telecommunications services and (2) value-added telecommunications services, and further divides each main category into several sub-categories. According to the Catalog for Classification of Telecommunications Businesses, which became effective on April 1, 2003, our business operates under the provision of information services through mobile networks and the Internet, thus fitting into the category of value-added telecommunications services.

Value-added Telecommunications Services

Providers of value-added telecommunications services in the PRC are subject to examination and approval from, and require licenses issued by, the MIIT or the relevant CABs. Pursuant to the Regulation on Telecommunications, to provide value-added telecommunications services in more than two provinces, autonomous regions or centrally administered municipalities, the value-added telecommunication service provider shall obtain the Transregional Value-added Telecommunication Business Operation License from the MIIT; to provide value-added telecommunications services within one province, autonomous region or centrally administered municipality, the value-added telecommunication service provider shall obtain the Value-Added Telecommunication Business Operation License from relevant CABs. On March 1, 2009, the MIIT issued the Administrative Measures for Licensing of Telecommunications Business Operations which set forth the basic requirements for a license to provide value-added telecommunications services in the PRC. Such requirements mainly include the following:

  • the applicant is a duly incorporated company;

  • the applicant has necessary funds and professional staff suitable for its business activities;

  • the applicant has the reputation or capability of providing customers with long-term services;

  • to operate value-added telecommunications services business across multiple provinces, autonomous regions or centrally administered municipalities, the applicant shall have a minimum registered capital of RMB10,000,000; to operate value-added telecommunications services business within a single province, autonomous region or centrally administered municipality, the applicant shall have a minimum registered capital of RMB1,000,000;

  • the applicant has necessary premises, facilities and technical scheme; and

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  • the applicant and its major capital contributors and business managers have no record of violating rules on telecommunication supervision and administration during the past three years.

We have obtained the China Value-Added Telecommunications Business License permitted by the MII (B2-20080062) and the China Value-Added Telecommunications Business License permitted by the Guangdong Provincial Communications Authority (B2-20050598). These are the only value-added telecommunications business licenses that we currently require to operate our business in the PRC.

Short Message Services

On April 15, 2004, the MII issued the Notice on Certain Issues Regarding Regulating Short Message Services which specifies that only those telecommunications services providers that hold specific short message service licenses may provide such services in the PRC. The notice also requires short message services providers to censor the contents of short messages, to automatically collect information such as the time that short messages are sent and received and the telephone numbers or codes of the sending and receiving terminals and to keep such records for five months within the time each short message is delivered.

Telecommunications Networks Code Number Resources

On January 29, 2003, the MII issued the Administrative Measures on Telecommunications Networks Code Number Resources to administer the code number resources including mobile communications network code number. According to the administrative measures, the entity shall apply to the MII for a code number to be used in the inter-provincial operations and shall apply to the relevant CAB for a separate code number for intra-provincial operations. The administrative measures specify the qualifications for a code number, required application materials and application procedures.

Specifications for Telecommunications Services

On March 13, 2005, the MII issued the Specifications for Telecommunications Services specifying the telecommunications service qualities to which all telecommunications service providers in the PRC should conform. It also requires all telecommunications services providers to establish a sound service quality management system and make periodical reports to the relevant telecommunications authorities.

Foreign Investments in Value-added Telecommunications Services Industry

Foreign direct investment in telecommunications services industry in China is regulated under Regulations on the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations. The FITE Regulations were issued by the State Council on December 11, 2001 and amended by the State Council on September 10, 2008. According to the FITE Regulations, foreign investors’ ultimate equity interests in any entity providing value-added telecommunications services in the PRC may not exceed 50%. A foreign investor must demonstrate a good track record and prior experience in providing value-added telecommunications services outside the PRC prior to acquiring any equity interest in any value-added telecommunications services business in the PRC.

On July 13 2006, the MII issued the Notice Regarding Strengthening the Administration of Foreign Investment in Operating Value-Added Telecommunications Businesses, or the MII Notice, which prohibits value-added telecommunications services operation license holders, including Trans-regional Value-added Telecommunications Services Operation License and Telecommunications Value-added Services Operation License holders, from leasing, transferring or selling their licenses to any foreign investors in any manner, or providing any resources, premises or facilities to any foreign investors for illegal operation of telecommunications services business in the PRC. The MII Notice also requires that, (1) value-added telecommunications services operation license holders or their shareholders must directly own the domain names and trademarks used by such license holders in their daily operations; (2) each license holder must have necessary facilities for its approved business operations and maintain such facilities in the regions specified by its license; and (3) all value-added telecommunications service providers are required to maintain network and Internet security in accordance with the standards set forth in relevant PRC regulations. If a license holder fails to comply with the requirements in the MII Notice and fails to remedy such non-compliance within a designated period, the MIIT or relevant CABs may take administrative actions against such license holder, including revocation of their valued-added telecommunications services operation licenses. We provide our services through our controlled affiliated entity that owns Value-added Telecommunications Services Operation Licenses. We believe our controlled affiliated entity is in compliance with the MII Notice.

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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).

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;

  • the development fund for software technique and products shall be above 8% of the enterprise’s annual software income; and

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  • the annual sale income of software shall be more than 35% of the total annual income of the enterprise, with the income of self-developed software more than 50% of the software sales income;

  • 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);

  •  

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).

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Trademarks

Registered trademarks in the PRC are protected by the Trademark Law of the PRC which came into effect in 1982 and was revised in 1993 and 2001 and the Regulations for the Implementation of Trademark Law of PRC which came into effect in 2002. A trademark can be registered in the PRC with the Trademark Office under the State Administration for Industry and Commerce, or the SAIC. The protection period for a registered trademark in the PRC is ten years starting from the date of registration and may be renewed if an application for renewal is filed within six months prior to expiration.

Copyright

Copyright in the PRC is protected by the Copyright Law of the PRC which was promulgated in 1990 and revised in 2001 and February 2010 and the Regulation for the Implementation of the Copyright Law of the PRC which came into effect in September 2002 and revised in January 2011. Under the revised Copyright Law, copyright protections have been extended to information network and products transmitted on information network. Copyrights are reserved by the author, unless specified otherwise by the laws. According to Article 16 of the Copyright Law, if a work constitutes “work for hire”, the employer, instead of the employee, is considered the legal author of the work and will enjoy the copyrights of such “work for hire” other than rights of authorship. “Works for hire” include, (1) drawings of engineering designs and product designs, maps, computer software and other works for hire, which are created mainly with the materials and technical resources of the legal entity or organization with responsibilities being assumed by such legal entity or organization; (2) those works the copyrights of which are, in accordance with the laws or administrative regulations or under contractual arrangements, enjoyed by a legal entity or organization. The actual creator may enjoy the rights of authorship of such “work for hire.”

A copyright owner may transfer its copyrights to others or permit others to use its copyrighted works. Use of copyrighted works of others generally requires a licensing contract with the copyright owner. The protection period for copyrights in the PRC varies, with 50 years as the minimum. The protection period for a “work for hire” where a legal entity or organization owns the copyright (except for the right of authorship) is 50 years, expiring on December 31 of the fiftieth year after the first publication of such work.

Patent protection in China

Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2009 and 2010, respectively.

The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

The Patent Law covers three kinds of patents—patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file; therefore, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.

PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One broad exception to this rule, however, is that, where the patent holder has not exploited the patent or has not exploited the patent adequately without any reasonable reason in the statutory period of time, or the patent holder’s act of exploiting the patent is held to be monopolistic, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license to date. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.

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PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one or more times the license fee under a contractual license. The infringing party may be also fined by the Administration of Patent Management in an amount of up to four times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB200,000, or approximately USD $31,250.

Measures for the Registration of Computer Software Copyright

In China, holders of computer software copyrights enjoy protections under the Copyright Law. China’s State Council and the State Copyright Administration have promulgated various regulations relating to the protection of software copyrights in China. Under these regulations, computer software that is independently developed and exists in a physical form is protected, and software copyright owners may license or transfer their software copyrights to others. Registration of software copyrights, exclusive licensing and transfer contracts with the Copyright Protection Center of China (previously, the State Copyright Administration) or its local branches is encouraged. Such registration is not mandatory under Chinese law, but can enhance the protections available to the registered copyrights holders. For example, the registration certificate is proof of protection.

Foreign Exchange Regulation

Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 2008 and various regulations issued by the State Administration of Foreign Exchange (“SAFE”), and other relevant PRC government authorities, the Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investments, require the prior approval from the SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.

Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by the SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into Renminbi.

Under the Implementing Rules of Measures for the Administration of Individual Foreign Exchange, or the Implementation Rules, issued by the SAFE on January 5, 2007, PRC citizens who are granted shares or share options by an overseas listed company according to its share incentive plan are required, through a qualified PRC agent or the PRC subsidiary of such overseas listed company, to register with the SAFE and complete certain other procedures related to the share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company must be remitted into a foreign currency account of such PRC citizen or be exchanged into Renminbi.

In addition, domestic wages and salaries of foreign employees outside of the PRC, as well as other rightful earnings, such as dividends, bonuses and profits, of shareholders outside of the PRC may be remitted freely out of the PRC after taxes have been paid in accordance with the provisions of the Chinese tax law with a tax certificate. Since we do not have any debt that is generated outside the PRC and do not have any employees located outside PRC, management is not aware of any material risk of paying in foreign currency in respect of those employee-related and debt-settlement amounts due to any other party located outside PRC.

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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

Xcel currently employs 32 individuals amongst its 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

CC Power’s offices are located at: Room 706, Cyber Times Tower B, Tairan Road, Futian District, Shenzhen, PRC.

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ITEM 1A. RISK FACTORS.

You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this document that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Our operating results are difficult to predict, and we may experience significant fluctuations in our operating results.

Our operating results may fluctuate significantly. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance. Factors causing these fluctuations include, among others:

  • our ability to maintain and increase sales to existing customers, attract new customers and satisfy our customers’ demands;
  • our ability to monetize our products;
  • the cooperation and access to our partners customer bases;
  • the price we charge for our products 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 products;
  • 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 mobile internet industry; and
  • economic and geopolitical conditions in China, Japan 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 commercial success of our products depends upon the degree of their market acceptance among the mobile internet community. If our products do not attain market acceptance among the mobile internet community, our operations and profitability would be adversely affected.

The commercial success of our products depends, in large part, upon the degree of market acceptance they achieve among the mobile internet community, particularly among cellular carriers, phone manufacturers, and phone retailers. Cellular carriers may not offer our products to their customers and phone manufacturers may not embed our software into their phones if the products are not attractive and desired by consumers. The acceptance and use of our products among the mobile internet community will depend upon a number of factors including:

  • perceptions by consumers, cellular carriers, phone manufacturers and retailers that our products are leading edge and enable faster use of the mobile Internet;
  • perceptions by cellular carriers that the use of our products are very efficient and enable them to provide more data to their customers through existing infrastructure;
  • the efficacy and potential advantages relative to competing products and products under development;
  • relative convenience and ease of administration of installing our products and collecting payment;
  • effectiveness of our product education, marketing and distribution efforts;

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  • publicity concerning our products or competing products and treatments; and
  • the price for our products and competing products.

If our products fail to attain and sustain market acceptance among the mobile internet community, or if our currently marketed products cannot maintain market acceptance, our results of operations and profitability would be adversely affected.

Our success is dependent upon our ability to maintain our relationships with cellular carriers, phone manufacturers and phone retailers and to expand such relationships and develop new relationships.

