News Column

XCELMOBILITY INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

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



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 June 11, 2014, we increased the total number of authorized shares of common stock to 400,000,000.

On July 5, 2011, we entered into a voluntary share exchange agreement (the "Exchange Agreement") with Shenzhen CC Power Corporation, a company organized under the laws of the People's Republic of China (PRC) ("CC Power"), CC Mobility Limited, a company organized under the laws of Hong Kong ("CC Mobility") and the shareholders of CC Mobility. As a result of the Exchange Transaction, CC Mobility became our wholly-owned subsidiary and we control the business and operations of CC Power.

On May 7, 2013, we entered into and consummated a stock purchase agreement (the "Purchase Agreement") with CC Investment, Jifu and certain of its shareholders (the "Jifu Shareholders"). Pursuant to the terms of the Purchase Agreement, we issued an aggregate of 27,000,000 shares of our common stock to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements with CC Investment. Through these controlling agreements, CC Investment will effectively own Jifu through a variable interest entity or VIE structure.

We recently made a strategic decision to change our primary business focus to becoming a wearable computing company, with two main business divisions: the wearable computing group and the video and security group. We were previously focused on the development of 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. As electronic miniaturization has moved us from mainframes to cellular phones, we believe that in the coming years wearable computing will replace or augment cellular phones on a growing basis. We believe this will include cellular phones and their related technology being embedded in wearable items, such as watches, belts, shoes, shirts, or glasses. We plan to focus on the development of applications for wearable computing, including:

Location-based services: core applications include finding

friends/family/assets, location-based marketing, and security-related

applications.

Medical monitoring: for patients with heart disease, epilepsy, Alzheimer's, and

other aged-related maladies.

Security force monitoring and deployment: wearable computing with video, sound,

and location which allows for remote monitoring and deployment of security

forces over the internet and in the cloud.

Secure and touch-less payment systems: near field communication-enabled

wearable devices have the potential to become the wallets of the future. 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 31, 2014.

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Comparison of the Three Months Ended June 30, 2014 and 2013

Revenue



Our revenue for the three months ended June 30, 2014 totaled $629,448, an increase of $613,420 or 3,827% from $16,028 for the three months ended June 30, 2013. This increase in revenue was primarily due to the acquisition of Jifu in the middle of 2013, which generated revenue of $617,588.

Cost of revenue



Cost of revenue for the three months ended June 30, 2014 totaled $93,445 an increase of $93,434, from $11 for the three months ended June 30, 2013. This increase in cost of revenue was primarily due to the acquisition of Jifu in the middle of 2013, which incurred cost of revenue of $93,442.

Gross profit



Gross profit for the three months ended June 30, 2014 was $536,003, an increase of $519,986 from $16,017 for the three months ended June 30, 2013. This increase in gross profit was primarily due to the acquisition of Jifu, which generated a gross profit of $524,146.

Operating Expenses



Our operating expenses for the three months ended June 30, 2014 decreased by $33,472 to $396,144 from $429,616 for the three months ended June 30, 2013. These expenses comprise of selling expenses of $9,307 and general & administrative expenses of $386,837 for the three months ended June 30, 2014, while the selling expenses and general & administrative expenses for the three months ended June 30, 2013 were $4,147 and $425,469 respectively. This increase in operating expenses was primarily due to the acquisition of Jifu, which incurred operating expenses for the three months ended June 30, 2014 of $256,460.

Other Income (expense)



Other income (expense) for the three months ended June 30, 2014 was ($174,759) a decrease of $$245,697 from $70,938 for the three months ended June 30, 2013. This decrease in other expense was primarily due to increase in loss on derivative by $439,098 to ($129,411) for the three months ended June 30, 2014 from gain on derivative of $309,687 for the three months ended June 30, 2013.

Net income (loss)



Our net (loss) was ($34,900) for the three months ended June 30, 2014, compared to net (loss) of ($342,661) for the three months ended June 30, 2013. This decrease in net income was primarily due to the acquisition of Jifu, which generated a net income of $311,466 for the three months ended June 30, 2014.

Comprehensive income (loss)



Our comprehensive (loss) decreased from ($321,367) for the three months ended June 30, 2013 to ($32,158) for the three months ended June 30, 2014. The increase is primarily due to a decrease in net loss.

Comparison of the Six Months Ended June 30, 2014 and 2013

Revenue



Our revenue for the three months ended June 30, 2014 totaled $1,473,976, an increase of $1,431,574 or 3,376% from $42,402 for the six months ended June 30, 2013. This increase in revenue was primarily due to the acquisition of Jifu in the middle of 2013, which generated revenue of $1,461,987.

