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 September 30, 2009
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)
|
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20-1198142
(I.R.S. Employer
Identification No.)
|
29
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
o
No
x
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
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do not check if a smaller reporting company)
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Smaller
reporting company
x
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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
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|
Outstanding
at November 23, 2009
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Common
Stock, US$.001 par value per share
|
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29,756,000
shares
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Page
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Part
I: Financial Information
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1
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Item
1 -Financial Statements
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1
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Consolidated
Balance Sheets
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1
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Consolidated
Statements of Income and Comprehensive Income
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2
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Consolidated
Statements of Cash Flows
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3
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Notes
to Consolidated Financial Statements
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4
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Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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15
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Item
3 - Quantitative and Qualitative Disclosures about Market
Risk
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22
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Item
4T - Controls and Procedures
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23
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Part
II. Other Information
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23
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Item
1 - Legal Proceedings
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23
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Item
1A - Risk Factors
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23
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Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
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23
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Item
3 - Defaults Upon Senior Securities
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24
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Item
4 - Submission of Matters to a Vote of Security Holders
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24
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Item
5 - Other Information
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24
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Item
6 - Exhibits
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24
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Signatures
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25
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PART
I – FINANCIAL INFORMATION
Item
1. Financial
Statements
Orsus
Xelent Technologies, Inc. and Subsidiaries
Consolidated Balance
Sheets
(US
Dollars in thousands except share data and per share amounts)
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September
30, 2009
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December
31, 2008
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(Unaudited)
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(Audited)
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ASSETS
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Current
assets
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Cash
and cash equivalents
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32
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102
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Accounts
receivable
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93,398
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82,076
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Advances
to suppliers
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21,834
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8,441
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Other
current assets
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1,824
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1,859
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Pledged
deposit
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1,290
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1,287
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Total
current assets
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118,378
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93,765
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Property,
plant and equipment, net
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187
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241
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118,565
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94,006
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities
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Loan
payable-bank
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9,389
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9,484
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Loan
payable
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307
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364
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Current
portion of mortgage loan
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-
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12
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Accounts
payable
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24,166
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16,353
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Accrued
expenses and other accrued liabilities
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21,813
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12,012
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Trade
deposits received
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1,936
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1,934
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Due
to shareholders
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568
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457
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Income
taxes payable
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5,871
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4,989
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Total
current liabilities
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64,050
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45,605
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Commitments
and contingencies (Note 12)
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Stockholders’
equity
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Preferred
stock, par value US$0.001; authorized 100,000,000 shares; none
issued
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-
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Common
stock, par value US$0.001;
authorized
100,000,000 shares;
Issued
and outstanding 29,756,000 shares, both periods
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30
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30
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Additional
paid-in capital
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3,209
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3,209
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Dedicated
reserves
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1,115
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1,042
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Accumulated
other comprehensive income
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5,691
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5,389
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Retained
earnings
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44,470
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38,731
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Total
stockholders’ equity
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54,515
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48,401
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118,565
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94,006
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See notes
to consolidated financial statements.
Orsus
Xelent Technologies, Inc. and Subsidiaries
Unaudited
Consolidated Statements of Income and Comprehensive Income
(US Dollars in thousands except
share and per share data)
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Three
months ended
September
30,
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Nine
months ended
September
30,
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2009
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2008
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2009
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2008
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Net
sales
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19,125
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29,240
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62,181
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78,853
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Cost
of sales
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17,053
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25,073
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53,928
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68,302
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Gross
margin
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2,072
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4,167
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8,253
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10,551
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Operating
expenses:
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Selling
expenses
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40
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128
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213
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353
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General
and administrative expenses
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164
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228
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533
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1,799
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Research
and development expenses
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4
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250
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32
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391
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Depreciation
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12
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23
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54
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72
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Total
operating expenses
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220
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629
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832
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2,615
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Operating
income
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1,852
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3,538
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7,421
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7,936
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Other
income (expenses)
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Interest
expense
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(270
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)
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(255
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)
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(758
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)
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(733
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)
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Other
income
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-
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87
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17
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465
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Income
before income tax expense
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1,582
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3,370
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6,680
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7,668
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Income
tax expense
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212
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445
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868
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1,320
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Net
income
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1,370
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2,925
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5,812
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6,348
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Other
comprehensive income
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Foreign
currency translation adjustment
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59
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(36
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)
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302
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1,480
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Comprehensive
income
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1,429
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2,889
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6,114
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7,828
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Earnings
per share:
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Basic
and diluted
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|
0.05
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0.10
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0.20
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0.21
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Weighted
average number of common shares outstanding – basic and
diluted
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29,756,000
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29,756,000
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29,756,000
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|
|
29,756,000
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|
See notes
to consolidated financial statements.
Orsus
Xelent Technologies, Inc. and Subsidiaries
Unaudited
Consolidated Statements of Cash Flows
(Dollars in thousands except share
and per share data)
|
|
Nine
months ended
September
30,
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2009
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2008
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Cash
flows from operating activities
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Net
income
|
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5,812
|
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6,348
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Adjustments
to reconcile net income to net cash used in operating
activities:
|
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Depreciation
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54
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72
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Compensation
costs for stock options granted
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-
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725
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Changes
in assets and liabilities:
|
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Accounts
receivable
|
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|
(11,114
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)
|
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(18,202
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)
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Inventories
|
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|
-
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|
4
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Advances
to suppliers
|
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|
(13,363
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)
|
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|
(5,362
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)
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Other
current assets
|
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|
41
|
|
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2,636
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Accounts
payable
|
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7,769
|
|
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8,582
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Accrued
expenses and other accrued liabilities
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9,443
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1,610
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Trade
deposits received
|
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|
-
|
|
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|
162
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Income
tax payables
|
|
|
832
|
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1,178
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Allowance
for warranty
|
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-
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(38
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)
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Net
cash used in operating activities
|
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(526
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)
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(2,285
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)
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Cash
flows from financing activities
|
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Due
to shareholders
|
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110
|
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125
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Proceeds
from short-term bank loan and financial istitution
|
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|
2,821
|
|
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|
9,114
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Repayment
of bank loan payable-bank and financial istitution
|
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|
(2,689
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)
|
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|
(9,033
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)
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Repayment
of mortgage loan
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(12
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)
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|
-
|
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|
|
|
|
|
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Net
cash (used in)/provided by financing activities
|
|
|
230
|
|
|
|
206
|
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|
|
|
|
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Effect of foreign currency
exchange rate fluctuation on cash
and cash
equivalents
|
|
|
226
|
|
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|
75
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|
|
|
|
|
|
|
|
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Net
decrease in cash and cash equivalents
|
|
|
(70
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)
|
|
|
(2,004
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)
|
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|
|
|
|
|
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Cash
and cash equivalents-beginning of the period
|
|
|
102
|
|
|
|
2,928
|
|
|
|
|
|
|
|
|
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|
Cash
and cash equivalents-end of the period
|
|
|
32
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
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Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
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Interest
Paid
|
|
|
43
|
|
|
|
756
|
|
Income Taxes
Paid
|
|
|
41
|
|
|
|
515
|
|
See notes
to consolidated financial statements.
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(US
Dollars in thousands except share data and per share amounts)
Orsus
Xelent Technologies Inc. (“ORS” or the “Company”), formerly known as Universal
Flirts Corp., was organized under the laws of the State of Delaware on May 25,
2004.
Prior to
reorganization with United First International Limited (“UFI”) on March 31,
2005, a company incorporated in the Hong Kong Special Administrative Region
(“HK”) of the People’s Republic of China (the “PRC”), ORS was a development
stage company which had no operations or revenues. ORS exited the development
stage after the recapitalization.
