|
Item
2.
|
Management
Discussion and Analysis of Financial Conditions and Results of
Operations
|
The
following is management's discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as
well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not
be
placed on these forward-looking statements which speak only as of the date
hereof. We undertake no obligation to update these forward-looking statements.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.
OVERVIEW
The
Company was organized under the laws of State of Delaware in May 2004 under
the
name of “Universal Flirts Corp.” On June 1, 2004, the Company acquired all the
issued and outstanding shares of Universal Flirts, Inc., a New York corporation,
from Darrel Lerner, the sole shareholder, in consideration for the issuance
of
8,500,000 shares of the Company’s common stock to Mr. Lerner pursuant to a stock
exchange agreement between Universal Flirts Inc. and the Company. Pursuant
to
the stock exchange transaction, Universal Flirts Inc. became the wholly-owned
subsidiary of the Company.
Pursuant
to Stock Transfer Agreement dated March 29, 2005, the Company transferred all
of
the common stock of Universal Flirts, Inc. to Mr. Darrell Lerner in exchange
for
the cancellation of 28,200,000 shares of the Company’s common stock. Immediately
following such cancellation, the Company had 14,756,000 shares of its common
stock outstanding.
On
March
31, 2005, Universal Flirts Corp. completed a stock exchange transaction with
the
stockholders of United First International Limited (“UFIL”), a company
incorporated under the laws of Hong Kong. The exchange was consummated under
the
laws of the State of Delaware and pursuant to the terms of the Securities
Exchange Agreement dated as of March 31, 2005 (the “Exchange Agreement”). In
connection with its acquisition of UFIL, the Company authorized a 4-1 forward
split of its common stock.
Pursuant
to the Exchange Agreement, Universal Flirts Corp. issued 15,000,000 shares
of
its common stock, $0.001 par value, to the stockholders of UFIL, representing
approximately 50.41% of the Company’s issued and outstanding common stock, in
exchange for the 20,000,000 outstanding shares of UFIL and a cash payment of
$50,000 from UFIL. Immediately after giving effect to the exchange, the Company
had 29,756,000 shares of its common stock outstanding. Pursuant to this
exchange, UFIL became a wholly-owned subsidiary of the Company and most of
the
Company’s business operations are now conducted through UFIL’s wholly-owned
subsidiary, Beijing Orsus Xelent Technology & Trading Company Limited
(“Xelent”).
On
April
19, 2005, the Company, formerly known as Universal Flirts Corp., changed its
list name to Orsus Xelent Technologies, Inc.
In
July,
2005, a wholly owned subsidiary, Orsus Xelent Trading (HK) Company Limited
(“OXHK”), was incorporated under the laws of Hong Kong. This subsidiary is
engaged in the trading of cellular phones and accessories with overseas
customers. In September 2005, OXHK commenced its Hong Kong operations to sell
and distribute our cellular phone products and technical support services to
customers outside the People’s Republic of China (the “PRC”).
The
business operations of UFIL are conducted through its wholly-owned subsidiary,
Xelent, which is also commonly called “Orsus Cellular” within the cellular phone
industry. Since May 2003, Xelent has been engaged in the business of designing
economically priced cellular phones for retail and wholesale distribution.
In
February 2004, Xelent registered “ORSUS” with the PRC State Administration for
Industry and Commerce as its product trademark. The cellular phone products
produced by Xelent are customarily equipped with industry leading features,
including
1.8-inch
to 2.8-inch CSTN, TFT or QVGA dual-color display,
1
minute
to 4 hours video recording, 300K to 3 million pixel photography,
MP3,
MPEG4 and U disk support, dual stereo speakers,
e-mail
messaging, multimedia messaging, 40 to 64 ring tone storage, slim bar-phone
& flip-phone technology and ultra thin innovative lightweight design. Xelent
has sold approximately 1,615,500 cellular phones since its first product
launched in 2004.
In
the
market of GSM mobiles, Xelent provided its handsets to all kinds of customers
and dealers and continues to maintain a good relationship with them. At present,
the GSM mobile devices constitute a significant percentage of the sales and
profit of the Company. What’s more, Xelent has emphasized the development of
specialized application mobile terminals in accordance with market changes
and
popular features. The Company has established itself in the specialized
application field and made great efforts in the marketing since entering the
field in September 2006. Based on its evaluation of the market and the
engagement proposals received from its major customers, the Company began to
produce X180 in mass volumes since April 2007 and took advantage of the great
opportunity to win the specialized application mobile terminal market. In June
2007, the Company received an order for 15,000 units from China Unicom under
an
initial intent agreement for 50,000 units. This is the first agreement and
order
signed with China Unicom, the second largest telecom operator in China, since
the establishment of the Company.
