UNITED STATES
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 June 30, 2005
000-117718
(Commission File Number)
Orsus Xelent Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 20-11998142
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
A-20G, Chengming Plaza
No. 2 Nan Da Street, Xicheng District
Beijing, People's Republic of China 100035
(Address of principal executive offices) (Zip Code)
86-10-83670505
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
29,756,000
PART I --- FINANCIAL INFORMATION
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
Note US$'000 US$'000 US$'000 US$'000
Operating revenues: 1,940 14,394 3,440 15,064
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 1,711 11,639 2,899 12,305
Sales and marketing 407 697 701 851
General and administrative 307 290 569 382
Research and development 108 52 142 189
Depreciation 49 103 75 105
----------- ----------- ----------- -----------
Total operating expenses 2,582 12,781 4,386 13,832
----------- ----------- ----------- -----------
Operating (loss)/profit (642) 1,613 (946) 1,232
Interest expense (4) (1) (25) (2)
Other income, net 122 3 452 4
----------- ----------- ----------- -----------
(Loss)/Income before income taxes and
minority interest (524) 1,615 (519) 1,234
Income taxes 5 -- -- -- --
----------- ----------- ----------- -----------
(Loss)/Income before minority interest (524) 1,615 (519) 1,234
Minority interest -- 58 -- 90
----------- ----------- ----------- -----------
Net (loss)/income (524) 1,673 (519) 1,324
=========== =========== =========== ===========
(Loss)/earnings per share: 4
Basic (0.02) 0.06 (0.02) 0.04
=========== =========== =========== ===========
Weighted average number of common stock
outstanding 29,756,000 29,756,000 29,756,000 29,756,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
Orsus Xelent Technologies, Inc.
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------
(Unaudited)
As of As of
June 30, December 31,
2005 2004
Note US$'000 US$'000
ASSETS
Current assets
Cash and cash equivalents 1,042 224
Restricted cash 1,721 2,333
Accounts receivable - Trade 5,658 8,250
Due from related company 7 -- 3,319
Due from a director 7 6 --
Inventories 5,292 5,781
Trade deposits paid 7,750 8,126
Other current assets 294 210
------------ ------------
Total current assets 21,763 28,243
Property, plant and equipment, net 1,171 778
------------ ------------
Total assets 22,934 29,021
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - Trade 10,392 13,840
Accrued expenses and other accrued liabilities 1,528 1,103
Trade deposits received -- 2,487
Due to directors 7 311 311
Provision for warranty 124 182
------------ ------------
Total current liabilities 12,355 17,923
------------ ------------
Commitments and contingencies
Stockholders' equity Preferred stock, US$0.001 par value:
Authorized: 100,000,000 shares, no shares issued -- --
Common stock and paid-in capital, US$0.001 par value:
Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of June 30,
2005 and as of December 31, 2004 30 30
Additional paid-in capital 2,484 2,484
Dedicated reserves 1,042 1,042
Retained earnings 7,023 7,542
------------ ------------
Total stockholders' equity 10,579 11,098
------------ ------------
Total liabilities and stockholders' equity 22,934 29,021
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Unaudited)
Six months ended
June 30,
------------------------
2005 2004
US$'000 US$'000
Cash flows from operating activities
Net (loss)/income (519) 1,324
Adjustments to reconcile net (loss)/income to net cash used in operating
activities:
Depreciation 75 105
Changes in assets and liabilities:
Accounts receivable -trade 2,592 (21)
Inventories, net 489 (5,887)
Trade deposits paid 376 (6,759)
Other current assets (84) (457)
Trade deposits received (2,487) 4,520
Accounts payable - trade (3,448) 6,301
Provision for warranty (58) 139
Accrued expenses and other accrued liabilities 425 (24)
---------- ----------
Net cash used in operating activities (2,639) (759)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (468) (1,043)
Repayment from a related company 3,319 736
Advance to a director (6) --
Minority interests -- 454
Decrease/(increase) in restricted cash 612 (1,857)
---------- ----------
Net cash generated from/(used in) investing activities 3,457 (1,710)
---------- ----------
Cash flows generated from financing activities
Advance from a related company -- 2,452
---------- ----------
Net cash generation from financing activities -- 2,452
---------- ----------
Net increase/(decrease) in cash and cash equivalents 818 (17)
Cash and cash equivalents, beginning of the period 224 190
---------- ----------
Cash and cash equivalents, end of the period 1,042 173
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Orsus Xelent Technologies, Inc. ("ORXT"), formerly known as Universal
Flirts Corp. was organized under the laws of the State of Delaware on
May 25, 2004. Through its subsidiary, Universal Flirts, Inc., ORXT
engaged in developing and operating an online dating service.
