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XCELMOBILITY INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Overview We were incorporated in the state of Nevada on December 27, 2007 under the name "Advanced Messaging Solutions, Inc." On March 29, 2011, we amended our Articles of Incorporation to change our name from "Advanced Messaging Solutions, Inc." to "XcelMobility Inc." and we effected a 35-for-1 forward stock split of all of our issued and outstanding shares of common stock. On July 5, 2011, we entered into a voluntary share exchange agreement (the "Exchange Agreement") with Shenzhen CC Power Corporation, a company organized under the laws of the People's Republic of China (PRC) ("CC Power"), CC Mobility Limited, a company organized under the laws of Hong Kong ("CC Mobility") and the shareholders of CC Mobility. As a result of the Exchange Transaction, CC Mobility became our wholly-owned subsidiary and we control the business and operations of CC Power. Through CC Mobility and CC Power, we are developing mobile applications directly for the mobile devices that utilize cellular networks to connect to the Internet and hardware/software products to increase the speed of Virtual Private Networks. Our strategy is global in scope, but we are focusing our efforts at this time on the large mobile markets of Asia. CC Power's principal activity is the design, testing sale and support of software to support mobile Internet applications on cellular phones, smartphones, tablets and mobile computers in China. The principal product designed and built by CC Power is the Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the Internet significantly faster than with other mobile browsers. The speed of the Mach 5 browser enables CC Power to develop other mobile software that can leverage off the Mach 5 product's speed of processing. In order to support CC Power products, we have built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via our website and retail locations, through distribution agents and through all three mobile phone carriers in China. 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. 27-------------------------------------------------------------------------------- Results of Operations The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed on March 30, 2012. Comparison of the Three Months Ended September 30, 2012 and 2011 Revenue Our revenue for the three months ended September 30, 2012 totaled US$72,000 an increase of 1656% from US$4,100 for the three months ended September 30, 2011. This increase in revenue was primarily due to an increase in revenue from paying subscribers for our internet accelerator software. Cost of revenue Cost of revenue for the three months ended September 30, 2012 was US$4,000 and consists primarily of business tax and the related tax surcharges associated with our service contracts. Cost of revenue increased US$3,800, or 1900%, from US$200 for the three months ended September 30, 2011. This increase in cost of revenue was primarily due to an increase in revenue. Gross profit Gross profit for the three months ended September 30, 2012 was US$68,000, an increase of US$64,100, or 1644% from US$3,900 for the three months ended September 30, 2011. This increase in gross profit was primarily due to increased revenue as noted above. Operating Expenses Our operating expenses for the three months ended September 30, 2012 increased by US$85,500, or 47%, from the three months ended September 30, 2011. This increase in operating expenses was primarily due to an increase in R&D expenses, and daily operating expenses. Other Income Other income of US$89,600 represents income recognized from the grant from the Science, Industry, Trade & Information Technology Commission of the Shenzhen Municipality. Net income (loss) A net loss of US($125,100) resulted for the three months ended September 30, 2012 compared to net loss of US($153,300) for the three months ended September 30, 2011, an decrease of US$28,200. Our net loss decreased primarily due to increased Other income of $76,600 ( 2011:US$13,000 ). Comprehensive income Our comprehensive income increased by US$22,100 from US$(147,800) for the three months ended September 30, 2011 to US$(125,700) for the three months ended September 30, 2012. The increase is primarily due to increased Other income as noted above. Comparison of the Nine Months Ended September 30, 2012 and 2011 Revenue 28-------------------------------------------------------------------------------- Our revenue for the nine months ended September 30, 2012 totaled US$198,800, an increase of 359%% from US$43,300for the nine months ended September 30, 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. Cost of revenue Cost of revenue for the nine months ended September 30, 2012 was US$11,900 and consists primarily of costs associated with our internet accelerator software. Cost of revenue increase US$9,500 or 396%, from US$2,400 for the nine months ended September 30, 2011. This increase in cost of revenue was primarily due to reduced marketing activities and related expenses associated with our internet accelerator software and decreased revenue. Gross profit Gross profit for the nine months ended September 30, 2012 was US$186,900, an increase of US$146,000, or 357% from US$40,900 for the nine months ended September 30, 2011. This increase in gross profit was primarily due to increased revenue as noted above. Operating Expenses Our operating expenses for the nine months ended September 30, 2012 increased by US$622,500, or 264% from the nine months ended September 30, 2011. This increase in operating expenses was primarily due to increased general and administrative expenses (2012: US$858,600; 2011: US$236,100. This primarily due to increase R&D cost and daily operating expenses. Other Income Other income of US$70,900 represents income recognized from the grant from the Science, Industry, Trade & Information Technology Commission of the Shenzhen Municipality. Net income (loss) A net loss of US$600,800 resulted for the nine months ended September 30, 2012 compared to net income of US$156,400 for the nine months ended September 30, 2011, an increase of US$444,400. Our net loss increased primarily due to significant increases in operating expenses and R&D expenses. Comprehensive income Our comprehensive income increased by US($454,300) from US($144,800) for the nine months ended September 30, 2011 to US($599,100) for the nine months ended September 30, 2012. The increase is primarily due to significant increases in operating expenses and R&D expenses. Liquidity and Capital Resources Overview As of September 30, 2012, we had cash and equivalents on hand of US$238,900 and negative working capital of US$-86,300. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through December 2012. On July 27, 2012, we issued a Convertible Promissory Note (the "Note") in the amount of $63,000 to an accredited investor. The Note is payable on April 13, 2012 and has an interest rate of 8% per annum (increases to 22% in the event of default). We are currently seeking both short term working capital to finance current operations as well as significant amounts of long term capital to execute our business plan and ultimately offer our products in the U.S. market. We project that to keep operations at our current level, approximately $900,000 in revenue and working capital will be required over the next 12 months to cover monthly expenses of $75,000. In order to successfully execute our business plan of increasing the Company's presence in Asia and making products available in the US, an additional $2 to $5 million will be required in long term financing. 29-------------------------------------------------------------------------------- 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 nine months ended September 30, 2012 and has an accumulated deficit at September 30, 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 $345,864 (RMB 2,526,000). Net cash provided by (used in) operating activities Net cash provided by (used in) operating activities for the nine months ended September 30, 2012 was US$-551,000 compared to net cash used in operating activities of US$-16,400 for the nine months ended September 30, 2011. This increase in cash used in operating activities was primarily due to an increase in other payables and accrued expenses. Net cash provided by (used in) investing activities Net cash used in investing activities for the nine months ended September 30, 2012 was US$-41,500 compared to net cash used in investing activities for the nine months ended September 30, 2011 of US$273,300. The majority of these funds were used to add to the server configuration in China and Hong Kong. Net cash provided by financing activities Net cash provided by financing activities for the nine months ended September 30, 2012 was US$213,000, cash provided by financing activities for the nine months ended September 30, 2011 was $432,300. The increase in cash provided by financing activities was as a result of the issuance of our convertible promissory notes. Off-Balance Sheet Arrangements We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder's equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it. 30-------------------------------------------------------------------------------- Critical Accounting Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates. Certain of our accounting policies require higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis. Recently Issued Accounting Pronouncements Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements. |