SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 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 March 31, 2008
o
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: 001-33456
ORSUS
XELENT TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
of incorporation)
|
|
20-1198142
(I.R.S.
Employer Identification No.)
|
12
th
Floor, Tower B, Chaowai MEN Office Building
26
Chaowai Street, Chaoyang Disc.
Beijing,
People’s Republic Of China 100020
(Address
of principal executive offices, including zip code)
86-10-85653777
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
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
o
Accelerated
filer
o
Non-accelerated
filer
o
(Do not check if a smaller
reporting company)
Smaller
reporting company
x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12-b2 of the Exchange Act).
Yes
o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at May 14, 2008
|
Common
Stock, $.001 par value per share
|
|
29,756,000
shares
|
PART
I - FINANCIAL INFORMATION
Item
1.
Financial
Statements.
Orsus
Xelent Technologies, Inc.
Index
to Financial Statements
|
Page
|
|
|
Condensed Consolidated
Statements of Operations (Unaudited)
|
2
|
|
|
Condensed Consolidated
Balance Sheets (Unaudited)
|
3
|
|
|
Condensed Consolidated
Statement of Cash Flows (Unaudited)
|
4
|
|
|
Consolidated Statement
of
Changes in Stockholders’ Equity (Unaudited)
|
5
|
|
|
Notes to Condensed
Consolidated Financial Statements
|
6
|
Orsus
Xelent Technologies, Inc.
Condensed
Consolidated Statements of Operations and Other Comprehensive
Income
For
the 3 months ended March 31, 2008 and 2007
|
(Dollars in thousands except
share data
and per share
amounts)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Three
months ended
March
31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
Operating
revenues - Net sales
|
|
|
|
|
|
20,719
|
|
|
20,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operating revenue
|
|
|
|
|
|
(17,501
|
)
|
|
(16,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
income
|
|
|
|
|
|
3,218
|
|
|
3,668
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
|
|
|
(103
|
)
|
|
(113
|
)
|
General
and administrative
|
|
|
|
|
|
(436
|
)
|
|
(1,374
|
)
|
Research
and development
|
|
|
|
|
|
(115
|
)
|
|
(53
|
)
|
Depreciation
|
|
|
|
|
|
(25
|
)
|
|
(52
|
)
|
Allowance
for obsolete inventories
|
|
|
|
|
|
-
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
|
(679
|
)
|
|
(1,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
2,539
|
|
|
1,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
(238
|
)
|
|
(127
|
)
|
Other
income, net
|
|
|
|
|
|
164
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
2,465
|
|
|
1,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
3
|
|
|
(548
|
)
|
|
(384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
1,917
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
1,466
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
3,383
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (US$)
|
|
|
|
|
|
6.44
cents
|
|
|
4.19
cents
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common stock outstanding
|
|
|
|
|
|
29,756,000
|
|
|
29,756,000
|
|
Orsus
Xelent Technologies, Inc.
Condensed
Consolidated Balance Sheets
As
of March 31, 2008 and December 31, 2007
|
(Dollars in thousands except share data
and per
share amounts)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
As
of
March
31,
2008
|
|
As
of
December
31,
2007
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
186
|
|
|
2,928
|
|
Accounts
receivable, net of allowance
|
|
|
|
|
|
73,860
|
|
|
57,743
|
|
Inventories,
net
|
|
|
|
|
|
-
|
|
|
4
|
|
Trade
deposits paid, net
|
|
|
|
|
|
2,360
|
|
|
839
|
|
Other
current assets
|
|
|
4
|
|
|
4,375
|
|
|
4,196
|
|
Pledged
deposit
|
|
|
6
|
|
|
1,256
|
|
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
82,037
|
|
|
66,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
5
|
|
|
305
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
82,342
|
|
|
67,234
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
|
6
|
|
|
9,541
|
|
|
9,160
|
|
Current
portion of mortgage loan
|
|
|
7
|
|
|
66
|
|
|
68
|
|
Accounts
payable - Trade
|
|
|
|
|
|
20,251
|
|
|
10,854
|
|
Accrued
expenses and other accrued liabilities
|
|
|
|
|
|
9,062
|
|
|
8,048
|
|
Trade
deposits
received
|
|
|
|
|
|
1,913
|
|
|
1,709
|
|
Due
to directors
|
|
|
8
|
|
|
451
|
|
|
323
|
|
Provision
for warranty
|
|
|
|
|
|
128
|
|
|
123
|
|
Tax
payables
|
|
|
|
|
|
3,650
|
|
|
3,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
45,062
|
|
|
33,332
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan
|
|
|
7
|
|
|
-
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, US$0.001 par value:
Authorized:
10,000,000 shares, no shares issued
|
|
|
|
|
|
|
|
|
|
|
Common
stock and paid-in capital, US$0.001 par value:
Authorized:
100,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 29,756,000 shares as of March 31, 2008 and as of
December
31, 2007
|
|
|
|
|
|
30
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
|
|
|
2,484
|
|
|
2,484
|
|
Dedicated
reserves
|
|
|
|
|
|
1,042
|
|
|
1,042
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
4,372
|
|
|
2,906
|
|
Retained
earnings
|
|
|
|
|
|
29,352
|
|
|
27,435
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
|
|
|
37,280
|
|
|
33,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
|
82,342
|
|
|
67,234
|
|
Orsus
Xelent Technologies, Inc.