As described in Note 2 below, prior to the reorganization with United
First International Limited ("UFI"), a company incorporated in the Hong
Kong Special Administrative Region of the People's Republic of China
(the "PRC"), on March 31, 2005, ORXT was a development stage company,
which, other than providing an online dating service, has had no
operations and revenues. After recapitalization, ORXT exited the
development stage after March 31, 2005.
Upon the completion of the reorganization, ORXT assumed the business
operations of UFI as primarily undertaken by its subsidiary, Beijing
Orsus Xelent Technologies & Trading Co., Limited ("Xelent") (English
translation for identification purpose only), an enterprise established
in Beijing, the PRC that is engaged in the business of designing for
retail and wholesale distribution cellular phones. Xelent had a 55%
interest in Shanghai Sapphine Telecom Tech Co., Ltd. ("Sapphine")
(English translation for identification purpose only), a company
engaged in research and development of cellular phones which was
incorporated in the PRC. On August 19, 2004, the owners of Sapphine
signed an agreement to liquidate Sapphine.
2. REORGANIZATION
a) Reorganization
On March 18, 2005, the board of directors approved a 4-for-1
forward split of its issued and outstanding common stock with
a record date of March 28, 2005.
Pursuant to a Stock Transfer Agreement dated March 29, 2005,
ORXT 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 ORXT's common stock. Subsequently, ORXT
had 14,756,000 shares of its common stock outstanding.
b) Recapitalization
Effective on March 31, 2005, ORXT completed a stock exchange
transaction with the stockholders of UFI. Pursuant to the
Securities Exchange Agreement, ORXT issued 15,000,000 shares
of its common stock to the stockholders of UFI, in exchange
for 20,000,000 outstanding shares of UFI and cash payment of
US$50,000 from UFI. After giving effect to the exchange, ORXT
had 29,756,000 shares of its common stock outstanding. As a
result of the exchange, UFI became a wholly-owned subsidiary
of ORXT.
4
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. REORGANIZATION (CONTINUED)
b) Recapitalization (Continued)
For accounting purposes, the transaction has been treated as a
recapitalization of UFI with ORXT being the legal survivor and
UFI being the accounting survivor and the operating entity.
That is, the historical financial statements prior to March
31, 2005 are those of UFI, even though they are labeled as
those of ORXT. Retained earnings of the accounting survivor,
UFI, is carried forward after the recapitalization. Operations
prior to the recapitalization are those of the accounting
survivor, UFI. Earnings per share for periods prior to the
recapitalization are restated to reflect the equivalent number
of shares. Upon completion of the transaction, the financial
statements become those of the operating company, with
adjustments to reflect the changes in equity structure and
receipt of the assets/liabilities of the public shell, ORXT.
Accordingly, the Company's stockholders' equity as of December
31, 2004 has been recapitalized and restated.
Following the recapitalization, ORXT held 100% of the issued
and outstanding shares of UFI and UFI became a wholly-owned
subsidiary of ORXT. In this report, ORXT, UFI, Xelent and
Sapphine are collectively referred to as the "Company".
c) Merger under common control
UFI was incorporated in Hong Kong on September 8, 2004 and was
20%, 40% and 40% owned by Mr. Wang Xin, Mr. Liu Yu and Mr.
Wang Zhibin respectively. UFI has had no operations since its
incorporation.
Pursuant to the agreement entered into between UFI and Mr.
Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin, who owned 20%, 40%
and 40% interests respectively in Xelent on November 1, 2004,
UFI consummated a merger with Xelent, and paid USD1,207,000,
to all owners of Xelent, in exchange for all their beneficial
interests in Xelent ("the Agreement"). Xelent was established
in the PRC on May 6, 2003 as a PRC company with limited
liability. The principal activities of Xelent were the
development of cellular phones software and technology,
including the design and trading of cellular phones.
On November 3, 2004, the Beijing Municipal Bureau of Commerce
(the "Bureau") approved the transfer of interests and the
application for the change of Xelent's status to a
wholly-owned foreign investment enterprise ("WOFIE") with
limited liability. Upon granting WOFIE status, the operating
period of Xelent was for an initial term of 10 years until
November 9, 2014 and UFI became the sole registered owner of
Xelent.
Consistent with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141 "Business Combinations",
transfers of net assets or exchanges of equity interests
between entities under common control do not constitute
business combinations. Because UFI and Xelent were
beneficially owned by the same stockholders group, Mr. Wang
Xin, Mr. Liu Yu and Mr. Wang Zhibin, immediately before and
after the combination, the Agreement has been accounted for as
a combination of entities under common control on a historical
cost basis in a manner similar to a pooling of interests. In
accordance with USGAAP, the accompanying financial statements
of the Company have been prepared as if the Merger had
occurred and UFI had been incorporated at the beginning of the
earliest period presented, as of May 6, 2003.