Upon the
completion of the reorganization, ORS assumed the business operations of UFI as
primarily undertaken by its subsidiary, Beijing Orsus Xelent Technologies &
Trading Co., Limited (“BOXT”) (English translation for identification purposes
only), an enterprise incorporated in Beijing, PRC on November 10, 2004 which is
engaged in the business of design, retail and wholesale distribution of cellular
phones.
On July
14, 2005, Orsus Xelent Holdings (BVI) Limited (“OXHBVI”) was incorporated by ORS
in the British Virgin Islands (“BVI”) with issued capital of US$2.00. OXHBVI is
a wholely owned subsidiary of ORS; OXHBVI’s principal activity is investment
holding. On July 22, 2005, Orsus Xelent Trading (HK) Company Limited (“OXTHK”)
was incorporated by OXHBVI in HK with issued capital of HK$100.00 (equivalent to
US$13.00); OXTHK is a company engaged in trading cellular phones and
accessories, and is 100% owned by OXHBVI.
2.
|
DESCRIPTION
OF BUSINESS
|
The
Company is principally engaged in the business of designing, manufacturing and
distributing economically priced cellular phones for retail and wholesale
distribution. In February 2004, the Company registered “ORSUS” with the State
Administration for Industry and Commerce in the PRC as its trademark, which is
also known as “Orsus Cellular” within the industry. In January 2007, the
trademark “PROXLINK” was registered for the Company’s specialized application
mobile series.
The
Company’s business relies on a few distributors. In the current economic
environment, turnover days of accounts receivable due from these distributors
are longer than before. The Company has not provided any bad debt provision to
the significant accounts receivable balance considering historical good
cooperation relationship with these distributors and believes no provision is
needed as of September 30, 2009.
The
Company is discussing with those distributors to try to collect a portion of
account receivable in fourth quarter of 2009.
The
Company has limited cash and cash equivalents in hand for a long time and may
obtain loans from banks to finance business operation from time to time. The
Company currently has certain overdue loan from Beijing Rural Commercial Bank at
September 30, 2009. The Company is negotiating an extension of the term with the
bank.
The
Company has not paid salaries and welfare to employees for certain months in
2009 due to difficulty in cash flow.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of presentation
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and include the financial statements of the
Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation.
The
accompanying unaudited consolidated financial statements as of September 30,
2009 and for the three months and nine months ended September 30, 2009 and 2008
have been prepared in accordance with GAAP for interim financial information and
with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to
smaller reporting companies. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to ensure the financial statements are not misleading.
The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2008.
Basis
of consolidation
The
consolidated financial statements include the accounts of Orsus Xelent
Technologies, Inc. and its subsidiaries. All inter-company transactions and
balances have been eliminated in consolidation.
Use
of Estimates
The
preparation of interim Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported and disclosed in
the financial statements and the accompanying notes. Actual results could differ
materially from these estimates. We evaluate our estimates on an ongoing basis,
including those related to accounts receivable and sales allowances, useful
lives of property and equipment, fair values of options to purchase our common
stock, and income taxes, among others. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities.
Accounts
Receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for any potential uncollectible amounts. An estimate for doubtful
debts is made when collection of the full amount is no longer probable. Bad
debts are written off as incurred. We generally do not require collateral from
our customers.
We
maintain allowances for doubtful accounts for estimated losses resulting from
the failure of customers to make payments on time. We review the accounts
receivable on a periodic basis and make specific allowances when there is doubt
as to the collectibility of individual balances. In evaluating the
collectibility of individual receivable balances, we consider many factors,
including the age of the balance, the customer’s past payment history,
cooperation history with us, its current credit-worthiness and current economic
trends.
Recently
issued accounting pronouncements
FASB Establishes Accounting
Standards Codification
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.
Fair Value
Accounting
In 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements” (ASC Topic 820)
which defines fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value measurements. This
guidance is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. It does not expand
or require any new fair value measures; however the application of this
statement may change current practice. We adopted this guidance for financial
assets and liabilities effective January 1, 2008 and for non financial
assets and liabilities effective January 1, 2009. The adoption did not have
a material effect on our financial condition or results of
operations.
In April
2009, the FASB issued the following updates that provide additional application
guidance and enhance disclosures regarding fair value measurements and
impairments of securities:
|
•
|
FSP
FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (ASC Topic 820-10-65). This update
relates to determining fair values when there is no active market or where
the price inputs being used represent distressed sales. It reaffirms the
need to exercise judgment to ascertain if a formerly active market has
become inactive and in determining fair values when markets have become
inactive.
|
|
•
|
FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (ASC topic 320-10-65). This update
applies to investments in debt securities for which other-than-temporary
impairments may be recorded. If an entity’s management asserts that it
does not have the intent to sell a debt security and it is more likely
than not that it will not have to sell the security before recovery of its
cost basis, then an entity may separate other-than-temporary impairments
into two components: 1) the amount related to credit losses (recorded in
earnings) and 2) all other amounts (recorded in Other comprehensive
income).
|
|
•
|
FSP
FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (ASC Topic 320-10-65). This update requires fair value
disclosures for financial instruments that are not currently reflected on
the balance sheet at fair value on a quarterly
basis.
|
The
adoption of these updates will not have a material effect on our financial
condition or results of operations.
In August
2009, FASB issued ASU No. 2009-05 which amends Fair Value Measurements and
Disclosures – Overall (ASC Topic 820-10) to provide guidance on the fair value
measurement of liabilities. This update requires clarification for circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2)
another valuation technique that is consistent with the principles in ASC Topic
820 such as the income and market approach to valuation. The amendments in this
update also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in an active market
for an identical liability, that price would be considered a Level 1 measurement
in the fair value hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a Level 1 fair
value measurement if no adjustments to the quoted price of the asset are
required. This update is effective for our fourth quarter 2009.
Business Combinations and
Noncontrolling Interests
In 2007,
the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (ASC
Topic 805). This guidance requires the acquiring entity in a business
combination to recognize the full fair value of assets acquired and liabilities
assumed in the transaction (whether a full or partial acquisition); establishes
the acquisition date fair value as the measurement objective for all assets
acquired and liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose the information
necessary to evaluate and understand the nature and financial effect of the
business combination. We adopted this guidance effective January 1, 2009
and have applied it to all business combinations prospectively from that date.
The impact of ASC 805 on our consolidated financial statements will depend upon
the nature, terms and size of the acquisitions we consummate in the
future.
In April
2009, the FASB issued Staff Position No. FSP FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (ASC Topic 805-20). This updated guidance amended the
accounting treatment for assets and liabilities arising from contingencies in a
business combination and requires that pre-acquisition contingencies be
recognized at fair value, if fair value can be reasonably determined. If fair
value cannot be reasonably determined, measurement should be based on the best
estimate in accordance with SFAS No. 5, “Accounting for Contingencies” (ASC
Topic 405). This updated guidance was effective January 1,
2009.
In 2007,
the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of Accounting Research Bulletin No. 51”,
(ASC Topic 810-10-65). This guidance requires companies to present
noncontrolling (minority) interests as equity (as opposed to a liability) and
provided guidance on the accounting for transactions between an entity and
noncontrolling interests. In addition, it requires companies to report a
consolidated net income (loss) measure that includes the amount attributable to
such noncontrolling interests. We adopted this guidance effective
January 1, 2009. The adoption did not have a material effect on our
financial condition or results of operations.
