UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2016
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number 000-54333
XCELMOBILITY INC.
(Exact name of registrant as specified in its charter)
Nevada | 98-1102006 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification Number) |
2225 East Bayshore Road, Suite 200, Palo Alto, CA 94303
(Address of principal executive offices) (Zip Code)
(650) 320-1728
(Registrant’s telephone number, including area code)
N/A
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer | [ ] Accelerated filer | [ ] Non-accelerated filer | [X] Smaller reporting company |
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding as of November 15, 2016 | ||||
Common stock, $0.001 par value | 2,160,533,090 |
XCELMOBILITY INC. FORM 10-Q
INDEX
2 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, other circumstances affecting anticipated revenues and costs, and the risk factors set forth in our Annual Report on Form 10-K filed on April 19, 2016.
The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.
YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS.
As used in this Quarterly Report on Form 10-Q, 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.
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XCELMOBILITY INC. AND SUBSIDIARIES
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4 |
XCELMOBILITY INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 106,369 | $ | 37,774 | ||||
Trade accounts receivable | 18,686 | 20,363 | ||||||
Other receivables and prepayment | 18,374 | - | ||||||
Inventory | 59,303 | 60,935 | ||||||
Prepaid VAT | 4,064 | 9,670 | ||||||
Total Current Assets | $ | 206,796 | $ | 128,742 | ||||
Property, Plant and Equipment, net of accumulated depreciation of $142,932 and $119,328, respectively | 52,221 | 68,670 | ||||||
TOTAL ASSETS | $ | 259,017 | $ | 197,412 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Amount due to a director | $ | - | $ | 599,318 | ||||
Other payables and accrued expenses | 441,909 | 984,242 | ||||||
Other taxes payable | 2,503 | 4,909 | ||||||
Convertible notes, net of debt discount | 2,450,000 | 101 | ||||||
Derivative liability | 429,111 | 279,071 | ||||||
Accrued interest | 247,884 | 188,987 | ||||||
Total Current Liabilities | $ | 3,571,407 | $ | 2,056,628 | ||||
Convertible notes, net of debt discount | - | 993,505 | ||||||
Accrued interest | 981 | 881 | ||||||
Total Liabilities | $ | 3,572,388 | $ | 3,051,014 | ||||
Shareholders’ Equity: | ||||||||
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 10,000,000 shares issued and outstanding at September 30, 2016 and December 31, 2015 | 10,000 | 10,000 | ||||||
Common stock, $0.001 par value, 800,000,000 shares authorized; 660,533,090 and 568,582,680 shares issued and outstanding at September 30, 2016 and December 31, 2015 | 660,533 | 568,583 | ||||||
Shares unissued | 486,500 | 486,500 | ||||||
Additional paid in capital | 1,880,909 | 1,938,503 | ||||||
Accumulated deficit | (7,324,211 | ) | (6,229,903 | ) | ||||
Accumulated other comprehensive loss | 972,898 | 372,715 | ||||||
Total Shareholders’ Equity | (3,313,371 | ) | (2,853,602 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 259,017 | $ | 197,412 |
The accompanying notes are an integral part of the condensed consolidated financial statements
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XCELMOBILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue | $ | 80,128 | $ | 83,286 | $ | 183,842 | $ | 250,283 | ||||||||
Cost of Revenue | 30,617 | 97,854 | 70,558 | 173,475 | ||||||||||||
Gross Profit | 49,512 | (14,569 | ) | 113,284 | 76,808 | |||||||||||
Operating Expenses: | ||||||||||||||||
Selling expense | 48,442 | 73,338 | 90,452 | 187,250 | ||||||||||||
General and administrative expense | 360,267 | 227,741 | 687,343 | 542,446 | ||||||||||||
Total Operating Expenses | 408,709 | 301,079 | 777,795 | 729,696 | ||||||||||||
Income (loss) from Operations | (359,198 | ) | (315,648 | ) | (664,511 | ) | (652,888 | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Interest income | 64 | 149 | 103 | 224 | ||||||||||||
Interest expense | (291 | ) | (760 | ) | (123,404 | ) | (1,128 | ) | ||||||||
Gain (loss) on derivative | 5,094 | (320,518 | ) | (30,160 | ) | 314,493 | ||||||||||
Amortization of debt discount | (623,273 | ) | 131,093 | (621,611 | ) | (12,435 | ) | |||||||||
Other income (expense) | (356,276 | ) | - | (356,276 | ) | - | ||||||||||
Total Other Income (Expense) | (262,130 | ) | (190,036 | ) | (429,796 | ) | 301,154 | |||||||||
Income (loss) Before Taxes | (621,328 | ) | (505,684 | ) | (1,094,307 | ) | (351,734 | ) | ||||||||
Income tax expense | - | - | - | - | ||||||||||||
Net Income (Loss) | (621,328 | ) | (505,684 | ) | (1,094,307 | ) | (351,734 | ) | ||||||||
Foreign currency translation adjustment | (546,168 | ) | (315,637 | ) | (600,183 | ) | 340,971 | |||||||||
Comprehensive (loss) income | (1,167,496 | ) | (821,321 | ) | (1,674,490 | ) | 10,763 | |||||||||
Basic income (loss) per share: | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Diluted income (loss) per share: | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Basic weighted average number of shares outstanding | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 | ||||||||||||
Diluted weighted average number of shares outstanding | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 |
The accompanying notes are an integral part of the condensed consolidated financial statements
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XCELMOBILITY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | (1,094,307 | ) | $ | (350,605 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation | 15,030 | 13,787 | ||||||
Amortization of debt discount | - | 12,435 | ||||||
Fair value adjustment on derivative liability | 632,611 | (314,493 | ) | |||||
Changes in assets and liabilities: | ||||||||
Trade accounts receivable, net | 1,677 | 19,350 | ||||||
Other receivables and prepayment | (12,768 | ) | 88,736 | |||||
Advances to suppliers | - | (3,059 | ) | |||||
Inventory | 1,632 | (61,869 | ) | |||||
Prepaid VAT | - | |||||||
Account payable | (310,875 | ) | 92,720 | |||||
Accrued interest | 58,997 | 2,676 | ||||||
Other taxes payable | (2,406 | ) | (6,142 | ) | ||||
Other payables and accrued expenses | (260,837 | ) | (260,958 | ) | ||||
Deferred revenue | - | (19,135 | ) | |||||
Net Cash Used In Operating Activities | (971,246 | ) | (786,827 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of property, plant and equipment, net of value added tax refunds received | (1,419 | ) | (40,992 | ) | ||||
Net Cash Used In Investing Activities | (1,419 | ) | (40,992 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Payment for director’s loan | (356,846 | ) | - | |||||
Proceeds from issuance of notes payable | 1,408,050 | 65,000 | ||||||
Net Cash Provided By Financing Activities | 1,051,204 | 65,000 | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (9,943 | ) | 638,865 | |||||
Net Change in Cash and Cash Equivalents | 68,595 | (123,954 | ) | |||||
Cash and Cash Equivalents at Beginning of Period | 37,774 | 159,628 | ||||||
Cash and Cash Equivalents at End of Period | $ | 106,369 | $ | 35,674 | ||||
Supplement Cash Flow Information | ||||||||
Cash paid during the period for interest | $ | - | $ | - | ||||
Cash received during the period for interest | 103 | 224 | ||||||
Cash paid during the period for income taxes | $ | - | $ | - |
The accompanying notes are an integral part of the condensed consolidated financial statements
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XCELMOBILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2013, $400,000 of the registered capital has been contributed.
Shenzhen CC Power Corporation
Shenzhen CC Power Corporation (“CC Power”) is a Chinese enterprise organized in the PRC on March 13, 2003 in accordance with the Laws of the People’s Republic of China. The required registered capital of CC Power was approximately $1,547,000 (RMB 10,000,000) and as of December 31, 2013, CC Power has paid up approximately $346,000 (RMB2,526,000). In March 2011, Mr. Ryan Ge sold his 5% ownership in CC Power to the other shareholder, Xili Wang (“CC Power Shareholder”). Ms. Wang holds 100% ownership interest in CC Power at the end of the financial period.
CC Power is primarily engaged in the research, development and commercialization of applications for mobile devices that access the Internet utilizing mobile phone networks. CC Power’s principal activity is the design, testing sale and support of software to support mobile internet applications on cellular phones, smart phones, tablets and mobile computers in China. The principal product designed and built by CC Power is its Mach 5 Accelerator. This product has been independently tested by all 3 mobile phone carriers in China and accesses the internet 5 times faster than with other mobile browsers. The speed of the Mach 5 browser enables CC Power to develop other mobile software that can leverage off the Mach 5 products speed of processing. In order to support CC Power products the Company has built a series of server locations throughout China. CC Power sells its products to corporations directly, to individual users via the company’s website and retail locations, through distribution agents and through all three mobile phone carriers in China.
As noted above, the primary purpose of CC Power is to develop software that allows user faster access to the Internet. CC Power’s primary focus is in the mobile Internet market, with a focus on providing software that significantly increases the speed that users of smartphones, tablets and laptops can access the Internet over cellular phone networks. CC Power also uses their technology to increase the speed at which users of Virtual Private Networks can access data from their networks.
On September 22, 2014, XcelMobility Inc. entered into an Asset Purchase Agreement with CC Power, Xianjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) and the shareholders of Silvercreek (the “Selling Shareholders”). Pursuant to the terms of the Agreement, CC Power will acquire certain assets of Silvercreek relating to its online sports lottery business unit in exchange for the issuance of up to 80,000,000 shares of common stock of the Company to the Selling Shareholders. No Shares will be issued upon the closing date of the transaction. The Shares will be issued to the Selling Shareholders on a pro rata basis and upon achievement of the following milestones: (i) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue (“Lottery Revenue”) of over 10,000 RMB per month from the business developed in connection with the Assets on or before October 1, 2014; (ii) 10,000,000 Shares to be issued in the event that CC Power derives Lottery Revenue of over 3,000,000 RMB per month from the business developed in connection with the Assets on or before March 31, 2016; (iii) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue of over 20,000,000 RMB per month from the business developed in connection with the Assets on or before December 31, 2015; (iv) 40,000,000 Shares to be issued in the event that CC power obtains a lottery gaming license from the People’s Republic of China; and (v) 10,000,000 Shares to be issued based on the achievement of certain incentives as determined by the board of directors of the Company.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
1. Organization and Nature of Business – Continued
Share Exchange Agreement
On August 30, 2011, the Company completed a voluntary share exchange transaction with Shenzhen CC Power Corporation, CC Mobility Limited and the shareholders of CC Mobility (“Selling Shareholders”) pursuant to a Share Exchange Agreement dated July 5, 2011 (the “Exchange Agreement”). In accordance with the terms of Exchange Agreement, on the Closing Date, Xcel issued 30,300,000 shares of its common stock to the Selling Shareholders in exchange for 100% of the issued and outstanding capital stock of CC Mobility (the “Exchange Transaction”). As a result of the Exchange Transaction, there was a change of control in the Company as the Selling Shareholders of CC Mobility acquired 50.5% of Xcel’s issued and outstanding common stock, CC Mobility became Xcel’s wholly-owned subsidiary, and Xcel acquired the business and operations of CC Mobility and CC Power.
For accounting purposes, the merger transaction is being accounted for as a reverse merger. The transaction has been treated as a recapitalization of CC Mobility and its subsidiaries, with Xcel (the legal acquirer of CC Mobility and its subsidiaries) considered the accounting acquiree and CC Mobility whose management took control of Xcel (the legal acquire of CC Mobility) considered the accounting acquirer.
CC Power is owned by an individual but controlled by CC Investment through a series of contractual arrangements that transferred all of the benefits and responsibilities for the operations of CC Power to CC Investment. CC Investment accounts for CC Power as a Variable Interest Entity (“VIE”) under ASC 810 “Consolidation.” Accordingly, CC Investment consolidates CC Power’s results, assets and liabilities.
Shenzhen Jifu Communication Technology Co., Ltd.
Shenzhen Jifu Communication Technology Co., Ltd (“Jifu”), was incorporated on April 16, 2001 under the laws of the People’s Republic of China (“PRC”) as a limited liability company. The required registered capital is RMB3,000,000 and all of the required registered capital has been contributed.
Jifu is primarily engaged in develops and distributes optical transmitters and receivers, electronic surveillance equipment, and other communications equipment. Jifu also engages in the purchase and sale of electronic products, network products, and communications equipment. In order to bolster its business, Jifu also engages in software research and development.
On May 7, 2013, the Company entered into and consummated a Stock Purchase Agreement (the “Agreement”) with Shenzhen CC Power Investment Consulting Co., Ltd., a company organized under the laws of the People’s Republic of China and an indirect wholly-owned subsidiary of the Company (“CC Power”), Shenzhen Jifu Communication Technology Co., Ltd. a company organized under the laws of the People’s Republic of China (“Jifu”) the shareholders of Jifu set forth in the signature page to the Agreement (the “Jifu Shareholders”) and Hui Luo.
Pursuant to the terms and conditions of the Agreement, the Company will issue an aggregate of 27,000,000 shares of the Company’s common stock (the “Purchase Shares”) to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements (the “VIE Agreement”) with CC Power. CC Power will effectively own Jifu through the various conditions prescribed in the VIE Agreements. The Company will also grant 3,000,000 shares (the “Luo Shares”, together with the Purchase Shares, the “Shares’”) to Mr. Luo.
The Shares will be released to the Jifu Shareholders and Mr. Luo after the Company has reviewed Jifu’s audited financial statements for the year ended December 31, 2013. If Jifu has achieved net revenue of $4,000,000 for the year ended December 31, 2013 (the “Target”), then the Company will release the Shares to the Jifu Shareholders and Mr. Luo in their full respective amounts. If Jifu has not achieved the Target by the end of the calendar year, the Company will decrease the amount of shares of common stock issued to the Jifu Shareholders and Mr. Luo in accordance with a formula set forth in the Agreement and release the Shares to the Jifu Shareholders and Mr. Luo in their respective decreased amounts. The Agreement has been approved by the boards of directors of the Company, CC Power, and Jifu, and the Jifu Shareholders.
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
9 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
1. Organization and Nature of Business – Continued
The organizational structure of the Company is as follows:
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at September 30, 2016 and for the nine months ended September 30, 2016 and 2015 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015. The Company follows the same accounting policies in the preparation of interim reports. The Company’s accounting policies used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United States of America (“US GAAP”)
The functional currency is the Chinese Renminbi, however the accompanying condensed consolidated financial statements have been translated and presented in United States Dollars ($). All significant inter-company balances and transactions have been eliminated in consolidation.
All dollars are rounded to nearest hundred except for share data.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies - Continued
Use of estimates
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.