Condensed
Consolidated Statements of Cash Flows
For
the 3 months ended March 31, 2008 and 2007
|
(Dollars in thousands except share
data
and per share amounts)
|
|
|
(Unaudited)
|
|
|
|
Three
months ended
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
US$’000
|
|
US$’000
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
Net
income
|
|
|
1,917
|
|
|
1,247
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25
|
|
|
52
|
|
Allowance
for obsolete inventories
|
|
|
-
|
|
|
320
|
|
Allowance
for doubtful account
|
|
|
-
|
|
|
1,341
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable -trade
|
|
|
(13,717
|
)
|
|
475
|
|
Inventories,
net
|
|
|
4
|
|
|
270
|
|
Trade
deposits paid
|
|
|
(1,486
|
)
|
|
(5,502
|
)
|
Other
current assets
|
|
|
(5
|
)
|
|
(16
|
)
|
Pledged
deposit
|
|
|
-
|
|
|
(126
|
)
|
Trade
deposits received
|
|
|
133
|
|
|
749
|
|
Accounts
payable - trade
|
|
|
8,946
|
|
|
(1,432
|
)
|
Due
to directors
|
|
|
32
|
|
|
-
|
|
Accrued
expenses and other accrued liabilities
|
|
|
677
|
|
|
2,187
|
|
Tax
payables
|
|
|
476
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,998
|
)
|
|
(1,345
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
-
|
|
|
(182
|
)
|
Loan
to third party
|
|
|
-
|
|
|
288
|
|
|
|
|
|
|
|
|
|
Net
cash
from
investing activities
|
|
|
-
|
|
|
106
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Advance
from a director
|
|
|
83
|
|
|
-
|
|
Proceeds
from short-term bank loan
|
|
|
2,563
|
|
|
-
|
|
Repayment
of short-term bank loans
|
|
|
(2,563
|
)
|
|
2,303
|
|
Repayment
of mortgage loan
|
|
|
(10
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash from financing activities
|
|
|
73
|
|
|
2,303
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(2,925
|
)
|
|
1,064
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
2,928
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
Effect
on exchange rate changes
|
|
|
183
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the period
|
|
|
186
|
|
|
3,485
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
238
|
|
|
127
|
|
Interest
received
|
|
|
38
|
|
|
-
|
|
Tax
paid
|
|
|
77
|
|
|
-
|
|
Orsus
Xelent Technologies, Inc.
Condensed
Consolidated Statements of Changes in Stockholders’
Equity
|
(Dollars in thousands except share
data
and per share amounts)
|
|
|
Common
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of
shares
|
|
Amount
|
|
Additional
paid-in
capital
|
|
Dedicated
reserves
|
|
Other
compre-
hensive
income
|
|
Retained
earnings
|
|
Total
|
|
|
|
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
975
|
|
|
17,752
|
|
|
22,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,683
|
|
|
9,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,931
|
|
|
-
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2008
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
2,906
|
|
|
27,435
|
|
|
33,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,917
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,466
|
|
|
-
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2008 (Unaudited)
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
4,372
|
|
|
29,352
|
|
|
37,280
|
|
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
1.
BASIS
OF PRESENTATION AND CONSOLIDATION
Basis
of presentation
The
accompanying financial statements, as of March 31, 2008 and for the 3 months
ended March 31, 2008 and 2007, have been prepared by the Company without audit.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“USGAAP”) have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that
the
disclosures herein are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with
Management’s Discussion and Analysis and the Company’s audited consolidated
financial statements and notes thereto for the year ended December 31, 2007
included in the Company’s 2007 Form 10-K dated March 31, 2008.
The
preparation of financial statements in conformity with USGAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets, liabilities, revenue and expenses and the disclosure of contingent
asses
and liabilities. Actual results and outcomes may differ from management’s
estimates and assumptions.
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in conformity with
USGAAP. The results for the 3 months ended March 31, 2008 and 2007 do not
necessarily indicate the results that may be expected for the full year.
Basis
of consolidation
The
financial statements include the accounts of Orsus Xelent Technologies, Inc.
(“ORS”) and its subsidiaries. Intercompany transactions and balances have been
eliminated.
2.
EARNINGS
PER SHARE
Basic
earnings per share is computed based upon the weighted average number of shares
of common stock outstanding during each period.
The
Company had no potential common stock instruments with a dilutive effect for
any
period presented, therefore basic and diluted earnings per share are the
same.
3.
INCOME
TAXES
ORS
and
its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates. Provision
for income and other related taxes have been provided in accordance with the
tax
rates and laws in effect in the various countries of operations.
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
No
provision for withholding or United States federal or state income taxes or
tax
benefits on the undistributed earnings and/or losses of the Company's
subsidiaries has been provided as the earnings of these subsidiaries, in the
opinion of the management, will be reinvested indefinitely.
United
First International Limited (“UFI”) was incorporated in Hong Kong and has no
assessable profit for the periods presented. Orsus Xelent Trading (HK) Limited
(“OXTHK”) was incorporated in Hong Kong and Hong Kong Profits Tax has been
provided at the rate of 17.5% in respect of its under-provision for prior years’
estimated assessable income; but no Hong Kong Profits Tax has been provided
for
the current 3-month period as OXTHK incurred a loss for the period for taxation
purposes.
The
Company’s income is principally generated in the PRC by Beijing Orsus Xelent
Technologies & Trading Co., Limited (“BOXT”). Since BOXT is registered as a
wholly-owned foreign investment enterprise (“WOFIE”), it is subject to tax laws
applicable to WOFIE in the PRC and is fully exempt from the PRC enterprise
income tax of 24% for two years commencing in fiscal year 2005, followed by
a
50% reduction for the next three years.
On
March
16, 2007, a New Enterprise Income Tax Law (“NEITL”) was issued in the PRC. Prior
to the issuance of the NEITL, domestic enterprises (“DE”) and foreign invested
enterprises (“FIE”) in the PRC were taxed under different enterprise income tax
laws. The NEITL unifies the enterprise tax law applicable to both DE and FIE
commencing in fiscal year beginning from January 1, 2008. The different
enterprise income tax (“EIT”) rates with effective from January 1, 2008 are as
follows:
Unified
EIT rate effective January 1, 2008
|
25%
|
Small
scale / low profit enterprises
|
20%
|
Hi-tech
enterprise
|
15%
|
By
virtue
of the NEITL, it is expected that BOXT will be subject to the unified EIT rate
of 25% under the NEITL. However, the 50% tax reduction, which has already been
obtained by BOXT under the old tax laws, can still be maintained and the
remaining tax holiday, which was commenced before 2008, can still be enjoyed
by
BOXT, until the year to expiry at 2009.