In June
2009, the FASB issued the following standards:
|
•
|
SFAS
No. 167, “Amendments to FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities” (ASC Topic 810-10). This
updated guidance requires an analysis to determine whether a variable
interest gives the entity a controlling financial interest in a variable
interest entity. It also requires an ongoing reassessment and eliminates
the quantitative approach previously required for determining whether an
entity is the primary beneficiary. This update is effective for our fiscal
year beginning January 1, 2010 and we are currently evaluating the
impact of adopting this update on our consolidated financial
statements.
|
|
|
|
|
•
|
SFAS
No. 166, “Accounting for Transfers of Financial Assets”, (ASC Topic
810). This updated guidance removed the concept of a qualifying
special-purpose entity and removed the exception from applying
consolidation guidance to these entities. This update also clarified the
requirements for isolation and limitations on portions of financial assets
that are eligible for sale accounting. ASC Topic 810 is effective for our
fiscal year beginning on January 1, 2010. We are currently evaluating
the impact of adopting this update on our consolidated financial
statements.
|
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (ASC Topic 855).
This guidance is intended to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting this date, that is, whether this date represents the
date the financial statements were issued or were available to be issued. This
guidance was effective for our third quarter ended September 30,
2009.
During
2009, the FASB has issued several ASU’s – ASU No. 2009-02 through ASU
No. 2009-15. Except for ASU’s No. 2009-05 discussed above, the ASU’s
entail technical corrections to existing guidance or affect guidance related to
specialized industries or entities and therefore have minimal, if any, impact on
the Company.
The main
component of US$93,398 of accounts receivable as of September 30, 2009, was
mainly a balance of US$83,556 due from Beijing Xingwang Shidai Commerce Co.,
Ltd. (“Xingwang”). On December 25, 2008, Xingwang entered into an irrevocable
Credit Guarantee Contract (the “Guarantee Contract”) with Zhong Hui Guarantee
Corporation, a third-party guarantee company licensed by the PRC government
(“Zhonghui”), and BOXT under which Zhonghui agreed to guarantee up to Renminbi
(“RMB”) 300 million (equivalent to US$43,829), for the principal debt, fine,
damages arising out of breach of contract, and costs incurred for realizing
those legal rights including but not limited to legal proceeding fees, attorney
fees and travel expenses arising out of the distributor agreement entered into
by BOXT and Xingwang. The Guarantee Contract was effective as of December 25,
2008 and provides a guarantee for all of the accounts receivable that are or may
become outstanding from Xingwang to BOXT from January 1, 2008 through December
31, 2008. Such accounts receivables are guaranteed for a period of two years
from the date they are due.
US$21,834
of advance to suppliers at September 30, 2009 is payment in advance to
suppliers. Since financial crisis spread in late 2008, more of our suppliers
require advance payment for purchasing their products.
US$1,824
of the Company’s other current assets at September 30, 2009 included other
receivables with a balance of US$1,731 which relates to the refundable deposit
paid for the potential acquisition of Hebei Leimeng Times Telecommunication
Equipment Co. Ltd. The potential acquisition was terminated during
the year ended December 31, 2008.
US$1,290
of deposit at September 30, 2009 and US$1,287 of deposit at December 31, 2008
was paid to Zhonghui, a guarantee company, in September 2008 as a pledge for
US$6,874 (RMB47,000) of bank loans. Refer to Note 9, “Loan Payable-bank” for
more discussion of the bank loans.
8.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment as of September 30, 2009 and December 31, 2008 consisted of
the following:
|
|
September
30, 2009
|
|
|
December
31,
2008
|
|
|
|
US$’000
|
|
|
US$’000
|
|
|
|
|
|
|
|
|
Moulds
|
|
|
4
|
|
|
|
4
|
|
Leasehold
improvements
|
|
|
131
|
|
|
|
131
|
|
Office
equipment
|
|
|
323
|
|
|
|
323
|
|
Motor
vehicles
|
|
|
303
|
|
|
|
303
|
|
|
|
|
761
|
|
|
|
761
|
|
Less:
Accumulated depreciation
|
|
|
(574
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
187
|
|
|
|
241
|
|
The
depreciation expenses were US$12 and US$23 for the three months ended September
30, 2009 and 2008 respectively. The depreciation expenses were US$54 and US$72
for the nine months ended September 30, 2009 and 2008 respectively.
All bank
loans outstanding at September 30, 2009 and December 31, 2008 were borrowed by
BOXT. Details of short-term bank loans are summarized as follows:
At
September 30, 2009
|
|
Amount
(RMB’000)
|
|
Annual
interest
rate
|
|
Term
|
|
Guarantee
provided by
|
|
|
|
|
|
|
|
|
|
Loan
from Beijing Rural Commercial Bank
|
|
47,000
(US$6,874)
|
|
10.08%
|
|
September
28, 2008 to September 27, 2009 (See note below)
|
|
Director
Liu Yu; A guarantee company; pledged deposit of
RMB8,820K
|
|
|
|
|
|
|
|
|
|
Loan
from Huaxia Bank
|
|
17,200
(US$2,515)
|
|
6.372%
|
|
February
20, 2009 to February 20, 2010
|
|
Director
Liu Yu; Two third party companies; Distributor
Xingwang.
|
At
December 31, 2008
|
|
Amount
(RMB’000)
|
|
Annual
interest
rate
|
|
Term
|
|
Guarantee
provided by
|
|
|
|
|
|
|
|
|
|
Loan
from Beijing Rural Commercial Bank
|
|
47,000
(US$6,857)
|
|
10.08%
|
|
From
September 28, 2008 to September 27, 2009
|
|
Director
Liu Yu; A guarantee company; pledged deposit of
RMB8,820K
|
|
|
|
|
|
|
|
|
|
Loan
from Huaxia Bank
|
|
18,000
(US$2,627)
|
|
8.964%
|
|
From
February 18, 2008 to February 18, 2009
|
|
Director
Liu Yu; Two third party companies; Distributor
Xingwang.
|
Interest
expense incurred for the three months ended September 30, 2009 and 2008 were
US$270 and US$255, respectively, and the nine months ended September 30, 2009
and 2008, US$758 and US$733, respectively.
US$6,874
(RMB47 million) of loan from Beijing Rural Commercial Bank was originally due on
September 27, 2009. The Company is currently negotiating an extension of the
term with the bank. The penalty interest rate on the principal and interest in
default is 130% of the contracted interest rate and is chargeable from the due
date of the principal. The Company accrued $8 in penalty interest from September
28, 2009 to September 30, 2009.
The
USD$307 short-term loan outstanding at September 30, 2009 was provided by a
third party company Zhonghui. It is unsecured, interest-free and repayable on
September 27, 2009. The Company is currently negotiating an extension of the
term with Zhonghui. No default penalty interest is chargeable according to the
loan agreement.
11.
|
AMOUNT
DUE TO SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
|
|
(a)
|
Name
and relationship of
shareholders
|
Related party
|
|
Relationship
|
|
|
|
Mr.
Liu Yu
|
|
Director
and shareholder of the Company
|
Mr.
Wang Xin
|
|
Shareholder
and former director of the Company (Resigned on March 27,
2009)
|
|
(b)
|
Summary
of balances due to shareholders and related party
transactions
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
US$’000
|
|
|
US$’000
|
|
Due
to shareholders
|
|
|
|
|
|
|
Mr.
Liu Yu
|
|
|
318
|
|
|
|
219
|
|
Mr.
Wang Xin
|
|
|
250
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
568
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
Bank
loans guaranteed by Mr. Liu Yu
|
|
|
9,379
|
|
|
|
9,484
|
|
The
amounts due to shareholders are unsecured, interest-free and repayable on
demand.