Significant Estimates
These financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, the valuation allowance for deferred taxes. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Variable Interest Entity
CC Power
The accounts of CC Power have been consolidated with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with Xili Wang as the “CC Power Shareholder” and with CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services (collectively referred to as the controlling agreements). On August 25, 2016, Mr. Wei, as the new “CC Power Shareholder” and CC Power revised these agreements pursuant to the transfer of ownership of CC Power from Xili Wang to Zhixiong Wei as set forth in the Agreement on Equity Transfer between Xili Wang and Zhixiong Wei. In summary, the new controlling agreements contain the following terms:
Entrusted Management Agreement. Pursuant to the Entrusted Management Service 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, including, without limitation, financial management services, business management services, advertising and marketing services, human resources management services, and internal control services. The Entrusted Management Service Agreement will remain in effect until the completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, 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, including, without limitation, software and technology development services, computer system services, data analysis services, training, technical consulting services, and import and export consultancy services. The Technical Services Agreement will remain in effect until completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, as more fully described in the Exclusive Purchase Option Agreement below.
Exclusive Purchase Option Agreement. . Pursuant to 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 option to acquire either all or substantially all of the assets, or all or a part of the equity of CC Power, in each case for nominal consideration, plus the cancellation of all or part of the debt owing under the Loan Agreement described below. CC Investment may exercise its purchase option at any time.
Loan Agreement. Pursuant to the Loan Agreement between CC Investment and the CC Power Shareholder, CC Investment agreed to lend 10,000,000 RMB to the CC Power Shareholder. The loan is to be used solely for the operations of CC Power. As security for the loan, the CC Power Shareholder agreed to pledge his equity in CC Power, as more fully described in the Equity Pledge Agreement below.
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XCELMOBILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies – Continued
Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement among CC Power, CC Investment, and the CC Power Shareholder, the CC Power Shareholder agreed to pledge all of his equity interest in CC Power to CC Investment as a guaranty of the performance of the obligations of the CC Power Shareholder and CC Power under the Loan Agreement, the Entrusted Management Service Agreement, the Technical Services Agreement, and the Exclusive Purchase Option Agreement. The Equity Pledge Agreement will remain in effect until all payments due and obligations under the foregoing agreements have been fulfilled by the CC Power Shareholder and/or CC Power. Pursuant to the terms of the Equity Pledge Agreement, the CC Power Shareholder shall not, among other things, sell, transfer, mortgage or otherwise dispose of or encumber the pledged equity interests without CC Investment’s prior written consent.
Assignment and Novation Agreement
In addition to revising the controlling agreements, CC Power, CC Investment, Xili Wang and Mr. Wei entered into an Assignment and Novation Agreement, under which the parties acknowledged that the new CC Power controlling agreements have replaced the original controlling agreements in their entirety, meaning that as of August 25, 2016, Xili Wang assigned to Mr. Wei all of the rights of the CC Power Shareholder under the CC Power controlling agreements, and Mr. Wei assumed from Xili Wang all of the obligations of the CC Power Shareholder under such agreements. The Assignment and Novation Agreement provides that the original controlling agreements have been terminated and replaced in their entirety by the updated controlling agreements. With respect to the Loan Agreement, the Assignment and Novation Agreement provides that the amount originally borrowed by Xili Wang under the original loan agreement, which was contributed to the bank account of CC Power, shall be treated as the amount received by Mr. Wei under the Loan Agreement, and that Mr. Wei shall assume the responsibility to repay the loan and fulfill all the obligations of the borrower under the Loan Agreement.
In sum, the agreements transfer to CC Investment all of the benefits and all of the risk arising from the operations of CC Power, as well as complete managerial authority over the operations of CC Power. Through these contractual arrangements, the Company has the ability to substantially influence CC Power’s daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control CC Power and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, CC Power is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of CC Power because the following characteristics identified in ASC 810-10-15-14 are present:
- | The holder of the equity investment in CC Power lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of CC Power, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)). | |
- | The holder of the equity investment in CC Power lacks the obligation to absorb the expected losses of CC Power, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2). | |
- | The holder of the equity investment in CC Power lacks the right to receive the expected residual returns of CC Power, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)). |
Accordingly, the Company’s condensed consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and classification of CC Power’s assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
September 30, 2016 | December 31, 2015 | |||||||
Total current assets | $ | 1,883,503 | $ | 1,825,197 | ||||
Total assets | 1,948,020 | 1,422,400 | ||||||
Total current liabilities | 2,037,446 | 1,316,298 | ||||||
Total liabilities | 2,037,446 | 1,316,298 |
13 |
XCELMOBILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies – Continued
Jifu
The accounts of Jifu have been consolidated with the accounts of the Company because Jifu is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated May 7, 2013 with Jifu Shareholder and with Jifu pursuant to which CC Investment provides Jifu with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:
Entrusted Management Agreement. Effective on May 7, 2013, CC Investment entered into an Entrusted Management Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive management services provided by CC Investment. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of Jifu. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee will be a percentage of Jifu’s total operational income. The Entrusted Management Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Technical Services Agreement. Effective on May 7, 2013, CC Investment entered into a Technical Services Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive technical services provided by CC Investment. Such technical services include but are not limited to software services, computer systems services, data analysis, training and other technical services. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee shall be a percentage of Jifu’s total operational income. The Technical Service Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Exclusive Purchase Option Agreement. Effective on May 7, 2013, CC Investment entered into an Exclusive Purchase Option Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders granted CC Investment an irrevocable and exclusive purchase option to acquire all of Jifu’s equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time. Until CC Investment has exercised its purchase option, Jifu is required to conduct its business in accordance with certain covenants as further described in the Exclusive Purchase Option Agreement.
Loan Agreement
Effective on May 7, 2013, CC Investment entered into a Loan Agreement with the Jifu Shareholders, pursuant to which CC Investment agreed to lend RMB 3,000,000 to the Jifu Shareholders, to be used solely for the operations of Jifu. The loan is interest free, unless the deemed value of the consideration for the equity purchase of Jifu or asset purchase of Jifu under the Exclusive Purchase Option Agreement is higher than the principal amount of the loan, in which case the excess will be deemed to be interest on the loan.
Equity Pledge Agreement
Effective on May 7, 2013, CC Investment entered into an Equity Pledge Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders pledged all of their equity interests in Jifu, including the proceeds thereof, to guarantee all of CC Investment’s rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of the Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investment’s prior consent. The Jifu Shareholders covenant to CC Investment that among other things, they will only appoint/elect candidates for the board of directors of Jifu and supervisor office of Jifu that were nominated by CC Investment.
14 |
XCELMOBILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Jifu, as well as complete managerial authority over the operations of Jifu. Through these contractual arrangements, the Company has the ability to substantially influence Jifu’s daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control Jifu and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, Jifu is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of Jifu because the following characteristics identified in ASC 810-10-15-14 are present:
|
The holder of the equity investment in Jifu lacks the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Jifu, having assigned their voting rights and all managerial authority to CC Investment. (ASC 810-10-15-14(b)(1)). | |
|
The holder of the equity investment in Jifu lacks the obligation to absorb the expected losses of Jifu, having assigned to CC Investment all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2). | |
|
The holder of the equity investment in Jifu lacks the right to receive the expected residual returns of Jifu, having granted to CC Investment all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)). |
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
Revenue recognition
Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements, and the source of revenue of Jifu is from developing and distributing optical transmitters and receivers, electronic surveillance equipment, and other communications equipment; and trading of electronic products, network products, and communications equipment. We also engage in software research and development, 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.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies - Continued
Revenue Recognition for Software Products (Software Elements)
New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element Arrangements - Software Products and Software Related Services(Software Arrangements)
We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.
Revenue Recognition for Multiple-Element Arrangements - Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) : Multiple-Deliverable Revenue Arrangements . This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of direct costs of products, direct labor of technical staff, depreciation of computer equipment, and overhead associated with the technical department.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies - Continued
Economic and political risks
The Company’s operations are mainly conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations in the PRC may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC.
The Company’s major operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in government administration, governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Credit risk
The Company may be exposed to credit risk from its cash and fixed deposits at bank. No allowance has been made for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment.
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
Equipment | 5 years |
Office equipment | 5 years |
Leasehold improvements | Over the lease terms |
Software | 5 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Accounting for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10 “Impairments of Long-Lived Assets”. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Company’s average cost of capital.
17 |
XCELMOBILITY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies – Continued
Inventories
Inventories are stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
Accounts receivable
Accounts receivable consists of amounts due from customers. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. As of September 30, 2016 and December 31, 2015, 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 nine months ended September 30, 2016 and 2015. Research and development expenses amounted to $108,912 and $ 193,795 for the nine months ended September 30, 2016 and 2015, respectively, and were included in general and administrative expense.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Income taxes
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies - Continued
Foreign currency translation
Assets and liabilities of the Company’s subsidiaries with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Shareholders’ Equity.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
September 30, 2016 | ||
Balance sheet | RMB 6.6694 to US $1.00 | |
Statement of income and other comprehensive income | RMB 6.5771 to US $1.00 |
September 30, 2015 | ||
Balance sheet | RMB 6.3561 to US $1.00 | |
Statement of income and other comprehensive income | RMB 6.3568 to US $1.00 |
December 31, 2015 | ||
Balance sheet | RMB 6.4904 to US $1.00 | |
Statement of income and other comprehensive income | RMB 6.2175 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.
19 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies - Continued
Post-retirement and post-employment benefits
The Company contributes to a state pension plan in respect of its PRC employees. Other than the state pension plan, the Company does not provide any other post-retirement or post-employment benefits.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2015-01 “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. The objective is to reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items while maintaining or improving the usefulness of the information provided to the users of financial statements. The extraordinary items must meet two criteria: unusual nature and infrequency of occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either. This amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Board decided to permit early adoption provided that the guidance is applied from the beginning of the fiscal year of adoption.
The FASB has issued ASU No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs”. The objective is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued.
The FASB has issued ASU No. 2015-05 “Intangibles-Goodwill and Other-Internal-Use Software”. The objective is to provide a guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment will not change GAAP for a customer accounting for service contracts. In addition, the guidance in this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendment will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.
Recently Issued Accounting Pronouncements
The FASB has issued ASU No. 2015-07 “Topic 820, Fair Value Measurement”, which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update apply to reporting entities that elect to measure the fair value of an investment within the related scope by using the net asset value per share (or its equivalent) practical expedient.
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XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies – Continued
The FASB has issued No. 2015-10 “Technical Corrections and Improvements”, which aims to address feedback received from stakeholders on the Codification and make improvements to GAAP. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Some of the amendments will make the Codification easier to understand and apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.
The FASB has issued No. 2015-11”Topic 330, Inventory”, which aims to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-14”Topic 606, Revenue from Contracts with Customers”, which aims to respond to stakeholders’ requests to defer the effective date of the guidance in Update 2014-09 and to consider feedback received through extensive outreach with preparers, practitioners, and users of financial statements. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The FASB has issued No. 2015-15”Subtopic 835-30, Interest - Imputation of Interest”: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This amendment adds SEC paragraphs pursuant to the SEC Staff Announcement on June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
Recently Issued Accounting Pronouncements
The FASB has issued No. 2015-16”Topic 805, Business Combinations”: Simplifying the Accounting for Measurement-Period Adjustments, which aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
21 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
2. Summary of Significant Accounting Policies – Continued
The FASB has issued No. 2015-17”Topic 740, Income Taxes”: Balance Sheet Classification of Deferred Taxes, which aims to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption
22 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
3. Going Concern
The Company has incurred negative operating cash flows during the six months ended September 30, 2016 and has an accumulated deficit at September 30, 2016 and has relied on the Company’s registered capital and issuance of convertible notes to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. As of September 30, 2016, 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:
September 30, 2016 | December 31, 2015 | |||||||
Equipment | $ | 146,903 | $ | 148,305 | ||||
Office equipment | 36,477 | 39,633 | ||||||
Leasehold improvements | 11,773 | 8,634 | ||||||
195,153 | 196,572 | |||||||
Less: Accumulated depreciation | (142,932 | ) | (127,902 | ) | ||||
Property and equipment, net | $ | 52,221 | $ | 68,670 |
During the nine months ended September 30, 2016 and 2015, depreciation expense was approximately $ 18,366 and $14,390, respectively.
23 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
5. Convertible Promissory Notes
Outstanding balances for the convertible promissory notes as of September 30, 2016 and December 31, 2015 are as follow:
Lender | Date of Note | Maturity Date | Loan Amount | Interest Rate (p.a.) | Convertible Number of stock | September 30, 2016 | December 31, 2015 | |||||||||||||||||||
Vantage Associates SA | April 15, 2011 | April 15, 2016 | $ | 150,000 | 5 | % | 600,000 | $ | 150,000 | $ | 150,000 | |||||||||||||||
Empa Trading Ltd. | June 5, 2011 | June 5, 2016 | 100,000 | 5 | % | 400,000 | 100,000 | 100,000 | ||||||||||||||||||
First Capital A.G. | July 14, 2011 | July 14, 2016 | 150,000 | 5 | % | 600,000 | 150,000 | 150,000 | ||||||||||||||||||
First Capital A.G. | September 9, 2011 | September 9, 2016 | 200,000 | 5 | % | 800,000 | 200,000 | 200,000 | ||||||||||||||||||
Vantage Associates SA | September 9, 2011 | September 9, 2016 | 200,000 | 5 | % | 800,000 | 200,000 | 200,000 | ||||||||||||||||||
Vantage Associates SA | October 27, 2011 | October 27, 2016 | 50,000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||||||
First Capital A.G. | December 1, 2011 | December 1, 2016 | 50,000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||||||
First Capital A.G. | January 23, 2012 | January 23, 2017 | 50 000 | 5 | % | 200,000 | 50,000 | 50,000 | ||||||||||||||||||
Magna Equities II, LLC (f/k/a Hanover Holdings I, LLC) | May 30, 2014 | May 30, 2016 | 150,000 | 8 | % | 10,632,951 | - | 350,000 | ||||||||||||||||||
Vis Vires Group Inc. | June 1, 2015 | June 3, 2016 | 48,000 | 8 | % | 50,732,143 | - | 48,000 | ||||||||||||||||||
Biz Wit Holdings Limited | May 6, 2016 | December 31, 2016 | 1,000,000 | 5 | % | 350,000,000 | 500,000 | - | ||||||||||||||||||
Sino Secure International (Holdings) Limited | May 18, 2016 | December 31, 2016 | 700,000 | 5 | % | 700,000,000 | 700,000 | |||||||||||||||||||
Lei Pan | May 18, 2016 | December 31, 2016 | 300,000 | 5 | % | 300,000,000 | 300,000 | |||||||||||||||||||
$ | $ | 2,450,000 | $ | 1,348,000 | ||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||
Debt discount | - | - | ||||||||||||||||||||||||
from beneficial | - | - | ||||||||||||||||||||||||
conversion feature | - | 354,394 | ||||||||||||||||||||||||
2,450,000 | 993,606 | |||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||
Current portion | 2,450,000 | 101 | ||||||||||||||||||||||||
Non-current portion | $ | - | $ | 993,505 |
24 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
5. Convertible Promissory Notes- Continued
The debt discount was the beneficial conversion feature of the notes. It is being accreted as additional interest expense ratably over the term of the convertible notes.