5
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
as of June 30, 2005 and 2004 have been prepared based upon Securities
and Exchange Commission ("SEC") rules that permit reduced disclosure
for interim periods and include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments and
reclassifications) necessary to present fairly the financial position,
results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America ("USA") have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
notes thereto incorporated by reference in the Company's Form 10-KSB
for the year ended December 31, 2004 filed on February 11, 2005 and
Form 8-K/A for the information of Xelent filed on May 19, 2005. The
results of operations for the six-month periods ended June 30, 2005 and
2004 are not necessarily indicative of the operating results to be
expected for the full year.
The condensed consolidated financial statements and accompanying notes
are presented in United States dollars and prepared in conformity with
accounting principles generally accepted in the USA ("USGAAP") which
requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
4. (LOSS) / EARNINGS PER SHARE
Basic (loss)/earnings per share is computed based upon the weighted
average number of shares of common stock outstanding during each period
as restated as a result of the recapitalization as described in Note 2.
The 29,756,000 shares in connection with the recapitalization were
included in the computation of (loss)/earnings per share as if
outstanding at the beginning of each period presented.
The Company had no potential common stock instruments with a dilutive
effect for any period presented, therefore basic and diluted
(loss)/earnings per share are the same.
5. INCOME TAXES
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates.
ORXT had a net operating loss carry-forward for income tax reporting
purposes of approximately US$227,070 that might be offset against
future taxable income. These net operating loss carry-forwards are
expected to become severely limited in future years if the Company
experiences a control change. Therefore, following the recapitalization
as mentioned in Note 2, the amount available to offset future taxable
income might be limited. No tax benefit has been reported in the
financial statements, because the Company believes there is more likely
than not the carry-forwards will be limited. Accordingly, the potential
tax benefits of the loss carry-forwards are offset by a valuation
allowance of the same amount.
6
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. INCOME TAXES (CONTINUED)
No provision for withholding or United States federal or state income
taxes or tax benefits on the undistributed earnings and/or losses of
the Company's subsidiaries has been provided as the earnings of these
subsidiaries, in the opinion of the management, will be reinvested
indefinitely. Determination of the amount of unrecognized deferred
taxes on these earnings is not practical, however, unrecognized foreign
tax credits would be available to reduce a portion of the tax
liability.
UFI was incorporated in Hong Kong and has no assessable profit for the
periods presented. All of the Company's income is generated in PRC by
Xelent. Since Xelent has registered as a wholly-owned foreign
investment enterprise ("WOFIE"), it is subject to tax laws applicable
to WOFIE in the PRC and is fully exempt from the PRC enterprise income
tax of 33% for two years followed by a 50% reduction for the next three
years, commencing with fiscal year 2005.
The reconciliation of PRC statutory income to the effective income tax
rate based on income stated in the statements of operations is as
follows:
(Unaudited)
Six months ended
June 30,
------------------
2005 2004
% %
Statutory rate 33 33
Tax exemption -- (33)
Tax losses (33) --
------- -------
-- --
======= =======
6. CONCENTRATIONS
The Company is engaged principally in the development of cellular
phones software and technology, including the design and trading of
cellular phones for sale primarily to two dealers in the PRC. Although
there are multiple sources of supply of raw materials, the Company buys
certain major materials from few major suppliers. In addition, the
Company subcontracts assembly works of cellular phones mainly to two
subcontracting factories. Management believes 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.
Time would be required to locate other qualified suppliers and
subcontracting factories, which could, however, cause a delay in
manufacturing and may be disruptive to the Company's operations.
7
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. CONCENTRATIONS (CONTINUED)
Customers accounted for over 10% of the Company's operating revenues as
follows:
(Unaudited)
Six months ended
June 30,
------------------
2005 2004
% %
Customer A 69 92
Customer B 31 --
======= =======
Trade deposits received in respect of the above customers were US$Nil
and US$2,487,000 as of June 30, 2005 and December 31, 2004,
respectively. Trade receivable in respect of the above customers were
US$5,658,000 and US$8,250,000 as of June 30, 2005 and December 31, 2004
respectively.
Suppliers accounted for over 10% of the Company's purchases are as
follows:
(Unaudited)
Six months ended
June 30,
------------------
2005 2004
% %
Supplier A 32 25
Supplier B 12 27
Supplier C 20 --
Supplier G -- 15
======= =======
Trade deposits paid in respect of the above suppliers were US$1,097,000
and US$1,665,000 as of June 30, 2005 and December 31, 2004. Trade
payable in respect of the above suppliers were US$Nil and US$1,077,000
as of June 30, 2005 and December 31, 2004 respectively.