12.
|
COMMITMENTS
AND CONTINGENCIES
|
|
(a)
|
Operating
lease commitments
|
At
September 30, 2009, the Company had a non-cancelable operating lease for the
office premises, under which the rental payment due within the next twelve
months is US$13. The lease term is from January 1, 2009 to December 31, 2009.
Rental expense for the nine months ended September 30, 2009 and 2008 was $39 and
$103, respectively.
Tax
penalty
In
accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17% of
value added tax (“VAT”) upon the sales made to customers. BOXT follows the
practice of reporting its revenue to PRC tax authorities for VAT purposes when
invoices are issued, but accruing the VAT liability when sales are made prior to
invoices being issued. As of September 30, 2009 and December 31, 2008, sales
accumulatively amounted to approximately US$236,748 and US$175,834,
respectively, for which VAT invoices have not yet been issued. The associated
output VAT amounts with the above unbilled revenue were US$40,247 and US$29,892
as of September 30, 2009 and December 31, 2008. Meanwhile, as of September 30,
2009 and December 31, 2008, purchases amounted to US$144,232 and US$137,119
respectively for which VAT invoices have not been received from suppliers. The
input VAT amounts associated with the above purchase were US$24,519 and
US$23,310 as of September 30, 2009 and December 31, 2008, respectively. The net
VAT payables resulting from the above non-issued and non-received invoices were
US$15,728 and US$6,582 as of September 30, 2009 and December 31, 2008,
respectively. The net VAT payable resulting from the issued and received
invoices netting paid amount was US$3,323 and US$3,590 as of
September 30, 2009 and December 31, 2008, respectively. The total net VAT
payables were US$19,051 and US$10,172 as of September 30, 2009 and
December 31, 2008, respectively. These balance amounts were included in “Accrued
expenses and other accrued liabilities.”
Furthermore,
BOXT reports its revenue for PRC Enterprise Income Tax (“EIT”) purposes when VAT
invoices are issued rather than when goods are delivered. All unbilled revenue
will become taxable when invoices are issued.
The above
practice is not in strict compliance with the relevant PRC 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 consolidated
financial statements, BOXT may be subject to a penalty for the deferred
reporting of the above tax obligations. The exact amount of penalty
cannot be estimated with any reasonable degree of certainty. The
board of directors considers it is not probable the penalty will be
imposed.
Financial guarantee
contract
On June
20, 2007, BOXT entered into a guarantee contract for three years from June 20,
2007 to June 16, 2010 to serve as guarantor of a bank loan amounting to
approximately US$17,550 (equivalent to RMB120,000) to an independent
third-party, 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
including principal and interest, late interest payments, fines and other
expenses incurred in the claiming process, 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 20, 2009 issued by an independent professional
appraiser, the fair value of the undiscounted maximum potential amount of future
payments as of December 31, 2008 that BOXT could be required to make under the
guarantee contract was approximately US$470. The Company’s management assessed
that the fair value of the undiscounted maximum potential amount of future
payments as of September 30, 2009 did not materially differ from the same figure
as of December 31, 2008. Management believes it is not probable BOXT will need
to fulfill any obligation under this contract.
The
Company’s subsidiary, BOXT, was required to allocate at least 10% of its after
tax profits as determined under generally accepted accounting principle in the
PRC to a statutory dedicated reserve until the reserve balance reaches 50% of
its registered capital. For the nine months ended September 30, 2009, BOXT made
appropriations to this statutory reserve of US$73. The accumulated balance of
the dedicated reserve at BOXT as of September 30, 2009 and December 31, 2008
were US$1,115 and US$1,042, respectively.
In
accordance with the PRC laws and regulations, BOXT is restricted in its ability
to transfer a portion of its net assets to UFI in the form of dividends, which
amounted to US$2,798 as of September 30, 2009.
On March
27, 2008, a stock option plan named the “2007 Omnibus Long-Term Incentive Plan”
(the “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 non-employee directors and key employees with
additional motivation and an incentive to improve the business results and
contribute to the success of the Company.
On April
2, 2008, stock options to a subscribed 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. The expiration date of the options is April 2, 2018.
In
accordance with the terms of the share-based payment arrangement, the
aforementioned options were vested at the date of grant. According to a
valuation report, dated August 1, 2008, issued by an independent professional
appraiser, the fair value of these options was US$725, which was estimated on
the date of grant using the Binomial Lattice option pricing model. Where
relevant, the expected life used in the model has been adjusted based on
management’s best estimate for the effects of transferability, exercise
restrictions and behavioral consideration. Compensation expense of US$725 is
charged to income as the benefit was fully vested at the date of grant. Key
assumptions included in the estimation are as follows:
Expected
dividend yield
|
|
|
-
|
|
Expected
stock price volatility
|
|
|
85.07
|
%
|
Risk
free interest risk
|
|
|
3.61
|
%
|
Expected
life of share options
|
|
10
Years
|
|
A summary
of the share option plan activity during the nine month period ended September
30, 2009 is presented below:
|
|
Number
of
share
options
|
|
As
of January 1, 2009
|
|
|
614,000
|
|
Granted
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Cancelled/lapsed
|
|
|
-
|
|
As
of September 30, 2009
|
|
|
614,000
|
|
As
stipulated by the PRC regulations, the Company maintains a defined contribution
retirement plan for all of its employees who are residents of the
PRC. All retired PRC employees of the Company are entitled to an
annual pension equivalent to their basic annual salary upon
retirement. The Company contributed to a state sponsored retirement
plan approximately 20% of the basic salary of its PRC employees and has no
further obligations for the actual pension payments or post-retirement benefits
beyond the annual contributions. The state sponsored retirement plan
is responsible for the entire pension obligation payable to all employees. The
pension expenses were US$6 and US$8 for the three months ended September 30,
2009 and 2008 respectively. The pension expenses were US$34 and US$24 for the
nine months ended September 30, 2009 and 2008 respectively.
The
Company and its subsidiaries are subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdictions in which they operate.
Provision for income and other related taxes has been provided in accordance
with the tax rates and laws in effect in the various countries of
operations.
No
provision for withholding or United States federal or state income taxes or tax
benefits on the undistributed earnings of the Company's subsidiaries has been
provided as the earnings of these subsidiaries, in the opinion of the
management, will be reinvested indefinitely.
OXHBVI
was incorporated in the BVI and, under the current laws of the BVI, is not
subject to income taxes.
UFI and
OXTHK, both incorporated in Hong Kong, are subject to Hong Kong tax laws and had
no significant income for the periods presented.
The
Company’s income is principally generated in the PRC by BOXT. Since BOXT is
registered as a wholly-owned foreign investment enterprise (“WOFE”), it is
subject to tax laws applicable to WOFEs in the PRC. On March 16, 2007, a New
Enterprise Income Tax Law (“NEITL”) was issued in the PRC, applicable for fiscal
years commencing on or after January 1, 2008. By virtue of the NEITL, BOXT was
subject to the unified EIT rate of 25% in effect from January 1, 2008. 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 expiration in
2009.