In
the
first quarter 2007, the Company confirmed its business relationship with China
Unicom and started a cooperative relationship based on the specialized
application mobile terminal. With the operational expansion during the last
two
fiscal quarters, the third quarter witnessed another increase in revenues and
net income. The revenues marked a record high in the current year and the net
profit approached the sum of last two fiscal quarters. It is anticipated that
both revenues and profit of this year will reach or surpass that of each past
year since the establishment of the company.
In
April
its common shares were approved for listing on the American Stock Exchange
("AMEX"), and began trading on AMEX on May 10, 2007 under the ticker symbol
“ORS”. The Company's CUSIP Number is 68749U106.
Business
Review
In
the
beginning of 2006, the Company made the strategic decision to set up cooperative
relationships with telecom operators and suppliers to increase sales and orders
for the Company. Now, the benefits of this policy are being realized. The
Company has focused on the implementation of 3G mobile technologies in the
PRC.
The Company has negotiated with many 3G design companies and expects to provide
samples to China Mobile for testing. Currently, we are planning to join into
the
TDS-CDMA Industry League, and are working toward obtaining 3G cellular phones
manufacturing licenses for the Company (or its holding company) from the PRC
government in 2008. The Company has positioned itself well to take advantage
of
this opportunity. Furthermore, to become less reliant on third-party
manufacturers, the Company is in discussions to potentially acquire a factory
and hopes to enter into an acquisition agreement by the end of the year
and consummate the acquisition upon the completion of its proper audit
and due diligence of the target company. This means the company will change
the
OEM production to independent production of its own-brand mobile phones.
The
Company’s management team has become more experienced and has a clearer focus on
sales targets and its distribution market. Furthermore, the Company optimized
the organization of its operations during the last year. The newly setup
business center has begun to strengthen the ties between the Company, the market
and its customers. Meanwhile, the Company continued to work diligently to expand
its customer base, including a continued push into the field of specialized
applications. Even with these initiatives, the Company continued to grow its
traditional markets, as evidenced by the great contribution it made to the
fiscal year’s highlights; in the third quarter, traditional handsets contributed
prominently to the increase of sales and revenues. For the most recent fiscal
quarter ended September 30, 2007, we have achieved a 27.25% increase in
operational revenues and 13.30% increase in net profit as compared to the same
period last year.
Since
the
beginning of 2007, we have shifted our operation strategy to increase our
profitability and avoid the mass distribution of low price products. Our focus
is on the importance of the mid-level and high-end products, which will allow
us
to reduce our operating costs and expenses as compared to revenues.
The
following table summarizes our operating results for the nine months ended
September 30, 2007 and September 30, 2006, respectively:
|
|
|
Nine months ended
September 30, 2007
|
|
Nine months ended
September 30, 2006
|
|
Comparison
|
|
|
|
|
$000
|
|
% of
Revenue
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
|
|
|
Revenue
|
|
|
58,411
|
|
|
-
|
|
|
45,901
|
|
|
-
|
|
|
12,510
|
|
|
27.25
|
%
|
|
Cost
of sales
|
|
|
47,586
|
|
|
81.47
|
%
|
|
37,879
|
|
|
82.52
|
%
|
|
9,707
|
|
|
25.63
|
%
|
|
Sales
& marketing expenses
|
|
|
389
|
|
|
0.67
|
%
|
|
926
|
|
|
2.02
|
%
|
|
-537
|
|
|
-57.99
|
%
|
|
General
& admin. expenses
|
|
|
763
|
|
|
1.31
|
%
|
|
519
|
|
|
1.13
|
%
|
|
244
|
|
|
47.01
|
%
|
|
R&D
expenses
|
|
|
319
|
|
|
0.55
|
%
|
|
187
|
|
|
0.41
|
%
|
|
132
|
|
|
70.59
|
%
|
|
Depreciation
|
|
|
113
|
|
|
0.19
|
%
|
|
149
|
|
|
0.32
|
%
|
|
-36
|
|
|
-24.16
|
%
|
|
Allowance
for obsolete inventories
|
|
|
700
|
|
|
1.20
|
%
|
|
-
|
|
|
-
|
|
|
700
|
|
|
100.00
|
%
|
|
Allowance
for trading deposit receivable
|
|
|
1,487
|
|
|
2.55
|
%
|
|
1,364
|
|
|
2.97
|
%
|
|
123
|
|
|
9.02
|
%
|