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for
uncertainty in tax positions, as defined, and prescribes the measurement process
and a minimum recognition threshold for a tax position, taken or expected to
be
taken in a tax return, that is required to be met before being recognized in
the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain position only if it is more-likely-than-not the tax position
will be sustained on examination by the taxing authority, based on the technical
merits of the position. The tax benefits recognized in the financial statements
attributable to such position are measured based on the largest benefit that
has
a greater than 50% likelihood of being realized upon the ultimate resolution
of
the position.
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
Since
January 1, 2007, the Company is subject to the provisions of FIN 48, and has
analyzed its filing positions in all of the federal, state and foreign
jurisdictions where it is required to file income tax returns, as well as for
all open years for those jurisdictions. As of December 31, 2007, and March
31,
2008, the Company has identified the following jurisdictions as “major” tax
jurisdictions, as defined, in which it is required to file income tax returns:
United States, Hong Kong and PRC. Based on the evaluations noted above, the
Company has concluded that there are no significant uncertain tax positions
requiring recognition in its consolidated financial statements. Based on a
review of tax positions for all open years, no reserves for uncertain income
tax
positions have been recorded pursuant to FIN 48 during the three months ended
March 31, 2008 and during the year ended December 31, 2007, and the Company
does
not anticipate that it is reasonably possible that any material increase or
decrease in its unrecognized tax benefits will occur within twelve
months.
As
of
December 31, 2007 and March 31, 2008, the Company had no unrecognized tax
benefits or accruals for the potential payment or interest and penalties. The
Company’s policy is to record interest and penalties in this connection as a
component of the provision for income tax expense. For the three months ended
March 31, 2008, no interest or penalties were recorded.
(a)
Income
tax expenses comprised the following:
|
|
(Unaudited)
Three
months ended
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
US$’000
|
|
US$’000
|
|
Current
tax
|
|
|
|
|
|
Hong
Kong
|
|
|
228
|
|
|
-
|
|
PRC
|
|
|
320
|
|
|
384
|
|
|
|
|
548
|
|
|
384
|
|
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
|
(b)
|
Reconciliation
from the expected statutory tax rate in the PRC of 24%
(2007:
24%)
is
as follows:
|
|
|
(Unaudited)
Three
months ended
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
%
|
|
%
|
|
|
|
|
|
|
|
Statutory
rate - PRC
|
|
|
24.0
|
|
|
24.0
|
|
Difference
in tax rates in the countries that a subsidiary of the Company
operates
|
|
|
(3.4
|
)
|
|
-
|
|
Tax
exemption
|
|
|
(13.8
|
)
|
|
(23.7
|
)
|
Non-deductible
items
|
|
|
15.4
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
22.2
|
|
|
23.5
|
|
4.
OTHER
CURRENT ASSETS
Included
in other current assets was a deposit of US$4,272 as of March 31, 2008 and
US$4,102 as of December 31, 2007, the movement of which represents the effect
on
exchange rate changes, in relation to a proposed acquisition paid pursuant
to a
letter of intent entered into in 2007.
5.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment are summarized as follows:
|
|
(Unaudited)
|
|
|
|
|
|
As
of
March
31,
2008
|
|
As
of
December
31,
2007
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
Moulds
|
|
|
4
|
|
|
4
|
|
Leasehold
improvements
|
|
|
122
|
|
|
123
|
|
Plant
and machinery
|
|
|
20
|
|
|
19
|
|
Office
equipment
|
|
|
295
|
|
|
284
|
|
Motor
vehicles
|
|
|
296
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
737
|
|
|
714
|
|
Accumulated
depreciation
|
|
|
(432
|
)
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
305
|
|
|
318
|
|
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
Property,
plant and equipment with an aggregate net book value as of March 31, 2008 of
US$179 and as of December 31, 2007 of US$177 were collateralized for the
mortgage loan granted to a subsidiary of the Company as set out in note 7 to
the
financial statements.
6.
SHORT-TERM
BANK LOANS
All
bank
loans are secured by a personal guarantee provided by the director, Mr. Liu
Yu.
In addition, bank loans of US$6,978 as of March 31, 2008 and US$6,699 as of
December 31, 2007 are further secured by a pledged deposit of US$1,256 as of
March 31, 2008 and US$1,206 as of December 31, 2007 and guarantee provided
by a
guaranty company. Remaining bank loan of US$2,563, obtained during the period,
as of March 31, 2008 and US$2,461 as of December 31, 2007 is further secured
by
co-guarantees provided by two third party companies and a major customer of
the
Company. All bank loans are repayable within one year at interest rates ranging
from 8.964% to 10.343% per annum.
7.
MORTGAGE
LOAN
The
mortgage loan is collateralized by a motor vehicle of a subsidiary of the
Company as set out in note 5 to the financial statements and a personal
guarantee provided by the director, Mr. Wang Xin. It was charged at a fixed
interest rate of 7.56% per annum and repayable on February 9, 2009.
|
|
(Unaudited)
|
|
|
|
|
|
As
of
March
31,
2008
|
|
As
of
December
31,
2007
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
Current
portion
|
|
|
66
|
|
|
68
|
|
Non-current
portion
|
|
|
-
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
73
|
|
8.
RELATED
PARTY TRANSACTIONS
a.
Name
and relationship of related parties
Related
party
|
Relationship
with the Company during the period ended March 31,
2008
|
|
|
Mr.
Wang Xin
|
Director
and stockholder of the Company
|
Mr.
Liu Yu
|
Director
and stockholder of the Company
|
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
|
b.
|
Summary
of related party balances
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
As
of
March
31,
2008
|
|
As
of
December
31,
2007
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
Due
to directors
|
|
|
|
|
|
|
|
Mr.
Wang Xin and Mr. Liu Yu
|
|
|
(i
|
)
|
|
451
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
loans guaranteed by a director
|
|
|
|
|
|
|
|
|
|
|
Mr.