7. RELATED PARTY TRANSACTION
a. Name and relationship of related parties
Relationship with the Company
Related party as at June 30, 2005
------------- --------------------------------------------
Mr. Wang Xin Director and stockholder of the Company
Mr. Liu Yu Director and stockholder of the Company
Mr. Wang Zhibin Director and stockholder of the Company
8
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. RELATED PARTY TRANSACTION (CONTINUED)
b. Summary of related party balance
As of As of
June 30, December 31,
2005 2004
Note US$'000 US$'000
Due from related company
Beijing Huan Yitong Tech & Trading Co., Ltd.* -- 3,319
============ ============
Due to directors
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (i) 311 311
============ ============
Due from a director
Mr. Wang Xin (i) 6 --
============ ============
c. Summary of related party transactions
(Unaudited)
Six months ended
June 30
-----------------
2005 2004
USD'000 USD'000
Repayment from related company
Beijing Huan Yitong Tech & Trading Co., Ltd.* 3,319 --
======= =======
Advance from related company
Beijing Huan Yitong Tech & Trading Co., Ltd.* -- 2,452
======= =======
Advance to a director
Mr. Wang Xin 6 --
======= =======
Note:
(i) The amounts due to directors are unsecured,
interest-free and repayable on demand.
* Ceased to be related party beginning on April 26,
2005.
8. EVENTS AFTER BALANCE SHEET DATE
On July 14, 2005, Orsus Xelent Holdings (BVI) Limited ("OXH") was
incorporated in the British Virgin Islands with issued capital of US$2.
OXH is 100% owned by ORXT. The principal activity of OXH is investment
holding. On July 22, 2005, Orsus Xelent Trading (HK) Company Limited
("OXT") was incorporated in Hong Kong with issued capital of HK$100
(equivalent to US$13) and is 100% owned by OXH. The ultimate holding
company of OXT is ORXT. The principal activity of OXT is trading of
mobile phones and accessories. OXT commenced its business operation in
August 2005.
9
Item 2. Management's Discussion and Analysis or Plan of Operation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN 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
Universal Flirts Corp., was organized under the laws of State of Delaware in May
2004. On June 1, 2004, the Company acquired all the issued and outstanding
shares of Universal Flirts Inc., a New York corporation, from Darrel Lerner, the
sole shareholder, in consideration for the issuance of 8,500,000 shares of the
Company's common stock to Mr. Lerner pursuant to a stock exchange agreement
between Universal Flirts Inc. and the Company. Pursuant to the purchase and
share exchange transaction, Universal Flirts Inc. became the wholly-owned
subsidiary of the Company.
Pursuant to Stock Transfer Agreement dated March 29, 2005, the Company
transferred all of the common stock of Universal Flirts, Inc. to Mr. Darrell
Lerner in exchange for the cancellation of 28,200,000 shares of the Company's
common stock. Immediately, 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, a company
incorporated under the laws of Hong Kong ("UFIL"). The exchange was consummated
under the laws of State of Delaware and pursuant to the terms of Securities
Exchange Agreement ("Exchange Agreement") dated effective as of March 31, 2005.
In connection with its acquisition of UFIL, the Company also authorized a 4-1
forward split of its common stock..
Pursuant to the Exchange Agreement, Universal Flirts Corp. issued 15,000,000
shares of its common stock, $0.001 par value, to the stockholders of UFIL,
representing approximately 50.41% of the Company's issued and outstanding common
stock, in exchange for 20,000,000 outstanding shares of UFIL and cash payment of
$50,000 from UFIL. Immediately after giving effect to the exchange, the Company
had 29,756,000 shares of its common stock outstanding.
10
Pursuant to the exchange, UFIL became a wholly-owned subsidiary of the Company
and all 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. The company's new OTC
Bulletin Board symbol is ORXT and the new CUSIP Number is 68749U106.
The business operation of UFIL is primarily undertaken by its wholly-owned
subsidiary, Xelent. Xelent have been engaged since May 2003 in the business of
designing for retail and wholesale distribution economically priced cellular
phones. In February 2004, Xelent registered "ORSUS" with the State
Administration for Industry and Commerce as its product trademark, also known as
"Orsus Cellular" within the industry. Orsus cellular are traditionally equipped
with leading features including 1.8-inch to 2.2-inch TFT dual-color display 1 to
120-minute video recording, 300K to 2M pixel photography, MP3, MPEG4 and U disk
support, dual stereo speakers, e-mail messaging, multimedia messaging, 40 to 64
ring tone storage, flip-phone technology and innovative lightweight design.