32 Cost of revenue



Cost of revenue for the six months ended June 30, 2014 totaled $228,297, an increase of $228,286, from $11 for the six months ended June 30, 2013. This increase in cost of revenue was primarily due to the acquisition of Jifu in the middle of 2013, which incurred cost of revenue of $228,252.

Gross profit



Gross profit for the six months ended June 30, 2014 was $1,245,679, an increase of $1,203,288 from $42,391 for the six months ended June 30, 2013. This increase in gross profit was primarily due to the acquisition of Jifu, which generated a gross profit of $1,233,735.

Operating Expenses



Our operating expenses for the six months ended June 30, 2014 increased by $234,247 to $950,282 from $716,035 for the six months ended June 30, 2013. These expenses comprise of selling expenses of $44,324 and general & administrative expenses of $905,958 for the six months ended June 30, 2014, while the selling expenses and general & administrative expenses for the six months ended June 30, 2013 were $8,634 and $707,401 respectively. This increase in operating expenses was primarily due to the acquisition of Jifu, which incurred operating expenses for the six months ended June 30, 2014 of $664,270.

Other Income (expense)



Other income (expense) for the six months ended June 30, 2014 was ($220,384), a decrease of $180,259 from ($40,125) for the six months ended June 30, 2013. This decrease in other expense was primarily due to increase in loss on derivative by $ 411,200 to ($101,513) for the three months ended June 30, 2014 from gain on derivative of $309,687 for the three months ended June 30, 2013.

Net income (loss)



Our net income was $75,013for the six months ended June 30, 2014, compared to net (loss) of ($713,769) for the six months ended June 30, 2013. This increase in net income was primarily due to the acquisition of Jifu, which generated a net income of $603,715 for the three months ended June 30, 2014.

Comprehensive income (loss)



Our comprehensive income (loss) increased from ($696,653) for the six months ended June 30, 2013 to comprehensive income of $84,812 for the six months ended June 30, 2014. The increase is primarily due to a decrease in net loss.

Liquidity and Capital Resources

Overview



As of June 30, 2014, we had cash and equivalents on hand of $182,384 and net current assets of $330,843. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through December 31, 2014. To meet our future development plan, 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 might result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations activities. Moreover, financing may not be available in amounts or on terms acceptable to us, if at all. Our capability to raise adequate 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.

In fiscal year 2013, we sold an aggregate of 8,400,000 shares of our common stock to accredited investors in private placements for aggregate cash proceeds of $420,000.

On May 30, 2014, we issued a senior convertible note (the "Hanover Note") and a warrant to acquire up to 3,176,092 shares of common stock at an initial exercise price of $0.04 (the "Hanover Warrant") to Hanover Holdings I, LLC in a private placement for an aggregate purchase price of $250,000. If the Hanover Warrant is exercised for cash, we expect to receive gross proceeds of up to $150,000.

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On July 14, 2014, we filed a registration statement on Form S-1 with the Securities and Exchange Commission to register 12,600,000 shares of our common stock issuable upon conversion of the Hanover Note and upon exercise of the Hanover Warrant. Such registration statement on Form S-1 was declared effective by the Securities and Exchange Commission on July 31, 2014.

Substantially all of our current revenues are earned by CC Power and Jifu, our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiary to declare dividends and other payments to their offshore parent company. Pursuant to the law of PRC on foreign-capital enterprises, when CC Power or Jifu 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) and the registered capital of Jifu is $362,472 (RMB 3,000,000).

We anticipate generating losses in the near term, and therefore, may be unable to continue operations in the future. We require additional capital, and we may have to issue debt or equity or enter into a strategic arrangement with a third party to obtain such capital. In order to meet our planned strategic two to four acquisitions, we estimate requiring up to US$3,000,000 in capital. We will consider debt or equity offerings or institutional borrowing as potential means of financing, however, there are no assurances that we will be successful or that we will obtain terms that are favorable to us.

Net cash provided by (used in) operating activities

Net cash provided by (used in) operating activities for the six months ended June 30, 2014 was ($460,611) compared to net cash provided by (used in) operating activities of ($137,493) for the six months ended June 30, 2013. This decrease in cash from operating activities was primarily due to decrease in accounts payable.

Net cash provided by (used in) investing activities

Net cash provided by (used in) investing activities for the six months ended June 30, 2014 was ($158) compared to net cash used in investing activities for the six months ended June 30, 2013 of ($1,533). This increase in cash provided by investing activities was primarily due to decrease in purchase of property, plant and equipment.

Net cash provided by financing activities

Net cash provided by financing activities for the six months ended June 30, 2014 was $200,000 compared to $175,775 in cash provided by financing activities for the six months ended June 30, 2013. The increase in cash provided by financing activities was as a result of increase in proceeds from issuance of notes payable.

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder's equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it.

Critical Accounting Estimates



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

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Certain of our accounting policies require higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis.

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.


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Source: Edgar Glimpses


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