Our business depends significantly on our relationships with cellular carriers, phone manufacturers and phone retailers. No assurance can be given that any such distribution channels will continue their relationships with us, and the loss of one or more of these distribution channel partners could have a material adverse effect on our business, results of operations and financial condition. Our ability to grow our business will therefore depend to a significant degree upon our ability to expand existing relationships and develop new relationships with such distribution channel partners and to expand existing relationships. No assurance can be given that new partners will be found, that any such new relationships will be successful when they are in place, or that business with current distribution channel partners will increase. Failure to develop and expand such relationships could have a material adverse effect on our business, results of operations and financial condition.

Concerns about health risks associated with wireless equipment may reduce the demand for our services.

Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. The actual or perceived risk of mobile communications devices could adversely affect us through a reduction in mobile communication devise users, thereby reducing potential users of our services.

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.

A limited number of customers account for a significant portion of our sales, and the loss of any one of them as a customer may substantially harm our financial results.

For the fiscal year ended December 31, 2012, 1 customer accounted for approximately 86% of our gross sales. Our near term, and possibly long term prospects are significantly dependent upon this customer. As a result, currently we are substantially dependent upon the continued participation of this customer in order to maintain and continue to grow our total revenues. Significantly reducing our dependence on this customer may take longer than we currently anticipate and there can be no guarantee that we will succeed in reducing that dependence. There is no assurance that any of this customer will continue to contribute to our total sales revenue in subsequent years. Under present conditions, the loss of this customer could have a material effect on our performance, liquidity and prospects. To reduce this risk, we continue to build our sales pipeline and diversify our product line.

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.

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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.

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

There is significant litigation in the telecommunications technology field regarding patents and other intellectual property rights. Other companies with greater financial and other resources than us have gone out of business from costs related to patent litigation and from losing a patent litigation. Our success depends, in large part, on our ability to use our proprietary information and know-how without infringing third party intellectual property rights. As we increase sales of our products, and as litigation becomes more common in China and throughout Asia, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources, may have or may obtain intellectual property protection that may prevent, limit or interfere with our ability to make, use or sell our products in China and elsewhere. Moreover, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our management personnel. Resolving intellectual property infringement claims may also require us to enter into license agreements. No assurances can be given that we would be able to obtain license agreements on commercially reasonable terms. A successful claim of intellectual property infringement could subject us to significant damages and may prevent us from developing or licensing the affected product. Any of these events could have a material adverse effect on our profitability and financial condition.

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, Gregory Tse 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.

Increasing government regulation of the internet could affect our business.

We are subject not only to regulations applicable to businesses generally but also to laws and regulations directly applicable to electronic commerce. The PRC government may adopt new laws and regulations applicable to electronic commerce. Currently, there are no specific internet regulations adopted by the PRC government pertaining to our industry. However, in the future the PRC government may decide to regulate electronic commerce as pertains to our industry. Any such legislation or regulation could dampen the growth of the internet and decrease its acceptance. If such a decline occurs, customers may decide in the future not to use the internet to purchase our products. Any new laws or regulations in the following areas could affect our business:

  • user privacy;
  • the pricing and taxation of products offered over the internet;
  • the content of websites;
  • copyrights;
  • the online distribution of specific material or content over the internet; and
  • the characteristics and quality of services offered over the internet.

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.

If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.

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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 mobile communication and software 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.

The technology used in the mobile internet industry continues to change rapidly and if we are unable to modify our products to adapt to future changes in the mobile communication industry, we will be unable to attract or retain customers.

The mobile internet industry has been characterized by a rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater functionality. Our future success will likely depend on our ability to develop new products and to adjust our product specifications in response to these developments in a timely manner. If our development efforts are not successful or are delayed, or if our newly developed products do not achieve market acceptance, we may be unable to attract or retain customers and our operating results could be harmed.

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Our efforts to develop new products involve several risks, including:

  • our ability to anticipate and respond in a timely manner to changes in customer requirements;

  • the significant research and development investment that we may be required to make before market acceptance of a particular new or enhanced product;

  • the possibility that the mobile internet industry may not accept our products after we have invested a significant amount of resources in development; and

  • competition from new technologies, processes and products introduced by our current or future competitors.

We intend to make significant investments in research and development and new mobile Internet products that may not be profitable.

Companies in our industry are under pressure to develop new software and new product innovations to support changing consumer tastes and regulatory requirements. We have engaged in research and development activities and we believe that substantial additional research and development activities are necessary to allow us to offer technologically-advanced products. We expect that our research and development budget will increase significantly as we attempt to create new products and as we have access to additional working capital to fund these activities. Research and development and investments in new technology are inherently speculative and commercial success depends on many factors including technological innovation, novelty, service and support, and effective sales and marketing.

We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may be minimal.

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.

Our contractual arrangements with CC Power and its shareholder may not be as effective in providing control over these entities as direct ownership.

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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 its contractual obligation to do so. If CC Power fails to perform its obligation under the 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.

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.

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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. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. 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.

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.

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Under the EIT and its implementing rules, the profits of a foreign invested enterprise which are distributed to its immediate holding company outside the PRC will be subject to a withholding tax rate of 10%. Pursuant to a tax arrangement between Hong Kong and the PRC, such rate may be lowered to 5% if a Hong Kong resident enterprise owns over 25% of a PRC company. CC Investment is currently wholly-owned by CC Mobility. However, the 5% withholding tax rate does not automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy any benefits under the relevant taxation treaties. Moreover, according to the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, for a tax treaty to be applicable, certain requirements must be satisfied, including: (1) the taxpayer must be the beneficial owner of the relevant dividends; (2) for corporate recipients to enjoy the favorable tax treatment under the tax treaty as direct owners of a PRC enterprise, such corporate recipients must satisfy the direct ownership thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. On August 24, 2009, the State Administration of Taxation issued the Administrative Measures for Non-resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective on October 1, 2009, requiring non-resident enterprises to obtain an approval from the competent tax authority in order to enjoy the treatments under tax treaties. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties on October 27, 2009, which limits the “beneficial owner” to individuals, enterprises or other organizations normally engaged in substantive operations, and set forth certain adverse factors on the recognition of such “Beneficial Owner.” CC Investment has not yet applied for such approvals because it has not declared or paid dividends, and does not intend to declare or pay dividends. CC Investment will apply for such approvals when it intends to declare and pay dividends. There is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received by CC Mobility from CC Investment.

Changes in economic conditions and consumer confidence in China may influence the industry in which we operate, consumer preferences and spending patterns.

A significant portion of our business and revenue growth depends on the size of the retail market of mobile internet products 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 and U.S. Generally Accepted Accounting Principles, 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.

     
  iv)

We lack personnel with formal training to properly analyze and record complex transactions in accordance with U.S. GAAP. Our current Chief Financial Officer, Ms. Wang, has 18 years of experience in financial management in private and public companies in China. She graduated from Huazhong Technical and Science University in 1990 with a Bachelor of Science degree in accounting and finance management; however, she is not familiar with U.S. GAAP. Since 2010, we have retained Auditprep to assist us with preparing our financial statements in accordance with U.S. GAAP and SEC rules and regulations.

     
  v)

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

Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we and our independent registered public accounting firm would be able to conclude that our internal control over financial reporting is effective at fiscal year end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.

A limited public trading market exists for our common stock, which makes it more difficult for our stockholders to sell their common stock in the public markets.

Our common stock is currently traded under the symbol “XCLL.OB,” but currently with low or no volume, based on quotations on the “Over-the-Counter Bulletin Board,” meaning that the number of persons interested in purchasing

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our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our stock until such time as we became more viable. Additionally, many brokerage firms may not be willing to effect transactions in the securities. As a consequence, there may be periods of several days or more when trading activity in our stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to the volatility of our common stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.

Shareholders should also be aware that, according to SEC Release No. 34-29093, the market for “penny stock,” such as our common stock, has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.

We do not anticipate paying any dividends in the foreseeable future. If and when we decide to pay dividends, any dividends or proceeds from liquidation will be subject to the approval of the relevant Chinese government agencies.

We currently intend to retain any future earnings for funding growth. We do not anticipate paying any dividends in the foreseeable future. As a result, shareholders should not rely on an investment in our securities if they require dividend income. A significant portion of our assets are located inside China. Under the laws governing foreign-invested enterprises in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. If and when made, any dividend payment will be subject to the decision of the board of directors of our Chinese operating company, CC Investment, and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.

Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’s ability to buy and sell our stock.

Our stock is categorized as a “penny stock.” The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $4.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

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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.

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The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

ITEM 2. PROPERTIES.

The principal executive offices for the Registrant are located at: 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

CC Power’s offices are located at: Room 706, Cyber Times Tower B, Tairan Road, Futian District, Shenzhen, PRC. The lease for CC Power’s offices is for a one year term from September 1, 2012 to August 30, 2013, with a payment of RMB14,500 (approx. US$2,264) per month.

ITEM 3. LEGAL PROCEEDINGS.

There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market for Registrant’s Common Equity

Our common stock is currently listed for trading on the Over-the-Counter Bulletin Board maintained by the Financial Industry Regulatory Authority (“FINRA”) 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 Over-the-Counter Bulletin Board.

Fiscal Year Ending December 31, 2012     High     Low  
First Quarter - March 31, 2012   $  1.08   $  0.58  
Second Quarter - June 30, 2012   $  0.65   $  0.10  
Third Quarter - September 30, 2012   $  0.44   $  0.12  
Fourth Quarter - December 31, 2012   $  0.17   $  0.05  

Fiscal Year Ending December 31, 2011     High     Low  
First Quarter - March 31, 2011   $  0.2   $  0.143  
Second Quarter - June 30, 2011   $  -   $  -  
Third Quarter - September 30, 2011   $  0.80   $  0.75  
Fourth Quarter - December 31, 2011   $  1.00   $  0.40  

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 27, 2013, there were 6 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

The information set forth below describes our issuance of securities without registration under the Securities Act of 1933, as amended, during the year ended December 31, 2012, that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K:

On December 19, 2012, we issued a Convertible Promissory Note (the “December Note”) in the amount of $37,500 to Asher Enterprises, Inc., a Delaware corporation and an accredited investor (the “Holder”). The December Note is payable on September 21, 2013 and has an interest rate of 8% per annum (increases to 22% in the event of default). The December Note is convertible at the option of the Holder commencing on the date that is 180 days from the date of the December Note into shares of the Company’s common stock at a conversion price determined by multiplying 60% by the market price of the Company’s common stock pursuant to the terms of the December Note. The Holder is entitled to certain anti-dilution protection such that should the Company sell any common stock or any instrument convertible into common stock, at a price per share that is less than the conversion price, then the conversion price of the December Note shall automatically be lowered to that new price. The issuance of the December Note to the Holder was exempt from registration in reliance on the exemption afforded by Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the rules promulgated thereunder as the Holder is an “accredited investor” as such term is defined in Rule 501(a) under the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA.

The following tables summarize selected consolidated financial data regarding the business of the Company and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements of the Company and the related notes included with those financial statements. The summary consolidated financial information has been derived from the audited consolidated financial statements for the Company and its subsidiaries for the years ended December 31, 2012 and 2011. All monetary amounts are expressed in U.S. dollars unless otherwise indicated.

Financial Performance of the Company

The following represents the past financial performance for the Company as of and for the years ended December 31, 2012 and 2011.