|
Interest
expenses
|
|
|
747
|
|
|
1.28
|
%
|
|
70
|
|
|
0.15
|
%
|
|
677
|
|
|
967.14
|
%
|
|
Other
net income
|
|
|
21
|
|
|
0.04
|
%
|
|
1
|
|
|
0.00
|
%
|
|
20
|
|
|
2000.00
|
%
|
|
Pre-tax
profit
|
|
|
6,328
|
|
|
10.83
|
%
|
|
4,808
|
|
|
10.47
|
%
|
|
1,520
|
|
|
31.61
|
%
|
|
Income
tax
|
|
|
1,062
|
|
|
1.82
|
%
|
|
160
|
|
|
0.35
|
%
|
|
902
|
|
|
563.75
|
%
|
|
Profit
(Loss)
|
|
|
5,266
|
|
|
9.02
|
%
|
|
4,648
|
|
|
10.13
|
%
|
|
618
|
|
|
13.30
|
%
|
The
following table summarizes our operating results for the three months ended
September 30, 2007 and September 30, 2006, respectively:
|
|
|
Three months ended
September 30,2007
|
|
Three months ended
September 30,2006
|
|
Comparison
|
|
|
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
%
|
|
|
Revenue
|
|
|
22,046
|
|
|
-
|
|
|
20,525
|
|
|
-
|
|
|
1,521
|
|
|
7.41
|
%
|
|
Cost
of sales
|
|
|
18,064
|
|
|
81.94
|
%
|
|
16,716
|
|
|
81.44
|
%
|
|
1,348
|
|
|
8.06
|
%
|
|
Sales
& marketing expenses
|
|
|
142
|
|
|
0.64
|
%
|
|
140
|
|
|
0.68
|
%
|
|
2
|
|
|
1.41
|
%
|
|
General
& admin. expenses
|
|
|
184
|
|
|
0.83
|
%
|
|
140
|
|
|
0.68
|
%
|
|
44
|
|
|
31.43
|
%
|
|
R&D
expenses
|
|
|
23
|
|
|
0.10
|
%
|
|
40
|
|
|
0.19
|
%
|
|
(17
|
)
|
|
(42.50
|
%)
|
|
Depreciation
|
|
|
26
|
|
|
0.12
|
%
|
|
24
|
|
|
0.12
|
%
|
|
2
|
|
|
8.33
|
%
|
|
Allowance
for obsolete inventories
|
|
|
108
|
|
|
0.49
|
%
|
|
-
|
|
|
-
|
|
|
108
|
|
|
100.00
|
%
|
|
Allowance
for trading deposit receivable
|
|
|
78
|
|
|
0.35
|
%
|
|
1,054
|
|
|
5.14
|
%
|
|
(976
|
)
|
|
(92.60
|
%)
|
|
Interest
expenses
|
|
|
443
|
|
|
2.01
|
%
|
|
41
|
|
|
0.20
|
%
|
|
402
|
|
|
980.49
|
%
|
|
Other
net income
|
|
|
14
|
|
|
0.06
|
%
|
|
(4
|
)
|
|
(0.02
|
%)
|
|
18
|
|
|
450.00
|
%
|
|
Pre-tax
profit
|
|
|
2,992
|
|
|
13.57
|
%
|
|
2,366
|
|
|
11.53
|
%
|
|
626
|
|
|
26.46
|
%
|
|
Income
tax
|
|
|
422
|
|
|
1.91
|
%
|
|
-
|
|
|
-
|
|
|
422
|
|
|
100.00
|
%
|
|
Profit
(Loss)
|
|
|
2,570
|
|
|
11.66
|
%
|
|
2,366
|
|
|
11.53
|
%
|
|
204
|
|
|
8.62
|
%
|
CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our
discussion and analysis on our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
RESULTS
OF OPERATIONS
Revenues
Our
Revenues were $58,411,000 for nine months ended September 30, 2007, representing
an increase of 27.25% as compared to $45,901,000 in the corresponding period
in
2006. The increase of our operation revenues as compared to the same period
last
year was mainly due to two factors: we experienced a slow business period in
2006 because of the reformation of the cellular industry and products which
affected our operation revenues for that period; but in the third quarter in
2007, product sales achieved a record high, with our GSM products continuing
to
meet the market’s demand for mid-level and high-end handsets, which resulted in
a higher sales volume and triggered the increased revenue growth over the same
period last year.
At
present, we divide our products into three categories according to the
distribution channels: (1) specialized application mobile terminals; (2)
tailor-made products for operators; and (3) traditional products for the common
customers in market. In addition, we created three series of product lines
based
on the nature of the products, such as functions, appearances, prices and target
market and so on: our mid-level and low-end products contain a number of
attractive features, such as MP3, MPEG4, video recording and outer card storage,
while our high-end products contain the above-mentioned features as well as
PDA,
GPS and office software functions, Mobile TV, special industry applications
and
other attractive features and functions.
Products
Segment
In
2007,
in order to carry out the business in three major channels, we achieved great
improvement in operator-tailored products. At the same time, we put great effort
into distributing our traditional products, maintained our joint cooperation
projects with our R&D partners and increased our trading activities in order
to widen our revenue streams. We increased the number of our models of mobile
phones sold in the market as compared to the same period last year and most
of
which were newly created in the current year. Through the first three quarters
of 2007, our mid-level and high-end GSM performed extraordinarily well and
reached the accumulated sales of $12,135,000.