As of
September 30, 2009 and December 31, 2008, the Company identified the following
as “major” tax jurisdictions, defined as those jurisdictions in which it was
required to file income tax returns: United States, Hong Kong and the 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 nine months ended September 30, 2009 and during the year ended
December 31, 2008, 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 the next three months.
|
(a)
|
Income
tax expense comprised the
following:
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
US$’000
|
|
|
US$’000
|
|
Current
tax
|
|
|
|
|
|
|
United
States
|
|
|
-
|
|
|
|
-
|
|
Hong
Kong
|
|
|
-
|
|
|
|
238
|
|
PRC
|
|
|
868
|
|
|
|
1,082
|
|
|
|
|
868
|
|
|
|
1,320
|
|
|
(b)
|
Reconciliation
between the provision for income taxes computed by applying the PRC
statutory income tax rate of 25% to income before income taxes and the
effective income tax rate is as
follows:
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
PRC
statutory income tax
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
Tax
exemption and tax relief granted to PRC subsidiary and the effects of
permanent differences
|
|
|
(12
|
%)
|
|
|
(8
|
%)
|
|
|
|
13
|
%
|
|
|
17
|
%
|
The
following table sets forth the computation of basic and diluted earnings per
share for the periods presented:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
used in basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,370
|
|
|
|
2,925
|
|
|
|
5,812
|
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
Plus:
weighted average incremental shares from assumed exercise of
warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted
average common shares outstanding used in computing diluted net
income per common share
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
|
|
29,756,000
|
|
Earnings
per ordinary share-basic and diluted
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
As of
September 30, 2009, the Company had 614,000 outstanding options that could
potentially dilute basic income per share in the future, but which were excluded
in the computation of diluted income per share in the periods presented, as
their effect would have been anti-dilutive since the exercise price of these
options was higher than average market price during nine months ended September
30, 2009.
18.
|
CONCENTRATIONS
AND CREDIT RISKS
|
At
September 30, 2009 the Company had a credit risk exposure of uninsured cash in
banks of approximately US $32, US $93,398 accounts receivable and US $21,834
advances to suppliers
.
To limit
exposure to credit risk relating to deposits, the Company primarily places cash
deposits only with large financial institutions in the PRC with acceptable
credit ratings.
During
three and nine months ended September 30, 2009, the Company is engaged
principally in the design and trading of cellular phones to two primary
distributors in the PRC. The Company’s policy is that the sole agent
arrangement gives the dealers more incentive to promote the Company’s products
and reduce the Company’s exposure to the distribution market.
The
Company buys certain major materials from three major suppliers. In addition,
the Company subcontracts material purchasing and assembly works of cellular
phones primarily to five subcontracting factories. The diversification of
suppliers will reduce the risk of increasing production cost.
|
(a)
|
During
the nine months ended September 30, 2009 and 2008, the Company’s operating
revenue was mainly derived from two distributors. For the nine months
ended September 30, 2009 and 2008, 90% and 92%, respectively, of total
revenue was derived from our largest distributor Xingwang. For the three
months ended September 30, 2009 and 2008, 87% and 78% of total revenue was
derived from our largest distributor Xingwang. There was no trade deposit
received from Xingwang as of September 30, 2009 and December 31, 2008
respectively. Accounts receivables from Xingwang were US$83,556 and
US$77,740 as of September 30, 2009, and December 31, 2008 respectively. As
mentioned in note 4, “accounts receivable”, in year 2008, a guarantee
company provided a guarantee up to US$43,875 (RMB300 million) for the
accounts receivable from Xingwang for two years from the date they are
due.
|
(b) Suppliers
accounting for over 10% of the Company’s purchases are as follows:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Supplier
A
|
|
|
58
|
|
|
|
-
|
|
|
|
52
|
|
|
|
-
|
|
Supplier
B
|
|
|
28
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
Supplier
C
|
|
|
14
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Supplier
D
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
35
|
|
Supplier
E
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
11
|
|
Supplier
F
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
12
|
|
Supplier
G
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
22
|
|
Supplier
H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Total
|
|
|
100
|
|
|
|
91
|
|
|
|
95
|
|
|
|
93
|
|
Advances
to the above suppliers were US$4,987 and US$8,129 as of September 30, 2009 and
December 31, 2008 respectively. Accounts payable owed to the above suppliers
were US$6,664 and US$12,188 as of September 30, 2009 and December 31, 2008,
respectively.
|
(c)
|
The
Company’s revenue for the three and nine months ended September 30, 2009
and 2008, respectively, were all derived from the PRC. Geographical
information of the carrying amount of long-lived assets is as
follows:
|
|
|
September
30, 2009
|
|
|
December
31,2008
|
|
|
|
US$’000
|
|
|
US$’000
|
|
|
|
|
|
|
|
|
PRC
|
|
|
184
|
|
|
|
237
|
|
Hong
Kong
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
long-lived assets
|
|
|
187
|
|
|
|
241
|
|
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. The business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
US$307
loan payable to a third party company, previously included in the balance of
accrued expenses and other accrued liabilities as of December 31, 2008, has been
reclassified into loan payable.
Management
has considered all events occurring through November 23, 2009, the date the
financial statements have been issued, and has determined that there are no such
events that are material to the financial statements, or all such material
events have been fully disclosed.
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 the State of Delaware in May 2004 under
the name “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 its sole shareholder, Darrel Lerner, 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 a wholly-owned
subsidiary of the Company.
Pursuant to a 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 the
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 (“
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, par value
US$0.001 per share, 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 US$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 of 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 (“
PRC
”).
The business operations of UFIL are
conducted through its wholly-owned subsidiary, Xelent, also known as “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, and specialized users from all fields of business and 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.
Many of Xelent’s cellular phone
products are equipped with industry cutting-edge features such as 1.8 to
2.8-inch CSTN, TFT or QVGA dual-color display; capacity to record videos lasting
one minute up to four hours; 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 and flip-phone technology; and
innovative ultra-thin lightweight design.
Xelent has provided its handsets to
many different types of consumers in the market for GSM mobile devices. 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 significant marketing efforts 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 GSM model X180 in large volumes starting in April 2007, thereby taking
advantage of the opportunity to establish a presence in the specialized
application mobile terminal market.
In April 2007, the Company’s common
shares were approved for listing on NYSE Amex (formerly known as the American
Stock Exchange) and began trading on NYSE Amex on May 10, 2007 under the ticker
symbol “ORS”. The Company's CUSIP Number is 68749U106.
The Company’s cell phone products are
mainly produced through Original Equipment Manufacturers (OEMs) and the products
were delivered from OEMs to distributors directly. The Company keeps no
inventory or very limited quantity.
Business
Review
The Company sold 186,950 cell
phone units during the third quarter of 2009. For the three months ended
September 30, 2009, the Company generated revenue of US$19,125,000,
representing a decrease of 34.59% as compared to US$29,240,000 for the same
period in 2008, in contrast with the entire cell phone market, in which
sales increased by 10.08% compared to the same period in 2008, as
recently reported by Sino Market Research Limited. Meanwhile, the Company
achieved a gross profit margin of 10.83%, a decrease of 3.42% as compared to
14.25% earned for the same period in 2008. The Company believes this decrease is
due to the fact that our major customers didn’t get several large orders
from their customers. The Company continued to supply feature-rich,
economically-priced, mid-level and low-end products – a different strategy
from that of foreign brands, which tend to have higher costs and higher
output prices. 92% of the products the Company sold in this quarter
were priced below RMB1,000 (approximately US$146). This has led to a decrease of
US$2,095,000 or 50.28% in the Company’s gross income, from
US$4,167,000 earned in the three months ended September 30, 2008, to
US$2,072,000 for the three months ended September 30, 2009.
The Company believes there are four
main influences on the current state of the cell phone market in the
PRC. First, the reorganization of domestic telecommunication
operators has created a lag in market demand. In particular, the
market demand for high-margin products was much lower than expected, because
telecom operators applied preferential service packages to low-priced cell
phones in order to safeguard increases in their customer base and control
costs while dealing with increased competition. Second, the major force driving
current cell phone sales in the PRC is rural customers, a majority of whom tend
to favor less expensive, lower-end products. This strength is expected to grow
continually as the PRC government further implements its national policies to
bring more home appliances to rural households. Third, it is unknown when the
far-reaching international financial crisis will hit its bottom
and the PRC’s economic stimulus programs have mainly focused on infrastructure
projects, rather than the consumer demand. Fourth, cell phones are gradually
shifting from high-tech products to fast-moving consumer goods, which,
inevitably, will lead to a decrease in cell phone prices in the near
future.