    Year Ended     Year Ended  
    December 31,     December 31,  
    2012     2011  
Income Statement Data:            
Revenue $  277,406   $  47,279  
Cost of revenue   17,953     55,122  
Gross profit (loss)   259,453     (7,843 )
Operating expenses   1,028,044     502,429  
Loss from operations   (768,591 )   (510,272 )
Interest income   853     321  
Interest expense   (122,268 )   (15,489 )
Other income and expense   455,237     50,615  
Loss before tax   (434,769 )   (474,825 )
Income tax expense         -  
Net income (loss) $  (434,769 ) $  (474,825 )

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    As of December 31,  
    2012     2011  
             
Balance Sheet Data:            
Cash and cash equivalents $  98,739   $  615,208  
Working capital   (738,322 )   252,808  
Total assets   226,645     695,621  
Total liabilities   1,209,689     1,305,591  
Total shareholders’ equity $ (983,044 ) $  (609,970 )

    Year ended     Year ended  
    December 31,     December 31,  
    2012     2011  
Cash Flow Data:            
Net cash (used in) provided by operating activities $  (689,782 ) $  (161,369 )
Net cash provided by (used in) investing activities   (44,328 )   233,040  
Net cash provided by (used in) financing activities   213,000     531,347  
Net (decrease) increase in cash and cash equivalents $  (516,469 ) $  606,374  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended December 31, 2012 and 2011. 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

As noted above, 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.

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

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In April 2012, we entered into an Exclusive Indonesian Supply Contract with ZTE Corp. (the “Supply Contract”). ZTE Corp. is a leading global provider and Original Equipment Manufacturer (OEM) of telecommunications equipment and network solutions. The Supply Contract provides that we will be the exclusive supplier of high speed USB modems for ZTE Corp. for sale in Indonesia. The initial order is for a minimum of 100,000 units with additional orders anticipated to follow once the initial test market is completed.

In July 2012, we surpassed over 1.5 million subscribers in Asia. In August 2012, we signed a strategic partnership agreement with Tokyo-based Unified Communications, Inc. (“UCI”), which includes the launch of its Mach 5 LBS (Location Based Service). The Mach 5 LBS is slated to become a featured product and optional component of our Mach 5 browser accelerator product line and offers a GPS tracking-based platform that enables application developers to collect and review significant user analytics that offer major impacts for retail marketing.

We are currently deriving revenue from the sale of licensing agreements, and we are increasing our revenues by expanding marketing efforts to broaden our product offering to include software sales directly to mobile device manufacturers and to provide application sales and enhanced products directly to consumers.

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

Certain of our accounting policies require higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis. Select significant accounting policies concerning revenue recognition and cost of revenue are listed as below:

Revenue recognition

Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements. During the year ended December 31, 2012, we also have revenues derived from GPS system development and website development projects along with maintenance arrangements.

We evaluate revenue recognition based on the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.

Revenue Recognition for Software Products (Software Elements)

New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.

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Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.

Revenue Recognition for Multiple-Element Arrangements – Software Products and Software Related Services (Software Arrangements)

We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.

Revenue Recognition for Multiple-Element Arrangements – Arrangements with Software and Hardware Elements

We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) : Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.

Cost of Revenue

Cost of revenue 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.

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Recently Issued Accounting Pronouncements

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-04, Technical Corrections and Improvements. This ASU make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013.

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-05, Statement of Cash Flows (Topic 230). This ASU addresses how cash receipts arising from the sale of certain donated financial assets, such as securities, should be classified in the statement of cash flows of not-for-profit entities (NFPs). Some NFPs classify those cash receipts as investing cash inflows, while other entities classify them as either operating cash inflows or financing cash inflows, consistent with their treatment of inflows arising from cash contributions. The objective of this Update is for an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without the NFP imposing any limitations for sale and were converted nearly immediately into cash. The amendments in the ASU are effective prospectively for fiscal years, and interim fiscal periods within those years, beginning after June 15, 2013. Retrospective application to all periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted.

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. This ASU addresses the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation or National Credit Union Administration) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). For public and nonpublic entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution.

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-07, Entertainment--Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs. This ASU eliminates the rebuttable presumption that the conditions leading to the write-off of unamortized film costs after the balance sheet date existed as of the balance sheet date. The amendments also eliminate the requirement that an entity incorporate into fair value measurements used in the impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence if the information would not have been considered by market participants at the measurement date. or SEC filers, the amendments are effective for impairment assessments performed on or after December 15, 2012. For all other entities, the amendments are effective for impairment assessments performed on or after December 15, 2013. The amendments resulting from this ASU should be applied prospectively. Earlier application is permitted, including for impairment assessments performed as of a date before October 24, 2012, if, for SEC filers, the entity’s financial statements for the most recent annual or interim period have not yet been issued or, for all other entities, have not yet been made available for issuance.

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.

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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.

Results of Operations

Comparison of the Years Ended December 31, 2012 and 2011

Revenue

            Our revenue for the year ended December 31, 2012 totaled US$277,406, an increase of 486% from US$47,279 for the year ended December 31, 2011. This increase in revenue was primarily due to an increase in revenue from paying subscribers for our internet accelerator software and the fact that our revenue service contracts are ending and being renewed.

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Cost of revenue

            Cost of revenue for the year ended December 31, 2012 was US$17,953 and consists primarily of costs associated with our internet accelerator software. Cost of revenue decreased US$37,169, or 67%, from US$55,122 for the year ended December 31, 2011. This decrease in cost of revenue was primarily due to lower cost associated with our internet accelerator software.

Gross profit

             Gross profit for the year ended December 31, 2012 was US$259,453, an increase of US$267,296 from US$(7,843) for the year ended December 31, 2011. This increase in gross profit was primarily due to revenue increase.

Operating Expenses

             Our operating expenses for the year ended December 31, 2012 increased to $1,028,044 by $525,615, or 105%, from $502,429 for the year ended December 31, 2011. This increase in operating expenses was primarily due to expenses incurred to generate revenue such as research and development cost increased to $246,667 by $199,067 or 418% for the year ended December 31, 2012 from $47,600 for the year ended December 31, 2011.

Other Income

            Net other income of $332,822 represents income recognized from the grant from the Science, Industry, Trade & Information Technology Commission of the Shenzhen Municipality.

Net loss

             A net loss of US$434,769 resulted for the year ended December 31, 2012 compared to net loss of US$474,825 for the year ended December 31, 2011, a decrease of US$40,056. Our net loss decreased primarily due to the gain on derivative of $669,329, though there was significant increase in operating expenses and, research and development expenses.

Comprehensive loss

             Our comprehensive loss decreased by US$36,208 from US$468,586 for the year ended December 31, 2011 to US$432,388 for the year ended December 31, 2012. The decrease was primarily due to the gain on derivative of $669,329, though the expenses increased substantially and even faster than the revenue.

Liquidity and Capital Resources

Overview

             As of December 31, 2012, we had cash and equivalents on hand of US$98,739 and negative working capital of US$100,909. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through June 2013 when the deferred revenue is recognized as income.

Convertible Loan

             On April 25, 2012, we issued a Convertible Promissory Note (the “April Note”) in the amount of $100,000 to First Capital A.G. (“First Capital”). The April Note is payable on April 25, 2014 and has an interest rate of 5% per annum. On July 27, 2012, we issued a Convertible Promissory Note (the “July Note”) in the amount of $63,000 to Asher Enterprises, Inc., a Delaware corporation and an accredited investor (“Asher”). The July Note is payable on April 13, 2013 and has an interest rate of 8% per annum (increases to 22% in the event of default). On December 19, 2012, we issued an additional Convertible Promissory Note (the “December Note”) in the amount of $37,500 to Asher. The December Note is payable on September 21, 2013 and has an interest rate of 8% per annum (increases to 22% in the event of default).

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            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.

            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.

            The Company has incurred significant continuing losses during the year ended December 31, 2012 and has an accumulated deficit at December 31, 2012 and has relied on the Company’s registered capital and issuance of convertible notes to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

             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 used in operating activities for the year ended December 31, 2012 was US$689,782 compared to net cash used in operating activities of US$161,369 for the year ended December 31, 2011. This increase in cash used in operating activities was primarily due to an increase in operating loss.

Net cash provided by (used in) investing activities

            Net cash used in investing activities for the year ended December 31, 2012 was US$44,328, compared to net cash provided by investing activities for the year ended December 31, 2011 of US$233,040. The majority of these 2011 funds were used to add to the server configuration in China and Hong Kong.

Net cash provided by financing activities

             Net cash provided by financing activities for the year ended December 31, 2012 was US$213,000. Cash provided by financing activities for the year ended December 31, 2011 was US$531,347. The decrease in cash provided by financing activities was as a result of the reduction on issuance of our convertible promissory notes.

Off-Balance Sheet Arrangements

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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.

Contractual Obligations

The following table outlines payments due under our significant contractual obligations over the periods shown, exclusive of interest:

    Payments due by Period  
         Contractual Obligations                              
         At December 31, 2012   Less than     One to     Three to     More Than        
    One Year     Three Years     Five Years     Five Years     Total  
Operating Lease Obligations $  -   $  -   $  -   $ -   $  -  
Long-Term Debt Obligations $  -   $  -   $  -   $ -   $  -  
Capital Expenditure Obligations $  -   $  -   $  -   $ -   $  -  
Purchase Obligations $  -   $  -   $  -   $ -   $  -  
Other Long-Term Liabilities $  -   $  -   $  -   $ -   $ -  

The above table outlines our obligations as of December 31, 2012 and does not reflect any changes in our obligations that have occurred after that date.

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.

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Considering the RMB balance of our cash as of December 31, 2012, which amounted to US$98,739, 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$987.39 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, 2012 begin on page F-1 and have been examined by our independent accountants, Albert Wong & Co.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

As previously disclosed on a Current Report on Form 8-K filed with the SEC on August 10, 2011, Li & Company, PC was dismissed as our independent accountant on August 4, 2011. On August 4, 2011, we engaged EFP Rotenberg, LLP, as our new independent registered public accounting firm. In connection with the foregoing change in accountants, there were no disagreements (as that term is used in Item 304(a)(1)(iv) of Regulation S-K) or reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).

As previously disclosed on a Current Report on Form 8-K filed with the SEC on January 9, 2013, EFP Rotenberg, LLP was dismissed as our independent accountant on January 3, 2013. On January 3, 2013, we engaged Albert Wong & Co. as our new independent registered public accounting firm. In connection with the foregoing change in accountants, there were no disagreements (as that term is used in Item 304(a)(1)(iv) of Regulation S-K) or reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).

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, 2012 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2012 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

Management’s Report on Internal Control Over Financial Reporting

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.

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  iii)

We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non- routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

     
  iv)

We lack personnel with formal training to properly analyze and record complex transactions in accordance with U.S. GAAP. Our current Chief Financial Officer, Ms. Wang, has 18 years of experience in financial management in private and public companies in China. She graduated from Huazhong Technical and Science University in 1990 with a Bachelor of Science degree in accounting and finance management; however, she is not familiar with U.S. GAAP. Since 2010, we have retained Auditprep to assist us with preparing our financial statements in accordance with U.S. GAAP and SEC rules and regulations.

     
  v)

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

Our management feels the weaknesses identified above have not had any material affect on our financial results. However, we are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses.

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, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Set forth below are the present directors and executive officers of the Company. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. Other than as set forth below, there are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.

Name   Age   Position   Since
             
Ronald Edward Strauss   53   Executive Chairman of the Board of Directors   2011
Renyan Ge   49   Director, Chief Executive Officer   2011
Xili Wang   43   Chief Financial Officer, Secretary   2011
Gregory D. Tse   52   Director   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.