The
revenues of product segments for nine months ended September 30,
2007:
|
|
|
Nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
% of Revenue
|
|
|
C8100
|
|
|
8,801
|
|
|
15.07
|
%
|
|
CECTA2000
|
|
|
7,762
|
|
|
13.29
|
%
|
|
C8000
|
|
|
6,735
|
|
|
11.53
|
%
|
|
D8110
|
|
|
6,287
|
|
|
10.76
|
%
|
|
OBEE007
|
|
|
4,373
|
|
|
7.49
|
%
|
|
D907
|
|
|
4,073
|
|
|
6.97
|
%
|
|
X180
|
|
|
3,914
|
|
|
6.70
|
%
|
|
M5
|
|
|
3,991
|
|
|
6.83
|
%
|
|
H8801
|
|
|
3,389
|
|
|
5.80
|
%
|
|
M6
|
|
|
2,908
|
|
|
4.98
|
%
|
|
M85
|
|
|
2,449
|
|
|
4.19
|
%
|
|
N808
|
|
|
2,230
|
|
|
3.82
|
%
|
|
N3200
|
|
|
629
|
|
|
1.08
|
%
|
|
N3201
|
|
|
672
|
|
|
1.15
|
%
|
|
Other
|
|
|
198
|
|
|
0.34
|
%
|
|
Total
|
|
|
58,411
|
|
|
100
|
%
|
For
the
nine months ended September 30, 2007, the total revenues were $58,411,000.
The
sales of CDMA products reached $38,490,000, representing 65.90% of our total
revenue, because the operator-tailored section kept growing since the beginning
of the year. Growth was triggered by specialized application mobile terminals
Proxlink X180 and other intelligent mobile phones. The CDMA products included
C8100, C8000, D907, M5, X180, H8801, M6,M85 and N808 with revenues of
$8,801,000, $6,735,000, $4,073,000, $3,991,000, $3,914,000, $3,389,000,
$2,908,000, $2,449,000 and $2,230,000, respectively. The sale of GSM products
in
this period accounted for $19,921,000, or 34.10%, of our total revenue, which
was mainly from the sales of CECT A2000, D8110, OBEE007, N3200, N3201 and other
small sales products with revenues of $7,762,000, $6,287,000, $4,373,000,
$629,000, $672,000 and $198,000, respectively.
Our
GSM
products are purchased from Hebei Jvyuan Commerce and Trade Co., Ltd. and
Beijing Dong Fang Long Yu Trading Company, which include CECTA2000 (Multimedia
Player, Camera, Remote Control, Anti-stolen, U-disk), D8110 (ultra thin, slide
PDA with MP3, MP4, Camera, T-Flash Card, PC camera). Our CDMA products are
provided by two major suppliers, China Electronic Appliance Corporation and
Beijing Tian Hong Bo Communication Apparatus Company Limited, from whom the
trading products included X180 of ORS’s brand Proxlink (high-end PDA,
specialized application mobile terminal, barcode Scanning, and wireless handling
of office work), C8100 (high-end PDA, MP3, MP4, Camera, T-flash Card, GSM &
CDMA Simultaneous Standby Dual Mode handset), C8000 (high-end PDA, MP3, MP4,
Camera, T-flash Card, GSM & CDMA Simultaneous Standby Dual Mode handset)and
D907 (high-end CDMA cell phone of GSM & CDMA Simultaneous Standby Dual Mode,
Mobile Stocks).
The
revenues of product segments for the three months ended September 30,
2007:
|
|
|
Three months ended September
30, 2007
|
|
|
|
|
$000
|
|
% of Revenue
|
|
|
CECTA2000
|
|
|
7,762
|
|
|
35.21
|
%
|
|
OBEE007
|
|
|
4,373
|
|
|
19.84
|
%
|
|
D907
|
|
|
4,073
|
|
|
18.48
|
%
|
|
H8801
|
|
|
3,389
|
|
|
15.37
|
%
|
|
M85
|
|
|
2,449
|
|
|
11.10
|
%
|
|
Total
|
|
|
22,046
|
|
|
100.00
|
%
|
In
the
third quarter, sales reached $22,046,000, which was slightly higher than sales
of $20,525,000 for the same period last year. With an emphasis on the high-end
products, our CDMA handsets generated $9,911,000, and accounted for 44.96%
of
the total sales in this quarter. Revenue derived from traditional GSM cellular
phones was $12,135,000 or 55.04% of the sales in this quarter.
The
increase in the Company’s revenues was attributable to: (1) the launch of
specialized application mobile terminals to meet the specific application
market; (2) the introduction of fashionable appearances and features to satisfy
market demand; and (3) the distribution through traditional channels.