Interest expenses for the three months ended September 30, 2016 and 2015 were $291 and $760 respectively. Interest expense for the nine months ended September 30, 2015 and 2014 was $123,404 and $1,128, respectively.
Amortization of the beneficial conversion feature for the nine months ended September 30, 2016 and 2015 were $nil and $12,435 respectively.
Except for the convertible promissory note of the $350,000 issued to Hanover Holdings I, LLC on May 30, 2014, and the $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014 respectively, all the convertible promissory notes (the “Notes”) are convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
(i) | one common share to be purchased at a price of $0.5, and | |
(ii) | one warrant that is convertible into one common share at a price of $1.00, and expires two years from the date of the Exchange Transaction is completed, and | |
(iii) | one warrant that is convertible into one common share at a price of $1.5, and expires three years from the date the Exchange Transaction is completed. |
(2) For the nine months ended September 30, 2016, 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 $0.001 |
(3) 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.
25 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
5. Convertible Promissory Notes – Continued
Convertible promissory note of $350,000 issued to Hanover Holdings I, LLC on May 30, 2014
On May 30, 2014, or the Closing Date, we entered into a securities purchase agreement dated as of the Closing Date (the “Purchase Agreement”) with Hanover Holdings I, LLC, a New York limited liability company (“Hanover”). Pursuant to the terms of the Purchase Agreement, Hanover purchased from us on the Closing Date (i) a senior convertible note with an initial principal amount of $350,000 (the “Convertible Note”) and (ii) a warrant to acquire up 3,716,091 shares of our common stock (the “Warrant”), for a total purchase price of $250,000. The Convertible Note was issued with an original issue discount of approximately 28.57%.
$40,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) we have properly filed a registration statement with the Securities and Exchange Commission, or SEC, on or prior to July 14, 2014, or the Filing Deadline, covering the resale by Hanover of the shares of common Stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date. Moreover, $60,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) the registration statement has been declared effective by the SEC on or prior to the earlier of (i) the 120th calendar day after the Closing Date and (ii) the fifth business day after the date we are notified by the SEC that such registration statement will not be reviewed or will not be subject to further review (the “Effectiveness Deadline”), and the prospectus contained therein is available for use by Hanover for the resale by Hanover of the shares of common stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date.
The Convertible Note matures on May 30, 2016 (subject to extension as provided in the Convertible Note) and, in addition to the approximately 28.57% original issue discount, accrues interest at the rate of 8.0% per annum. The Convertible Note is convertible at any time, in whole or in part, at Hanover’s option into shares of our common stock, par value $0.001 per share at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) trade prices of our common stock during the 10 consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.12 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Warrant entitles Hanover to purchase up to 3,716,091 shares of our common stock (the “Share Amount”) at any time for a period of one year from the Closing Date at an exercise price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) VWAPs of the common stock during preceding ten (10) consecutive trading days and (y) sixty-five percent (65%), and (B) $0.12 (as adjusted for any stock split, stock dividend, stock combination or other similar transaction) (the “Exercise Price”). The Warrant may only be exercised for cash and we have the right to accept or decline any exercise of the Warrant by Hanover. If at any time the Share Amount is less than the quotient of $150,000 and the Exercise Price (the “Required Share Amount”), then the number of shares issuable upon exercise of the warrant shall automatically be increased by such number of shares equal to the difference of the Required Share Amount less the Share Amount.
At no time will Hanover be entitled to convert any portion of the Convertible Note or exercise any portion of the Warrant to the extent that after such conversion or exercise, Hanover (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of our common stock as of such date (the “Maximum Percentage”). The Maximum Percentage may be raised to any other percentage not in excess of 9.99% at the option of Hanover upon at least 61 days’ prior notice to us, or lowered to any other percentage, at the option of Hanover, at any time.
The Convertible Note includes customary event of default provisions. Upon the occurrence of an event of default, Hanover may require us to pay in cash the greater of (i) the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency related event of default) and (ii) the product of (X) the conversion price in effect at that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the date we make the entire payment required to be made under this provision.
26 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
5. Convertible Promissory Notes – Continued
We have the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the Convertible Note in cash at a price equal to 135% of the total amount of such Convertible Note then outstanding. If at any time after the Closing Date, (i) the closing bid price of our common stock is equal to or greater than 140% of the Exercise Price for a period of 30 consecutive trading days (the “Measuring Period”), (ii) no Equity Conditions Failure (as defined in the Warrant) shall have occurred, and (iii) the aggregate dollar trading volume of the Common Stock for each trading day during the Measuring Period exceeds $3,000 per day, then we shall have the right to require Hanover to exercise all, or any part, of the Warrant (up to the Maximum Forced Exercise Amount (defined below)) (the “Forced Exercise”) at the then applicable Exercise Price. We will not be permitted to effect a Forced Exercise if, after giving effect to such Forced Exercise, we have received more than $150,000 in cash, in the aggregate, from one or more exercises of the Warrant. “Maximum Forced Exercise Amount” means, as of any given date, the lesser of (x) the number of shares of our common stock issuable upon exercise of the Warrant as of such given date and (y) 500% of the average trading volume (as reported on Bloomberg) of our common stock on our principal market on each of the 10 consecutive trading days ending and including the trading day immediately prior to such given date.
Convertible promissory notes of $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014
On August 14, 2014 and November 17, 2014, we and KBM Worldwide, Inc. (“KBM”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $110,000 and $61,000 respectively (the “Notes”). The Notes bear 8% interest and is due on August 21, 2015 and November 17, 2015 respectively. The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date.
Convertible promissory notes of $48,000 issued to Vis Vires Group Inc. on June 1, 2015
On June 1, 2015, we and Vis Vires Group Inc. (“Vis Vires”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $48,000 (the “Note”). The Note bear 8% interest and is due on June 3, 2015. The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 70% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The Note will cancel on first quarter 2016.
Convertible promissory notes of $500,000 issued to Biz Wit Holdings Ltd. on May 6, July 28 and September 2, 2016
On May 6, July 28 and September 2, 2016 we and Biz Wit Holdings Ltd. (“Biz Wit”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of totally $500,000 (the “Note”). The Note bear 5% interest and is due on December 31, 2016. The Notes become convertible 90 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock at par value $0.001 per share of the Company common stock.
Convertible promissory notes of $700,000 issued to Sino Secure International (Holdings) Limited and $300,000 issued to Lei Pan on May 18, 2016
On May 18, 2016, we and Sino Secure International (Holdings) Limited (“Sino Secure”) and Lei Pan (“Lei”) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $700,000 and $300,000 representatively (the “Note”). The Note bear 5% interest and is due on December 31, 2016. The Notes become convertible 90 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Company’s common stock at par value $0.001 per share of the Company common stock.
27 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
5. Convertible Promissory Notes – Continued
The fair value of the embedded conversion feature of these notes as at September 30, 2016 and December 31, 2015 was $429,111 and $279,071, respectively.
The fair value of the convertible notes was calculated using the Black-Scholes model with the following assumptions: expected life of 0.5-2 years, expected dividend rate of 0%, volatility of 246.8% and interest rate at 0.14%-0.26%.
Fair Value on a Recurring Basis
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2016:
Fair Value Measurements at September 30, 2016 | ||||||||||||||||
Quoted Prices In Active Markets for | Significant Other | Significant Unobservable | Total Carrying | |||||||||||||
Identical Assets | Observable Inputs | Inputs | Value as of | |||||||||||||
Descriptions | (Level 1) | (Level 2) | (Level 3) | September 30, 2016 | ||||||||||||
Derivative warrant instruments | - | - | 429,111 | 429,111 | ||||||||||||
Total | - | - | 429,111 | 429,111 |
28 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
6. 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 2016 and 2015, the statutory income tax rate is 25%. The open tax years in PRC are 2010-2015.
CC Mobility is incorporated in Hong Kong and is subjected to Hong Kong corporate income tax at 16.5% statutory income tax rate. No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the nine months ended June 30, 2016 and 2015. The open tax year for CC Mobility in Hong Kong are 2012-2015.
The Company has no income tax expense for the nine months ended September 30, 2016 and 2015 because it has not net assessable income.
The Company applied the provisions of ASC 740.10.50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. ASC 740.10.50 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740.10.50 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the statements of operation. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.
The following table sets forth the components of deferred income taxes as of September 30, 2016 and December 31, 2015:
September 30, 2016 | December 31, 2015 | |||||||
Deferred tax assets: | ||||||||
Net operating (profit)/losses - U.S. | $ | 558,913 | $ | 440,250 | ||||
Net operating losses - PRC and Hong Kong | 535,394 | 525,268 | ||||||
Deferred revenue | - | |||||||
1,094,307 | 965,518 | |||||||
Valuation allowance | (1,094,307 | ) | (965,518 | ) | ||||
Deferred tax assets, net | $ | - | $ | - |
As of September 30, 2016, the Company has net operating losses carry forward of $558,913 in the U.S. and $535,394 in Hong Kong and PRC available to offset future taxable income. They will begin to expire in 2030 and 2016, respectively. We provided for a full valuation allowance against the deferred tax assets of $0 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 Company did not recognize any interest or penalties related to unrecognized tax benefits for the six months ended September 30, 2016 and 2015.
29 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
7. 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 $40,934 and $20,623 for the nine months ended September 30, 2016 and 2015, respectively.
8. Earnings (loss) per share
Basic earnings (loss) per share are 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 Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Net income (loss) available for common shareholders – basic | $ | (1,094,307 | ) | $ | (351,734 | ) | ||
Interest expense on convertible notes | 123,404 | 1,128 | ||||||
Net income (loss) available for common shareholders - diluted | $ | (970,903 | ) | $ | (350,606 | ) | ||
Weighted average outstanding shares of common stock – basic | 333,925,553 | 253,896,191 | ||||||
Dilutive shares: | ||||||||
Conversion of convertible notes payable | - | - | ||||||
Weighted average outstanding shares of common stock – diluted | 333,925,553 | 253,896,191 | ||||||
Earnings (loss) per share – basic | $ | - | $ | - | ||||
Earnings (loss) per share – diluted | $ | - | $ | - |
Since the company is suffering losses, the dilutive loss per share is equal to the basic loss per share for the nine months ended September 30, 2016, because the convertible notes are anti-dilutive.
9. Commitments and Contingencies
Operating commitments:
Operating lease agreement generally contains renewal options that may be exercised at the Company’s discretion after the completion of the terms. The Company’s obligations under operating lease are as follows:
2016 | $ | 78,280 | |||
Thereafter | - | ||||
Total minimum payment | $ | 78,280 |
The Company incurred rental expenses of $81,625 and $91,278 for the nine months ended September 30, 2016 and 2015, respectively.
30 |
XCELMOBILITY INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
10. 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 Six Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Customer A | 65.92 | % | - | |||||
Customer B | 22.94 | % | - | |||||
Customer C * | - | - |
* 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.
11. 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.
12. Related Party Transactions
As of September 30, 2016, the appointment of Mr. Zhixiong Wei as director rendered a loans amount $0 became loans from director. The $0 did bear of interest at 15%, have no collateral and be repayable on demand.
13. Subsequent Events
The Company has evaluated all other subsequent events through November 14, 2016, the date these consolidated financial statements were issued, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements.
31 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. See Item 1 –”Forward-Looking Statements” for additional information.
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 June 11, 2014, we increased the total number of authorized shares of common stock to 400,000,000. On July 9, 2015, our board of directors approved a new class of preferred stock of the Company, to be known as Series A Convertible Preferred Stock. We are authorized to issue up to 5,000,000 shares of Series A Convertible Preferred Stock. Holders of Series A Convertible Preferred Stock shall be entitled to the number of votes equal to 51% of the total number of votes entitled to be cast on any matters requiring a stockholder vote. The shares of Series A Convertible Preferred are convertible at a one to one ratio into shares of our common stock. On September 17, 2015, we further amended our Articles of Incorporation to increase our number of authorized shares of common stock from 400,000,000 shares to 800,000,000 shares. On June 6, 2016, we further amended our Articles of Incorporation to increase the total number of authorized shares of common stock from 800,000,000 to 4,200,000,000.
On July 5, 2011, we entered into a voluntary share exchange agreement (the “Exchange Agreement”) with Shenzhen CC Power Corporation (“CC Power”), a company organized under the laws of the People’s Republic of China (PRC), CC Mobility Limited (“CC Mobility”), a company organized under the laws of Hong Kong, 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 September 22, 2014, we entered into an asset purchase agreement with Xinjiang Silvercreek Digital Technology Co., Ltd. (“Silvercreek”) pursuant to which we acquired certain assets of Silvercreek (the “Assets”) relating to an online sports lottery business in exchange for the issuance of up to 80,000,000 shares (“Shares”) of common stock of the Company.
Our lottery business aggregates and processes lottery purchase orders, deriving revenue from service fees paid by local sports lottery administration centers for the purchase orders of sports lottery products directed to such centers. We offer a comprehensive and integrated suite of online lottery services in China. We hope that the merging of our lottery business with our existing mobile technologies, partners, and customers, will provide a platform for growth in this industry.
Recent Developments
On May 6, 2016, we issued a convertible promissory note in the aggregate principal amount of $1,000,000 to Biz Wit Holdings Ltd., a company organized under the laws of the British Virgin Islands (“Biz Wit”). The president, beneficial owner and control person of Biz Wit is Mr. Zhixiong Wei, who serves as our Chief Executive Officer and Chairman of the Board of the Company (“Mr. Wei”). On May 18, 2016, we issued a convertible promissory note in the aggregate principal amount of $700,000 to Sino Secure International (Holdings) Limited, a company organized under the laws of the British Virgin Islands (“Sino Secure”). On October 14, 2016, Biz Wit converted $500,000 of the principal amount outstanding under its note into shares of our common stock, and Sino Secure converted the entire principal amount of $700,000 under its note into shares of our common stock, at a conversion price of $0.001 per share. The conversion of these notes resulted in an issuance of 500,000,000 shares of common stock to Biz Wit, and an issuance of 700,000,000 shares of common stock to Sino Secure. We believe these issuances may have effected a change of control of the Company because of the significant ownership percentages acquired by each of Biz Wit and Sino Secure.