Renyan Ge, Chief Executive Officer, Director

Mr. Ge has over 25 years 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.

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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.

Gregory D. Tse, Director

Mr. Tse has over 25 years of international finance, marketing, media, PR and advertising experience with an extensive brand management track record in North America, Hong Kong and China. In China, Mr. Tse has helped many international brands to enter into the marketplace before moving on to become one of China’s first communications/media M&A specialists. Mr. Tse is currently a member of the Board of Directors of First China Pharmaceutical Group, Inc. (OTCBB: FCPG), a position he has held since 2010. He has also served as Head of China Advisory for Calneva Financial Group from July 2004 to the present date, providing investment banking services for merger and acquisitions in the information technology, media, energy, infrastructure and natural resources areas. Previously, Mr. Tse’s media and marketing communications career included heading up several multinational advertising and PR agencies, including from May 1997 to June 2004, when Mr. Tse served as Managing Director at Publicis China, a communications group, where he managed the China national offices. Mr. Tse has also served as a member of the Board of Directors of i-Level Media Group Incorporated (PK: ILVL) from July 2008 to January 2009. Mr. Tse has also traveled extensively in China as the Chief Communications Officer for CORA (China’s Old Revolution Area), a NGO with a mandate to develop China’s rural areas, and started many humanitarian projects to fund education there.

Mr. Tse graduated from the School of Architecture at University of Waterloo, Canada. Mr. Tse was appointed to the Company’s Board of Directors due to his over 25 years of experience, primarily in China, as well as his public company board and management experience. The Company believes that Mr. Tse’s knowledge of sales and marketing will be an invaluable resource as the Company seeks to expand its business within Asia and develop a unique brand image.

Family Relationships

There are no family relationships between or among any of our directors, executive officers and incoming directors or executive officers.

Involvement in Certain Legal Proceedings

No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

Committees of the Board

Our Board of Directors held no formal meetings in the prior fiscal year. All proceedings of the Board of Directors were conducted by resolutions consented to in writing by the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada Revised Statutes and the bylaws of our Company, as valid and effective as if they had been passed at a meeting of the directors duly called and held. We do not presently have a policy regarding director attendance at meetings.

54


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, 2012, our officers, directors and greater than 10% percent beneficial owners complied with all applicable filing requirements.

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, 2012, we did not effect any material changes to the procedures by which our shareholders may recommend nominees to our Board of Directors.

Board Leadership Structure and Role on Risk Oversight

55


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, 2012 and 2011 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 Table

                        Non-Equity        
Name and Principal               Stock   Option   Incentive Plan   All Other    
Position   Year   Salary   Bonus   Awards   Awards   Compensation   Compensation   Total
Ronald Edward Strauss,
Executive Chairman of the Board
  2012
2011
 
-
  -
-
  -
-
  -
-
  -
-
  -
-
  -
Renyan Ge, Director, Chief
Executive Officer
  2012
2011
  $60,000
$18,600
  -
-
  -
-
  -
-
  -
-
  -
-
  $60,000
$18,600
Xili Wang, Chief Financial
Officer & Secretary
  2012
2011
  $36,000
$12,600
  -
-
  -
-
  -
-
  -
-
  -
-
  $36,000
$12,600
Jaime Brodeth, former
Director, President and
Treasurer(1)
  2012
2011
  -
-
  -
-
  -
-
  -
-
  -
-
  -
-
  -

-
Moses Carlo Supera Paez,   2012   -   -   -   -   -   -   -
former Director & Secretary(1)   2011   -   -   -   -   -   -   -

_______________
(1) Effective August 30, 2011, Mr. Brodeth and Mr. Paez each resigned as members of the Board of Directors of the Registrant. In addition, also effective on August 30, 2011, Mr. Brodeth resigned as the Registrant’s President and Treasurer, and Mr. Paez resigned as the Registrant’s Secretary.

Potential Payments Upon Termination or Change-in-Control

56


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 a Management Service Agreement with Ronald Edward Strauss in connection with his service as Executive Chairman of the Board of Directors, commencing August 30, 2011 and continuing for an indefinite term. Mr. Strauss is entitled to a payment of $5,000 per month as a base management fee during the Company’s development period. After an aggregate of $2,000,000 is raised by the Company in a financing, Mr. Strauss’ compensation shall be reviewed and a new base management fee shall be agreed upon by the Company’s Board of Directors, such revised management fee to be no less than $180,000 per year. The Board of Directors will recommend a bonus program for Mr. Strauss subject to specific performance criteria.

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, Mr. Strauss may elect to either terminate his existing service agreement and sign a new agreement with the controlling entity, or in the event Mr. Strauss does not sign a new agreement with the controlling entity, the controlling entity will provide Mr. Strauss a cash payment equal to 1.5 times his annual salary at the time of the change in control event. Mr. Strauss may terminate his management service agreement upon two months notice.

Renyan Ge - The Company is a party to a Management Service Agreement with Renyan Ge in connection with his service as Chief Executive Officer of the Company, commencing August 30, 2011 and continuing for an indefinite term. Mr. Ge is entitled to a payment of $5,000 per month as a base management fee during the Company’s development period. After an aggregate of $2,000,000 is raised by the Company in a financing, Mr. Ge’s compensation shall be reviewed and a new base management fee shall be agreed upon by the Company’s Board of Directors, such revised management fee to be no less than $180,000 per year. The Board of Directors will recommend a bonus program for Mr. Ge subject to specific performance criteria.

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.

57


In the event there is a change in control of the Company, Mr. Ge may elect to either terminate his existing service agreement and sign a new agreement with the controlling entity, or in the event Mr. Ge does not sign a new agreement with the controlling entity, the controlling entity will provide Mr. Ge a cash payment equal to 1.5 times his annual salary at the time of the change in control event. Mr. Ge may terminate his management service agreement upon two months notice.

Xili Wang - The Company is a party to a Management Service Agreement with Xili Wang in connection with her service as Chief Financial Officer of the Company, commencing August 30, 2011 and continuing for an indefinite term. Ms. Wang is entitled to a payment of $3,000 per month as a base management fee during the Company’s development period. After an aggregate of $2,000,000 is raised by the Company in a financing, Ms. Wang’s compensation shall be reviewed and a new base management fee shall be agreed upon by the Company’s Board of Directors, such revised management fee to be no less than $150,000 per year. The Board of Directors will recommend a bonus program for Ms. Wang subject to specific performance criteria.

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, Ms. Wang may elect to either terminate her existing service agreement and sign a new agreement with the controlling entity, or in the event Ms. Wang does not sign a new agreement with the controlling entity, the controlling entity will provide Ms. Wang a cash payment equal to 1.5 times her annual salary at the time of the change in control event. Ms. Wang may terminate her management service agreement upon two months notice.

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

Other than as noted below, 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.

The following table sets forth compensation paid to our non-executive directors for the fiscal year ended December 31, 2012.

                              Nonqualified              
      Fees Earned                 Non-Equity     Deferred     All      
      or Paid     Stock     Option     Incentive Plan     Compensation     Other      
      in Cash     Awards     Awards     Compensation     Earnings     Compensation     Total
Name     ($)     ($)     ($)     ($)     ($)     ($)     ($)
                                           
Gregory D. Tse   $  30,000   $  82,800   $  -   $ -   $ -   $  -   $ 112,800
Jack Zwick(1)     20,000     12,000                             32,000

(1)

Mr. Zwick was appointed to the Board of Directors on April 18, 2012. Mr. Zwick resigned from the Board of Directors effective November 28, 2012.

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On April 20, 2012, the Board of Directors of the Company granted to Mr. Zwick 360,000 shares of the Company’s common stock. The restricted stock shall vest with respect to 1/8th of the total number of restricted stock per quarter from vesting commencement date of April 1, 2012 such that all restricted stock shall vest on January 1, 2013, subject to his continuous service. The fair value of the restricted stock on the grant date is $201,600. Mr. Zwick resigned from the Board of Directors effective November 28, 2012.

Pursuant to a Board Advisory Agreement, in consideration for serving on the Company’s Board of Directors, Mr. Tse will receive: (a) three hundred and sixty thousand (360,000) shares of Company common stock, vesting as to one hundred and thirty five thousand (135,000) shares immediately, 45,000 shares on September 1, 2012, 45,000 shares on January 1, 2013, 45,000 shares on May 1, 2013, 45,000 shares on September 1, 2013, and the remaining 45,000 shares on January 1, 2014, subject to Mr. Tse’s continuous service; and (b) a consulting fee of two thousand five hundred dollars ($2,500) per month commencing September 1, 2011. The payment to Mr. Tse of his monthly fee is contingent upon the Company closing an equity or debt financing of at least $2,000,000. The fair value of Mr. Ge’s stock on the grant date is $82,800.

Stock Option Plans - Outstanding Equity Awards at Fiscal Year End

None.

Pension Table

We contribute to a state pension plan organized by municipal and provincial governments in respect of our employees in the PRC. The compensation expense related to this plan was $6,600 and $4,900 for the years ended December 31, 2012 and 2011, respectively.

Retirement Plans

We do not offer any annuity, pension, or retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement, or any other termination of employment with our company, or from a change in the control of our Company.

Compensation Committee

The Company does not have a separate Compensation Committee. Instead, the Company’s Board of Directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for other officers, administers the Company’s stock option plans and other benefit plans, if any, and considers other matters.

Risk Management Considerations

We believe that our compensation policies and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information as of March 30, 2013, 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 30, 2013, there were 60,940,781 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.

59



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


13,332,000




22.22%
Renyan Ge(3)
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065


16,968,000




28.28%
Xili Wang
303 Twin Dolphins Drive, Suite 600
Redwood City, CA 94065


-



-

Gregory D. Tse(4)
1155 Yu Yuan Road
Building 4, Suite 103
Shanghai, China 200050



-





-


         
All Officers and Directors as a Group   30,300,000   50.50%
         
5% Shareholders        
Sheen Ventures Limited(2)
8th Floor, Henley Building,
5 Queen’s Road,
Central, Hong Kong




13,332,000





22.22%

CC Wireless Limited(3)
Room 15A, 17/F,
Mai On Industrial Building,
17-21 Kung Yip Street,




16,968,000





28.28%

         
Kwai Chung, Hong Kong        
____________________
(1)

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the SEC, shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be beneficially owned and outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

   
(2)

Ms. Guo Jie has direct ownership over the 13,332,000 shares held by Sheen Ventures Limited, a company organized under the laws of Hong Kong. Ms. Guo Jie is the wife of Mr. Strauss. As such, Mr. Strauss may be deemed to be the indirect beneficial owner of the securities by reason of his influence or control over Ms. Guo Jie’s voting and disposition decisions.

   
(3)

Mr. Renyan Ge holds voting and dispositive control over the 16,968,000 shares held by CC Wireless Limited, a company organized under the laws of Hong Kong.

   
(4)

Pursuant to a Board Advisory Agreement, in consideration for serving on our Board of Directors, Mr. Tse received: three hundred and sixty thousand (360,000) shares of Company common stock, vesting as to one hundred and thirty five thousand (135,000) shares immediately, 45,000 shares on September 1, 2012, 45,000 shares on January 1, 2013, 45,000 shares on May 1, 2013, 45,000 shares on September 1, 2013, and the remaining 45,000 shares on January 1, 2014, subject to Mr. Tse’s continuous service.

60


Securities Authorized for Issuance Under Equity Compensation Plans

None.