Customer
Segments
The
revenues of customer segments for nine month ended September 30,
2007.
|
|
|
Nine months ended September 30, 2007
|
|
|
|
|
$000
|
|
% of Revenue
|
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
54,497
|
|
|
93.30
|
%
|
|
China
Electronic Appliance Corporation
|
|
|
3,914
|
|
|
6.70
|
%
|
|
Total
|
|
|
58,411
|
|
|
100.00
|
%
|
For
the
nine months ended September 30, 2007, our revenues were mainly derived from
two
major domestic customers, Beijing Xingwang Shidai Tech & Trading Co., Ltd.
(XWSD), and China Electronic Appliance Corporation (CEAC), in the amounts of
$54,497,000 and $3,914,000, respectively, for a total amount of $58,411,000.
In
particular, Beijing Xingwang Shidai Tech & Trading Co., Ltd. has been our
most important customer for a long period, and accounted for 93.30% of the
total
sales in this period. It is the largest distributor and dealer in Mainland
China
and has sales networks in major cities in the PRC. China Electronic Appliance
Corporation, who became our customer in the second quarter, is a subsidiary
of
China Electronics Appliance Corporation Group (CEC), serving as one of the
three
largest trading enterprises in the electronic industry in China.
The
revenues of customer segments for the three months ended September 30,
2007:
|
|
|
Three months ended September 30,
2007
|
|
|
|
|
$000
|
|
% of Revenue
|
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
22,046
|
|
|
100.00
|
%
|
|
TOTAL
|
|
|
22,046
|
|
|
100.00
|
%
|
The
total
sales revenues increased by 34.79% as compared to the last quarter, all of
which
was derived from Beijing Xingwang Shidai Tech & Trading Co., Ltd. Our
deliveries to CECT-Chinacom Communications Co., Ltd. (“CECT-Chinacom”) were
terminated in this quarter due to the fact that CECT-Chinacom had an outstanding
debt over our credit limit.
Other
net income
For
the
nine months ended September 30, 2007, other net income accounted for $21,000,
or
0.04% of the total revenue. It was mainly generated from selling obsolete raw
materials in stock.
Operating
expenses
For
the
nine months ended September 30, 2007, our operating expenses are $51,357,000.
The operating expenses include sales and marketing, general and administrative,
R & D expenses, and depreciation, which are set forth in the following table
together with a comparison with the corresponding amounts from the same period
in 2006:
|
|
|
Nine months ended
September 30, 2007
|
|
Nine months ended
September 30, 2006
|
|
Comparison
|
|
|
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
%
|
|
|
Cost
of sales
|
|
|
47,586
|
|
|
81.47
|
%
|
|
37,879
|
|
|
82.52
|
%
|
|
9,707
|
|
|
25.63
|
%
|
|
Sales
& marketing expenses
|
|
|
389
|
|
|
0.67
|
%
|
|
926
|
|
|
2.02
|
%
|
|
(537
|
)
|
|
(57.99
|
%)
|
|
General
& Admin. expenses
|
|
|
763
|
|
|
1.31
|
%
|
|
519
|
|
|
1.13
|
%
|
|
244
|
|
|
47.01
|
%
|
|
R&D
expenses
|
|
|
319
|
|
|
0.55
|
%
|
|
187
|
|
|
0.41
|
%
|
|
132
|
|
|
70.59
|
%
|
|
Depreciation
|
|
|
113
|
|
|
0.19
|
%
|
|
149
|
|
|
0.32
|
%
|
|
(36
|
)
|
|
(24.16
|
%)
|
|
Allowance
for obsolete inventories
|
|
|
700
|
|
|
1.20
|
%
|
|
-
|
|
|
-
|
|
|
700
|
|
|
100.00
|
%
|
|
Allowance
for trading deposit receivable
|
|
|
1,487
|
|
|
2.55
|
%
|
|
1,364
|
|
|
2.97
|
%
|
|
123
|
|
|
9.02
|
%
|
|
Total
|
|
|
51,357
|
|
|
87.92
|
%
|
|
41,024
|
|
|
89.37
|
%
|
|
10,333
|
|
|
25.19
|
%
|
The
operating expenses for the three months ended September 30, 2007 and September
30, 2006, respectively:
|
|
|
Three months ended
September 30, 2007
|
|
Three months ended
September 30, 2006
|
|
Comparison
|
|
|
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
% of Revenue
|
|
$000
|
|
%
|
|
|
Cost
of sales
|
|
|
18,064
|
|
|
81.94
|
%
|
|
16,716
|
|
|
81.44
|
%
|
|
1,348
|
|
|
8.06
|
%
|
|
Sales
& marketing expenses
|
|
|
142
|
|
|
0.64
|
%
|
|
140
|
|
|
0.68
|
%
|
|
2
|
|
|
1.41
|
%
|
|
General
& Admin. expenses
|
|
|
184
|
|
|
0.83
|
%
|
|
140
|
|
|
0.68
|
%
|
|
44
|
|
|
31.43
|
%
|
|
R&D
expenses
|
|
|
23
|
|
|
0.10
|
%
|
|
40
|
|
|
0.19
|
%
|
|
(17
|
)
|
|
(42.50
|
%)
|
|
Depreciation
|
|
|
26
|
|
|
0.12
|
%
|
|
24
|
|
|
0.12
|
%
|
|
2
|
|
|
8.33
|
%
|
|
Allowance
for obsolete inventories
|
|
|
108
|
|
|
0.49
|
%
|
|
-
|
|
|
-
|
|
|