Liu Yu
|
|
|
6
|
|
|
9,541
|
|
|
9,160
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan guaranteed by a director
|
|
|
|
|
|
|
|
|
|
|
Mr.
Wang Xin
|
|
|
7
|
|
|
66
|
|
|
73
|
|
Note
:
(i)
The
amounts are unsecured, interest-free and repayable on demand.
9.
SEGMENT
INFORMATION
During
the period ended March 31, 2008 and year ended December 31, 2007, all revenue
of
the Company are from its business of designing for retail and wholesale
distribution cellular phones. Accordingly no financial information by business
segment is presented.
The
Company operates in the PRC and all its revenue and operating profit are from
the PRC. Accordingly no geographical analysis is presented.
10.
CONTINGENCIES
Tax
penalty
In
accordance with PRC’s tax regulations, BOXT’s sales are subject to a 17% of
value added tax (“VAT”) upon the issuance of VAT invoices to customers. BOXT
follows the practice of reporting its revenue for VAT purposes when invoices
are
issued. As of March 31, 2008 and December 31, 2007, there were sales amounted
to
approximately US$137,710 and US$117,824 respectively for which VAT invoices
have
not yet been issued.
Furthermore,
BOXT reports its revenue for PRC enterprise income tax (“EIT”) purposes when VAT
invoices are issued instead of when goods are delivered. All unbilled revenue
will become taxable when invoice are issued.
The
above
practice is not in strict compliance with the relevant laws and regulations
in
respect of VAT and EIT. Despite the fact that BOXT has made full provision
on
VAT and EIT including any estimated surcharge in the financial statements,
BOXT
may be subject to a penalty for the deferred reporting of above tax obligations.
The exact amount of penalty cannot be estimated with any reasonable degree
of
certainty. The board of directors considers it is more likely than not that
the
penalty will not be imposed.
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
Financial
guarantee contract
On
June
20, 2007, BOXT entered into a guarantee contract for three years to June 16,
2010 to serve as guarantor of a bank loan amounting to approximately US$17,089
(equivalent to RMB120,000) to an independent third-party, CECT-Chinacom
Communications Co., Ltd. (“CECT”), from Beijing Rural Bank to provide CECT with
capital for equipment purchases. Under the guarantee contract, BOXT 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.
According
to a valuation report dated March 27, 2008 issued by an independent professional
valuer, the fair value of the undiscounted maximum potential amount of future
payments, which was estimated by the independent professional valuer, that
BOXT
could be required to make under the guarantee contract is amounted to US$106
(equivalent to approximately RMB745) as of the date of inception. At the balance
sheet date, there is no change in the estimated fair value of the financial
guarantee since the date of inception in accordance with the estimation made
by
the directors of the Company.
11.
SHARE
OPTION PLAN
On
March
27, 2008, a stock option plan of “2007 Omnibus Long-Term Incentive Plan”
(“Plan”) was approved by the Board of Directors. The purpose of the Plan is to
promote the long-term performance goals and general prosperity of the Company.
The Plan, which provides for the grant of stock options, stock appreciation
rights, restricted stock, restricted stock units, unrestricted stock and cash
awards, is designed to help the Company and its subsidiaries and affiliates
attract and retain senior officers for positions of substantial responsibility
and to provide for non-employee directors and key employees with an additional
motivation and incentive to improve the business results and contribute to
the
success of the Company.
On
April
2, 2008, stock options to subscribe total of 614,000 shares were granted to
certain directors, senior officers and other key employees of the Company at
an
exercise price of US$2.26 per share. The options granted are exercisable from
July 2, 2008.
12.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No.
157 establishes a framework for measuring fair value within generally accepted
accounting principles, clarifies the definition of fair value within that
framework and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require any new fair value
measurements in generally accepted accounting principles. However,
the definition of fair value in SFAS No. 157 may affect assumptions used by
companies in determining fair value. On January 1, 2008 the Company
adopted SFAS 157 with respect to its financial assets and liabilities that
are
measured at fair value; the adoption of these provisions did not have a material
impact on the consolidated financial statements.
Orsus
Xelent Technologies, Inc.
Notes
to Condensed Consolidated Financial Statements
For
the three months ended March 31, 2007 and
2008
|
|
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115,” or SFAS 159. SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Entities that elect the fair value option will report unrealized gains
and losses in earnings at each subsequent reporting date. The fair value option
may be elected on an instrument-by-instrument basis, with few exceptions.
SFAS 159 also establishes presentation and disclosure requirements to
facilitate comparisons between companies that choose different measurement
attributes for similar assets and liabilities. Companies may elect the fair
value option under SFAS 159 for fiscal years beginning after
November 15, 2007. We elected not to adopt the fair value option of
SFAS 159 at this time.
In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations. SFAS No. 141(R) improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. This Statement
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. The adoption of this Statement is not
expected to have a material impact on the Company’s financial position or
results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest
in
a subsidiary and for the deconsolidation of a subsidiary and clarifies that
a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years
beginning on or after December 15, 2008. The adoption of this
Statement is not expected to have a material impact on the Company’s financial
position or results of operations.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and
Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No.
161 amends SFAS No. 133 and requires entities to enhance their disclosures
about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS No. 161 is effective for fiscal years beginning on
or after November 15, 2008. The adoption of SFAS No. 161 is not
expected to have a material impact on the Company’s financial position or
results of operations.
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
May 9,
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 the Company are conducted through Beijing Orsus Xelent
Tech & Trading Co., Ltd.(the “Xelent”), which is also commonly called “Orsus
Cellular” within the cellular phone industry. Xelent sells its handsets and
total solutions, including economically priced and fully-loaded cell phones
for
both Global System for Mobile communications (“GSM”) and Code Division Multiple
Access (“CDMA”) platforms, to a diverse base of customers and dealers, such as
ordinary users, tailored operators, specialized users from all field of business
or government. Most of our mobile phone models are either designed by us for
both our exclusive distribution and joint sales under established co-brands,
or
developed in conjunction with outside design firms. In February 2004, Xelent
registered “ORSUS” with the PRC State Administration for Industry and Commerce
as its product trademark.