Since the first Orsus cellular launched the market in April 2004, approximately
500,000 units had been sold, and it represents approximately 1% of the market in
the People's Republic of China (the "PRC") for cellular phones in 2004.
According to research conducted by China Ministry of Information Industry, in
the first half of 2005, the PRC added 28 million mobile phone users, bringing
total year-end subscribers to 363 million, the largest nation in the world. This
number is expected to reach over 500 million by 2007. With the market in the PRC
for cellular phones continues to develop, Xelent is gradually introducing an
advanced product line incorporating the new 3G (Third Generation) high-speed
mobile technology. This technology is expected to be approved by the Chinese
government in 2006 and, according to China Ministry of Information Industry,
amount to a US$120 billion market in the PRC by year-end.
BUSINESS REVIEW
During the first quarter of 2004, the Company mainly engaged in the trading of
cellular phones business. Since April 2004, the Company has diversified its
business into the research and manufacture of cellular phones. This business
strategy was successful and brought a sharp increase of revenues in remaining
three quarters of 2004.
Since the 4th quarter 2004 the growth rate of the cellular phones market in the
PRC has slowed down as a result from the oversupply of cellular phones in the
market. The cellular phones market in the PRC is characterized by rapidly
changing customer preferences. Cellular phones with multi-media function
replaced camera function and became the most popular products in 2005.
Additionally, foreign manufacturers of cellular phone have paid much investment
on the middle- to low-end products. Much more new products have been launched
into the Chinese market and cost much to advertise on the main media, which have
led foreign manufacturers grasp more market share from domestic manufactures.
11
In response to the fierce competition in the PRC cellular market, we enhanced
the quality and function of our products to increase the competitive edge. We
have developed new platforms, namely Agere and MTK, which could enable us to
develop a series of low to moderately priced new products with innovative
functions, such as multi-media to meet the rapid change in the market. Two
models with multi-media functions were successfully launched into the market,
namely M36 and OS70+, in July 2005. In response to the competition in product
functions and pricing with international cellular giants, we negotiated with our
suppliers to reduce the cost of raw materials and improve our operation
efficiency so as to increase our price reduction ability.
In response to the fierce competition in the PRC cellular market, we continually
adopted our strategy to develop our product with low to moderately price with
innovative functions. Additionally, we planned to export our cellular phone
products and R&D services to foreign-based customers in Hong Kong and Southeast
Asia. We believe our products with popular features and reasonable price are
highly competitive in Hong Kong and other foreign markets.
Although the overall operating environment would be difficult in this year, we
expect the revenues, and earnings will demonstrate steady growth in 2005 with
the introduction of new products, optimization of supply chain and enhanced
usage of raw materials.
Six months ended June 30, 2005
- -------------------------- ------------------------- ------------------------ ------------------
Six months ended June Six months ended June Comparison
30, 2005 30, 2004
- -------------------------- ------------------------- ------------------------ ------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Revenues 3440 15064 11624 77.17%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Cost of sales (2899) 84.27% (12305) 81.68% 9406 76.44%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Sales & Marketing
expenses (701) 20.38% (851) 5.65% 150 17.62%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
General & Admin
expenses (569) 16.54% (382) 2.54% -187 -48.95%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
R&D expenses (142) 4.13% (189) 1.25% 47 24.87%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Depreciation &
Amortization (75) 2.18% (105) 0.70% 30 28.57%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Interest expenses (25) 0.73% (2) -0.01% -23 1150.00%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Other income, net 452 13.14% 4 0.03% 448 11200.00%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Income (loss) before tax (519) -15.09% 1234 8.19% 1754 142.02%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Income taxes 0 0% 0 0.00% 0 NIL
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Minority interest 0 0% 90 0.60% -90 100.00%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
Net income (loss) (519) -15.09% 1324 8.79% 1843 139.19%
- -------------------------- ---------- -------------- ---------- ------------- ------- ----------
12
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 on 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 OPERATION
>> Revenues
Our revenues were $3,440,000 for the six months ended June 30, 2005,
representing a decrease of 77.17% as compared to the same period in 2004. The
revenues mainly derived from the sales of cellular phones particularly model FG
830, OS850, M86 and OS83. The tremendous decrease was primarily due to the quick
change and fierce competition of the market. In the second quarter of 2004, we
grasp a good opportunity of camera cellular to enter into the market. The ten
models we have introduced into the market are all camera cellular. Right
products going into the market in the right time have benefited us a lot. Since
the 4th quarter 2004, Cellular phone with multi-media function became most
popular. We have changed our technologies to develop platform from ADI to MTK in
order to research and develop a cellular phone with multimedia functions. Since
time is required to develop such new platform, our new products rollout in the
first half-year was delayed. As a result, our revenues in the first half-year
were mainly contributed from our old products and the growth in revenue was slow
down in this quarter. Although the growth rate of revenues in the third quarter
of this year would not be as fast as that in last corresponding period, we
believe that our revenues would have a obvious growth in the second half of 2005
as long as the successful introduction of our new products with multi-media
functions.