108
|
|
|
100.00
|
%
|
|
Allowance
for trading deposit receivable
|
|
|
78
|
|
|
0.35
|
%
|
|
1,054
|
|
|
5.14
|
%
|
|
(976
|
)
|
|
(92.60
|
%)
|
|
Total
|
|
|
18,625
|
|
|
84.48
|
%
|
|
18,114
|
|
|
88.25
|
%
|
|
511
|
|
|
2.82
|
%
|
Cost
of sales
For
the
nine months ended September 30, 2007, our cost of sales was $47,586,000, or
81.47% of revenues. The cost of sales to revenues decreased by 1.05%, as
compared to 82.52% of the corresponding period in 2006. The principal reasons
for the decrease were the decrease in sales of traditional mobiles over the
period coupled with the increase in sales of specialized application mobile
terminal X180, which has a higher gross profit margin and resulted in the
increase of the total gross operating income.
Sales
and marketing expenses
Sales
and
marketing expenses mainly represent payments made to sales personnel, cost
of
provision for after-sales services, and marketing and transportation
costs.
For
the
nine months ended September 30, 2007, sales and marketing expenses were
$389,000, or 0.67% of the revenues, which shows a decrease of 57.99% as compared
to $926,000, or 2.02% of the revenues for the corresponding period in 2006.
This
sharp decrease was caused by the reduction in the number of personnel. The
costs
for salaries and social insurances etc. were similarly reduced.
In
2006,
the restructuring of the management framework and personnel reduction, which
the
company started in the second quarter and finished in the third quarter, caused
a great decrease of the sales and marketing expenses. In the fourth quarter,
the
after-sale maintenance services were shifted to the materials suppliers,
reducing the workload of our after-sale service department. After further
negotiation, the costs of all the after-sale services, excluding the employees’
salaries, were borne by our cooperative partners. This resulted in a significant
reduction of our sales and marketing expenses.
Because
of the reasons above, for the three months ended September 30, 2007, sales
and
marketing expenses were $142,000, or 0.64% of total revenue, representing a
1.41% increase, as compared to $140,000 in the same period of last year.
R&D
expenses
Our
R&D expenses were $319,000 or 0.55% of total revenue for nine months ended
September 30, 2007, which represents a 70.59% increase, as compared with
$187,000 and 0.41%, of total revenue in the same period of 2006. The increase
was attributed to the increased spending in the research and development of
promising and high-margin advanced smart mobile terminals.
General
and administrative expenses
General
and Administrative expenses primarily consisted of compensation for personnel,
depreciation, travel expenses, rental, materials expenses related to ordinary
administration and fees for professional services.
For
the
nine months ended September 30, 2007, the total general and administrative
expenses were $2,950,000, or 5.05% of the total revenue. After deducting the
inefficient payment receivable of $1,487,000 and the allowance for obsolete
inventories of $700,000, the actual general and administrative expenses were
$763,000 or 1.31% of the total revenue, representing an increase of $244,000
or
47.01% as compared to $519,000 or 1.13% of the total revenues for the
corresponding period in 2006.
Because
of the reasons above, for the three months ended September 30, 2007, general
and
administrative expenses were $184,000, or 0.83% of total revenue, representing
an increase of $44,000 or 31.43% as compared to $140,000 or 0.68% for the
corresponding period in 2006.
Allowance
for obsolete inventories
For
the
nine months ended September 30, 2007, allowance for obsolete inventories were
$700,000, which was due to the fact that old models prior to 2006 were not
produced any more and some related obsolete inventories were
overstocked.
Gross
Profit and Gross Profit Margin
For
the
nine months ended September 30, 2007, our gross profit was $10,825,000,
reflecting a significant increase of $2,803,000, as compared to $8,022.000
for
the same period of last year. In addition, our gross profit margin for the
reporting period was 18.53%, representing an increase of 1.05% as compared
to
17.48% for the same period of 2006.