32 |
Additionally, on August 25, 2016, Mr. Wei acquired a 100% equity interest in CC Power, pursuant an Agreement on Equity Transfer between Mr. Wei and Xili Wang, our former Chief Financial Officer and Secretary. The Agreement on Equity Transfer provides that Mr. Wei acquired all of the outstanding equity of CC Power for the price of RMB 1 Yuan.
On September 1, 2016, following the expiration of management agreements for, and resignations of, each of Mr. Renyan Ge and Ms. Wang, the Board appointed Mr. Wei as our new Chief Executive Officer and Chairman of the Board of Directors and Ms. Li Ouyang as our new Chief Financial Officer.
Results of Operations
The following discussion of the financial condition, results of operations, cash flows, and changes in our financial position should be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K filed on April 19, 2016.
Comparison of the Three Months Ended September 30, 2016 and 2015
Revenue
Our revenue for the three months ended September 30, 2016 totaled $80,128, compared to $83,286 for the three months ended September 30, 2015. This decrease in revenue was primarily due to a decrease in revenue from Silvercreek.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2016 totaled $30,617, compared to $97,854 for the three months ended September 30, 2015. This decrease in cost of revenue was primarily due to the decrease in revenue.
Gross Profit
Gross profit for the three months ended September 30, 2016 was $49,512 compared to $(14,569) for the three months ended September 30, 2015. This increase in gross profit was primarily due to the decrease in cost of revenue.
Operating Expenses
Our operating expenses for the three months ended September 30, 2016 totaled $408,709 compared to $301,079 for the three months ended September 30, 2015. These expenses were comprised of selling expenses of $48,442 and general and administrative expenses of $360,267 for the three months ended September 30, 2016, while the selling expenses and general and administrative expenses for the three months ended September 30, 2015 were $73,338 and $227,741, respectively. This increase in operating expenses was primarily due to an increase in R&D expenses.
Other Income (Expense)
Other expenses for the three months ended September 30, 2016 totaled $262,130, compared to $190,036 for the three months ended September 30, 2015. This increase in other expenses was primarily due to a write off of former accrued salary.
Net Income (Loss)
Our net loss was $621,328 for the three months ended September 30, 2016, compared to a net loss of $505,684 for the three months ended September 30, 2015. The increase in net loss was primarily due to increased amortization of debt discount.
33 |
Comprehensive Income (Loss)
Our comprehensive loss was $1,167,496 for the three months ended September 30, 2016, compared to a comprehensive loss of $821,321 for the three months ended September 30, 2015. This increase in comprehensive loss was primarily due to foreign exchange rate fluctuations and differences between RMB and USD.
Comparison of the Nine months Ended September 30, 2016 and 2015
Revenue
Our revenue for the nine months ended September 30, 2016 totaled $183,842, compared to $250,283 for the nine months ended September 30, 2015. This decrease in revenue was primarily due to a decrease in revenue from Silvercreek.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2016 totaled $70,558, compared to $173,475 for the nine months ended September 30, 2015. This decrease in cost of revenue was primarily due to the decrease in revenue.
Gross Profit
Gross profit for the nine months ended September 30, 2016 was $113,284 compared to $76,808 for the nine months ended September 30, 2015. This increase in gross profit was primarily due to the decrease in cost of revenue.
Operating Expenses
Our operating expenses for the nine months ended September 30, 2016 totaled $777,795, compared to $729,696 for the nine months ended September 30, 2015. These expenses were comprised of selling expenses of $90,452 and general and administrative expenses of $687,343 for the nine months ended September 30, 2016, while the selling expenses and general and administrative expenses for the nine months ended September 30, 2015 were $187,250 and $542,446, respectively. This increase in operating expenses was primarily due to an increase in R&D expenses.
Other Income (Expense)
Other expenses for the nine months ended September 30, 2016 totaled $429,796 compared to other income totaling $301,154 for the nine months ended September 30, 2015. This increase in other expenses was primarily due to a write off of former accrued salary.
Net Income (Loss)
Our net loss was $1,094,307 for the nine months ended September 30, 2016, compared to a net loss of $351,734 for the nine months ended September 30, 2015. This increase in net loss was primarily due to increased amortization of debt discount.
Comprehensive Income (Loss)
Our comprehensive loss was $1,674,490 for the nine months ended September 30, 2016, compared to a comprehensive income of $10,763 for the nine months ended September 30, 2015. This increase in comprehensive loss was primarily due to foreign exchange rate fluctuations and differences between RMB and USD.
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Liquidity and Capital Resources
Overview
As of September 30, 2016, we had cash and equivalents on hand of $106,369 and total current liabilities of $3,571,407. We believe that our cash on hand and working capital will be sufficient to meet our anticipated cash requirements through December 31, 2016. 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.
On September 1, 2014, our indirect wholly-owned subsidiary, CC Power, entered into a credit loan facility with Mr. Zhixiong Wei of up to RMB 5,000,000 at 15% simple interest. Interest is payable monthly, and any loans are due within 15 days prior written notice. The loans may be paid in cash or in common stock of our Company at a conversion price equal to 90% of the average closing price of our common stock for the ten days prior to conversion. Any loans under this facility are guaranteed by our Company. As of September 30, 2016, CC Power owes US$0.
On May 6, 2016, we entered into a convertible promissory note in the principal amount of USD $1,000,000 (the “Biz Wit Note”) with Biz Wit Holdings Ltd. (“Biz Wit”). Biz Wit’s beneficial owner and control person is Mr. Wei. The Biz Wit Note matures on December 31, 2016 and accrues interest at the rate of 5.0% per annum. The Biz Wit Note is convertible at any time prior to August 6, 2016, in whole or in part, at Biz Wit’s option into shares of our common stock, at a conversion price equal to $0.001 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). On October 14, 2016, Biz Wit converted $500,000 of the principal amount outstanding under the Biz Wit Note into 500,000,000 shares of the Company’s common stock, which resulted in a reduction of the principal amount outstanding under the Biz Wit Note to $500,000.
On May 18, 2016, we entered into the Sino Secure Note and the Lei Pan note, in the aggregate principal amount of USD $1,000,000 (collectively, the “Investor Notes”) with two foreign accredited investors (the “Investors”). The Investor Notes mature on December 31, 2016 and accrue interest at the rate of 5.0% per annum. The Investor Notes are convertible at any time prior to August 18, 2016, in whole or in part, at the Investors’ option into shares of our common stock, at a conversion price equal to $0.001 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). On October 14, 2016, Sino Secure converted the entire principal amount outstanding under the Sino Secure Note to 700,000,000 shares of the Company’s common stock, which resulted in a reduction of the principal amount outstanding under the Sino Secure Note to $nil.
As of September 30, 2016, we had outstanding indebtedness pursuant to convertible notes issued to various accredited investors in the aggregate principal amount of $2,450,000.
Substantially all of our current revenues are earned by CC Power, our PRC subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to their offshore parent company. Pursuant to the law of PRC on foreign-capital enterprises, when CC Power decides to distribute profits, reserve funds and bonus and welfare funds for workers and staff members shall be withdrawn from the profits after a foreign-capital enterprise has paid income tax in accordance with the provisions of the Chinese tax law. The proportion of reserve funds to be withdrawn shall not be lower than 10% of the total amount of profits after payment of tax; the withdrawal of reserve funds may be stopped when the total cumulative reserve has reached 50% of the registered capital. The proportion of bonus and welfare funds for workers and staff members to be withdrawn shall be determined by the foreign-capital enterprise of its own accord. Companies may be subject to a fine up to 5,000 RMB as a result of non-compliance of such rules. The registered capital of CC Power is $345,864 (RMB 2,526,000).
We are currently seeking both short term working capital to finance current operations, as well as significant amounts of long term capital to execute our business plan and ultimately offer our products in the U.S. market. We project that to keep operations at our current level, approximately $900,000 in revenue and working capital will be required over the next 12 months to cover monthly expenses of $75,000. In order to meet our planned strategic two to four acquisitions, we estimate requiring up to $3,000,000 in capital. As of June 30, 2016, we had secured $2,000,000 in additional capital by issuing convertible promissory notes. We will consider additional debt or equity offerings or institutional borrowings as potential means of financing; however, there are no assurances we will be successful in obtaining favorable financing terms.
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Net cash provided by (used in) operating activities
Net cash provided by (used in) operating activities for the nine months ended September 30, 2016 was $(971,246), compared to net cash provided by (used in) operating activities of $(786,827) for the nine months ended September 30, 2015.
Net cash provided by (used in) investing activities
Net cash provided by (used in) investing activities for the nine months ended September 30, 2016 was $(1,419), compared to net cash provided by (used in) investing activities of $(40,992) for the nine months ended September 30, 2015.
Net cash provided by financing activities
Net cash provided by financing activities for the nine months ended September 30, 2016 was $1,051,204, compared to $65,000 in cash provided by financing activities for the nine months ended September 30, 2015.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it.
Critical Accounting Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
Certain of our accounting policies require higher degrees of professional judgment than others in their application. These include allowance for doubtful accounts, depreciation and impairment of fixed assets, and income tax. Management evaluates all of its estimates and judgments on an ongoing basis.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Exchange Rates
Our financial instruments consist mainly of cash, borrowings and accounts receivable. The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in exchange rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expect future rates.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. The RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings, cash and assets are currently denominated in RMB, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our Chinese operations are translated from local currency into U.S. dollar upon consolidation. If the U.S. dollar weakens against the RMB, the translation of our foreign-currency-denominated balances will result in increased net assets, net revenues, operating expenses, and net income or loss. Similarly, our net assets, net revenues, operating expenses, and net income or loss will decrease if the U.S. dollar strengthens against the RMB. Additionally, foreign exchange rate fluctuations on transactions denominated in RMB other than the functional currency result in gains and losses that are reflected in our consolidated statement of operations. Our operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.
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Considering the RMB balance of our cash as of September 30, 2016, which amounted to US $103,348, a 1.0% change in the exchange rates between the RMB and the U.S. dollar would result in an increase or decrease of approximately US$1,033 of the balance.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including Mr. Wei, our new Chief Executive Officer (who is our Principal Executive Officer) and Ms. Ouyang, our new Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of September 30, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2016 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.
In performing the above-referenced assessment, our management identified the following material weaknesses:
i) | We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis. | |
ii) | We do not have an audit committee. While not being legally obligated to have an audit committee, it is the management’s view that to have an audit committee, comprised of independent board members, is an important entity-level control over our financial statements. | |
iii) | We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud-related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness. |
Our management feels the weaknesses identified above have not had any material effect on our financial results. However, we are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses.
Our management team will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended September 30, 2016 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.
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None.
As a smaller reporting company, we are not required to provide risk factors in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Not applicable.
None.
38 |
Exhibit No. | Description | |
3.1 | Articles of Incorporation of XcelMobiltiy, Inc., effective June 6, 2016 (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed August 15, 2016) | |
3.2 | Amended and Restated Bylaws, effective April 22, 2011 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed April 27, 2011) | |
4.1 | Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to our Current Report on Form 8-K filed on July 15, 2015) | |
10.1 | Employment Agreement dated September 1, 2016, between XcelMobility, Inc. and Ying Yang (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 2, 2016) | |
10.2 | Agreement on Equity Transfer dated August 25, 2016 by and between Xili Wang and Zhixiong Wei (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.3 | Entrusted Management Service Agreement dated August 25, 2016, by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., and the Shareholder of Shenzhen CC Power Corporation (Zhixiong Wei) (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.4 | Technical Services Agreement dated August 25, 2016, by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., and the Shareholder of Shenzhen CC Power Corporation (Zhixiong Wei) (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.5 | Exclusive Purchase Option Agreement dated August 25, 2016, by and among Shenzhen CC Power Investment Consulting Co., Ltd., Shenzhen CC Power Corporation, and the Shareholder of Shenzhen CC Power Corporation (Zhixiong Wei) (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.6 | Loan Agreement dated August 25, 2016, by and between the Shareholder of Shenzhen CC Power Corporation (Zhixiong Wei) and Shenzhen CC Power Investment Consulting Co., Ltd. (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.7 | Equity Pledge Agreement dated August 25, 2016, by and among the Shareholder of Shenzhen CC Power Corporation (Zhixiong Wei), Shenzhen CC Power Investment Consulting Co., Ltd., and Shenzhen CC Power Corporation (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 18, 2016) | |
10.8 | Assignment and Novation Agreement dated August 25, 2016, by and among Shenzhen CC Power Corporation, Shenzhen CC Power Investment Consulting Co., Ltd., Xili Wang and Zhixiong Wei (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on October 18, 2016) | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101* | Interactive Data Files. |
* Filed herewith.
39 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
XCELMOBILITY INC. | ||
Dated: November 18, 2016 | By: | /s/ Li Ouyang |
Name: | Li Ouyang | |
Its: | Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) |
40 |
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Zhixiong Wei, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of XcelMobility Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 18, 2016 | /s/ Zhixiong Wei |
Zhixiong Wei | |
Chief Executive Officer and Director | |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Li Ouyang, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of XcelMobility Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 18, 2016 | /s/ Li Ouyang |
Li Ouyang, | |
Chief Financial Officer and Secretary | |
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Zhixiong Wei, the Chief Executive Officer of XcelMobility Inc. (the “Company”) hereby certify, that, to my knowledge:
1. The Quarterly Report on Form 10-Q for the period ended September 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: November 18, 2016 | |
/s/ Zhixiong Wei | |
Zhixiong Wei | |
Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Li Ouyang, the Chief Financial Officer of XcelMobility Inc. (the “Company”) hereby certify, that, to my knowledge:
1. The Quarterly Report on Form 10-Q for the period ended September 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: November 18, 2016 | |
/s/ Li Ouyang | |
Li Ouyang | |
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Nov. 15, 2016 |
|
Document And Entity Information | ||
Entity Registrant Name | XcelMobility Inc. | |
Entity Central Index Key | 0001465509 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 2,160,533,090 | |
Trading Symbol | XCLL | |
Document Fiscal Period Focus | Q3 | |
Document Fiscal Year Focus | 2016 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Property and equipment, accumulated depreciation | $ 142,932 | $ 119,328 |
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 20,000,000 | 20,000,000 |
Preferred stock, shares issued | 10,000,000 | 10,000,000 |
Preferred stock, shares outstanding | 10,000,000 | 10,000,000 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 800,000,000 | 800,000,000 |
Common stock, shares issued | 660,533,090 | 568,582,680 |
Common Stock, shares outstanding | 660,533,090 | 568,582,680 |
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Income Statement [Abstract] | ||||
Revenue | $ 80,128 | $ 83,286 | $ 183,842 | $ 250,283 |
Cost of Revenue | 30,617 | 97,854 | 70,558 | 173,475 |
Gross Profit | 49,512 | (14,569) | 113,284 | 76,808 |
Operating Expenses: | ||||
Selling expense | 48,442 | 73,338 | 90,452 | 187,250 |
General and administrative expense | 360,267 | 227,741 | 687,343 | 542,446 |
Total Operating Expenses | 408,709 | 301,079 | 777,795 | 729,696 |
Income (loss) from Operations | (359,198) | (315,648) | (664,511) | (652,888) |
Other Income (Expense): | ||||
Interest income | 64 | 149 | 103 | 224 |
Interest expense | (291) | (760) | (123,404) | (1,128) |
Gain (loss) on derivative | 5,094 | (320,518) | (30,160) | 314,493 |
Amortization of debt discount | (623,273) | 131,093 | (12,435) | |
Other income (expense) | (356,276) | (356,276) | ||
Total Other Income (Expense) | (262,130) | (190,036) | (429,796) | 301,154 |
Income (loss) Before Taxes | (621,328) | (505,684) | (1,094,307) | (351,734) |
Income tax expense | ||||
Net Income (Loss) | (621,328) | (505,684) | (1,094,307) | (351,734) |
Foreign currency translation adjustment | (546,168) | (315,637) | (600,183) | 340,971 |
Comprehensive (loss) income | $ (1,167,496) | $ (821,321) | $ (1,674,490) | $ 10,763 |
Basic income (loss) per share: | $ 0 | $ 0 | $ 0 | $ 0 |
Diluted income (loss) per share: | $ 0 | $ 0 | $ 0 | $ 0 |
Basic weighted average number of shares outstanding | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 |
Diluted weighted average number of shares outstanding | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 |
Organization and Nature of Business |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Organization and Nature of Business |
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 Peoples 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, 2013, $400,000 of the registered capital has been contributed.