In
the
market of GSM mobiles, Xelent provided its handsets to all types of customers
and dealers and continues to maintain good relationships with them. At present,
the GSM mobile devices constitute a significant percentage of the sales and
profit of the Company. In addition, 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 its marketing since entering the
field in September 2006.
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 2,039,800 cellular phones since its first product
launched in 2004.
In
April
2007, the Company’s 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
2007,
companies in the cell phone market in China were not optimistic. Many of the
big
local brand cellphone enterprises were digesting their inventories. Their
revenues sharply decreased during the year due to the high cost of R&D,
personnel and purchasing of raw materials and components. Despite these
challenges in the industry, the Company continued to achieve high growth because
of the adjustments we made to our business model as early as the end of 2006.
We
changed the OEM model by asking suppliers to provide materials instead of
purchasing the material by ourselves, by shifting the after-sales maintenance
service to the materials suppliers, by reducing our management personnel and
unnecessary R&D units and by capturing some fully-developed projects in the
market. In the end, being swift and simple, the Company has performed better
than expected and become more competitive. The growth of our revenue and net
income for the fiscal year ended December 31, 2007 were 32% and 44%,
respectively.
During
the first quarter of 2008, although the Company did not make significant changes
regarding its specific operations or undertake changes and initiatives in
response to China's macroeconomic industrial policies, the Company still
saw 3.55% increase in operational revenues and a 53.73% increase in net
profit as compared to the same period last year. In addition, the Company made
overall adjustments and innovations in its business model during this last
year,
and the Company’s new industrial model has helped it stand out among many other
mobile phone makers in terms of brand awareness, reputation, interests and
other
important criteria. All of the above will allow the Company to continue to
develop its good ideology and build on its firm foundation over the upcoming
quarters and years.
Looking
ahead into the fiscal year of 2008, we have three objectives to meet in our
business operation:
1.
|
|
To
complete the acquisition of a manufacturing facility during the second
quarter in 2008
|
The
acquisition will assist the Company (or its holding company) to fulfill its
industrial development strategy and will help to prepare it to obtain a 3G
manufacturing license and permit sales of 3G terminals from Chinese
government. Moreover, the acquisition will enable us to turn our designs into
manufactured products more quickly and will significantly lower the associated
cost. The Company will successfully step into another remarkable development
phase through the acquisition.
2.
|
To
seek continuing growth of sales volume in
2008
|
The
operations of 2007 are the firm foundations for us, from which we achieved
advantages from our highly efficiency low cost operations and our capital
platform.. For 2008, we have decided to adjust our structure of goods delivery
according to the changing cellphone market and the impact of the restructuring
of China’s telecommunication operators. Since the fourth quarter of 2007,
customized orders from China Unicom Co., Ltd have been decreasing. The reported
restructuring of five Chinese operators, China Telecom, China Unicom, China
Netcomm, China Tietong and China Mobile, did not yet commence in the first
quarter of 2008 as expected, which resulted in most suppliers holding off on
their deliveries of cellphones until the restructuring occurs. This delay had
a
negative impact on our revenue growth of some related products.
For
fiscal year of 2008, our aims are: for the sales volume of operator-tailored
products to achieve the same level as that of last year; and for the sales
volume of traditional terminals to gorw as a result of our increased investment
in R&D, marketing, self control of production and through the further
build-up of our business development professionals to strengthen our market
penetration.
The
Company anticipates a significant growth in revenues resulting in a total sales
revenue of between $120 to $130 million for the twelve months ending on December
31, 2008, up by 34% from 89.9 million in 2007 and net income to be approximately
$14.5 to $15.5 million, up more than 50% from $9.7 million in 2007. The Company
expects that our general & administration expenses and marketing spending in
2008 will be higher than that of 2007. However, we will invest 6 or 7 times
more
in our R&D department in 2008 than in 2007 in order to expand our R&D
department units and increase our presence and share of the overall market.
These estimates are based on the expectation that we will complete an
acquisition of a manufacturing facility during 2008, after which our entire
product line should show significant progress, from further gains in
productivity resulting from increased control of our manufacturing to increased
R&D capability.
The
Company also expects approximately 47% of 2008 sales will be contributed by
traditional handsets, while operator-tailored cellphones may account for
approximately 33% and specialized application mobile terminals roughly 20%
of
the total sales for 2008. All of these products will make our sales volume
reach
above-mentioned projections. Further, a majority of the traditional handsets
we
expect to sell in 2008, will be “mid-level” and "low end" cell phones. Our
middle-level and low-end products are all multi-functional and
economically-priced, which gives them an advantage when competing against
foreign brands that tend to be higher prices and cost more to
produce
3.
|
To
develop and launch qualified 3G
products
|
Our
company is ready to launch the products that meet the 3G standards one the
market for 3G is fully opened and licenses have been granted. While no specific
time frames have been announced for the trials, or whether they may be extended
to other cities, we are optimistic that next stages of testing will be taken
before the Olympic Games in August after results of the initial trials can
be
evaluated.
On
April
1, 2008, China Mobile, China’s top wireless operator, began commercial trial
services of 3G mobile phones in eight major cities, including Beijing, Shanghai,
Guangzhou, Shenzhen, Tianjin, Xiamen, Qinhuangdao, and Shenyang. Five of the
eight cities are hosting events for the Beijing Olympics in August, 2008, and
China Mobile has promised to provide 3G mobile phone services in time for the
Games. The service features high-speed data transmissions that can allow
users to watch videos, play 3D games, and conduct video conferences. The
TD-SCDAM signal offers coverage within the eight cities. It is not available
in
other cities, but users can switch to 2G networks there.