The
gross
profit margin growth of entire products lines is attributable to:
|
|
1.
|
the
27.25% increase of revenues for nine months ended September 30,2007,
as
compared to the same period last year;
|
|
|
2.
|
the
company’s increased efforts to develop and distribute more highly
profitable products; and
|
|
|
3.
|
for
nine months ended September 30,2007, the products which yielded a
profit
margin of over 18% accounted for 56.89% of
revenues.
|
Net
income
For
the
nine months ended September 30, 2007, our net income was $ 5,266,000 or a net
profit margin of 9.02%, representing an increase of $618,000, or 13.30%, as
compared to $4,648,000, or a net profit margin of 10.13% in the same period
of
2006. The increase in our net profit is due to our new business strategy and
cost controls.
However,
our net profit margin does not show a significant change from last year, which
is mainly because:
|
|
1.
|
In
2007, we paid the income tax at the rate of 12% of the aggregated
profit.
|
|
|
2.
|
In
2007, the allowance for obsolete inventories and doubtful accounts
amounted to $2,187,000 by the end of third quarter.
|
Due
to
comparatively higher profits of mid-level and high-end products and the
effective control over trade deposits, we have achieved net income of $2,570,000
in the third quarter, or 95.33% of the sum of the previous two quarters
($2,696,000).
LIQUIDITY
AND SOURCE OF CAPITAL
We
generally finance our operations from cash flow generated internally and the
short-term indirect financing from the domestic banks.
As
of
September 30, 2007, we had current assets of $60,019,000. Current assets are
mainly comprised of accounts receivable of $46,741,000, trade deposits of
$9,521,000, cash and cash equivalents of $2,519,000, inventories of $4,000
and
other accounts receivable of $1,234,000. Our current liabilities of $32,863,000
included accounts payable of $13,760,000, short-term bank loan of $8,571,000,
other accrued expenses and accrued liabilities of $6,610,000, tax payables
of
$2,350,000, amounts due to directors of $325,000, amounts due to a stockholder
of $132,000, trade deposits received of $1,000,000 and provision of warranty
of
$115,000.
We
offer
two different trading terms to our customers, i.e. cash-on-delivery and on
credit term within 45-90 days. As of Sept 30, 2007, our accounts receivable
had
increased to $46,741,000, as compared to $31,425,000 on December 31, 2006.
The
increase in our account receivable was primarily derived from our two major
customers, XWSD and CEAC. Our accounts receivable consisted of: $25,794,000
or
55.18% aged less than three months; $17,266,000 or 36.94% by four - six months,
and $3,681,000 or 7.88% by more than six months. However, $2,587,000 of the
$3,681,000 was received by the end of October 2007 and the amounts receivable
for more than three months will be paid back by the end of the
year.
As
of
September 30, 2007, our trade deposits were $9,521,000, which represented an
increase of $532,000 or 5.92%, as compared to $8,989,000 on December 31, 2006.
The trade deposit comprised the deposit for the order of Specialized Application
Devices and the advance payment on other good-sale cellular phones.
As
of
September 30, 2007, our other accounts receivable were $1,234,000, which
represented a slight decrease, as compared to $1,502,000 on December 31, 2006.
It is mainly composed of a deposit of guarantee of the bank loan of $1,128,000
(the bank loan is secured by a guarantee company since 2006).
As
of
September 30, 2007, accounts payable were $13,760,000, which represented an
increase of $2,796,000 or 25.50%, as compared to $10,964,000 on December 31,
2006. The increase in accounts payable was attributable mainly to unpaid
products from our vendor China Electronic Apparatus Company and Fusong
Technology Development (Shenzhen) Ltd.
As
of
September 30, 2007, other accrued expenses and accrued liabilities were
$6,610,000, indicating a significant growth of $2,166,000 or 48.74%, as compared
to $4,444,000 on December 31, 2006. The increase is constituted by the
outstanding tax of $5,747,000 caused by the time difference between USGAAP
and
PRCGAAP while determining the value-added tax (VAT).
As
of
September 30, 2007, tax payable was $2,350,000, which was attributable mainly
to
income tax at the rate of 12% and the deferred tax.
As
of
September 30, 2007, cash and bank balances were mainly denominated in Renminbi
(“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated
in RMB and USD. Our activities in the operation are mainly denominated in RMB.
In the accounting period, RMB currency is quoted officially against USD currency
according to a floating exchange rate. However, the exchange fluctuations were
relatively low per to RMB currency against USD currency. We consider that the
exposure to exchange fluctuations dose not affect our business and therefore
we
have not engaged in any hedging activity.
CASH
FLOWS
As
of
September 30, 2007, we had cash and cash equivalents of $2,519,000. This
represented an increase of $98,000, or 4.05% as compared to $2,421,000 on
December 31, 2006.
As
of
September 30, 2007, our short-term loan was $8,571,000, which is comprised
of
$2,303,000 from Huaxia Bank and $6,268,000 from Beijing Rural Bank.