Our old products also faced a direct competition with the overseas international
cellular phone giants. We became more cautious to introduce new products without
multi-media functions and reduced the price so as to capture profit and clear
inventories.
Comparing with the 1st quarter of 2005, our revenues had increased from
US$1,500,000 to US$1,940,000 this quarter, rising up about 29.33%. We stimulated
the market sales by means of reduction of old type of products prices in order
to reduce inventories. Together with our distributors and dealers launched a
series of promotion campaigns during this quarter, our revenues have an obvious
improvement in this quarter. We still have an increase in the products, such as
M86, OS83 etc, compared to first quarter 2005. By more and more new product have
been researched, we will accelerate the speed of product launch to market to
enhance our gross margin through innovative products. We plan to introduce a
series of new products with innovative functions, such as MP3, MPEG4, over one
mega pixels resolutions and intelligent handwriting features.
13
Although the overall operating environment is difficult in this year, we believe
that our revenues in 2005 will achieve a steady growth through the introduction
of innovative features cellular phones with low and moderate price to penetrate
the market and strengthen the brand awareness.
Breakdown by products
For the first six months ended June 30, 2005, our revenues are mainly generated
from the sales of the following products:
- --------------- ------------------------------
Six months ended June 30, 2005
- --------------- ------------------------------
$'000 % of revenue
- --------------- ------------ -----------------
FG 830 1,267 37%
- --------------- ------------ -----------------
M 86 631 18%
- --------------- ------------ -----------------
OS850 475 14%
- --------------- ------------ -----------------
OS83 381 11%
- --------------- ------------ -----------------
The sales of FG830 was $1267,000 in the six months ended June 30, 2005,
represents a 37% of revenue, it is the major source of revenue due to (i) Right
market positioning as the product is correctly priced for lower to middle income
groups, even for college students, the demand is strong (ii) Proven quality and
multi-functions satisfy customers who are looking for an affordable modern
cellular phones.(iii) This type of mobile phone is appealing to the consumers
with its elegant and beautiful appearance
Breakdown by customers
- ------------------------------------------------- ------------------------------
Six months ended June 30, 2005
- ------------------------------------------------- ------------------------------
$'000 % of revenue
- ------------------------------------------------- ------------ -----------------
CEC Cellular Limited 2,372 69%
- ------------------------------------------------- ------------ -----------------
Beijing Xingwang Shidai Tech & Trading Co., Ltd. 1,053 31%
- ------------------------------------------------- ------------ -----------------
Our revenues were primarily derived from two major customers, also our strategic
partners, CECM and XWSD. For the six months ended June 30, 2005, our revenues
generated from CEC Cellular Limited ("CECM") and Beijing Xingwang Shidai Tech &
Trading Co., Ltd. ("XWSD") were $2,372,000 and $ 1,053,000 respectively, which
representing a 69% and 31% of the revenue respectively. We have set up of
strategic partnership with these two companies, both are provincial and national
distributors and dealers, and the sales networks cover most of the main cities
all over the PRC.
Now, we have paid more attentions on developing new distributors and dealers. By
incorporating with different distributors and dealers, it could reduce the sales
risk and dependence on certain distributor. In addition, the different
distributors and dealers could complement with each other so to fill up the
empty market of our products. With more collaborators, we are more confident
that our revenues will increase in the next few months.
14
>> OTHER INCOME, NET
For six months ended June 30, 2005, other income, net were $452,000, accounting
for 13.14% of the total revenues, as compared to $4,000, or 0.03% of total
revenues for the corresponding period in 2004. Other income, net had a sharp
period-to-period increase which is mainly due to a royalty fee rebate amounting
to US$314,000.