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
The
following table summarizes our operating results for the three months ended
March 31, 2008 and March 31, 2007, respectively:
|
|
Three
months ended
March
31, 2008
|
|
Three
months ended
March
31, 2007
|
|
Comparison
|
|
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
|
|
Revenue
|
|
|
20,719
|
|
|
-
|
|
|
20,009
|
|
|
-
|
|
|
710
|
|
|
3.55
|
%
|
Cost
of sales
|
|
|
17,501
|
|
|
84.47
|
%
|
|
16,341
|
|
|
81.67
|
%
|
|
1,160
|
|
|
7.10
|
%
|
Sales
& marketing expenses
|
|
|
103
|
|
|
0.50
|
%
|
|
113
|
|
|
0.56
|
%
|
|
(10
|
)
|
|
(8.85
|
%)
|
General
& admin. expenses
|
|
|
436
|
|
|
2.10
|
%
|
|
159
|
|
|
0.79
|
%
|
|
277
|
|
|
174.21
|
%
|
R&D
expenses
|
|
|
115
|
|
|
0.56
|
%
|
|
53
|
|
|
0.26
|
%
|
|
62
|
|
|
116.98
|
%
|
Depreciation
|
|
|
25
|
|
|
0.12
|
%
|
|
52
|
|
|
0.26
|
%
|
|
(27
|
)
|
|
(51.92
|
%)
|
Allowance
for obsolete inventories
|
|
|
-
|
|
|
-
|
|
|
320
|
|
|
1.60
|
%
|
|
(320
|
)
|
|
(100.00
|
%)
|
Allowance
for trading deposit receivable
|
|
|
-
|
|
|
-
|
|
|
1,215
|
|
|
6.07
|
%
|
|
(1,215
|
)
|
|
(100.00
|
%)
|
Finance
cost
|
|
|
238
|
|
|
1.15
|
%
|
|
127
|
|
|
0.63
|
%
|
|
111
|
|
|
87.40
|
%
|
Other
net income
|
|
|
164
|
|
|
0.79
|
%
|
|
2
|
|
|
0.01
|
%
|
|
162
|
|
|
8,100
|
%
|
Pre-tax
profit
|
|
|
2,465
|
|
|
11.90
|
%
|
|
1,631
|
|
|
8.15
|
%
|
|
834
|
|
|
51.13
|
%
|
Income
tax
|
|
|
548
|
|
|
2.64
|
%
|
|
384
|
|
|
1.92
|
%
|
|
164
|
|
|
42.71
|
%
|
Profit
|
|
|
1,917
|
|
|
9.25
|
%
|
|
1,247
|
|
|
6.23
|
%
|
|
670
|
|
|
53.73
|
%
|
Revenues
Our
Revenues were $20,719,000 for the three months ended March 31, 2008,
representing a slight increase as compared to $20,009,000 in the corresponding
period in 2007.
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. I
n
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
the
first quarter of 2008, we achieved the total revenues of $20,719,000, all of
which were generated from our GSM products.
The
revenues of product segments for the three months ended March 31,
2008:
|
|
Three
months ended March 31, 2008
|
|
|
|
$000
|
|
%
of Revenue
|
|
DX6018
|
|
|
3,990
|
|
|
19.26
|
%
|
DX7020
|
|
|
1,459
|
|
|
7.04
|
%
|
DX7026
|
|
|
2,680
|
|
|
12.93
|
%
|
DX7028
|
|
|
2,740
|
|
|
13.22
|
%
|
DX8020
|
|
|
2,263
|
|
|
10.92
|
%
|
DX8028
|
|
|
2,335
|
|
|
11.27
|
%
|
DX3020
|
|
|
1,679
|
|
|
8.10
|
%
|
DX6010
|
|
|
1,263
|
|
|
6.10
|
%
|
DX6028
|
|
|
2,000
|
|
|
9.66
|
%
|
LG2018
|
|
|
310
|
|
|
1.50
|
%
|
TOTAL
|
|
|
20,719
|
|
|
100.00
|
%
|
For
the
three months ended March 31, 2008, the sale of GSM products accounted for 100%,
of our total revenue, which was from the sales of DX6018, DX7020, DX7026,
DX7028, DX8020, DX8028, DX3020, DX6010, DX6028 and LG2018, which generated
revenues of $3,990,000, $1,459,000, $2,680,000, $2,740,000, $2,263,000,
$2,335,000, $1,679,000, $1,263,000, $2,000,000 and $310,000, respectively.
Our
GSM
products are purchased from Tianjin Communication Broadcast Group (TCB) which
supplies DX6028 (Dual Simcards Simul-Standby, 2.4TP, 300K Pixel Camera, MP3,
MP4, Bluetooth, Dual Speakers, Fire Wall, 1200
~
1300mAh
Battery), from China Electronic Appliance Corporation (CEAC), which supplies
DX7026 (Dual Simcards Mono-Standby, 2.4+TP, 300K Pixel Camera, MP3, MP4,
Bluetooth, Tricolor Pad Lamp, Dual Speakers, 850~950mAh Battery), from Hongyuan
Kangda Trading Co., Ltd. (HKT), which supplies DX8028 (Mono-Chip, Dual Simcards
Simul-Standby, 1.8+TP, 300K Pixel Camera, MP3, MP4, Colorful Pad Lamp, Dual
Speakers) and from Holley Communications Co., Ltd. (Holley), which supplies
DX6018 (Dual Simcards Mono-Standby, 2.4+TP, 300K Pixel Camera, Bluetooth,
Tricolor Pad Lamp, MP3, MP4, 850~950mAh Battery).
Customer
Segments
For
the
three months ended March 31, 2008, all of our revenues were derived from Beijing
Xingwang Shidai Tech & Trading Co., Ltd. (XWSD), in amount of $20,719,000.
XWSD has been our most important customer for a long period. It is one of the
largest distributors and dealers in Mainland China and has sales networks in
major cities in the PRC.
Other
net income
For
the
three months ended March 31, 2008, other net income accounted for $164,000,
or
0.79% of the total revenues. It was mainly comprised of interest income from
bank deposits and exchange gains due to the RMB appreciation.