The Company is aware that the cell
phone market in the PRC may continue to experience some difficulty in the 2009,
but it still projects that the industry will be in a better position in upcoming
quarters because (a) the reorganization of PRC telecom carriers is projected to
lead to market development, and (b) new 3G technology is likely to encourage
market demand. With these projections in mind, the Company will
continue to employ the following three operating strategies going
forward:
1.
|
Safeguard
our traditional sales channels and explore the possibility of selling more
GSM cell phones in traditional markets. The Company will use
its key ability to create telephone models that respond precisely to
market opportunities to target customer
needs.
|
2.
|
Launch
our own 3G products while telecom carriers are promoting the commercial
use of 3G. Based on the relationships we have already built with the
telecom carriers, we believe the Company will be able to establish a
beneficial market share in this new era of the telecom
industry.
|
3.
|
Expand
our industrial structure by consummating certain acquisitions using funds
obtained from the capital markets in order to enhance our business
foundation and long-term
development.
|
In
summary, the Company predicts modest decline in both sales revenues and net
income during the fiscal year ending December 31, 2009.
CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our
discussion and analysis of 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 nine months ended
September 30, 2009 and 2008, respectively (in thousand USD):
|
|
Nine
months ended
|
|
|
Nine
months ended
|
|
|
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
Comparison
|
|
|
|
(US$000)
|
|
|
%
of Revenue
|
|
|
(US$000)
|
|
|
%
of Revenue
|
|
|
(US$000)
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
62,181
|
|
|
|
100.00
|
%
|
|
|
78,853
|
|
|
|
100.00
|
%
|
|
|
(16,672
|
)
|
|
|
(21.14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
53,928
|
|
|
|
86.73
|
%
|
|
|
68,302
|
|
|
|
86.62
|
%
|
|
|
(16,434
|
)
|
|
|
(21.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& marketing expenses
|
|
|
213
|
|
|
|
0.34
|
%
|
|
|
353
|
|
|
|
0.45
|
%
|
|
|
(140
|
)
|
|
|
(39.66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
& admin. expenses
|
|
|
533
|
|
|
|
0.86
|
%
|
|
|
1,799
|
|
|
|
2.28
|
%
|
|
|
(1,266
|
)
|
|
|
(70.37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
expenses
|
|
|
32
|
|
|
|
0.05
|
%
|
|
|
391
|
|
|
|
0.50
|
%
|
|
|
(359
|
)
|
|
|
(91.82
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
54
|
|
|
|
0.09
|
%
|
|
|
72
|
|
|
|
0.09
|
%
|
|
|
(18
|
)
|
|
|
(25.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
758
|
|
|
|
1.22
|
%
|
|
|
733
|
|
|
|
0.93
|
%
|
|
|
25
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
17
|
|
|
|
0.03
|
%
|
|
|
465
|
|
|
|
0.59
|
%
|
|
|
(448
|
)
|
|
|
(96.34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,680
|
|
|
|
10.74
|
%
|
|
|
7,668
|
|
|
|
9.72
|
%
|
|
|
(988
|
)
|
|
|
(12.88
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
868
|
|
|
|
1.40
|
%
|
|
|
1320
|
|
|
|
1.67
|
%
|
|
|
(452
|
)
|
|
|
(34.24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
5,812
|
|
|
|
9.35
|
%
|
|
|
6,348
|
|
|
|
8.05
|
%
|
|
|
(536
|
)
|
|
|
(8.44
|
)%
|
The
following table summarizes our operating results for the three months ended
September 30, 2009 and 2008, respectively:
|
|
Three
months ended
|
|
|
Three
months ended
|
|
|
|
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
Comparison
|
|
|
|
(US$000)
|
|
|
%
of Revenue
|
|
|
(US$000)
|
|
|
%
of Revenue
|
|
|
(US$000)
|
|
|
%
|
|
Net
sales
|
|
|
19,125
|
|
|
|
100.00
|
%
|
|
|
29,240
|
|
|
|
100.00
|
%
|
|
|
(10,115
|
)
|
|
|
(34.59
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
17,053
|
|
|
|
89.17
|
%
|
|
|
25,073
|
|
|
|
85.75
|
%
|
|
|
(8,020
|
)
|
|
|
(31.99
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& marketing expenses
|
|
|
40
|
|
|
|
0.21
|
%
|
|
|
128
|
|
|
|
0.44
|
%
|
|
|
(88
|
)
|
|
|
(68.75
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
& admin. expenses
|
|
|
164
|
|
|
|
0.86
|
%
|
|
|
228
|
|
|
|
0.78
|
%
|
|
|
(63
|
)
|
|
|
(27.63
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D
expenses
|
|
|
4
|
|
|
|
0.02
|
%
|
|
|
250
|
|
|
|
0.85
|
%
|
|
|
(246
|
)
|
|
|
(98.40
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12
|
|
|
|
0.06
|
%
|
|
|
23
|
|
|
|
0.08
|
%
|
|
|
(11
|
)
|
|
|
(47.83
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
270
|
|
|
|
1.41
|
%
|
|
|
255
|
|
|
|
0.87
|
%
|
|
|
15
|
|
|
|
5.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
0.30
|
%
|
|
|
(87
|
)
|
|
|
(100.00
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,582
|
|
|
|
8.27
|
%
|
|
|
3,370
|
|
|
|
11.53
|
%
|
|
|
(1,788
|
)
|
|
|
(53.06
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
212
|
|
|
|
1.11
|
%
|
|
|
445
|
|
|
|
1.52
|
%
|
|
|
(233
|
)
|
|
|
(52.36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,370
|
|
|
|
7.16
|
%
|
|
|
2,925
|
|
|
|
10.00
|
%
|
|
|
(1,555
|
)
|
|
|
(53.16
|
)%
|
Net
sales
Our
revenue was US$62,181,000 for the nine months ended September 30, 2009,
representing a decrease of 21.14% compared to US$78,853,000 for the same period
in 2008. For the three months ended September 30, 2009, the total revenues of
the Company were US$19,125,000, representing a decrease of 34.59% as compared to
US$29,240,000 in the same period of 2008.
As stated
in Business Review above, despite the global economic turmoil, we believe
China's economy has begun to improve gradually. However, it seems that the
economy has mainly focused on large-scale projects instead of the consumer goods
markets, as the sector has experienced a much slower recovery. In the Chinese
cell phone market, sales volume has fallen by 30% as compared to the same period
last year. During this quarter, the Company has continued to undertake its sales
strategy of supplying feature-rich, low-priced, mid-level and low-end products.
It has also put great efforts into developing new products tailored for telecom
operators and expanding its sales channels beyond the enhanced traditional
market in which products were traded at prices less than RMB1,000, or
approximately US$146.