>> OPERATING EXPENSES
For six months ended June 30, 2005, operating expenses mainly include sales and
marketing expenses, general and administrative expenses and R & D expenses and
shown as follows:
- ------------------- -------------------------- -------------------------- --------------------
Six months ended June 30, Six months ended June 30, Comparison
2005 2004
- ------------------- -------------------------- -------------------------- --------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
Cost of sales (2899) 84.27% (12305) 81.68% 9406 76.44%
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
Sales & marketing (701) 20.38% (851) 5.65% 150 17.62%
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
General & admin (569) 16.54% (382) 2.54% -187 -48.95%
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
R&D (142) 4.13% (189) 1.25% 47 24.87%
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
Total (4,311) (13,727) 9416 68.59%
- ------------------- ---------- --------------- ----------- -------------- ---------- ---------
Cost of sales
- -------------
For the six months ended June 30, 2005, our cost of sales were $2,899,000,
representing 84.27% of revenue, compared to $12,305,000 and 81.68% of the
corresponding period of last year respectively. The percentage as of revenue of
the reporting period increased due to that the fierce competition lead to lower
the price and reduction of the profit. Since the second half of 2004, all the
famous international cellular manufacturers have launched a large amount of low
and middle class products into the market. With these more and more similarly
positioned products entering into our target market, we have to make great
effort to maintain our market share by reducing price and increasing marketing
expenses.
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses mainly represent the free-gift and product model to
customers and dealers respectively, cost of provision for after-sales services,
remunerations for sales personnel and development of market.
For six months ended June 30, 2005, sales and marketing expenses were $701,000,
accounting for 20.38% of the total revenues, as compared to $851,000, or 5.65%
of total revenues for the corresponding period in 2004. Sales and marketing
expenses had a period-to-period decrease of 17.62% .The occupied percentage in
the total revenues increased from 5.65% to 20.38% compared to the corresponding
period in 2004 is due to the total revenue's decrease and the approximately
15
steady absolute expense. Although the revenue has a large decrease, the
free-gift and product model to customers and dealers did not decrease in the
same proportion. A large portion of sales and marketing expenses was fixed
expenses, such as remunerations for sales personnel. In the following quarter,
we would manage to lower the fixed sales and marketing expenses by cooperating
with various distributors and dealers.
Sales and marketing expenses are correlated to the change in revenues. The sales
and marketing expenses was also resulting from our efforts to expand our
business range, penetrate into new markets and set up branches and
representative offices. The remunerations for sales personnel increased largely
compared to the same period in 2004, due to that the company has some market
foundation and employed a large number of sales personnel. We expect the
expenditures in the sales and marketing expenses would being benefit to our
income growth in the coming quarters as well as strengthen our brand in
long-run.
R&D expenses
- ------------
The R&D cost was $142,000 for the six months ended June 30, 2005, which
represents 4.13% of total revenue, compared with $189,000 and 1.25% respectively
in the same period in 2004. The R&D expenses had a period-to-period decrease of
24.87% due to the different platform development expense incurred in the period.
R&D expenses incurred in the six months ended June 30, 2004 mainly represented
the ADI platform development expense which was incurred when expensed, even
though this platform has been adopted in various products which were
manufactured throughout the whole year of 2004. Currently new platforms, namely
AGERE and MTK, have been developed and put into the production of new cellular
phones. In the second quarter we have put the AGERE platform and the MTK
platform into manufacturing of M70+ and M36. We expected the development cost of
the new platforms would be increased in this year so as to develop and launch
new models of cellular phones with more advanced multimedia functions to the
market.
The Company has very flexible R&D strategies to response to the market timely
and quickly. We are planning to introduce more models of cellular phones with
utilization of the new platforms in the second half of 2005. We expect the R&D
cost would be increased throughout the rest of the year. We believe that our R&D
activities will strengthen our technologies, reduce the costs of existing
products and also provide future revenue streams through the launch of new
innovative products.
General and administrative expenses
- -----------------------------------
General and administrative expenses consist primarily of compensation for
personnel, travel expenses, materials expenses related to ordinary
administration and fees for professional services.
For the six months ended June 30, 2005, general and administrative expenses were
$569,000, accounting for 16.54% of the total revenues, as compared to $382,000,
or 2.54% of the total revenues for the corresponding period in 2004. General and
administrative expenses had a period-to-period sharply increase of 48.95%. Since
April, 2004, the company has got an enormous progress not only in sales but also
in organization and human resources. Therefore the increase in general & admin
expenses were mainly due to increased travel expenses and compensation for
personnel in the reporting period.
16
>> GROSS PROFIT AND GROSS MARGIN
For the six months ended June 30, 2005, our gross profit was $ 541,000, which
represented a decrease of 80.39% as compared to the gross profit of $2,759,000
in the same period in 2004. Our gross margin for the reporting period was
decrease from 18.3% in 2004 to 15.7% in 2005.
Both gross profit and gross margin decreased attributable to: 1. The fierce
market competitive lead to lower price and reduction of the profit with each
product; 2. For the purpose of inventories reduction, the company had to
stimulate the old products' sales by price reduction.
>> NET INCOME
For the six months ended June 30, 2005, our net loss was $519,000, as compared
to net income of $1,324,000 of the same period in 2004. The recession in our
profitability is mainly attributable to the decreased revenues.