Shenzhen CC Power Corporation
Shenzhen CC Power Corporation (CC Power) is a Chinese enterprise organized in the PRC on March 13, 2003 in accordance with the Laws of the Peoples Republic of China. The required registered capital of CC Power was approximately $1,547,000 (RMB 10,000,000) and as of December 31, 2013, CC Power has paid up approximately $346,000 (RMB2,526,000). In March 2011, Mr. Ryan Ge sold his 5% ownership in CC Power to the other shareholder, Xili Wang (CC Power Shareholder). Ms. Wang holds 100% ownership interest in CC Power at the end of the financial period.
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 Powers 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 companys 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 Powers primary focus is in the mobile Internet market, with a focus on providing software that significantly increases the speed that users of smartphones, tablets and laptops can access the Internet over cellular phone networks. CC Power also uses their technology to increase the speed at which users of Virtual Private Networks can access data from their networks.
On September 22, 2014, XcelMobility Inc. entered into an Asset Purchase Agreement with CC Power, Xianjiang Silvercreek Digital Technology Co., Ltd. (Silvercreek) and the shareholders of Silvercreek (the Selling Shareholders). Pursuant to the terms of the Agreement, CC Power will acquire certain assets of Silvercreek relating to its online sports lottery business unit in exchange for the issuance of up to 80,000,000 shares of common stock of the Company to the Selling Shareholders. No Shares will be issued upon the closing date of the transaction. The Shares will be issued to the Selling Shareholders on a pro rata basis and upon achievement of the following milestones: (i) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue (Lottery Revenue) of over 10,000 RMB per month from the business developed in connection with the Assets on or before October 1, 2014; (ii) 10,000,000 Shares to be issued in the event that CC Power derives Lottery Revenue of over 3,000,000 RMB per month from the business developed in connection with the Assets on or before March 31, 2016; (iii) 10,000,000 Shares to be issued in the event that CC Power derives initial online lottery sales revenue of over 20,000,000 RMB per month from the business developed in connection with the Assets on or before December 31, 2015; (iv) 40,000,000 Shares to be issued in the event that CC power obtains a lottery gaming license from the Peoples Republic of China; and (v) 10,000,000 Shares to be issued based on the achievement of certain incentives as determined by the board of directors of the Company.
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 Xcels issued and outstanding common stock, CC Mobility became Xcels 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 Powers results, assets and liabilities.
Shenzhen Jifu Communication Technology Co., Ltd.
Shenzhen Jifu Communication Technology Co., Ltd (Jifu), was incorporated on April 16, 2001 under the laws of the Peoples Republic of China (PRC) as a limited liability company. The required registered capital is RMB3,000,000 and all of the required registered capital has been contributed.
Jifu is primarily engaged in develops and distributes optical transmitters and receivers, electronic surveillance equipment, and other communications equipment. Jifu also engages in the purchase and sale of electronic products, network products, and communications equipment. In order to bolster its business, Jifu also engages in software research and development.
On May 7, 2013, the Company entered into and consummated a Stock Purchase Agreement (the Agreement) with Shenzhen CC Power Investment Consulting Co., Ltd., a company organized under the laws of the Peoples Republic of China and an indirect wholly-owned subsidiary of the Company (CC Power), Shenzhen Jifu Communication Technology Co., Ltd. a company organized under the laws of the Peoples Republic of China (Jifu) the shareholders of Jifu set forth in the signature page to the Agreement (the Jifu Shareholders) and Hui Luo.
Pursuant to the terms and conditions of the Agreement, the Company will issue an aggregate of 27,000,000 shares of the Companys common stock (the Purchase Shares) to the Jifu Shareholders as consideration for Jifu entering into certain controlling agreements (the VIE Agreement) with CC Power. CC Power will effectively own Jifu through the various conditions prescribed in the VIE Agreements. The Company will also grant 3,000,000 shares (the Luo Shares, together with the Purchase Shares, the Shares) to Mr. Luo.
The Shares will be released to the Jifu Shareholders and Mr. Luo after the Company has reviewed Jifus audited financial statements for the year ended December 31, 2013. If Jifu has achieved net revenue of $4,000,000 for the year ended December 31, 2013 (the Target), then the Company will release the Shares to the Jifu Shareholders and Mr. Luo in their full respective amounts. If Jifu has not achieved the Target by the end of the calendar year, the Company will decrease the amount of shares of common stock issued to the Jifu Shareholders and Mr. Luo in accordance with a formula set forth in the Agreement and release the Shares to the Jifu Shareholders and Mr. Luo in their respective decreased amounts. The Agreement has been approved by the boards of directors of the Company, CC Power, and Jifu, and the Jifu Shareholders.
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
The organizational structure of the Company is as follows:
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Summary of Significant Accounting Policies |
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Summary of Significant Accounting Policies |
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at September 30, 2016 and for the nine months ended September 30, 2016 and 2015 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015. The Company follows the same accounting policies in the preparation of interim reports. The Companys accounting policies used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United States of America (US GAAP)
The functional currency is the Chinese Renminbi, however the accompanying condensed consolidated financial statements have been translated and presented in United States Dollars ($). All significant inter-company balances and transactions have been eliminated in consolidation.
All dollars are rounded to nearest hundred except for share data.
Use of estimates
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.
Significant Estimates
These financial statements include some amounts that are based on managements best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, the valuation allowance for deferred taxes. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Variable Interest Entity
CC Power
The accounts of CC Power have been consolidated with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with Xili Wang as the CC Power Shareholder and with CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services (collectively referred to as the controlling agreements). On August 25, 2016, Mr. Wei, as the new CC Power Shareholder and CC Power revised these agreements pursuant to the transfer of ownership of CC Power from Xili Wang to Zhixiong Wei as set forth in the Agreement on Equity Transfer between Xili Wang and Zhixiong Wei. In summary, the new controlling agreements contain the following terms:
Entrusted Management Agreement. Pursuant to the Entrusted Management Service 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, including, without limitation, financial management services, business management services, advertising and marketing services, human resources management services, and internal control services. The Entrusted Management Service Agreement will remain in effect until the completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, 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, including, without limitation, software and technology development services, computer system services, data analysis services, training, technical consulting services, and import and export consultancy services. The Technical Services Agreement will remain in effect until completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, as more fully described in the Exclusive Purchase Option Agreement below.
Exclusive Purchase Option Agreement. .. Pursuant to 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 option to acquire either all or substantially all of the assets, or all or a part of the equity of CC Power, in each case for nominal consideration, plus the cancellation of all or part of the debt owing under the Loan Agreement described below. CC Investment may exercise its purchase option at any time.
Loan Agreement. Pursuant to the Loan Agreement between CC Investment and the CC Power Shareholder, CC Investment agreed to lend 10,000,000 RMB to the CC Power Shareholder. The loan is to be used solely for the operations of CC Power. As security for the loan, the CC Power Shareholder agreed to pledge his equity in CC Power, as more fully described in the Equity Pledge Agreement below.
Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement among CC Power, CC Investment, and the CC Power Shareholder, the CC Power Shareholder agreed to pledge all of his equity interest in CC Power to CC Investment as a guaranty of the performance of the obligations of the CC Power Shareholder and CC Power under the Loan Agreement, the Entrusted Management Service Agreement, the Technical Services Agreement, and the Exclusive Purchase Option Agreement. The Equity Pledge Agreement will remain in effect until all payments due and obligations under the foregoing agreements have been fulfilled by the CC Power Shareholder and/or CC Power. Pursuant to the terms of the Equity Pledge Agreement, the CC Power Shareholder shall not, among other things, sell, transfer, mortgage or otherwise dispose of or encumber the pledged equity interests without CC Investments prior written consent.
Assignment and Novation Agreement
In addition to revising the controlling agreements, CC Power, CC Investment, Xili Wang and Mr. Wei entered into an Assignment and Novation Agreement, under which the parties acknowledged that the new CC Power controlling agreements have replaced the original controlling agreements in their entirety, meaning that as of August 25, 2016, Xili Wang assigned to Mr. Wei all of the rights of the CC Power Shareholder under the CC Power controlling agreements, and Mr. Wei assumed from Xili Wang all of the obligations of the CC Power Shareholder under such agreements. The Assignment and Novation Agreement provides that the original controlling agreements have been terminated and replaced in their entirety by the updated controlling agreements. With respect to the Loan Agreement, the Assignment and Novation Agreement provides that the amount originally borrowed by Xili Wang under the original loan agreement, which was contributed to the bank account of CC Power, shall be treated as the amount received by Mr. Wei under the Loan Agreement, and that Mr. Wei shall assume the responsibility to repay the loan and fulfill all the obligations of the borrower under the Loan Agreement.
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 Powers 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:
Accordingly, the Companys condensed consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and classification of CC Powers assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
Jifu
The accounts of Jifu have been consolidated with the accounts of the Company because Jifu is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated May 7, 2013 with Jifu Shareholder and with Jifu pursuant to which CC Investment provides Jifu with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:
Entrusted Management Agreement. Effective on May 7, 2013, CC Investment entered into an Entrusted Management Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive management services provided by CC Investment. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of Jifu. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee will be a percentage of Jifus total operational income. The Entrusted Management Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Technical Services Agreement. Effective on May 7, 2013, CC Investment entered into a Technical Services Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive technical services provided by CC Investment. Such technical services include but are not limited to software services, computer systems services, data analysis, training and other technical services. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee shall be a percentage of Jifus total operational income. The Technical Service Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Exclusive Purchase Option Agreement. Effective on May 7, 2013, CC Investment entered into an Exclusive Purchase Option Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders granted CC Investment an irrevocable and exclusive purchase option to acquire all of Jifus equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time. Until CC Investment has exercised its purchase option, Jifu is required to conduct its business in accordance with certain covenants as further described in the Exclusive Purchase Option Agreement.
Loan Agreement
Effective on May 7, 2013, CC Investment entered into a Loan Agreement with the Jifu Shareholders, pursuant to which CC Investment agreed to lend RMB 3,000,000 to the Jifu Shareholders, to be used solely for the operations of Jifu. The loan is interest free, unless the deemed value of the consideration for the equity purchase of Jifu or asset purchase of Jifu under the Exclusive Purchase Option Agreement is higher than the principal amount of the loan, in which case the excess will be deemed to be interest on the loan.
Equity Pledge Agreement
Effective on May 7, 2013, CC Investment entered into an Equity Pledge Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders pledged all of their equity interests in Jifu, including the proceeds thereof, to guarantee all of CC Investments rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of the Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investments prior consent. The Jifu Shareholders covenant to CC Investment that among other things, they will only appoint/elect candidates for the board of directors of Jifu and supervisor office of Jifu that were nominated by CC Investment.
In sum, the agreements transfer to CC Investment all of the benefits and all of the risk arising from the operations of Jifu, as well as complete managerial authority over the operations of Jifu. Through these contractual arrangements, the Company has the ability to substantially influence Jifus daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control Jifu and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, Jifu is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of Jifu because the following characteristics identified in ASC 810-10-15-14 are present:
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders.
Revenue recognition
Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements, and the source of revenue of Jifu is from developing and distributing optical transmitters and receivers, electronic surveillance equipment, and other communications equipment; and trading of electronic products, network products, and communications equipment. We also engage in software research and development, GPS system development and website development projects along with maintenance arrangements.
We evaluate revenue recognition based on the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
Revenue Recognition for Software Products (Software Elements)
New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element Arrangements - Software Products and Software Related Services(Software Arrangements)
We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.
Revenue Recognition for Multiple-Element Arrangements - Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605) : Multiple-Deliverable Revenue Arrangements . This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the best estimate of selling price in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold through its online system. Other service income is recognized when the service is provided.
Cost of Revenue
Cost of revenue primarily consists of direct costs of products, direct labor of technical staff, depreciation of computer equipment, and overhead associated with the technical department.
Economic and political risks
The Companys operations are mainly conducted in the PRC. Accordingly, the Companys business, financial condition and results of operations in the PRC may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC.
The Companys major operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Companys results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in government administration, governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Credit risk
The Company may be exposed to credit risk from its cash and fixed deposits at bank. No allowance has been made for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment.
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Accounting for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10 Impairments of Long-Lived Assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Companys average cost of capital.
Inventories
Inventories are stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.
Accounts receivable
Accounts receivable consists of amounts due from customers. An allowance for doubtful accounts is established and determined based on managements assessment of known requirements, aging of receivables, payment history, the customers current credit worthiness and the economic environment. As of September 30, 2016 and December 31, 2015, no allowance for doubtful accounts was deemed necessary based on managements 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.
Research and development and Software Development Costs
All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements for the nine months ended September 30, 2016 and 2015. Research and development expenses amounted to $108,912 and $ 193,795 for the nine months ended September 30, 2016 and 2015, respectively, and were included in general and administrative expense.
Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Income taxes
Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
Foreign currency translation
Assets and liabilities of the Companys 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:
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.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2015-01 Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The objective is to reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items while maintaining or improving the usefulness of the information provided to the users of financial statements. The extraordinary items must meet two criteria: unusual nature and infrequency of occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either. This amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Board decided to permit early adoption provided that the guidance is applied from the beginning of the fiscal year of adoption.