Products
Segment
For the
nine months ended September 30, 2009, the Company’s sales were primarily
attributable to the following products:
Cellular
|
|
Nine
months ended September 30, 2009
|
|
phones
model
|
|
Amount
(US$’000)
|
|
|
%
of total revenue
|
|
X600
|
|
|
5,430
|
|
|
|
8.73
|
%
|
X610
|
|
|
5,559
|
|
|
|
8.94
|
%
|
X555
|
|
|
1,949
|
|
|
|
3.13
|
%
|
T303
|
|
|
6,795
|
|
|
|
10.93
|
%
|
DX880
|
|
|
3,685
|
|
|
|
5.93
|
%
|
X650
|
|
|
3,710
|
|
|
|
5.97
|
%
|
X780
|
|
|
12,554
|
|
|
|
20.19
|
%
|
LM2800
|
|
|
1,187
|
|
|
|
1.91
|
%
|
LM2850
|
|
|
1,312
|
|
|
|
2.11
|
%
|
LM2820
|
|
|
877
|
|
|
|
1.41
|
%
|
CN747
|
|
|
2,571
|
|
|
|
4.13
|
%
|
X98
|
|
|
2,748
|
|
|
|
4.42
|
%
|
X666
|
|
|
8,542
|
|
|
|
13.74
|
%
|
X8828
|
|
|
2,598
|
|
|
|
4.18
|
%
|
X6102
|
|
|
2,666
|
|
|
|
4.28
|
%
|
Total
|
|
|
62,183
|
|
|
|
100.00
|
%
|
For the
three months ended September 30, 2009, the Company’s sales were primarily
attributable to the following products:
Cellular
|
|
Three
months ended September 30, 2009
|
|
phones
model
|
|
Amount
(US$’000)
|
|
|
%
of total revenue
|
|
CN747
|
|
|
2,571
|
|
|
|
13.44
|
%
|
X98
|
|
|
2,748
|
|
|
|
14.37
|
%
|
X666
|
|
|
8,542
|
|
|
|
44.66
|
%
|
X8828
|
|
|
2,598
|
|
|
|
13.58
|
%
|
X6102
|
|
|
2,666
|
|
|
|
13.95
|
%
|
Total
|
|
|
19,125
|
|
|
|
100.00
|
%
|
Customer
Segments
For the
nine months ended September 30, 2009, our sales in the aggregate amount of
US$62,181,000 were derived mainly from Beijing Xingwang Shidai Tech &
Trading Co., Ltd. (“Xingwang”). Xingwang has been our most important
distributor for a long period of time and provided revenues of US$56,239,000. It
is one of the largest distributors in mainland China and has sales networks in
major cities across the PRC.
|
|
Nine
months ended September 30, 2009
|
|
|
|
Amount
(US$’000)
|
|
|
%
of total revenue
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
56,239
|
|
|
|
90.44
|
%
|
Tianjin
Tongguang
|
|
|
5,942
|
|
|
|
9.56
|
%
|
Total
|
|
|
62,181
|
|
|
|
100.00
|
%
|
For the
three months ended September 30, 2009, our revenues were derived also mainly
from sales to Xingwang, in the aggregate amount of US$16,558,000.
|
|
Three
months ended September 30, 2009
|
|
|
|
Amount
(US$’000)
|
|
|
%
of total revenue
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
16,558
|
|
|
|
86.58
|
%
|
Tianjin
Tongguang
|
|
|
2,567
|
|
|
|
13.42
|
%
|
Total
|
|
|
19,125
|
|
|
|
100.00
|
%
|
Gross
Margin
For the
three months ended September 30, 2009, gross margin was US$2,072,000,
representing a decrease of US$2,095,000 in gross profit when compared to the
same period of 2008. During this period, to cope with the global
financial crisis and the increasing competition in the Chinese cell phone
market, many manufacturers were involved in price wars, clearance sales and
capital recalls, regardless of the losses they might suffer from in the short
term. As a result, normal selling prices of products were unstable and products’
gross profits dropped severely. The Company’s gross margin for the period
decreased to 10.83% as compared to 14.25% for the same period of
2008.
For the
three months ended September 30, 2009, although we received few bulk orders on
high-margin customized products from the telecom operators sector, we did
develop and supply our customized 3G phone model T303 to meet their needs. X666
products have contributed approximately 40.20% of our sales volume and 44.67% of
our revenue in the quarterly financial results. Marketed at a very reasonable
price, X666 products were sold in such a large quantity that they indeed boosted
the Company’s overall gross margin for this quarter.
For the
nine months ended September 30, 2009, gross margin was US$8,253,000,
representing a decrease of US$2,298,000 in gross profit when compared to the
same period of 2008. The decline of gross margin is due to financial
crisis impact and increasing competition in the market.
Under the
guidance of its previously planned products strategy, the Company will be
focused on broadening sales channels for high-profit customized products and
enhancing the existing customer base and sales channel in the traditional
market. To maintain a sustainable growth in gross margin, the Company is
planning to extend its product development in line with telecom operators’
requirements.
Selling
expenses
Selling
expenses mainly represent payments made to sales personnel and transportation
costs.
For the
three months ended September 30, 2009, selling expenses were US$40,000, or 0.21%
of revenues, representing a US$88,000 decrease compared with US$128,000 for the
corresponding period in 2008.
For the
nine months ended September 30, 2009, selling expenses were US$213,000, or 0.34%
of revenues, representing a US$140,000 decrease compared with US$353,000 for the
corresponding period in 2008.
We rely
more on concentrated distributors in products sales and this strategy led to the
decrease of selling expenses.
R&D
expenses
For the
three months ended September 30, 2009, R&D expenses were US$4,000, or 0.02%
of revenue, representing a decrease of US$246,000 or 98.40%, compared with the
numbers for the corresponding period in 2008. For the nine months ended
September 30, 2009, R&D expenses were US$32,000, or 0.05% of revenue,
representing a decrease of US$359,000 or 91.82%, compared with the numbers for
the corresponding period in 2008. The significant decrease in R&D expenses
was a result of the Company’s focus on more regular R&D initiatives and the
fact that it did not launch full R&D projects for development of new
products during the current year. This decision was considered prudent in light
of the potential impact from the pending telecom industrial reorganization in
the PRC.
General
and administrative expenses
General
and administrative expenses primarily consist of compensation for personnel,
travel expenses, rental, materials expenses related to ordinary administration
and fees for professional services.
For the
three months ended September 30, 2009, total general and administrative expenses
were US$164,000, or 0.86% of total revenues, representing a decrease of
US$63,000, or 27.63% as compared to US$228,000, or 0.78%, of the total revenues
for the corresponding period in 2008.
For the
nine months ended September 30, 2009, total general and administrative expenses
were US$533,000, or 0.86% of total revenues, representing decreases of
US$1,266,000, or 70.37% as compared to US$1,799,000, or 2.28%, of the total
revenues for the corresponding period of 2008.
The sharp
decrease in general and administrative expenses was primarily attributable to
structural adjustment, internal management control and costs reduction. In
addition, there was US$724,520 stock based compensation cost recognized during
the nine months ended September 30, 2008. There was no such type of expense
during the nine months ended September 30, 2009 since no stock options were
granted.
Interest
expenses
For the
three months ended September 30, 2009, interest expenses increased by US$15,000
compared with same period in 2008. The increase is mainly due to an additional
of US$218,000 short-term loan is outstanding in the third quarter of 2009
compared with same period in 2008.
For the
nine months ended September 30, 2009, interest expenses increased by US$25,000
compared with same period in 2008. The increase is mainly due to significant
outstanding loans during the nine months ended September 30, 2009 as well as a
result of exchange rate fluctuation, as the short-term loans are denominated in
RMB.
Other
income
For the
nine months ended September 30, 2009, other income accounted for US$17,000, or
0.03% of total revenues. It was mainly comprised of reversals of doubtful
accounts allowance.
Provision
for income taxes
For the
three months ended September 30, 2009, provision for income taxes decreased by
US$233,000 compared with same period in 2008. The decrease is mainly
attributable to a decline in taxable income.