>> LIQUIDITY AND SOURCE OF CAPITAL
We generally finance our operations from cash flow generated internally.
As of June 30, 2005, we had current assets of $21,763,000. Current assets are
comprised of inventories of $5,292,000, accounts receivable of $5,658,000, trade
deposits and other receivables aggregated of $8,044,000,,due from directors of
$6,000 and restricted cash, cash and cash equivalents of $2,763,000. Current
liabilities comprised accounts payable of $10,392,000, trade deposit received of
$0, accrued expenses and other accrued liabilities of $1,528,000, due to
directors of $311,000, and provision for warranty of $124,000.
We offer two trading terms to our customers, i.e. cash-on-delivery and on credit
term within 180 days. As of June 30, 2005, our accounts receivable were
$5,658,000, compared to $8,250,000 as of Dec 31, 2004. A large decrease in the
accounts receivable is due to the repayment from one of the major customers,
XWSD.
As of June 30, 2005, our inventories were $5,292,000, as compared to $5,781,000
as of Dec 31, 2004, which represented moderate decrease of 8.46%. The main
reason for this decrease is due to reduction of the old materials' inventories.
We stimulated the old type products' sales by reducing the price. Furthermore,
we will develop and research new functions (such as MP3, MPEG4 etc.) on old
products, such as OS70+,M62+, therefore many old materials' inventories could be
reused in the new products. In the future, we will critically and regularly
evaluate our inventories to consider any provision is required to reduce the
excess or obsolete inventories to their estimated net realizable value.
As of June 30, 2005, our cash and bank balances were all denominated in Renminbi
("RMB"). Renminbi had been pegged at a constant rate to the United States dollar
for the entire periods. Although Renminbi had been slightly inflated in July
2005, our activities, assets and liabilities are mainly denominated in Renminbi,
any further possible inflation of Renminbi would be benefit to the Company. We
consider that the exposure to exchange fluctuations is relatively low and
therefore has not engaged in any hedging activity.
17
>> CASH FLOWS
As of June 30, 2005, we have cash and cash equivalents of $1,042,000, compared
to $224,000 as of Dec.31, 2004, which representing an increase of 365.18%, which
is mainly resulted from the decrease in restricted cash from $2,333,000 as of
Dec.31 2004 to $1,721,000 which is due to the decrease of payment to our
suppliers and the decrease in the account receivable from $8,250,000 to
$5,658,000. The decrease of accounts receivable is due to the repayment from one
of the major customers, XWSD.
Our gearing ratio, calculated as total debts over total assets, was 53.87% as of
June 30, 2005, 61.76% as of Dec 31, 2004, respectively.
>> CONTINGENT LIABILITIES
As of June 30, 2005, we had not entered into any guarantee contracts nor any
non-disclosed contracts which will affect stockholders' equity or share
structure.
18
PART II --- OTHER INFORMATION
Item 1. Legal Proceedings.
There is no litigation pending or threatened against the Company, other than
certain legal proceedings arising in the ordinary course of business, none of
which are expected to have a material impact on the Company's financial
condition, operating results or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Pursuant to Stock Transfer Agreement dated March 29, 2005, the
Company transferred all of the common stock of Universal
Flirts, Inc. to Mr. Darrell Lerner in exchange for the
cancellation of 28,200,000 shares of the Company's common
stock. Immediately, 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, a company incorporated under the laws
of Hong Kong ("UFIL"). The exchange was consummated under the
laws of State of Delaware and pursuant to the terms of
Securities Exchange Agreement ("Exchange Agreement") dated
effective as of March 31, 2005. In connection with its
acquisition of UFIL, the Company also authorized a 4-1 forward
split of its common stock.
Pursuant to the Exchange Agreement, Universal Flirts Corp.
issued 15,000,000 shares of its common stock, $0.001 par
value, to the stockholders of UFIL, representing approximately
50.41% of the Company's issued and outstanding common stock,
in exchange for 20,000,000 outstanding shares of UFIL and cash
payment of $50,000 from UFIL. Immediately after giving effect
to the exchange, the Company had 29,756,000 shares of its
common stock outstanding.
(a) None (b) None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
19
Exhibits.
Exhibits:
---------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer).
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Accounting Officer).
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Accounting Officer).
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORSUS XELENT TECHNOLOGIES, INC.
By: /s/ Wang Xin
----------------------------
Wang Xin
Chief Executive Officer
DATED: August 15, 2005
21
Exhibit Number Description of Document
- -------------- --------------------------------------------------------------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer). *
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Accounting Officer). *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer). *
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Accounting Officer). *
* filed herewith
22