The FASB has issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs. The objective is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued.
The FASB has issued ASU No. 2015-05 Intangibles-Goodwill and Other-Internal-Use Software. The objective is to provide a guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment will not change GAAP for a customer accounting for service contracts. In addition, the guidance in this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendment will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.
The FASB has issued ASU No. 2015-07 Topic 820, Fair Value Measurement, which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update apply to reporting entities that elect to measure the fair value of an investment within the related scope by using the net asset value per share (or its equivalent) practical expedient.
The FASB has issued No. 2015-10 Technical Corrections and Improvements, which aims to address feedback received from stakeholders on the Codification and make improvements to GAAP. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Some of the amendments will make the Codification easier to understand and apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.
The FASB has issued No. 2015-11Topic 330, Inventory, which aims to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-14Topic 606, Revenue from Contracts with Customers, which aims to respond to stakeholders requests to defer the effective date of the guidance in Update 2014-09 and to consider feedback received through extensive outreach with preparers, practitioners, and users of financial statements. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The FASB has issued No. 2015-15Subtopic 835-30, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This amendment adds SEC paragraphs pursuant to the SEC Staff Announcement on June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
The FASB has issued No. 2015-16Topic 805, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-17Topic 740, Income Taxes: Balance Sheet Classification of Deferred Taxes, which aims to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys consolidated financial statements upon adoption |
Going Concern |
9 Months Ended |
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Sep. 30, 2016 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Going Concern |
3. Going Concern
The Company has incurred negative operating cash flows during the six months ended September 30, 2016 and has an accumulated deficit at September 30, 2016 and has relied on the Companys registered capital and issuance of convertible notes to fund operations. These conditions raise substantial doubt about the Companys ability to continue as a going concern.
The financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. As of September 30, 2016, 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. |
Property and Equipment, Net |
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Property and Equipment, Net |
4. Property and Equipment, net
Property, plant and equipment, net consist of the following:
During the nine months ended September 30, 2016 and 2015, depreciation expense was approximately $ 18,366 and $14,390, respectively. |
Convertible Promissory Notes |
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Convertible Debt [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Promissory Notes |
5. Convertible Promissory Notes
Outstanding balances for the convertible promissory notes as of September 30, 2016 and December 31, 2015 are as follow:
The debt discount was the beneficial conversion feature of the notes. It is being accreted as additional interest expense ratably over the term of the convertible notes.
Interest expenses for the three months ended September 30, 2016 and 2015 were $291 and $760 respectively. Interest expense for the nine months ended September 30, 2015 and 2014 was $123,404 and $1,128, respectively.
Amortization of the beneficial conversion feature for the nine months ended September 30, 2016 and 2015 were $nil and $12,435 respectively.
Except for the convertible promissory note of the $350,000 issued to Hanover Holdings I, LLC on May 30, 2014, and the $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014 respectively, all the convertible promissory notes (the Notes) are convertible upon the occurrence of the following events:
(1) At any time, prior to the maturity date, the Company and the holder of the notes may mutually agree on a date to convert in whole or in part the notes into shares of common stock of the Company on the following terms: Holder of the note will be issued share units comprising of:
(2) For the nine months ended September 30, 2016, 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:
(3) Unless earlier converted into common stock mentioned above, if within twelve months of the date hereof the Company completes a Qualified Financing, as defined by the respective convertible promissory notes, the holder agrees to exchange the notes simultaneously with the initial closing of such Qualified Financing as follows:
(a) In the event of a debt Qualified Financing (Qualified Debt Financing), the Holder may at its option exchange in whole or in part this Note for a promissory note (or other evidence of indebtedness) in the same form and with the same terms and conditions as those issued in such Qualified Debt Financing and in a principal amount equal to the then outstanding Debt.
(b) In the event of an equity Qualified Financing (Qualified Equity Financing), the Holder may at its option convert the Debt into shares of capital stock of the same class and series and with the same rights, preferences and privileges as those issued in such Qualified Equity Financing, at a price per share equal to the purchase price paid by investors in such Qualified Equity Financing.
Convertible promissory note of $350,000 issued to Hanover Holdings I, LLC on May 30, 2014
On May 30, 2014, or the Closing Date, we entered into a securities purchase agreement dated as of the Closing Date (the Purchase Agreement) with Hanover Holdings I, LLC, a New York limited liability company (Hanover). Pursuant to the terms of the Purchase Agreement, Hanover purchased from us on the Closing Date (i) a senior convertible note with an initial principal amount of $350,000 (the Convertible Note) and (ii) a warrant to acquire up 3,716,091 shares of our common stock (the Warrant), for a total purchase price of $250,000. The Convertible Note was issued with an original issue discount of approximately 28.57%.
$40,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) we have properly filed a registration statement with the Securities and Exchange Commission, or SEC, on or prior to July 14, 2014, or the Filing Deadline, covering the resale by Hanover of the shares of common Stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date. Moreover, $60,000 of the outstanding principal amount of the Convertible Note (together with any accrued and unpaid interest with respect to such portion of the principal amount) shall be automatically extinguished (without any cash payment by us) if (i) the registration statement has been declared effective by the SEC on or prior to the earlier of (i) the 120th calendar day after the Closing Date and (ii) the fifth business day after the date we are notified by the SEC that such registration statement will not be reviewed or will not be subject to further review (the Effectiveness Deadline), and the prospectus contained therein is available for use by Hanover for the resale by Hanover of the shares of common stock issued or issuable upon conversion of the Convertible Note and (ii) no event of default or an event that with the passage of time or giving of notice would constitute an event of default has occurred on or prior to such date.
The Convertible Note matures on May 30, 2016 (subject to extension as provided in the Convertible Note) and, in addition to the approximately 28.57% original issue discount, accrues interest at the rate of 8.0% per annum. The Convertible Note is convertible at any time, in whole or in part, at Hanovers option into shares of our common stock, par value $0.001 per share at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) trade prices of our common stock during the 10 consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.12 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Warrant entitles Hanover to purchase up to 3,716,091 shares of our common stock (the Share Amount) at any time for a period of one year from the Closing Date at an exercise price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) VWAPs of the common stock during preceding ten (10) consecutive trading days and (y) sixty-five percent (65%), and (B) $0.12 (as adjusted for any stock split, stock dividend, stock combination or other similar transaction) (the Exercise Price). The Warrant may only be exercised for cash and we have the right to accept or decline any exercise of the Warrant by Hanover. If at any time the Share Amount is less than the quotient of $150,000 and the Exercise Price (the Required Share Amount), then the number of shares issuable upon exercise of the warrant shall automatically be increased by such number of shares equal to the difference of the Required Share Amount less the Share Amount.
At no time will Hanover be entitled to convert any portion of the Convertible Note or exercise any portion of the Warrant to the extent that after such conversion or exercise, Hanover (together with its affiliates) would beneficially own more than 4.99% of the outstanding shares of our common stock as of such date (the Maximum Percentage). The Maximum Percentage may be raised to any other percentage not in excess of 9.99% at the option of Hanover upon at least 61 days prior notice to us, or lowered to any other percentage, at the option of Hanover, at any time.
The Convertible Note includes customary event of default provisions. Upon the occurrence of an event of default, Hanover may require us to pay in cash the greater of (i) the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency related event of default) and (ii) the product of (X) the conversion price in effect at that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the date we make the entire payment required to be made under this provision.
We have the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the Convertible Note in cash at a price equal to 135% of the total amount of such Convertible Note then outstanding. If at any time after the Closing Date, (i) the closing bid price of our common stock is equal to or greater than 140% of the Exercise Price for a period of 30 consecutive trading days (the Measuring Period), (ii) no Equity Conditions Failure (as defined in the Warrant) shall have occurred, and (iii) the aggregate dollar trading volume of the Common Stock for each trading day during the Measuring Period exceeds $3,000 per day, then we shall have the right to require Hanover to exercise all, or any part, of the Warrant (up to the Maximum Forced Exercise Amount (defined below)) (the Forced Exercise) at the then applicable Exercise Price. We will not be permitted to effect a Forced Exercise if, after giving effect to such Forced Exercise, we have received more than $150,000 in cash, in the aggregate, from one or more exercises of the Warrant. Maximum Forced Exercise Amount means, as of any given date, the lesser of (x) the number of shares of our common stock issuable upon exercise of the Warrant as of such given date and (y) 500% of the average trading volume (as reported on Bloomberg) of our common stock on our principal market on each of the 10 consecutive trading days ending and including the trading day immediately prior to such given date.
Convertible promissory notes of $110,000 and $61,000 issued to KBM Worldwide, Inc. on August 14, 2014 and November 17, 2014
On August 14, 2014 and November 17, 2014, we and KBM Worldwide, Inc. (KBM) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $110,000 and $61,000 respectively (the Notes). The Notes bear 8% interest and is due on August 21, 2015 and November 17, 2015 respectively. The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date.
Convertible promissory notes of $48,000 issued to Vis Vires Group Inc. on June 1, 2015
On June 1, 2015, we and Vis Vires Group Inc. (Vis Vires) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $48,000 (the Note). The Note bear 8% interest and is due on June 3, 2015. The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at a rate of 70% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. The Note will cancel on first quarter 2016.
Convertible promissory notes of $500,000 issued to Biz Wit Holdings Ltd. on May 6, July 28 and September 2, 2016
On May 6, July 28 and September 2, 2016 we and Biz Wit Holdings Ltd. (Biz Wit) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of totally $500,000 (the Note). The Note bear 5% interest and is due on December 31, 2016. The Notes become convertible 90 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at par value $0.001 per share of the Company common stock.
Convertible promissory notes of $700,000 issued to Sino Secure International (Holdings) Limited and $300,000 issued to Lei Pan on May 18, 2016
On May 18, 2016, we and Sino Secure International (Holdings) Limited (Sino Secure) and Lei Pan (Lei) completed a financing pursuant to which the Company issued Convertible Promissory Notes in the original principal amounts of $700,000 and $300,000 representatively (the Note). The Note bear 5% interest and is due on December 31, 2016. The Notes become convertible 90 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at par value $0.001 per share of the Company common stock.
The fair value of the embedded conversion feature of these notes as at September 30, 2016 and December 31, 2015 was $429,111 and $279,071, respectively.
The fair value of the convertible notes was calculated using the Black-Scholes model with the following assumptions: expected life of 0.5-2 years, expected dividend rate of 0%, volatility of 246.8% and interest rate at 0.14%-0.26%.
Fair Value on a Recurring Basis
The following table sets forth, by level within the fair value hierarchy, the Companys financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2016:
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Income Tax |
6. Income Tax
We are subject to income tax in the United States, Hong Kong and PRC.
The Companys 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 2016 and 2015, the statutory income tax rate is 25%. The open tax years in PRC are 2010-2015.
CC Mobility is incorporated in Hong Kong and is subjected to Hong Kong corporate income tax at 16.5% statutory income tax rate. No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the nine months ended June 30, 2016 and 2015. The open tax year for CC Mobility in Hong Kong are 2012-2015.
The Company has no income tax expense for the nine months ended September 30, 2016 and 2015 because it has not net assessable income.
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 Companys policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.
The following table sets forth the components of deferred income taxes as of September 30, 2016 and December 31, 2015:
As of September 30, 2016, the Company has net operating losses carry forward of $558,913 in the U.S. and $535,394 in Hong Kong and PRC available to offset future taxable income. They will begin to expire in 2030 and 2016, respectively. We provided for a full valuation allowance against the deferred tax assets of $0 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 Company did not recognize any interest or penalties related to unrecognized tax benefits for the six months ended September 30, 2016 and 2015. |
Employee Benefits |
9 Months Ended |
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Sep. 30, 2016 | |
Compensation and Retirement Disclosure [Abstract] | |
Employee Benefits |
7. 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 $40,934 and $20,623 for the nine months ended September 30, 2016 and 2015, respectively. |
Earnings (loss) per Share |
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Earnings (loss) per Share |
8. Earnings (loss) per share
Basic earnings (loss) per share are 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:
Since the company is suffering losses, the dilutive loss per share is equal to the basic loss per share for the nine months ended September 30, 2016, because the convertible notes are anti-dilutive. |
Commitments and Contingencies |
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Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||
Commitments and Contingencies |
9. Commitments and Contingencies
Operating commitments:
Operating lease agreement generally contains renewal options that may be exercised at the Companys discretion after the completion of the terms. The Companys obligations under operating lease are as follows:
The Company incurred rental expenses of $81,625 and $91,278 for the nine months ended September 30, 2016 and 2015, respectively. |
Concentrations, Risks, and Uncertainties |
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Concentrations, Risks, and Uncertainties |
10. Concentrations, Risks, and Uncertainties
Customer Concentrations
The Company has the following concentrations of business with each customer constituting greater than 10% of the Companys gross sales:
* Constitutes less than 10% of the Companys 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. |
Operating Risk |
9 Months Ended |
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Sep. 30, 2016 | |
Risks and Uncertainties [Abstract] | |
Operating Risk |
11. Operating Risk
The Companys operations are all carried out in the PRC. Accordingly, the Companys 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 PRCs economy.
The Companys 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 Companys 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. |
Related Party Transactions |
9 Months Ended |
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Sep. 30, 2016 | |
Related Party Transactions [Abstract] | |
Related Party Transactions |
12. Related Party Transactions
As of September 30, 2016, the appointment of Mr. Zhixiong Wei as director rendered a loans amount $0 became loans from director. The $0 did bear of interest at 15%, have no collateral and be repayable on demand. |
Subsequent Events |
9 Months Ended |
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Sep. 30, 2016 | |
Subsequent Events [Abstract] | |
Subsequent Events |
13. Subsequent Events
The Company has evaluated all other subsequent events through November 14, 2016, the date these consolidated financial statements were issued, and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements. |
Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation |
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at September 30, 2016 and for the nine months ended September 30, 2016 and 2015 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position and results of operations of the Company for the periods presented. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015. The Company follows the same accounting policies in the preparation of interim reports. The Companys accounting policies used in the preparation of the accompanying financial statements conform to accounting principles generally accepted in the United States of America (US GAAP)
The functional currency is the Chinese Renminbi, however the accompanying condensed consolidated financial statements have been translated and presented in United States Dollars ($). All significant inter-company balances and transactions have been eliminated in consolidation.