Our
gearing ratio, calculated as total debts over total assets, was 54.40%, as
of
September 30, 2007. It increased slightly compared to 51.44% as of December
31,
2006.
CONTINGENT
LIABILITIES
On
June
20, 2007, we entered into a guarantee contract to serve as guarantor of a loan
in the amount of RMB120,000,000 to CECT-Chinacom Communications Co., Ltd.
(CECT-Chinacom) from Beijing Rural Bank to provide CECT-Chinacom with capital
for equipment purchases. Under the guarantee contract, we shall perform all
obligations of CECT under the Loan Contract if CECT fails to perform its
obligations as set forth in the Loan Contract, including, but not limited to,
ceasing production, going out of business, dissolving the business, having
its
business license withdrawn, and filing for bankruptcy.
OFF
BALANCE SHEET ARRANGEMENTS
As
of
September 30, 2007, we had no off balance sheet arrangements.
CONTRACTUAL
COMMITMENTS
We
are
obligated to make future payments under various contracts, including purchase
and operating leases. The Company does not have any long-term debt or capital
lease obligations. The following table summarized the Company’s contractual
obligations at September 30, 2007, reported by maturity of
obligation.
|
|
|
Payments due by period
|
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
|
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt Obligations
|
|
|
8,571
|
|
|
8,571
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Capital
Lease Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Operating
Lease Obligations
|
|
|
19
|
|
|
19
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Purchase
Obligations
|
|
|
3,136
|
|
|
3,136
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Other
long-term liabilities reflected on the registrant’s balance sheet under
GAAP
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,726
|
|
|
11,726
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk.
Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices and other market-driven rates
or
prices. The Company, in the normal course of doing business, is exposed to
market risk through changes in interest rates with respect to bank loans.
Bank
loans at September 30, 2007 were $8,571,000. The interest rate for the nine
months ended September 30, 2007 was charged at 7.344% to 7.956% per
annum.
The
Company considers RMB as its functional currency as a substantial portion
of the
Company's business activities are based in RMB. However, the Company has
chosen
the United States dollar as its reporting currency.
Transactions
in currencies other than the functional currency during the period are
translated into the functional currency at the applicable rates of exchange
prevailing at the time of the transactions. Monetary assets and liabilities
denominated in currencies other than functional currency are translated into
functional currency at the applicable rates of exchange in effect at the
balance
sheet date. Exchange gains and losses are recorded in the combined statements
of
operations.
For
translation of financial statements into the reporting currency, assets and
liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments, when materials
resulting from this process are recorded in accumulated other comprehensive
income within stockholders' equity.
Item 4.
Controls
and Procedures.
The
Company maintains disclosure controls and procedures that are designed to
ensure
that information required to be disclosed in our reports filed pursuant to
the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules, regulations
and related forms, and that such information is accumulated and communicated
to
our principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure.
The
Company, under the supervision of our chief executive officer and chief
financial officer, carried out an evaluation of the effectiveness of the
design
and operation of its disclosure controls and procedures as of the balance
sheet
date. Based upon that evaluation, management, including our chief executive
officer and chief financial officer, concluded that the Company’s disclosure
controls and procedures were effective in alerting it in a timely manner
to
information relating to the Company required to be disclosed in this
report.
During
the period, there were no significant changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely
to
materially affect our internal controls over financial reporting.
PART
II – OTHER INFORMATION
Item
1.
Legal
Proceedings.
We
are
not party to any litigation, and we are not aware of any threatened litigation
that would have a material adverse effect on us or our business.
Item
1A.
Risk
Factors.
None.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
(a)
None.
(b)
None.
(c)
None.
Item
3.
Defaults
Upon Senior Securities.
None.
Item
4.
Submission
of Matters to a Vote of Security Holders.
None.
Item
5.
Other
Information.
None.
Item
6.
Exhibits.
|
Exhibit
|
|
|
|
Number
|
|
Exhibit
Description
|
|
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
|
|
31.2
|
|
Certification
of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer under Section 906 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
|
|
32.2
|
|
Certification
of Principal Accounting Officer under Section 906 of the Sarbanes-Oxley
Act of 2002
|
SIGNATURES
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.
|
ORSUS
XELENT TECHNOLOGIES, INC.
|
|
|
|
|
|
By:
|
/s/
Wang Xin
|
|
|
Wang
Xin
|
|
|
Chief
Executive Officer
|
DATED:
November 13, 2007
|
Exhibit
|
|
|
|
Number
|
|
Exhibit
Description
|
|
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer under Section 906 of the Sarbanes-Oxley
Act
of 2002
|
|
|
|
|
|
32.2
|
|
Certification
of Principal Fincial Officer under Section 906 of the Sarbanes-Oxley
Act
of 2002
|
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