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, Fricso, Texas, 75034. Their telephone number is (469) 633-0101.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Certain Relationships and Transactions

There are no family relationships between any of our former directors or executive officers and new directors or new executive officers. Other than Mr. Strauss, who was appointed to the Registrant’s Board of Directors on August 12, 2011, none of the new directors and executive officers were directors or executive officers of the Company prior to the Closing of the Exchange Transaction, nor did any hold any position with the Company prior to the Closing of the Exchange Transaction, nor 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.

Related Party Transactions

On July 5, 2011, we entered into the Exchange Agreement. As a result of the Exchange Transaction, the Selling Shareholders received 30,300,000 shares of our common stock in exchange for 100% of the issued and outstanding common stock of CC Mobility representing approximately 50.50% of our common stock. Mr. Strauss, our Executive Chairman of the Board and a director, and Mr. Ge, a director and our Chief Executive Officer, were beneficial shareholders of CC Mobility prior to the Closing of the Exchange Transaction, through their ownership of Sheen Ventures Limited, a company organized under the laws of Hong Kong, and CC Wireless Limited, a company organized under the laws of Hong Kong, respectively. Accordingly, Mr. Strauss and Mr. Ge were beneficial recipients of certain shares of our common stock issued in connection with the Exchange Transaction.

In addition, our subsidiary, CC Power Investment has entered into variable interest entity control agreements over CC Power. Ms. Xili Wang, our Chief Financial Officer and Secretary, is the sole shareholder and Chief Financial Officer of CC Power, Mr. Strauss is a director of CC Power and Mr. Ge is the Chief Executive Officer and a director of CC Power.

Further, as detailed above under “Employment Agreements,” Mr. Strauss, Mr. Ge and Ms. Wang, our Executive Chairman, Chief Executive Officer and Chief Financial Officer, respectively, have each entered into Management Service Agreements with the Company, pursuant to which they will be compensated for their services provided to the Company as executives.

Effective October 1, 2011 for a period of one year, the Company’s subsidiary, CC Mobility engaged the Company’s shareholder, CC Wireless Limited, to provide technical consultation for product R&D and business development. The monthly fee is determined periodically. During the year ended December 31, 2012, $42,800 of consulting fees were paid to CC Wireless Limited. Mr. Strauss, our Executive Chairman of the Board and a director, and Mr. Ge, a director and our Chief Executive Officer, are beneficial shareholders of CC Mobility through their ownership of Sheen Ventures Limited, a company organized under the laws of Hong Kong, and CC Wireless Limited, a company organized under the laws of Hong Kong, respectively.

61


Pursuant to a Board Advisory Agreement, in consideration for serving on the Company’s Board of Directors, Mr. Tse will receive: (a) three hundred and sixty thousand (360,000) shares of Company common stock, vesting as to one hundred and thirty five thousand (135,000) shares immediately, 45,000 shares on September 1, 2012, 45,000 shares on January 1, 2013, 45,000 shares on May 1, 2013, 45,000 shares on September 1, 2013, and the remaining 45,000 shares on January 1, 2014, subject to Mr. Tse’s continuous service; and (b) a consulting fee of two thousand five hundred dollars ($2,500) per month commencing September 1, 2011. The payment to Mr. Tse of his monthly fee is contingent upon the Company closing an equity or debt financing of at least $2,000,000.

Other than as set forth above, 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, 2012, we had two independent directors on our board - Mr. Gregory D. Tse and Mr. Jack Zwick. Mr. Zwick resigned effective November 28, 2012. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., the NASDAQ National Market, and the Securities and Exchange Commission.

Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The following table shows the fees paid or accrued by us for the audit and other services provided by Albert Wong & Co. for the fiscal periods shown.

62



    December 31,     December 31,  
    2012     2011  
Audit Fees $  20,000   $  —  
Audit Related Fees          
Tax Fees   3,000      
All Other Fees          
Total $  23,000   $  —  

The following table shows the fees paid or accrued by us for the audit and other services provided by EFP Rotenberg LLP for the fiscal periods shown.

    December 31,     December 31,  
    2011     2010  
Audit Fees $  81,000   $  0  
Audit Related Fees        
Tax Fees        
All Other Fees        
Total $  81,000   $  0  

Audit fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by the above auditors in connection with statutory and regulatory fillings or engagements

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, 2012 and 2011. 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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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

            The following documents are filed as part of this Annual Report:

  (a)

Financial Statements:


     Page
  Report of Independent Registered Accounting Firm F-1- F-2
  Consolidated Balance Sheets as of December 31, 2012 and 2011 F-3
  Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012 and 2011 F-4
  Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012 and 2011 F-5
  Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 F-6
  Notes to Consolidated Financial Statements F-7 – F-24

  (b)

Exhibits:


Exhibit No.

Description

 

 

2.1

Share Exchange Agreement, dated July 5, 2011(incorporated by reference to our Current Report on Form 8-K filed on July 6, 2011).

 

 

3.1(a)

Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1 originally filed on October 14, 2009).

 

 

3.1(b)

Amendment to Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on March 29, 2011).

 

 

3.2

Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on April 27, 2011).

 

 

10.1

Convertible Promissory Note with Empa Trading Ltd., dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

 

 

10.2

Form of Convertible Promissory Note (incorporated by reference to our Quarterly Report on Form 10-Q filed on August 19, 2011).

 

 

10.3

Employment Agreement with Ronald Edward Strauss, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

 

 

10.4

Employment Agreement with Renyan Ge, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

 

 

10.5

Employment Agreement with Xili Wang, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

 

 

10.6

Technical Services Agreement, dated August 22, 2011 by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co. Ltd. and the Shareholder of Shenzhen CC Power Corporation (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

 

 

10.7

Loan Agreement, dated August 22, 2011 by and among the Shareholder of Shenzhen CC Power Corporation and Shenzhen CC Power Investment Consulting Co., Ltd. (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

64



Exhibit No. Description
   
10.8

Exclusive Purchase Option Agreement, dated August 22, 2011 by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co. Ltd. and the Shareholder of Shenzhen CC Power Corporation (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.9

Entrusted Management Service Agreement, dated August 22, 2011 by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co. Ltd. and the Shareholder of Shenzhen CC Power Corporation (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.10

Equity Pledge Agreement, dated August 22, 2011 by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co. Ltd. and the Shareholder of Shenzhen CC Power Corporation (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.11

Indemnification Agreement by and between the Registrant and Renyan Ge, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.12

Indemnification Agreement by and between the Registrant and Ronald Edward Strauss, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.13

Indemnification Agreement by and between the Registrant and Xili Wang, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.14

Indemnification Agreement by and between the Registrant and Gregory D. Tse, dated August 30, 2011 (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.15

Office Lease Agreement by and between Shenzhen CC Power Corporation and Chen Zhifang & Chao Jialu (incorporated by reference to our Current Report on Form 8-K filed on September 6, 2011).

   
10.16

Convertible Promissory Note issued to Asher Enterprises, Inc. (incorporated by reference to our Quarterly Report on Form 10-Q filed on November 14, 2012).

   
10.17

Exclusive Indonesian Supply Contract With ZTE Corp. (incorporated by reference to our Quarterly Report on Form 10-Q filed on August 14, 2012).

   
10.18

Board Advisory Agreement with Greg Tse dated August 14, 2012 (incorporated by reference to our Quarterly Report on Form 10-Q filed on August 14, 2012).

   
10.19

Form of Securities Purchase Agreement (incorporated by reference to our Current Report on Form 8-K filed on March 14, 2013).

   
10.20

Mutual Release and Settlement Agreement with Jack Zwick (incorporated by reference to our Current Report on Form 8-K filed on March 14, 2013).

   
10.21

MOU with United Communications, Inc. (incorporated by reference to our Annual Report on Form 10-K filed on April 1, 2013).

   
14.1

Code of Ethics (incorporate by reference to our Current Report on Form 8-K filed on September 28, 2011).

   
16.1

Letter of Li and Company, PC (incorporated by reference to our Current Report on Form 8-K filed on August 10, 2011).

   
16.2

Letter of EFP Rotenberg, LLP (incorporated by reference to our Current Report on Form 8-K filed on January 9, 2013).

65



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.

   
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.

   
99.1*

Permission of Independent Registered Public Accounting Firm, EFP Rotenberg LLP

 

 

101.INS

XBRL Instance Document**

 

 

101.SCH

XBRL Taxonomy Extension Schema**

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase**

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase**

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase**

   
101.PRE

XBRL Taxonomy Extension Presentation Linkbase**

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

66


SIGNATURES

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: August 15, 2013 By: /s/ Renyan Ge
    Renyan Ge
    Chief Executive Officer (Principal
    Executive Officer)
     
Date: August 15, 2013 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 August 15, 2013
    (Principal Executive Officer)  
       
/s/ Xili Wang   Chief Financial Officer August 15, 2013
Xili Wang   (Principal Financial Officer and  
    Principal Accounting Officer)  
       
/s/ Ronald Edward Strauss   Director August 15, 2013
Ronald Edward Strauss      
       
/s/ Gregory D. Tse   Director August 15, 2013
Gregory D. Tse      

67


XCELMOBILITY INC. AND SUBSIDIARIES

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  Page
Report of Independent Registered Public Accounting Firm F-1 – F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012 and 2011 F-4
Consolidated Statements of Changes in Shareholders’ Deficit for the years ended December 31, 2012 and 2011 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011 F-6
Notes to Consolidated Financial Statements F-7 – F-28


ALBERT WONG & CO.
CERTIFIED PUBLIC ACCOUNTANTS
7th Floor, Nan Dao Commercial Building
359-361 Queen’s Road Central
Hong Kong
Tel : 2851 7954
Fax: 2545 4086

ALBERT WONG
B.Soc., Sc., ACA., LL.B., C.P.A.(Practising)
 

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, 2012 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2012. 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, 2012 and the results of its operations and its cash flows for the years ended December 31, 2012 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, 2012 and net losses for the year ended December 31, 2012. 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/ Albert Wong & Co.
   
Hong Kong, China Albert Wong & Co.
March 30, 2013 Certified Public Accountants
Except for note 7, note 10 and note 18 dated August 2, 2013  

F-1


Certified Public Accountants 280 Kenneth Drive, Suite 100 Rochester, NY 14623 585.427.8900 EFPRotenberg.com


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of XcelMobility Inc.

We have audited the accompanying consolidated balance sheets of XcelMobility Inc. as of December 31, 2011, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2011. XcelMobility Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the 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 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 purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of XcelMobility Inc. as of December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, these conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.