Operating
expenses
For
the
three months ended March 31, 2008, our operating expenses were $679,000. The
operating expenses included sales and marketing, general and administrative,
R
& D expenses, depreciation, and allowance for obsolete inventories and
trading deposit receivables which are set forth in the following table, together
with a comparison with the corresponding amounts from the same period in 2007:
|
|
Three
months ended March 31, 2008
|
|
Three
months ended March 31, 2007
|
|
Comparison
|
|
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& marketing expenses
|
|
|
103
|
|
|
0.50
|
%
|
|
113
|
|
|
0.56
|
%
|
|
(10
|
)
|
|
(8.85
|
%)
|
General
& Admin. expenses
|
|
|
436
|
|
|
2.10
|
%
|
|
159
|
|
|
0.79
|
%
|
|
277
|
|
|
174.21
|
%
|
R&D
expenses
|
|
|
115
|
|
|
0.56
|
%
|
|
53
|
|
|
0.26
|
%
|
|
62
|
|
|
116.98
|
%
|
Depreciation
|
|
|
25
|
|
|
0.12
|
%
|
|
52
|
|
|
0.26
|
%
|
|
(27
|
)
|
|
(51.92
|
%)
|
Allowance
for obsolete inventories
|
|
|
-
|
|
|
-
|
|
|
320
|
|
|
1.60
|
%
|
|
(320
|
)
|
|
(100.00
|
%)
|
Allowance
for trading deposit receivable
|
|
|
-
|
|
|
-
|
|
|
1,215
|
|
|
6.07
|
%
|
|
(1,215
|
)
|
|
(100.00
|
%)
|
Total
|
|
|
679
|
|
|
3.28
|
%
|
|
1,912
|
|
|
9.56
|
%
|
|
(1,233
|
)
|
|
(64.49
|
%)
|
Sales
and marketing expenses
Sales
and
marketing expenses mainly represent payments made to sales personnel and
transportation costs.
For
the
three months ended March 31, 2008, sales and marketing expenses were $103,000,
or 0.50% of the revenues, which was only slightly higher as compared to $53,000,
or 0.26% of the revenues for the corresponding period in 2007.
R&D
expense
Our
R&D expenses were $115,000 or 0.56% of total revenue for the three months
ended March 31, 2008, which represents a 116.98% increase, as compared with
$53,000 and 0.26%, of total revenue in the same period of 2007. 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
three months ended March 31, 2008, the total general and administrative expenses
were $436,000, or 2.10% of the total revenues, representing an increase of
$277,000 or 174.21% as compared to $159,000, or 0.79% of the total revenues,
for
the corresponding period in 2007.
Gross
Profit and Gross Profit Margin
For
the
three months ended March 31, 2008, our gross profit was $3,218,000, reflecting
a
decrease of $450,000, as compared to $3,668,000 for the same period of last
year. In addition, our gross profit margin for the reporting period was 15.53%,
representing a decrease of 2.80% as compared to 18.33% for the same period
of
2007.
The
change of gross profit margin growth is attributable to:
|
1.
|
the
intensified competition in the domestic market and a decline in the
gross
margin of products sold during the period. When competing with foreign
brands in the market, domestic brands usually focus on sales of low-price
products as a strategy to increase their market presence and secure
originally-owned distribution to create conditions for future development,
but this results in higher sales of low-margin products;
|
2.
the
pending structural adjustment of operators. In the first quarter of 2008, there
were few high-margin customized orders generated from operators sector while
the
operators were focused on their restructuring.
Net
income
For
the
three months ended March 31, 2008, our net income was $1,917,000 or a net profit
margin of 9.25%, representing an increase of $670,000, or 53.73%, as compared
to
$1,247,000, or a net profit margin of 6.23% in the same period of 2007. The
increase in our net profit is due to our new business strategy and cost
controls.
LIQUIDITY
AND SOURCE OF CAPITAL
We
generally finance our operations from cash flow generated internally and
short-term indirect financing from the domestic banks.
As
of
March 31, 2008, we had current assets of $82,037,000. Current assets are mainly
comprised of accounts receivable of $73,860,000, trade deposits of $2,360,000,
cash and cash equivalents of $186,000, pledged deposit of $1,256,000 and other
current assets of $4,375,000. Our current liabilities of $45,062,000 included
accounts payable of $20,251,000, trade deposits received of $1,913,000,
short-term bank loan of $9,541,000, current portion of mortgage loan of $66,000,
accrued expenses and other accrued liabilities of $9,062,000, tax payables
of
$3,650,000, amounts due to directors of $451,000, and provision for warranty
of
$128,000.
We
offer
two different trading terms to our customers, i.e. cash-on-delivery and on
credit term within 45-90 days. As of March 31, 2008, our accounts receivable
had
increased by $16,117,000 to $73,860,000, as compared to $57,743,000 as of
December 31, 2007.
As
of
March 31, 2008, our trade deposits paid were $2,360,000, which represented
an
increase of $1,521,000 or 181.29% as compared to $839,000 as of December 31,
2007. The increase was due to larger portion of trade deposits or earlier
imbursement that go to the suppliers to seek lower prices of materials or
products from them. In order to arrange for the timely delivery of goods and
ensure our market share, we agreed to adjust the prepayment.
As
of
March 31, 2008, our other current assets were $4,375,000, which represented
an
increase of $179,000, as compared to $4,196,000 as of December 31, 2007. It
is
mainly composed of prepaid deposit for investment of $4,272,000 for acquiring
the production facility.
As
of
March 31, 2008, accounts payable were $20,251,000, which represented an increase
of $9,397,000 or 86.58%, as compared to $10,854,000 as of December 31, 2007.
As
of
March 31, 2008, accrued expenses and other accrued liabilities were $9,062,000,
indicating a growth of $1,014,000 or 12.60%, as compared to $8,048,000 as of
December 31, 2007. The increase was due to an outstanding tax of $7,747,000
caused by the time difference between USGAAP and PRCGAAP while determining
the
value-added tax (VAT).
As
of
March 31, 2008, other accrued expenses and liabilities were $128,000, which
were
used as provision for warranty.