All dollars are rounded to nearest hundred except for share data. |
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Use of Estimates |
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. |
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Significant Estimates |
Significant Estimates
These financial statements include some amounts that are based on managements 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. |
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Variable Interest Entity |
Variable Interest Entity
CC Power
The accounts of CC Power have been consolidated with the accounts of the Company because CC Power is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated August 22, 2011 with Xili Wang as the CC Power Shareholder and with CC Power pursuant to which CC Investment provides CC Power with exclusive technology consulting and management services (collectively referred to as the controlling agreements). On August 25, 2016, Mr. Wei, as the new CC Power Shareholder and CC Power revised these agreements pursuant to the transfer of ownership of CC Power from Xili Wang to Zhixiong Wei as set forth in the Agreement on Equity Transfer between Xili Wang and Zhixiong Wei. In summary, the new controlling agreements contain the following terms:
Entrusted Management Agreement. Pursuant to the Entrusted Management Service 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, including, without limitation, financial management services, business management services, advertising and marketing services, human resources management services, and internal control services. The Entrusted Management Service Agreement will remain in effect until the completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, 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, including, without limitation, software and technology development services, computer system services, data analysis services, training, technical consulting services, and import and export consultancy services. The Technical Services Agreement will remain in effect until completion of an acquisition of all the assets or equity of CC Power by CC Investment or its designated third party, as more fully described in the Exclusive Purchase Option Agreement below.
Exclusive Purchase Option Agreement. .. Pursuant to 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 option to acquire either all or substantially all of the assets, or all or a part of the equity of CC Power, in each case for nominal consideration, plus the cancellation of all or part of the debt owing under the Loan Agreement described below. CC Investment may exercise its purchase option at any time.
Loan Agreement. Pursuant to the Loan Agreement between CC Investment and the CC Power Shareholder, CC Investment agreed to lend 10,000,000 RMB to the CC Power Shareholder. The loan is to be used solely for the operations of CC Power. As security for the loan, the CC Power Shareholder agreed to pledge his equity in CC Power, as more fully described in the Equity Pledge Agreement below.
Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement among CC Power, CC Investment, and the CC Power Shareholder, the CC Power Shareholder agreed to pledge all of his equity interest in CC Power to CC Investment as a guaranty of the performance of the obligations of the CC Power Shareholder and CC Power under the Loan Agreement, the Entrusted Management Service Agreement, the Technical Services Agreement, and the Exclusive Purchase Option Agreement. The Equity Pledge Agreement will remain in effect until all payments due and obligations under the foregoing agreements have been fulfilled by the CC Power Shareholder and/or CC Power. Pursuant to the terms of the Equity Pledge Agreement, the CC Power Shareholder shall not, among other things, sell, transfer, mortgage or otherwise dispose of or encumber the pledged equity interests without CC Investments prior written consent.
Assignment and Novation Agreement
In addition to revising the controlling agreements, CC Power, CC Investment, Xili Wang and Mr. Wei entered into an Assignment and Novation Agreement, under which the parties acknowledged that the new CC Power controlling agreements have replaced the original controlling agreements in their entirety, meaning that as of August 25, 2016, Xili Wang assigned to Mr. Wei all of the rights of the CC Power Shareholder under the CC Power controlling agreements, and Mr. Wei assumed from Xili Wang all of the obligations of the CC Power Shareholder under such agreements. The Assignment and Novation Agreement provides that the original controlling agreements have been terminated and replaced in their entirety by the updated controlling agreements. With respect to the Loan Agreement, the Assignment and Novation Agreement provides that the amount originally borrowed by Xili Wang under the original loan agreement, which was contributed to the bank account of CC Power, shall be treated as the amount received by Mr. Wei under the Loan Agreement, and that Mr. Wei shall assume the responsibility to repay the loan and fulfill all the obligations of the borrower under the Loan Agreement.
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 Powers 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:
Accordingly, the Companys condensed consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and classification of CC Powers assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
Jifu
The accounts of Jifu have been consolidated with the accounts of the Company because Jifu is a variable interest entity with respect to CC Investment, which is a wholly-owned subsidiary of the Company. CC Investment entered into five agreements dated May 7, 2013 with Jifu Shareholder and with Jifu pursuant to which CC Investment provides Jifu with exclusive technology consulting and management services. In summary, the five agreements contain the following terms:
Entrusted Management Agreement. Effective on May 7, 2013, CC Investment entered into an Entrusted Management Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive management services provided by CC Investment. Such management services include but are not limited to financial management, business management, marketing management, human resource management and internal control of Jifu. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee will be a percentage of Jifus total operational income. The Entrusted Management Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Technical Services Agreement. Effective on May 7, 2013, CC Investment entered into a Technical Services Agreement with Jifu and the Jifu Shareholders, pursuant to which CC Investment agreed to provide, and Jifu agreed to accept, exclusive technical services provided by CC Investment. Such technical services include but are not limited to software services, computer systems services, data analysis, training and other technical services. Jifu will pay a service fee to CC Investment on a quarterly basis, which fee shall be a percentage of Jifus total operational income. The Technical Service Agreement will remain in effect until the acquisition of all the assets or equity of Jifu by CC Investment.
Exclusive Purchase Option Agreement. Effective on May 7, 2013, CC Investment entered into an Exclusive Purchase Option Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders granted CC Investment an irrevocable and exclusive purchase option to acquire all of Jifus equity and/or assets at a nominal consideration. CC Investment may exercise the purchase option at any time. Until CC Investment has exercised its purchase option, Jifu is required to conduct its business in accordance with certain covenants as further described in the Exclusive Purchase Option Agreement.
Loan Agreement
Effective on May 7, 2013, CC Investment entered into a Loan Agreement with the Jifu Shareholders, pursuant to which CC Investment agreed to lend RMB 3,000,000 to the Jifu Shareholders, to be used solely for the operations of Jifu. The loan is interest free, unless the deemed value of the consideration for the equity purchase of Jifu or asset purchase of Jifu under the Exclusive Purchase Option Agreement is higher than the principal amount of the loan, in which case the excess will be deemed to be interest on the loan.
Equity Pledge Agreement
Effective on May 7, 2013, CC Investment entered into an Equity Pledge Agreement with Jifu and the Jifu Shareholders, pursuant to which the Jifu Shareholders pledged all of their equity interests in Jifu, including the proceeds thereof, to guarantee all of CC Investments rights and benefits under the Entrusted Management Agreement, the Technical Service Agreement, the Exclusive Purchase Option Agreement and the Loan Agreement. Prior to termination of the Equity Pledge Agreement, the pledged equity interests cannot be transferred without CC Investments prior consent. The Jifu Shareholders covenant to CC Investment that among other things, they will only appoint/elect candidates for the board of directors of Jifu and supervisor office of Jifu that were nominated by CC Investment.
In sum, the agreements transfer to CC Investment all of the benefits and all of the risk arising from the operations of Jifu, as well as complete managerial authority over the operations of Jifu. Through these contractual arrangements, the Company has the ability to substantially influence Jifus daily operations and financial affairs, appoint its directors and senior executives, and approve all matters requiring board and/or shareholder approval. These contractual arrangements enable the Company to control Jifu and operate our business in the PRC through CC Investment. By reason of the relationship described in these agreements, Jifu is a variable interest entity with respect to CC Investment and CC Investment is considered the primary beneficiary of Jifu because the following characteristics identified in ASC 810-10-15-14 are present:
On October 1, 2014, we entered into a Settlement Agreement, Waiver and Mutual Release with Jifu. Pursuant to the Release, the parties cancelled the Stock Purchase Agreement. We have completely transferred bac k the ownership of shares of Jifu to Jifu Shareholders without any further disputation and mutual accountability. In exchange, we have agreed to deliver 1,000,000 newly issued shares of our common stock to Jifu Shareholders. |
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Revenue Recognition |
Revenue recognition
Our source of revenues is from internet accelerator software, which includes new software license revenues and software plus hardware and maintenance arrangements, and the source of revenue of Jifu is from developing and distributing optical transmitters and receivers, electronic surveillance equipment, and other communications equipment; and trading of electronic products, network products, and communications equipment. We also engage in software research and development, GPS system development and website development projects along with maintenance arrangements.
We evaluate revenue recognition based on the criteria set forth in FASB ASC 985-605, Software: Revenue Recognition and Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104, Revenue Recognition.
Revenue Recognition for Software Products (Software Elements)
New software license revenues represent fees earned from granting customers licenses to download our software products that aim at improving the internet connection speed of the mobile phone, computers or servers. The basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. For software license that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met.
Our software license arrangements do not include acceptance provisions, software license updates or product support contracts.
Revenue Recognition for Multiple-Element Arrangements - Software Products and Software Related Services(Software Arrangements)
We enter into arrangements with customers that purchase software related products that include one to three year product support service and a short training session (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, and product support contracts whereby software license delivery is followed by the subsequent delivery of the other elements. Our software license arrangements include acceptance provisions. We recognize revenue upon the receipt of written customer acceptance. The vast majority of our software license arrangements include software license updates and product support contracts. Software license updates provide customers with rights to unspecified software product upgrades during the term of the support period. Product support includes telephone access to technical support personnel or on-site support. For those software related multiple-element arrangements, we recognized revenue pursuant to ASC 985-605. Since we are unable to determine the fair value of the selling price for the undelivered elements in a multiple-element arrangement, which is the product support service and training, the entire arrangement consideration is deferred and is recognized ratably over the term of the arrangement, typically one year to three years.
Revenue Recognition for Multiple-Element Arrangements - Arrangements with Software and Hardware Elements
We also enter into multiple-element arrangements that may include a combination of our software installed in the hardware products we purchased from third parties and service offerings including purchased hardware , new software licenses, installation of the software in the hardware and one to three years product support. We adopted Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605) : Multiple-Deliverable Revenue Arrangements . This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements , by allowing the use of the best estimate of selling price in addition to vendor-specific objective evidence and third-party evidence for determining the selling price of a deliverable for non-software arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimated selling price. In addition, the residual method of allocating arrangement consideration is no longer permitted. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the hardware elements. We recognize the hardware element considerations upon delivery of the hardware. The consideration allocated to the software group which includes the software element and the product support is recognized in according to the software arrangements policy as described above.
Revenue Recognition for Lottery Revenue
Commission income is recognized when the lottery ticket is sold through its online system. Other service income is recognized when the service is provided. |
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Cost of Revenue |
Cost of Revenue
Cost of revenue primarily consists of direct costs of products, direct labor of technical staff, depreciation of computer equipment, and overhead associated with the technical department. |
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Economic and Political Risks |
Economic and political risks
The Companys operations are mainly conducted in the PRC. Accordingly, the Companys business, financial condition and results of operations in the PRC may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC.
The Companys major operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Companys results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in government administration, governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. |
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Credit Risk |
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. |
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Property and Equipment |
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized. |
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Accounting for the Impairment of Long-lived Assets |
Accounting for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10 Impairments of Long-Lived Assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Companys average cost of capital. |
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Inventories |
Inventories
Inventories are stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required. |
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Accounts Receivable |
Accounts receivable
Accounts receivable consists of amounts due from customers. An allowance for doubtful accounts is established and determined based on managements assessment of known requirements, aging of receivables, payment history, the customers current credit worthiness and the economic environment. As of September 30, 2016 and December 31, 2015, no allowance for doubtful accounts was deemed necessary based on managements assessment. |
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Fair Value of Financial Instruments |
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. |
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Patents |
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.
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Research and Development and Software Development Costs |
Research and development and Software Development Costs
All research and development costs are expensed as incurred. Software development costs eligible for capitalization under ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements for the nine months ended September 30, 2016 and 2015. Research and development expenses amounted to $108,912 and $ 193,795 for the nine months ended September 30, 2016 and 2015, respectively, and were included in general and administrative expense. |
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Comprehensive Income |
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. |
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Income Taxes |
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. |
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Foreign Currency Translation |
Foreign currency translation
Assets and liabilities of the Companys 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:
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. |
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Post-retirement and Post-employment Benefits |
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. |
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Recently Issued Accounting Pronouncements |
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2015-01 Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The objective is to reduce the cost and complexity of income statement presentation by eliminating the concept of extraordinary items while maintaining or improving the usefulness of the information provided to the users of financial statements. The extraordinary items must meet two criteria: unusual nature and infrequency of occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either. This amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Board decided to permit early adoption provided that the guidance is applied from the beginning of the fiscal year of adoption.
The FASB has issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs. The objective is to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued.
The FASB has issued ASU No. 2015-05 Intangibles-Goodwill and Other-Internal-Use Software. The objective is to provide a guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendment will not change GAAP for a customer accounting for service contracts. In addition, the guidance in this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendment will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.
The FASB has issued ASU No. 2015-07 Topic 820, Fair Value Measurement, which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update apply to reporting entities that elect to measure the fair value of an investment within the related scope by using the net asset value per share (or its equivalent) practical expedient.
The FASB has issued No. 2015-10 Technical Corrections and Improvements, which aims to address feedback received from stakeholders on the Codification and make improvements to GAAP. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Some of the amendments will make the Codification easier to understand and apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.
The FASB has issued No. 2015-11Topic 330, Inventory, which aims to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-14Topic 606, Revenue from Contracts with Customers, which aims to respond to stakeholders requests to defer the effective date of the guidance in Update 2014-09 and to consider feedback received through extensive outreach with preparers, practitioners, and users of financial statements. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The FASB has issued No. 2015-15Subtopic 835-30, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This amendment adds SEC paragraphs pursuant to the SEC Staff Announcement on June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.
The FASB has issued No. 2015-16Topic 805, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.