EFP Rotenberg, LLP
Rochester, New York
March 30, 2012

F-2


XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

    December 31,     December 31,  
    2012     2011  
ASSETS   (Restated)        
Current Assets:            
Cash and cash equivalents $  98,739   $  615,208  
Trade accounts receivable   19,309     -  
Other receivables, net of 3,500 and 3,500 allowance for doubtful accounts   5,615     5,407  
Inventory   348     -  
Prepaid expenses   8,887     8,807  
Advances to suppliers   3,372     -  
             
Total Current Assets   136,270     629,422  
             
Property and Equipment, net of accumulated depreciation of $65,500 and $44,400, respectively   90,375     66,199  
             
TOTAL ASSETS $  226,645   $  695,621  
             
LIABILITIES AND SHAREHOLDERS’ DEFICIT            
Current Liabilities:            
Accounts payable $  76,594   $  41,382  
Other payables and accrued expenses   109,147     44,724  
Deferred revenue   78,811     290,508  
Convertible notes, net of debt discount   46,040        
Derivative liability   423,480     -  
Accrued interest   140,520     -  
             
Total Current Liabilities   874,592     376,614  
             
Convertible notes, net of debt discount   314,967     900,000  
Accrued interest   -     18,254  
Deferred revenue   20,130     10,723  
             
Total Liabilities   1,209,689     1,305,591  
             
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, 2012 and 2011   -     -  
Common stock, $0.001 par value, 100,000,000 shares authorized; 60,000,000 issued and outstanding December 31, 2012 and 2011   60,000     60,000  
Additional paid in capital   131,562     72,248  
Accumulated deficit   (1,207,650 )   (772,881 )
Accumulated other comprehensive income   33,044     30,663  
Total Shareholders’ (Deficit) Equity   (983,044 )   (609,970 )
             
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $  226,645   $  695,621  

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

F-3


XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

    For the Years Ended  
    December 31,  
    2012     2011  
    (Restated)        
Revenue $  277,406   $  47,279  
Cost of Revenue   17,953     55,122  
Gross Profit   259,453     (7,843 )
             
Operating Expenses:            
Selling expense   41,136     23,389  
General and administrative expense   986,908     479,040  
Total Operating Expenses   1,028,044     502,429  
Loss from Operations   (768,591 )   (510,272 )
             
Other Income (Expense):            
Interest income   853     321  
Interest expense   (463,084 )   (15,489 )
Loss on disposal of property, plant and equipment   -     (4,359 )
Gain on derivative   669,329     -  
Other income   126,724     23,567  
Total Other Income (Expense)   333,822     4,040  
Loss Before Taxes   (434,769 )   (506,232 )
Income tax expense   -     -  
Loss from continuing operation $  (434,769 ) $  (506,232 )
             
Discontinued Operation:            
Income from discontinued operation   -     27,252  
Gain on disposal of interest in subsidiary   -     4,155  
Net income from discontinued operation   -     31,407  
             
Net Loss   (434,769 )   (474,825 )
Less: income attributable to non-controlling interest   -     1,626  
             
Net loss attributable to XcelMobility $  (434,769 ) $  (476,451 )
             
Net Loss   (434,769 )   (474,825 )
Foreign currency translation adjustment   2,381     9,289  
Comprehensive loss   (432,388 )   (465,536 )
   Less: Comprehensive Income attributable to Non-controlling interest   -     (3,050 )
Comprehensive loss attributable to XcelMobility   (432,388 )   (468,586 )
             
Basic and diluted loss per share attributable to            
XcelMobility shareholders:            
   Continuing Operation $  (0.01 ) $  (0.01 )
   Discontinued Operation   -     -  
Basic and diluted loss per share attributable to            
XcelMobility shareholders:   (0.01 )   -  
Basic and diluted weighted average number of shares outstanding   60,000,000     70,765,479  

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

F-4


XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

    Common Stock                 Accumulated              
                Additional           Other     Non-        
    Number of           Paid in     Accumulated     Comprehensive     controlling       Total  
    shares     Amount     Capital     Deficit     Income     Interest     Deficit  
                            (Restated)           (Restated)  
Balance, December 31, 2010   77,700,000     77,700     268,164     (296,430 )   22,798     42,268     114,500  
Cancellation of common stock   (17,700,000 )   (17,700 )   17,700     -     -     -     -  
                                           
Recapitalization   -     -     (213,616 )   -     -     -     (213,616 )
Net (loss) income for the year   -     -     -     (476,451 )   -     1,626     (474,825 )
Foreign currency translation difference   -     -     -     -     7,865     1,424     9,289  
                                           
Withdrawal from NCI   -     -     -     -     -     (45,318 )   (45,318 )
Balance, December 31, 2011   60,000,000     60,000     72,248     (772,881 )   30,663     -     (609,970 )
Stock based compensation to director   -     -     59,314     -     -     -     59,314  
Net loss for the year   -     -     -     (434,769 )   -     -     (434,769 )
Foreign currency translation difference   -     -     -     -     2,381     -     2,381  
                                           
                                           
Balance, December 31, 2012 $  60,000,000   $  60,000   $  131,562     (1,207,650 ) $  33,044     -   $  (983,044 )

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

F-5


XCELMOBILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

    For the Years Ended  
    December 31,  
    2012     2011  
Cash Flows from Operating Activities:   (Restated)        
Net loss $ (434,769 ) $  (474,825 )
Adjustments to reconcile net loss to net cash used in operating activities            
Depreciation   20,381     14,017  
Amortization   379     -  
Stock compensation expenses   59,314     -  
Amortisation of debt discount   340,816     -  
Fair value adjustment on derivative liability   (669,329 )   -  
Gain on disposal of subsidiaries   -     (4,155 )
Loss on disposal of property and equipment   -     4,359  
Investment income from equity investment in affiliate   -     (27,193 )
             
Changes in assets and liabilities:            
   Trade accounts receivable   (19,302 )   1,452  
   Other receivables and prepayment   (159 )   (5,715 )
   Advances to suppliers   (3,371 )   -  
   Inventory   (348 )   -  
   Accounts payable   35,211     35,078  
   Accrued interest   122,266     15,489  
   Other taxes payable   1,787     -  
   Other payables and accrued expenses   62,301     29,138  
   Deferred revenue   (204,959 )   250,986  
             
Net Cash Used In Operating Activities   (689,782 )   (161,369 )
             
Cash Flows from Investing Activities:            
Purchase of property, plant and equipment, net of value added tax refunds   (44,328 )   (53,634 )
received            
Cash acquired in CC Mobility and XcelMobility   -     193,852  
Proceeds from disposal of ownership interest in affiliate   -     92,822  
Net Cash ( Used In) Provided By Investing Activities   (44,328 )   233,040  
             
Cash Flows from Financing Activities:            
Proceeds from issuance of notes payable   213,000     500,000  
Receipt of amount due from shareholder   -     31,347  
Net Cash Provided By Financing Activities   213,000     531,347  
             
Effect of Exchange Rate Changes on Cash and Cash Equivalents   4,641     3,356  
             
Net Change in Cash and Cash Equivalents   (516,469 )   606,374  
             
Cash and Cash Equivalents at Beginning of Year   615,208     8,834  
Cash and Cash Equivalents at End of Year $ 98,739   $  615,208  
             
Supplement Cash Flow Information            
Cash paid during the period for interest $ -   $  -  
Cash paid during the period for income taxes $ -   $  -  
Convertible notes payable assumed from reverse merger $ -   $  400,000  

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

F-6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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, 2012, $400,000 of the registered capital has been contributed.

Shenzhen CC Power Corporation
Shenzhen CC Power Corporation (“CC Power”, the Company) is a Chinese enterprise organized in the PRC on March 13, 2003 in accordance with the Laws of the People’s Republic of China. The required registered capital of the Company was approximately $1,547,000 (RMB 10,000,000) and as of December 31, 2011, the Company has paid up approximately $346,000 (RMB2, 526,000). In March 2011, Mr. Ryan Ge sold his 5% ownership in CC Power to the other shareholder, Xili Wang (“CC Power Shareholder”). Ms. Wang holds 100% ownership interest in CC Power as of December 31, 2012 and 2011.

CC Power is primarily engaged in the research, development and commercialization of applications for mobile devices that access the Internet utilizing mobile phone networks. CC Power’s principal activity is the design, testing sale and support of software to support mobile internet applications on cellular phones, smart phones, tablets and mobile computers in China. The principal product designed and built by CC Power is its Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the internet 5 times faster than with other mobile browsers. The speed of the Mach 5 browser enables CC Power to develop other mobile software that can leverage off the Mach 5 products speed of processing. In order to support CC Power products the Company has built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via the company’s website and retail locations, through distribution agents and through all three mobile phone carriers in China.

As noted above, the primary purpose of CC Power is to develop software that allows user faster access to the Internet. CC Power’s primary focus is in the mobile Internet market, with a focus on providing software that significantly increases the speed that users of smartphones, tablets and laptops can access the Internet over cellular phone networks. CC Power also uses their technology to increase the speed at which users of Virtual Private Networks can access data from their networks.

F-7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

1. Organization and Nature of Business - Continued

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

Share Exchange Agreement

On August 30, 2011, the Company completed a voluntary share exchange transaction with Shenzhen CC Power Corporation, CC Mobility Limited and the shareholders of CC Mobility (“Selling Shareholders”) pursuant to a Share Exchange Agreement dated July 5, 2011 (the “Exchange Agreement”). In accordance with the terms of Exchange Agreement, on the Closing Date, Xcel issued 30,300,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, there was a change of control in the Company as the Selling Shareholders of CC Mobility acquired 50.5% of Xcel’s issued and outstanding common stock, CC Mobility became Xcel’s wholly-owned subsidiary, and Xcel acquired the business and operations of CC Mobility and CC Power.

For accounting purposes, the merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of CC Mobility and its subsidiaries, with Xcel (the legal acquirer of CC Mobility and its subsidiaries) considered the accounting acquiree and CC Mobility whose management took control of Xcel (the legal 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.

As a result of the Exchange Transaction, the organizational structure of the Company 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, 2012 AND 2011

2. Summary of Significant Accounting Policies - Continued

Reclassification

Cost of revenue –Cost of revenue totaled $55,122 for the year ended December 31, 2011 has been reclassified from cost of revenue to selling expense and general and administrative expense to conform to current presentation.

Use of estimates

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, the valuation allowance for deferred taxes. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

Variable Interest Entity

The accounts of CC Power have been consolidated with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with CC Power Shareholder and with CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:

Entrusted Management Agreement. This agreement provides that CC Investment will provide exclusive management services to CC Power. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of CC Power. The Entrusted Management Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).

Technical Services Agreement. This agreement provides that CC Investment will provide exclusive technical services to CC Power. Such technical services include but are not limited to software, computer system, data analysis, training and other technical services. CC Investment shall be entitled to charge CC Power service fees equivalent to CC Power’s total net income. The Technical Service Agreement will remain in effect until the acquisition of all assets or equity of CC Power by CC Investment is complete (as more fully described in the Exclusive Purchase Option Agreement below).

Exclusive Purchase Option Agreement. Under the Exclusive Purchase Option Agreement, the CC Power Shareholder granted CC Investment an irrevocable and exclusive purchase option to acquire CC Power’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time.

Loan Agreement. Under the Loan Agreement, CC Investment agreed to lend RMB 10,000,000 to the CC Power Shareholder, to be used solely for the operations of CC Power.

Equity Pledge Agreement. Under the Equity Pledge Agreement, the CC Power Shareholder pledged all of its equity interests in CC Power, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of this Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s prior consent. The CC Power Shareholder covenants to CC Investment that among other things, it will only appoint/elect the candidates for the directors of CC Power nominated by CC Investment.

F-9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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,  
    2012     2011  
             
Total current assets $  113,894   $  326,583  
Total assets   190,199     390,026  
Total current liabilities   320,873     460,171  
Total liabilities   341,003     470,894  

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.

F-10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

2. Summary of Significant Accounting Policies - Continued

Revenue Recognition for Software Products (Software Elements)

New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.

Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.

Revenue Recognition for Multiple-Element Arrangements – Software Products and Software Related Services(Software Arrangements)

We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.

Revenue Recognition for Multiple-Element Arrangements – Arrangements with Software and Hardware Elements

We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (“ASU”) 2009-13,

Revenue Recognition (Topic 605) : Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.

Cost of Revenue

Cost of revenue primarily consists of business tax and surcharges on revenue.

F-11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

2. Summary of Significant Accounting Policies - Continued

Credit risk

The Company may be exposed to credit risk from its cash and fixed deposits at bank. No allowance has been made for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment.