For the
nine months ended September 30, 2009, provision for income taxes decreased by
US$452,000 compared with same period in 2008. The decrease is mainly
attributable to a decline in taxable income.
Net
income
For the
nine months ended September 30, 2009, our net income was US$5,812,000 or a net
profit margin of 9.35%, representing a decrease of US$536,000, or 29.77%, as
compared to US$6,348,000, or a net profit margin of 8.05% in the same period of
2008, primarily due to the current difficulties effecting the market and
industry as well as our deceased net sales.
For the
three months ended September 30, 2009, our net income was US$1,370,000 or a net
profit margin of 7.16%, representing a decrease of US$1,555,000, or 53.16%, as
compared to US$2,925,000, or a net profit margin of 10.00% in the same period of
2008.
The
decrease was mainly due to our business shrinking in the current economic
downturn.
LIQUIDITY
AND SOURCES OF CAPITAL
The
Company’s business relies on few distributors. In current economic environment,
turnover days of accounts receivable due from these distributors are
longer. The Company has not provided any bad debt provision to the
significant accounts receivable balance considering historical good cooperation
relationship with these distributors and believes no provision is needed as of
September 30, 2009.
The
Company is discussing with those distributors to try to collect a portion of
account receivable in fourth quarter of 2009.
The Company has limited
cash and cash equivalents in hand for a long time and may obtain loans from
banks to finance business operation from time to time. The Company currently has
certain overdue loan from Beijing Rural Commercial Bank at September 30,
2009. The Company is negotiating an extension of the term with the
bank.
The
Company has not paid salaries and welfare to employees for certain months in
2009 due to difficulty in cash flow.
We
generally finance our operations from cash flow generated internally and
short-term financing from domestic banks in China.
As of
September 30, 2009, we had current assets of US$118,378,000. Current assets are
mainly comprised of accounts receivable of US$93,398,000, advance to suppliers
of US$21,834,000, cash and cash equivalents of US$32,000, pledged deposit of
US$1,290,000 and other current assets of US$1,824,000.
As of
September 30, 2009, our current liabilities were US$64,050,000 and included
accounts payable of US$24,166,000, trade deposits received of US$1,936,000,
short-term loans of US$9,389,000, accrued expenses and other accrued liabilities
of US$21,813,000, income tax payables of US$5,871,000 and amounts due to
directors of US$568,000.
We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days. As of September 30, 2009, our accounts receivable had
increased by US$11,322,000 to US$93,398,000, as compared to US$82,076,000 on
December 31, 2008. The increase in accounts receivables was mainly due to a
longer turn over period in the current economic recession environment. We will
pay close attention to the liquidity progress of our distributors. As previously
disclosed, in order to reduce the risks of default, we have limited terms of
credit to our major distributor in the Master Distributor Agreement and have the
third-party guarantee company to guarantee the accounts receivable due from this
major distributor.
As of
September 30, 2009, our advance to suppliers was US$21,834,000, which
represented an increase of US$13,393,000 as compared with US$8,441,000 as of
December 31, 2008. The increase was primarily because the Company made some
prepayments to suppliers in past quarters of year 2009.
As of
September 30, 2009, our other current assets were US$1,824,000, which
represented a decrease of US$34,000, as compared to US$1,859,000 as of December
31, 2008. The “other current assets” are mainly composed of prepaid deposits to
acquire a manufacturing facility in the amount of US$1,731,000. The acquisition
was terminated in 2008. The decrease in other current assets was mainly
attributable to the recovery of some of the deposit paid to our office equipment
and facilities suppliers.
As of
September 30, 2009, our accounts payable were US$24,166,000, which represents an
increase of US$7,813,000, or 47.78%, as compared to US$16,353,000 as of December
31, 2008. The increase was mainly because we delayed the payment to certain
suppliers to meet our working capital demand.
As of
September 30, 2009, accrued expenses and liabilities were US$21,813,000,
representing an increase of US$9,801,000 or 81.59%, compared to US$12,012,000 as
of December 31, 2008. The increase was mainly due to an additional VAT payable
of US$8,916,000 mainly caused by outstanding input VAT invoices.
During
this quarter, we made no allowance for warranty problems because, during this
period, after-sale services for newly-launched products were undertaken by OEM
factories, rather than the Company. Therefore, allowances were not made
accordingly for these after-sale services.
As of
September 30, 2009, income tax payable was US$5,871,000, representing an
increase of US$888,000 or 17.80%, compared to US$4,989,000 as of December 31,
2008. The increase was mainly due to provision of PRC income tax at
the effective tax rate of 13%, and our deferment of income tax payable to the
government for the three months ended September 30, 2009.
As of
September 30, 2009, cash and bank balances were mainly denominated in Renminbi
(“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated
in RMB and U.S. Dollars (“USD”). The Company operations are mainly denominated
in RMB.
It seems
that the global financial crisis has made it difficult for companies to raise
capital through equity financing. In order to ensure its liquidity, the Company
will attempt to recover accounts receivable due from customers and to raise
funds, as necessary, through loans from Chinese domestic banks.
CASH
FLOWS
As of
September 30, 2009, we had cash and cash equivalents of US$32,000. This
represented a decrease of US$70,000 when compared with US$102,000 as of December
31, 2008. During nine months ended September 30, 2009, we had a fast moving cash
flow to ensure desirable goods supplies. We made timely payments to our
suppliers so that we had shortened goods supply terms to deal with the fierce
competition in the cell phone market.
As of
September 30, 2009, our aggregate short term loans were US$9,696,000, which were
comprised of US$2,515,000 from Huaxia Bank, US$6,874,000 from Beijing Rural and
Commercial Bank and US$307,000 from a third party company.
CONTINGENT
LIABILITIES
On June
20, 2007, we entered into a guarantee contract to serve as guarantor of a loan
in the amount of RMB 120,000,000, or approximately US$17,530,000,
to CECT-Chinacom
Communications Co., Ltd. (“CECT-Chinacom”) from Beijing Rural Bank to provide
CECT-Chinacom with capital for equipment purchases between June 20, 2006 and
June 16, 2010. Under the guarantee contract, we shall perform all obligations of
CECT-Chinacom under the Loan Contract if CECT-Chinacom fails to perform its
obligations as set forth in the Loan Contract. Failing to perform
could include, but is not limited to, the following: ceasing production, going
out of business, dissolving the business, having its business license withdrawn,
or filing for bankruptcy.
OFF
BALANCE SHEET ARRANGEMENTS
As of September 30, 2009, we had no
off-balance sheet arrangements.
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.
Aggregate bank loans as of September 30, 2009, were US$9,389,000. The interest
rate for the three months ended September 30, 2009 was charged at 6.372% to
10.080% per annum.
Item
4T. Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of other members of
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.
Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Changes
in Internal Controls over Financial Reporting
There
were no significant changes in our internal controls over financial reporting
identified in connection with this evaluation that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s 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) Not
applicable.
(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 September 30, 2009.
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
|
|
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)
|
10.2
|
|
Master
Distributor Agreement, dated as of August 7, 2008, by and between Beijing
Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang
Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 20, 2008)
|
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/
Guoji Liu
|
|
|
|
Guoji
Liu
|
|
|
|
Chief
Executive Officer
|
|
|
By:
|
/s/
Hua Chen
|
|
|
|
Hua
Chen
|
|
|
|
Chief
Financial Officer
|
|
DATED: November
23, 2009
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
|
|
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)
|
10.2
|
|
Master
Distributor Agreement, dated as of August 7, 2008, by and between Beijing
Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang
Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 20, 2008)
|
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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