The FASB has issued No. 2015-17Topic 740, Income Taxes: Balance Sheet Classification of Deferred Taxes, which aims to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys consolidated financial statements upon adoption |
Summary of Significant Accounting Policies (Tables) |
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Variable Interest Entities |
Accordingly, the Companys condensed consolidated financial statements reflect the results of operations, assets and liabilities of CC Power. The carrying amount and classification of CC Powers assets and liabilities included in the Condensed Consolidated Balance Sheets are as follows:
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Summary of Property Plant and Equipment Useful Life |
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
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Schedule of Foreign Currency Exchange Rates |
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:
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Property and Equipment, Net (Tables) |
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Property and Equipment, Net |
Property, plant and equipment, net consist of the following:
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Convertible Promissory Notes (Tables) |
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Convertible Debt [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Convertible Debt |
Outstanding balances for the convertible promissory notes as of September 30, 2016 and December 31, 2015 are as follow:
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Schedule of Fair Value Measurements Recurring and Nonrecurring |
The following table sets forth, by level within the fair value hierarchy, the Companys financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2016:
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Income Tax (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Deferred Tax Assets and Liabilities |
The following table sets forth the components of deferred income taxes as of September 30, 2016 and December 31, 2015:
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Earnings (loss) per Share (Tables) |
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted |
The following table sets forth the computation of basic and diluted net loss per share:
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Commitments and Contingencies (Tables) |
9 Months Ended | ||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||
Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||
Schedule of Future Minimum Rental Payments for Operating Leases |
Operating lease agreement generally contains renewal options that may be exercised at the Companys discretion after the completion of the terms. The Companys obligations under operating lease are as follows:
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Concentrations, Risks, and Uncertainties (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Concentration of Risk, by Risk Factor |
The Company has the following concentrations of business with each customer constituting greater than 10% of the Companys gross sales:
* Constitutes less than 10% of the Companys gross sales. |
Summary of Significant Accounting Policies (Details Narrative) |
9 Months Ended | |||||
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Oct. 01, 2014
shares
|
May 07, 2013
CNY (¥)
|
Sep. 30, 2016
USD ($)
|
Sep. 30, 2016
CNY (¥)
|
Sep. 30, 2015
USD ($)
|
Dec. 31, 2015
USD ($)
|
|
Allowance for doubtful accounts | $ | $ 0 | $ 0 | ||||
Research and development expense | $ | $ 108,912 | $ 193,795 | ||||
CC Power [Member] | RMB [Member] | ||||||
Loan agreement | ¥ | ¥ 10,000,000 | |||||
Jifu [Member] | ||||||
Business disposal equity interest issued or issuable number of new shares issued | shares | 1,000,000 | |||||
Jifu [Member] | RMB [Member] | ||||||
Loan agreement | ¥ | ¥ 3,000,000 |
Summary of Significant Accounting Policies - Schedule of Variable Interest Entities (Details) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Variable Interest Entity [Line Items] | ||
Total current assets | $ 206,796 | $ 128,742 |
Total assets | 259,017 | 197,412 |
Total current liabilities | 3,571,407 | 2,056,628 |
Total liabilities | 3,572,388 | 3,051,014 |
CC Power [Member] | ||
Variable Interest Entity [Line Items] | ||
Total current assets | 1,883,503 | 1,825,197 |
Total assets | 1,948,020 | 1,422,400 |
Total current liabilities | 2,037,446 | 1,316,298 |
Total liabilities | $ 2,037,446 | $ 1,316,298 |
Summary of Significant Accounting Policies - Summary of Property Plant and Equipment Useful Life (Details) |
9 Months Ended |
---|---|
Sep. 30, 2016 | |
Equipment [Member] | |
Property, Plant and Equipment [Line Items] | |
Estimated useful life | 5 years |
Office Equipment [Member] | |
Property, Plant and Equipment [Line Items] | |
Estimated useful life | 5 years |
Leasehold Improvements [Member] | |
Property, Plant and Equipment [Line Items] | |
Estimated useful life, description | Over the lease terms |
Software [Member] | |
Property, Plant and Equipment [Line Items] | |
Estimated useful life | 5 years |
Summary of Significant Accounting Policies - Schedule of Foreign Currency Exchange Rates (Details) |
9 Months Ended | 12 Months Ended | |
---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Dec. 31, 2015 |
|
Accounting Policies [Abstract] | |||
Balance sheet exchange rates used to translate amounts in RMB into 1 USD | 6.6694 | 6.3561 | 6.4904 |
Statement of income and other comprehensive income exchange rates used to translate amounts in RMB into 1 USD | 6.5771 | 6.3568 | 6.2175 |
Property and Equipment, Net (Details Narrative) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Property, Plant and Equipment [Abstract] | ||
Depreciation expense | $ 18,366 | $ 14,390 |
Property and Equipment, Net - Summary of Property and Equipment, Net (Details) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Property, Plant and Equipment [Line Items] | ||
Property and equipment, gross | $ 195,153 | $ 196,572 |
Less: Accumulated depreciation | (142,932) | (127,902) |
Property and equipment, net | 52,221 | 68,670 |
Equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, gross | 146,903 | 148,305 |
Office Equipment [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, gross | 36,477 | 39,633 |
Leasehold Improvements [Member] | ||
Property, Plant and Equipment [Line Items] | ||
Property and equipment, gross | $ 11,773 | $ 8,634 |
Convertible Promissory Notes (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 02, 2016 |
Jul. 28, 2016 |
May 18, 2016 |
May 06, 2016 |
Jun. 02, 2015 |
Nov. 17, 2014 |
Aug. 14, 2014 |
May 30, 2014 |
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
Dec. 31, 2015 |
|
Debt Instrument [Line Items] | |||||||||||||
Amortization of debt discount | $ 623,273 | $ (131,093) | $ 12,435 | ||||||||||
Vis Vires Group Inc [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 48,000 | ||||||||||||
Debt instrument interest rate | 8.00% | ||||||||||||
Notes maturity date | Jun. 03, 2015 | ||||||||||||
Common stock conversion treshhold percentage | 70.00% | ||||||||||||
Debt instrument, convertible, beneficial conversion feature | $ 429,111 | $ 279,071 | |||||||||||
Fair value assumptions, expected dividend rate | 0.00% | ||||||||||||
Fair value assumptions, expected volatility rate | 246.80% | ||||||||||||
Vis Vires Group Inc [Member] | Minimum [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Fair value assumptions, expected term | 6 months | ||||||||||||
Fair value assumptions, risk free interest rate | 0.14% | ||||||||||||
Vis Vires Group Inc [Member] | Maximum [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Fair value assumptions, expected term | 2 years | ||||||||||||
Fair value assumptions, risk free interest rate | 0.26% | ||||||||||||
Biz Wit Holdings Ltd [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 500,000 | $ 500,000 | $ 500,000 | ||||||||||
Debt conversion, price per share | $ 0.001 | $ 0.001 | $ 0.001 | ||||||||||
Debt instrument interest rate | 5.00% | 5.00% | 5.00% | ||||||||||
Notes maturity date | Dec. 31, 2016 | Dec. 31, 2016 | Dec. 31, 2016 | ||||||||||
Sino Secure International (Holdings) Limited [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 700,000 | ||||||||||||
Debt conversion, price per share | $ 0.001 | ||||||||||||
Debt instrument interest rate | 5.00% | ||||||||||||
Notes maturity date | Dec. 31, 2016 | ||||||||||||
Lei Pan [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 300,000 | ||||||||||||
Debt conversion, price per share | $ 0.001 | ||||||||||||
Debt instrument interest rate | 5.00% | ||||||||||||
Notes maturity date | Dec. 31, 2016 | ||||||||||||
Convertible Debt [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Interest expense, debt | $ 760 | $ 291 | $ 123,404 | 1,128 | |||||||||
Amortization of debt discount | $ 0 | $ 12,435 | |||||||||||
Debt conversion, price per share | $ 0.5 | ||||||||||||
Convertible Debt [Member] | Warrant Expire In Two Years [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Class of warrant or right, exercise price of warrants or rights | $ 1.00 | $ 1.00 | |||||||||||
Convertible Debt [Member] | Warrant Expire In Three Years [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Class of warrant or right, exercise price of warrants or rights | $ 1.5 | $ 1.5 | |||||||||||
Debt instrument interest rate | 28.57% | 28.57% | |||||||||||
Convertible Debt [Member] | Hanover Holdings I, LLC [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 350,000 | ||||||||||||
Debt conversion, price per share | $ 0.001 | ||||||||||||
Warrant to acquire common shares | 3,716,091 | ||||||||||||
Proceeds from issuance of warrants | $ 250,000 | ||||||||||||
Notes issued discount rate | 28.57% | ||||||||||||
Notes outstanding principal amount | $ 40,000 | ||||||||||||
Extinguishment of debt | $ 60,000 | ||||||||||||
Debt instrument interest rate | 8.00% | ||||||||||||
Notes maturity date | May 30, 2016 | ||||||||||||
Debt instrument, convertible, terms of conversion feature | The Convertible Note is convertible at any time, in whole or in part, at Hanovers option into shares of our common stock, par value $0.001 per share at a conversion price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) trade prices of our common stock during the 10 consecutive trading days ending and including the trading day immediately preceding the applicable conversion date and (y) 65%, and (ii) $0.12 (as adjusted for stock splits, stock dividends, stock combinations or other similar transactions). The Warrant entitles Hanover to purchase up to 3,716,091 shares of our common stock (the Share Amount) at any time for a period of one year from the Closing Date at an exercise price equal to the lesser of (i) the product of (x) the arithmetic average of the lowest three (3) VWAPs of the common stock during preceding ten (10) consecutive trading days and (y) sixty-five percent (65%), and (B) $0.12 (as adjusted for any stock split, stock dividend, stock combination or other similar transaction) (the Exercise Price). The Warrant may only be exercised for cash and we have the right to accept or decline any exercise of the Warrant by Hanover. | ||||||||||||
Debt instrument description | Upon the occurrence of an event of default, Hanover may require us to pay in cash the greater of (i) the product of (A) the amount to be redeemed multiplied by (B) 135% (or 100% if an insolvency related event of default) and (ii) the product of (X) the conversion price in effect at that time multiplied by (Y) the product of (1) 135% (or 100% if an insolvency related event of default) multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the date we make the entire payment required to be made under this provision. | ||||||||||||
Common stock price triger | $ 3,000 | ||||||||||||
Amount received on forced exercise | $ 150,000 | ||||||||||||
Redemption of convertible debt description | We have the right at any time to redeem all, but not less than all, of the total outstanding amount then remaining under the Convertible Note in cash at a price equal to 135% of the total amount of such Convertible Note then outstanding. If at any time after the Closing Date, (i) the closing bid price of our common stock is equal to or greater than 140% of the Exercise Price for a period of 30 consecutive trading days (the Measuring Period), (ii) no Equity Conditions Failure (as defined in the Warrant) shall have occurred, and (iii) the aggregate dollar trading volume of the Common Stock for each trading day during the Measuring Period exceeds $3,000 per day, then we shall have the right to require Hanover to exercise all, or any part, of the Warrant (up to the Maximum Forced Exercise Amount (defined below)) (the Forced Exercise) at the then applicable Exercise Price. We will not be permitted to effect a Forced Exercise if, after giving effect to such Forced Exercise, we have received more than $150,000 in cash, in the aggregate, from one or more exercises of the Warrant. Maximum Forced Exercise Amount means, as of any given date, the lesser of (x) the number of shares of our common stock issuable upon exercise of the Warrant as of such given date and (y) 500% of the average trading volume (as reported on Bloomberg) of our common stock on our principal market on each of the 10 consecutive trading days ending and including the trading day immediately prior to such given date. | ||||||||||||
Convertible Debt [Member] | Hanover Holdings I, LLC [Member] | Minimum [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument convertible beneficial conversion feature percentage | 4.99% | ||||||||||||
Convertible Debt [Member] | Hanover Holdings I, LLC [Member] | Maximum [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument convertible beneficial conversion feature percentage | 9.99% | ||||||||||||
Convertible Debt [Member] | KBM Worldwide, Inc [Member] | |||||||||||||
Debt Instrument [Line Items] | |||||||||||||
Debt instrument face amount | $ 61,000 | $ 110,000 | |||||||||||
Debt instrument interest rate | 8.00% | 8.00% | |||||||||||
Notes maturity date | Nov. 17, 2015 | Aug. 21, 2015 | |||||||||||
Debt instrument, convertible, terms of conversion feature | The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. | The Notes become convertible 180 days after the date of the Note. The principal amounts of the Notes and any accrued interest can then be converted into shares of the Companys common stock at a rate of 75% multiplied by the market price, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date. | |||||||||||
Common stock conversion treshhold percentage | 75.00% |
Income Tax (Details Narrative) - USD ($) |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2016 |
Dec. 31, 2015 |
|
Income Tax Examination [Line Items] | ||
Effective income tax rate reconciliation, at federal statutory income tax rate, percent | 25.00% | 25.00% |
Deferred tax assets, valuation allowance | $ 1,094,307 | $ 965,518 |
Unrecognized tax benefits, income tax penalties and interest | ||
HONG KONG [Member] | ||
Income Tax Examination [Line Items] | ||
Effective income tax rate reconciliation, at federal statutory income tax rate, percent | 16.50% | |
Operating loss carryforwards | $ 535,394 | |
Operating loss carryforwards, expiration date | Dec. 31, 2016 | |
UNITED STATES [Member] | ||
Income Tax Examination [Line Items] | ||
Operating loss carryforwards | $ 558,913 | |
Operating loss carryforwards, expiration date | Dec. 31, 2030 |
Income Tax - Schedule of Deferred Tax Assets and Liabilities (Details Narrative) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
---|---|---|
Income Tax Disclosure [Abstract] | ||
Net operating (profit)/losses - U.S. | $ 558,913 | $ 440,250 |
Net operating losses - PRC and Hong Kong | 535,394 | 525,268 |
Deferred revenue | ||
Deferred revenue, gross | 1,094,307 | 965,518 |
Valuation allowance | (1,094,307) | (965,518) |
Deferred tax assets, net |
Employee Benefits (Details Narrative) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Compensation and Retirement Disclosure [Abstract] | ||
Pension and Other Postretirement Benefit Expense | $ 40,934 | $ 20,623 |
Earnings (loss) per Share - Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Earnings Per Share [Abstract] | ||||
Net income (loss) available for common shareholders - basic | $ (1,094,307) | $ (351,734) | ||
Interest expense on convertible notes | $ 123,404 | $ 1,128 | ||
Net income (loss) available for common shareholders - diluted | $ (970,903) | $ (350,606) | ||
Weighted average outstanding shares of common stock - basic | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 |
Conversion of convertible notes payable | ||||
Weighted average outstanding shares of common stock - diluted | 333,925,553 | 253,896,191 | 333,925,553 | 253,896,191 |
Earnings (loss) per share - basic | $ 0 | $ 0 | $ 0 | $ 0 |
Earnings (loss) per share - diluted | $ 0 | $ 0 | $ 0 | $ 0 |
Commitments and Contingencies (Details Narrative) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Commitments and Contingencies Disclosure [Abstract] | ||
Operating leases rent expense | $ 81,625 | $ 91,278 |
Commitments and Contingencies - Schedule of Future Minimum Rental Payments for Operating Leases (Details) |
Sep. 30, 2016
USD ($)
|
---|---|
Commitments and Contingencies Disclosure [Abstract] | |
2016 | $ 78,280 |
Thereafter | |
Total minimum payment | $ 78,280 |
Concentrations, Risks, and Uncertainties - Schedule of Concentration of Risk, by Risk Factor (Details) - Customer Concentration Risk [Member] - Sales [Member] |
9 Months Ended | |||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|||
Customer A [Member] | ||||
Concentration Risk [Line Items] | ||||
Concentration percentage | 65.92% | 0.00% | ||
Customer B [Member] | ||||
Concentration Risk [Line Items] | ||||
Concentration percentage | 22.94% | 0.00% | ||
Customer C [Member] | ||||
Concentration Risk [Line Items] | ||||
Concentration percentage | [1] | 0.00% | 0.00% | |
|
Related Party Transactions (Details Narrtive) |
9 Months Ended |
---|---|
Sep. 30, 2016
USD ($)
| |
Related Party Transactions [Abstract] | |
Notes payable related parties | $ 0 |
Related party transaction rate | 15.00% |
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