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, 2012 and 2011, no allowance for doubtful accounts was deemed necessary based on management’s assessment.

Fair Value of Financial Instruments

FASB accounting standards require disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

For certain financial instruments, including cash, accounts payable, accruals and other payables, the carrying amounts approximate fair value because of the near term maturities of such obligations.

Patents

The Company has three patents as listed in the table below relating to its internet accelerator software products. Fees related to registering these patents were insignificant and have been expensed as incurred.

Patent Register Number Issued By
Mach5 Internet Acceleration Software V.6.0 2007SR09253 National Copyright Administration of PRC
Mach5 Enterprise Acceleration Software V.3.3 2009SR058767 National Copyright Administration of PRC
Mach5 Web Browser Software 2010SR001089 National Copyright Administration of PRC

Research and development and Software Development Costs

All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements for the years ended December 31, 2012 and 2011. Other research and development expenses amounted to $246,667 and $47,600 for years ended December 31, 2012 and 2011, respectively, and were included in general and administrative expense.

Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.

F-12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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, 2012  
Balance sheet RMB 6.3011 to US $1.00
Statement of operations and other comprehensive loss RMB 6.3034 to US $1.00
   
December 31, 2011  
Balance sheet RMB 6.3585 to US $1.00
Statement of operations and other comprehensive loss RMB 6.4640 to US $1.00

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Post-retirement and post-employment benefits

The Company contributes to a state pension plan in respect of its PRC employees. Other than the state pension plan, the Company does not provide any other post-retirement or post-employment benefits.

Statutory surplus reserve

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

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

Recently Issued Accounting Pronouncements

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-04, Technical Corrections and Improvements. This ASU make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013.

F-13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

2. Summary of Significant Accounting Policies - Continued

Recently Issued Accounting Pronouncements

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-05, Statement of Cash Flows (Topic 230). This ASU addresses how cash receipts arising from the sale of certain donated financial assets, such as securities, should be classified in the statement of cash flows of not-for-profit entities (NFPs). Some NFPs classify those cash receipts as investing cash inflows, while other entities classify them as either operating cash inflows or financing cash inflows, consistent with their treatment of inflows arising from cash contributions. The objective of this Update is for an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without the NFP imposing any limitations for sale and were converted nearly immediately into cash. The amendments in the ASU are effective prospectively for fiscal years, and interim fiscal periods within those years, beginning after June 15, 2013. Retrospective application to all periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted.

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. This ASU addresses the diversity in practice about how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation or National Credit Union Administration) acquisition of a financial institution that includes a loss-sharing agreement (indemnification agreement). For public and nonpublic entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution.

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-07, Entertainment--Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs. This ASU eliminates the rebuttable presumption that the conditions leading to the write-off of unamortized film costs after the balance sheet date existed as of the balance sheet date. The amendments also eliminate the requirement that an entity incorporate into fair value measurements used in the impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence if the information would not have been considered by market participants at the measurement date. or SEC filers, the amendments are effective for impairment assessments performed on or after December 15, 2012. For all other entities, the amendments are effective for impairment assessments performed on or after December 15, 2013. The amendments resulting from this ASU should be applied prospectively. Earlier application is permitted, including for impairment assessments performed as of a date before October 24, 2012, if, for SEC filers, the entity’s financial statements for the most recent annual or interim period have not yet been issued or, for all other entities, have not yet been made available for issuance.

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.

F-14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

2. Summary of Significant Accounting Policies - Continued

Recently Issued Accounting Pronouncements

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

The new amendments will require an organization to:

z

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.

z

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.

F-15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

3. Going Concern

The Company has incurred significant continuing losses during the year ended December 31, 2012 and 2011, and has an accumulated deficit at December 31, 2012 and 2011. 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, 2012 and 2011, the Company had limited cash resources and management plans to continue its efforts to raise additional funds through debt or equity offerings which will be used to fund operations.

4. Property and Equipment, net

Property, plant and equipment, net consist of the following:

    December 31,     December 31,  
    2012     2011  
             
Equipment $  132,017   $  86,886  
             
Office equipment   13,617     13,494  
Leasehold improvements   8,411     8,335  
Software   1,895     1,878  
    155,940     110,593  
Less: Accumulated depreciation   (65,565 )   (44,394 )
Property and equipment, net $  90,375   $  66,199  

The depreciation expense was $21,171 and $14,017 for the years ended December 31, 2012 and 2011, respectively.

5. Equity Investment in Affiliated Company and Deconsolidation of Subsidiary

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

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

Prior to the disposition of the 25% equity interest in Nanovision, CC Power held 60% equity interest in Nanovision. Up through June 15, 2011, Nanovision was consolidated with CC Power.

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

The results of operations for Nanovision for the three and nine months ended September 30, 2011, which includes the calibration panel sales segment and the technical consulting service segment, are reported as a discontinued operation.

F-16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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

The following are the summarized results of discontinued operations for Nanovision attributable to the Company for the years ended December 31, 2011.

    For The Years Ended  
    December 31,  
    2011  
       
Net revenues $  84,464  
Total cost of sales and expenses   48,128  
Income before tax   36,336  
Income tax (income)/expense   9,084  
Gain from discontinued operation $  27,252  

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

6. Deferred Revenue

Deferred revenue represents deferred internet accelerator license revenue over the maintenance period of one to three years for our multiple element arrangements (Note 2).

In addition, deferred revenue includes two government grants for use in research and development related expenditures for periods through July 2014. The portion of the grants that has not been spent is deferred and recognize as other income as the funds are spent on research and development related expenditures.

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

    December 31,     December 31,  
    2012     2011  
Deferred revenue:            
Current $  78,811   $  290,508  
Non-current   20,130     10,723  
Total $  98,941   $  301,231  

F-17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

6. Deferred Revenue- Continued

The table below sets forth the deferred revenue activities during the years ended December 31, 2012 and 2011:

    For the years ended December 31,  
    2012     2011  
             
Deferred revenue, balance at beginning of year $  301,231   $  44,382  
Add: Payments received from customers during the year   105,721     251,388  
Add: Government grant received during the year   95,222     77,351  
Less: government grant earned during the year   (135,602 )   (24,612 )
Less: Revenue earned during the year   (276,631 )   (47,279 )
Deferred revenue, balance at end of year $  98,941   $  301,231  

7. Convertible Promissory Notes

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

        Loan     Interest     Convertible     December 31,     December 31,  
Lender Date of Note Maturity Date   Amount     Rate (p.a.)     Number of stock     2012     2011  
                                   
Vantage Associates SA April 15, 2011 April 15, 2016 $  150,000     5%     150,000   $ 150,000   $  150,000  
Empa Trading Ltd. June 5, 2011 June 5, 2016   100,000     5%     100,000     100,000     100,000  
First Capital A.G. July 14, 2011 July 14, 2016   150,000     5%     150,000     150,000     150,000  
First Capital A.G. September 9, 2011 September 9, 2016   200,000     5%     200,000     200,000     200,000  
Vantage Associates SA September 9, 2011 September 9, 2016   200,000     5%     200,000     200,000     200,000  
Vantage Associates SA October 27, 2011 October 27, 2016   50,000     5%     50,000     50,000     50,000  
First Capital A.G. December 1, 2011 December 1, 2016   50,000     5%     50,000     50,000     50,000  
First Capital A.G. January 23, 2012 January 23, 2017   50 000     5%     50,000     50,000     -  
First Capital A.G. April 25, 2012 April 25,2014   100,000     5%     935,760     100,000     -  
Asher Enterprises, Inc. July 27th, 2012 April 13th, 2013   63,000     8%     1,175,373     63,000     -  
Asher Enterprises, Inc. October 17,2012 July 17, 2013   53,000     8%     988,806     53,000     -  
      $                 $ 1,166,000   $  900,000  
                    Less:              
                    Debt discount              
                    from beneficial              
                    conversion feature     804,993     -  
                          361,007        
                                   
                    Less:              
                    Current portion     46,040     -  
                    Non-current portion              
                        $ 314,967   $  900,000  

F-18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

7. 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 expense for the year ended December 31, 2012 was $463,084, which is comprised of the contractual interest coupon of $122,269, and amortization of the beneficial conversion feature of $340,815.

Interest expense for the year ended December 31, 2011 was $15,489.

Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, and the convertible promissory notes issued to Asher Enterprises, Inc., all the convertible promissory notes (the “Notes”) are convertible upon the occurrence of the following events:

(1) At any time, prior to the maturity date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:

  (i)

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

     
  (ii)

one warrant that is convertible into one common share at a price of $1.00, and expires two years from the date of the Exchange Transaction is completed, and

     
  (iii)

one warrant that is convertible into one common share at a price of $1.5, and expires three years from the date the Exchange Transaction is completed.

(2) Unless earlier converted into common stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such Qualified Financing as follows:

(a) In the event of a debt Qualified Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified Debt Financing and in a principal amount equal to the then outstanding Debt.

(b) In the event of an equity Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.

The convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, is convertible upon the occurrence of the following events:

(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:

F-19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

7. Convertible Promissory Notes- Continued

(a) In the event of a debt Qualified Financing (“Qualified Debt Financing”), the Holder may at its option exchange in whole or in part this Note for a promissory note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified Debt Financing and in a principal amount equal to the then outstanding Debt.

(b) In the event of an equity Qualified Financing (“Qualified Equity Financing”), the Holder may at its option convert the Debt into shares of capital stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.

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

1)

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

   
2)

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

The fair value of the embedded conversion feature of these notes as at December 31, 2012 and 2011 was $423,480 and nil, respectively.

Except for the convertible promissory note of $100,000 issued to First Capital A.G. on April 25, 2012, and the convertible promissory notes issued to Asher Enterprises, Inc., the fair value of the convertible notes was calculated using the Black-Scholes model with the following assumptions: expected life of 5 year, expected dividend rate of 0%, volatility of 136.6% and interest rates ranged from 0.36% to 0.54%.

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

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

  December 31, 2012
   
Common stock issuable upon conversion 935,760
Market value of common stock on measurement date (1) 0.10
Adjusted Exercise price 0.11
Risk free interest rate (2) 0.21%
Term in year 1.32
Expected volatility (3) 137%
Expected dividend yield (4) 0%

F-20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

7. Convertible Promissory Notes- Continued

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

  December 31, 2012
   
Common stock issuable upon conversion 2,164,179
Market value of common stock on measurement date (1) 0.10
Adjusted Exercise price 0.05
Risk free interest rate (2) 0.14%
Term in year 0.28-0.54
Expected volatility (3) 166% - 172%
Expected dividend yield (4) 0%

(1)

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

   
(2)

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

   
(3)

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

   
(4)

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

Fair Value on a Recurring Basis

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012:

      Fair Value Measurements at December 31, 2012  
      Quoted Prices In           Significant        
      Active Markets for     Significant Other     Unobservable     Total Carrying  
      Identical Assets     Observable Inputs     Inputs     Value as of  
Descriptions     (Level 1)     (Level 2)     (Level 3)     December 31, 2012  
                           
Derivative warrant instruments     -     -     423,480     423,480  
                           
Total     -     -     423,480     423,480  

F-21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

8. Income Tax

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

The Company’s subsidiaries, CC Power and CC Investment are incorporated in PRC and are subjected to PRC enterprises income tax at the applicable tax rates on the taxable income as reported in their Chinese statutory accounts in accordance with the relevant enterprises income tax laws (“EIT Law”). The subsidiaries locate in Shenzhen, a special economic region, where companies are allowed to gradually phase into the 25% statutory tax rate. For 2011 the statutory income tax rate is 24% and the rate will be 25% for 2012 and thereafter. The open tax years in PRC are 2009-2012.