As
of
March 31, 2008, tax payable was $3,650,000, which was attributable mainly to
income tax at the rate of 12% and the tax deferred by Beijing Orsus Xelent
Tech&Trading Co., Ltd.
As
of
March 31, 2008, 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 appreciation of the RMB
against USD did not bring us with risks of currency exchanges because we had
few
USD in stock.
CASH
FLOWS
As
of
March 31, 2008, we had cash and cash equivalents of $186,000. This represented
a
decrease of $2,742,000 or 93.65% as compared to $2,928,000 as of December 31,
2007. The decrease of cash flows was caused by expenditures to address fierce
competition and high inflation.
As
of
March 31, 2008, our short-term loan was $9,541,000, which is comprised of
$2,563,000 from Huaxia Bank and $6,978,000 from Beijing Rural Bank.
In
addition, we had mortgage loan of $122,000 to purchase a company car in 2007.
It
had $66,000 outstanding and payable as of March 31, 2008.
Our
gearing ratio, calculated as total debts over total assets, was 54.73%, as
of
March 31, 2008. It increased slightly compared to 49.58% as of December 31,
2007.
CONTINGENT
LIABILITIES
On
June
20, 2007, we entered into a guarantee contract for three years to serve as
guarantor of a bank loan in the amount of $17,089,000 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
March 31, 2008, we had no off balance sheet arrangements.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk.
Not
Required.
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
party to certain litigation/arbitration with regards to amounts payable to
suppliers for
which
the
Company was not satisfied with the quality and timing of the goods
supplied. However, the amount in question is not material to the Company
and we believe that such litigation/arbitration will not have a material adverse
effect on us or our business and that we will be able to resolve these issues
through further business negotiations.
Item
1A.
Risk
Factors.
Not
required.
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.
(a)
None.
(b)
There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the fiscal
quarter ended March 31, 2008.
Item
6.
Exhibits.
The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
Exhibit
Number
|
Exhibit
Description
|
3.1
|
Certificate
of Incorporation of Orsus Xelent Technologies, Inc. (incorporated
by
reference from Exhibit 3.1 to the Registration Statement on Form
SB-2
filed with the Securities and Exchange Commission on July 28, 2004
as
amended by that Plan of Merger and Agreement of Merger attached as
Exhibit
2.1 to the Current Report on Form 8-K filed with the SEC on April
20,
2005)
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
from
Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 7, 2007, as amended by the Current
Report on Form 8-K filed with the SEC on March 5, 2007)
|
4.1
|
Specimen
Certificate of Common Stock (incorporated by reference to Exhibit
4.1 to
Amendment 2 to the Registration Statement on Form SB-2/A filed with
the
Securities and Exchange Commission on October 19, 2004)
|
10.1
|
Contract
of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing
Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
10.2
|
X180
Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
Distribution Company and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2007)
|
10.3
|
2007
Omnibus Long-Term Incentive Plan (incorporated by reference from
Exhibit
10.1 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on January 11, 2008)
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from Exhibit
14
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007)
|
24.1
|
Power
of Attorney (included on signature page)
|
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 Financial Officer under Section 906 of the Sarbanes-Oxley
Act
of 2002 *
|
*
Filed
herewith
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:
May 15, 2008
POWER
OF ATTORNEY
The
registrant and each person whose signature appears below hereby appoint
Wang Xin
as attorney-in-fact with full power of substitution, severally, to execute
in
the name and on behalf of the registrant and each such person, individually
and
in each capacity stated below, one or more amendments to the annual report
which
amendments may make such changes in the report as the attorney-in-fact
acting
deems appropriate and to file any such amendment to the report with the
U. S.
Securities and Exchange Commission.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
/s/
Wang Xin
|
|
|
|
|
Wang
Xin
|
|
Chief
Executive Officer (Principal Executive Officer) and
Director
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Zhao Hongwei
|
|
|
|
|
Zhao
Hongwei
|
|
Chief
Financial Officer (Principal Accounting Officer)
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Liu Yu
|
|
|
|
|
Liu
Yu
|
|
Chairman
of the Board of Directors
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Naizhong Che
|
|
|
|
|
Naizhong
Che
|
|
Director
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Peng Wang
|
|
|
|
|
Peng
Wang
|
|
Director
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Zhixiang Zhang
|
|
|
|
|
Zhixiang
Zhang
|
|
Director
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Gao Jian
|
|
|
|
|
Gao
Jian
|
|
Director
|
|
May
15, 2008
|
|
|
|
|
|
/s/
Howard S. Barth
|
|
|
|
|
Howard
S. Barth
|
|
Director
|
|
May
15, 2008
|
INDEX
TO EXHIBITS
Exhibit
Number
|
Exhibit
Description
|
3.1
|
Certificate
of Incorporation of Orsus Xelent Technologies, Inc. (incorporated
by
reference from Exhibit 3.1 to the Registration Statement on Form
SB-2
filed with the Securities and Exchange Commission on July 28, 2004
as
amended by that Plan of Merger and Agreement of Merger attached as
Exhibit
2.1 to the Current Report on Form 8-K filed with the SEC on April
20,
2005)
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
from
Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 7, 2007, as amended by the Current
Report on Form 8-K filed with the SEC on March 5, 2007)
|
4.1
|
Specimen
Certificate of Common Stock (incorporated by reference to Exhibit
4.1 to
Amendment 2 to the Registration Statement on Form SB-2/A filed with
the
Securities and Exchange Commission on October 19, 2004)
|
10.1
|
Contract
of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing
Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
10.2
|
X180
Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
Distribution Company and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2007)
|
10.3
|
2007
Omnibus Long-Term Incentive Plan (incorporated by reference from
Exhibit
10.1 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on January 11, 2008)
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from Exhibit
14
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007)
|
24.1
|
Power
of Attorney (included on signature page)
|
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 Financial Officer under Section 906 of the Sarbanes-Oxley
Act
of 2002 *
|
*
Filed
herewith
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