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, 2012 and 2011. The open tax year for CC Mobility in Hong Kong is 2012.

The Company has no income tax expense for the years ended December 31, 2012 and 2011 because it has incurred loss before tax from continuing operation.

The Company applied the provisions of ASC 740.10.50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. ASC 740.10.50 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740.10.50 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the statements of operation. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.

The following table sets forth the components of deferred income taxes as of December 31, 2012 and 2011:

    December 31,     December 31,  
    2012     2011  
Deferred tax assets:            
Net operating losses - U.S. $  129,630   $  83,110  
Net operating losses - PRC and Hong Kong   68,625     59,076  
Deferred revenue   19,703     75,308  
Allowance for doubtful accounts   -0     867  
             
    217,958     218,361  
Valuation allowance   (217,958 )   (218,361 )
Deferred tax assets, net $  -   $  -  

As of December 31, 2012, the Company has net operating losses carry forward of 625,706 in the U.S. and $549,213 in Hong Kong and PRC available to offset future taxable income. They will begin to expire in 2030 and 2013, respectively. We provided for a full valuation allowance against the deferred tax assets of $217,958 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, 2012 and 2011 was a decrease of $403 and increase of $149,585, respectively.

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

9. Employee Benefits

The Company contributes to a state pension plan organized by municipal and provincial governments in respect of its employees in PRC. The compensation expense related to this plan was $6,600 and $4,900 for the years ended December 31, 2012 and 2011, respectively.

F-22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

10. (Loss) earnings per Share

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

    For The Years Ended  
    December 31,  
             
    2012     2011  
             
Net income (loss) available for common shareholders - basic            
  $  (434,769 ) $  (476,451 )
Interest expense on convertible notes   463,084     18,253  
             
Net income (loss) available for common shareholders - diluted $  28,315   $  (458,198 )
             
Weighted average outstanding shares of common stock – basic            
             
Effect of dilutive securities – convertible notes   60,000,000     70,765,479  
             
Weighted average outstanding shares of common stock –diluted   6,899,939     -  
             
    66,899,939     70,765,479  
Profit (loss) per share - basic:            
Continuing Operations $  (0.01 ) $  (0.01 )
Discontinued Operations $  -   $  -  
  $  (0.01 ) $  (0.01 )
Profit (loss) per share - diluted:            
Continuing Operations $  0.00   $  (0.01 )
Discontinued Operations $  -   $  -  
  $  0.00   $  (0.01 )

11. Commitments and Contingencies

Operating commitments:

Operating commitment consists of the lease for office space under operating lease agreement which expired in August 2012 and the Company has renewed the lease for a one year period.

Operating lease agreement generally contains renewal options that may be exercised at the Company’s discretion after the completion of the terms. The Company’s obligations under operating lease are as follows:

2013 $  56,858  
Thereafter   -  
Total minimum payment $  56,858  

The Company incurred rental expenses of $85,300 and $29,000 for the years ended December 31, 2012 and 2011, respectively.

F-23


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

12. Concentrations, Risks, and Uncertainties

Customer Concentrations

The Company has the following concentrations of business with each customer constituting greater than 10% of the Company’s gross sales:

For The Years Ended  
  December 31,
2012     2011
       
Customer A -   66%
Customer B *   30%
Customer C 86%   -

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

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers.

13. Operating Risk

The Company’s operations are all carried out in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy.

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

14. Unaudited Pro-Forma Financial Information

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

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

    Unaudited,  
    Proforma  
    Year Ended  
    December 31,  
    2011  
       
Revenues $  47,279  
Net Loss applicable to common shareholders $  (719,344 )
Loss per share $  (0.01 )
       
Weighted Average Shares Outstanding   60,000,000  

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

F-24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

15. Related Party Transaction

Effective October 1, 2011 for a period of one year, the Company’s subsidiary, CC Mobility engaged the Company’s shareholder, CC Wireless Limited, to provide technical consultation for product R&D and business development. The monthly fee is determined periodically. During the year ended December 31, 2012, $42,800 of consulting fee was paid to CC Wireless Limited.

16. Restricted Stock to Director

On April 20, 2012, the Board of Directors of the Company appointed Jack Zwick as the independent director of the Company and granted to Mr. Zwick 360,000 shares of the Company’s common stock. The restricted stock shall vest with respect to 1/8 th of the total number of restricted stock per quarter from vesting commencement date of April 1, 2012 such that all restricted stock shall vest on January 1, 2013, subject to his continuous service. The fair value of the restricted stock on the grant date is $201,600.

In November 2012, Mr. Zwick resigned from the Board of Directors. In connection with the Mutual Release and Settlement Agreement entered into between the Company and Mr. Zwick on March 13, 2013, the Company granted Jack Zwick 150,000 shares of the Company’s common stock, par value $0.001 per share, as consideration for his past services rendered to the Company and in consideration for Jack Zwick’s release and waiver of claims regarding certain compensation owed to Jack Zwick. The fair value of the 150,000 shares on the grant date is $12,000.

On August 14, 2012, the Board of Directors of the Company granted 360,000 shares of the Company’s common stock to Gregory Tse for his service to serve as the Company’s independent director. The restricted stock shall vest with respect to 120,000 shares of Restricted Stock immediately, 45,000 shares on September 1, 2012, 45,000 shares on January 1, 2013, 45,000 shares on May 1, 2013, 45,000 shares on September 1, 2013, and the remaining 45,000 shares on January 1, 2014, subject to his continuous service. The fair value of the restricted stock on the grant date is $82,800.

The fair value of the restricted stock is recognized as stock based compensation over the service period. The shares have not been issued as of December 31, 2012.

During the year ended December 31, 2012, 180,000 shares were vested and stock based compensation expense totaled $59,900 was recorded.

17. Subsequent Events

Other than the Mutual Release and Settlement Agreement with Mr. Zwick as disclosed in Note 16, the Company has no significant subsequent events from December 31, 2012 through the consolidated financial statements issue date of this report.

F-25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

18. Restatement

During the course of internal evaluation, our accounting staff discovered some misstatements in our previously reported financial statements for the year ended December 31, 2012 that required correction relating to: (1) the improper accounting treatments for the issued convertible notes. Specifically, the derivative liability was understated by $423,480, the convertible notes, net of debt discounts were overstated by $751,993, the accrued interests were understated by $69,105, the interest expenses were understated by $409,921, the gain on derivative liability understated by $669,329.

The changes on the relevant financial statements for the year ended December 31, 2012 are shown in the following:

CONSOLIDATED BALANCE SHEETS

    December 31,     December 31,  
    2012     2012  
    Original     Restated  
LIABILITIES AND SHAREHOLDERS’ DEFICIT            
Current Liabilities:            
Accounts payable $  76,594   $  76,594  
Other payables and accrued expenses   109,147     109,147  
Deferred revenue   78,811     78,811  
Derivative liability   -     423,480  
Accrued interest   -     140,520  
Convertible notes   63,000     46,040  
             
Total Current Liabilities   327,552     874,592  
             
Convertible notes, net of debt discount   1,050,000     314,967  
Accrued interest   71,415     -  
Deferred revenue   20,130     20,130  
             
Total Liabilities   1,469,097     1,209,689  
             
Shareholders’ Deficit:            
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding December 31, 2012 and 2011   -     -  
Common stock, $0.001 par value, 100,000,000 shares authorized; 60,000,000 issued and outstanding December 31, 2012 and 2011   60,000     60,000  
Additional paid in capital   131,562     131,562  
Accumulated deficit   (1,467,058 )   (1,207,650 )
Accumulated other comprehensive income   33,044     33,044  
             
Total Shareholders’ Deficit   (1,242,452 )   (983,044 )
             
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $  226,645   $  226,645  

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

F-26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

    For the year ended     For the year ended  
    December 31,     December 31,  
    2012     2012  
    Original     Restated  
Revenue $  277,406   $  277,406  
Cost of Revenue   17,953     17,953  
Gross Profit   259,453     259,453  
             
Operating Expenses:            
Selling expense   41,136     41,136  
General and administrative expense   986,908     986,908  
Total Operating Expenses   1,028,044     1,028,044  
Loss from Operations   (768,591 )   (768,591 )
             
Other Income (Expense):            
Interest income   853     853  
Interest expense   (53,163 )   (122,268 )
Amortisation of debt instrument   -     (340,816 )
Gain on derivative   -     669,329  
Other income   126,724     126,724  
Total Other Income (Expense)   74,414     333,822  
Loss Before Taxes   (694,177 )   (434,769 )
Income tax expense   -     -  
Loss from continuing operation $  (694,177 ) $  (434,769 )
             
             
Net Loss   (694,177 )   (434,769 )
Less: income attributable to non-controlling interest   -     -  
             
Net loss attributable to XcelMobility $  (694,177 ) $  (434,769 )
             
Net Loss   (694,177 )   (434,769 )
   Foreign currency translation adjustment   2,381     2,381  
Comprehensive loss   (691,796 )   (432,388 )
   Less: Comprehensive Income attributable to            
   Non-controlling interest   -     -  
Comprehensive loss attributable to XcelMobility   (691,796 )   (432,388 )
             
Basic and diluted loss per share attributable to            
XcelMobility shareholders:            
   Continuing Operation $  (0.01 ) $  (0.01 )
   Discontinued Operation   -     -  
Basic and diluted loss per share attributable to            
XcelMobility shareholders:   (0.01 )   (0.01 )
Basic and diluted weighted average number of shares outstanding   60,000,000     60,000,000  

As a result of the restatement of the consolidated statement of operations and comprehensive loss, the total expenses was reduced with $259,408 owing to additional interest expenses of $69,105 and additional amortisation of debt discount of $340,816 offset by gain on derivative $669,329. The operation loss and net loss reduced to $434,769 from $694,177. The comprehensive loss reduced to $432,388 from $691,796.

F-27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

CONSOLIDATED STATEMENTS OF CASH FLOWS

    For the year ended     For the year ended  
    December 31.     December 31.  
    2012     2012  
    Original     Restated  
Cash Flows from Operating Activities:            
Net loss $  (694,177 ) $ (434,769 )
Adjustments to reconcile net loss to net cash used in operating activities            
Depreciation   20,381     20,381  
Amortization   379     379  
Stock compensation expenses   59,314     59,314  
Amortisation of debt discount   -     340,816  
Fair value adjustment on derivative liability   -     (669,329 )
             
Changes in assets and liabilities:            
   Trade accounts receivable   (19,302 )   (19,302 )
   Other receivables and prepayment   (159 )   (159 )
   Advances to suppliers   (3,371 )   (3,371 )
   Inventory   (348 )   (348 )
   Accounts payable   35,211     35,211  
   Accrued interest   53,161     122,266  
   Other taxes payable   1,787     1,787  
   Other payables and accrued expenses   62,301     62,301  
   Deferred revenue   (204,959 )   (204,959 )
             
Net Cash Used In Operating Activities   (689,782 )   (689,782 )

As a result of the restatement of consolidated statement of cash flow, the net loss reduced by $$259,408 from $694,177 to $434,769 which were offset by increment of amortisation of debt discount by $340,816, reduction of fair value adjustment on derivative liabilities by $669,329, increment of accrued interest by $69,105. The net cash used in operating activities did not have any changes.

F-28