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 September 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.)
6B Building 5, Yi Jing Yuan
Chaoyang Disc
Beijing, People's Republic Of China 100020
(Address of principal executive offices) (Zip Code)
86-10-85613362
(Issuer's telephone number)
A-20G, Chengming Plaza
No. 2 Nan Da Street, Xicheng District
Beijing, People's Republic Of China 100035
(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
Item 1. Condensed Consolidated Statement of Operations.
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Operations
==========================================================================================================
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
Note US$'000 US$'000 US$'000 US$'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues 13,164 37,853 16,604 52,917
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 10,358 30,287 13,257 42,592
Sales and marketing 430 1,545 1,131 2,396
General and administrative 200 606 769 988
Research and development 195 267 337 456
Depreciation 89 409 164 514
----------- ----------- ----------- -----------
Total operating expenses 11,272 33,114 15,658 46,946
----------- ----------- ----------- -----------
Operating profit 1,892 4,739 946 5,971
Interest expense -- (88) (25) (90)
Other income, net 89 28 541 32
----------- ----------- ----------- -----------
Income before income taxes and minority
interest 1,981 4,679 1,462 5,913
Income taxes 3 (23) -- (23) --
----------- ----------- ----------- -----------
Income before minority interest 1,958 4,679 1,439 5,913
Minority interest -- 30 -- 120
----------- ----------- ----------- -----------
Net income 1,958 4,709 1,439 6,033
=========== =========== =========== ===========
Earnings per share: 2
Basic 0.07 0.16 0.05 0.20
=========== =========== =========== ===========
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.
- --------------------------------------------------------------------------------
2
Orsus Xelent Technologies, Inc.
Condensed Consolidated Balance Sheets
=============================================================================================
As of As of
September 30, December 31,
2005 2004
Note US$'000 US$'000
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents 2,734 224
Restricted cash 1,623 2,333
Accounts receivable - Trade 10,145 8,250
Due from related company 4 -- 3,319
Due from a director 4 6 --
Inventories 4,566 5,781
Trade deposits paid 8,333 8,126
Other current assets 352 210
----------- -----------
Total current assets 27,759 28,243
Property, plant and equipment, net 1,193 778
----------- -----------
Total assets 28,952 29,021
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - Trade 11,054 13,840
Accrued expenses and other accrued liabilities 2,033 1,103
Trade deposits received 2,906 2,487
Due to directors 4 311 311
Provision for warranty 88 182
Provision for taxation 23 --
----------- -----------
Total current liabilities 16,415 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$0.001 par value:
Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of
September 30, 2005 and as of December 31, 2004 30 30
Additional paid-in capital 2,484 2,484
Dedicated reserves 1,042 1,042
Retained earnings 8,981 7,542
----------- -----------
Total stockholders' equity 12,537 11,098
----------- -----------
Total liabilities and stockholders' equity 28,952 29,021
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
3
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
=====================================================================================
Nine months ended
September 30,
--------------------------
2005 2004
US$'000 US$'000
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income 1,439 6,033
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 164 514
Loss on disposal of property, plant and equipment -- 7
Loss on liquidation of a subsidiary -- 120
Minority interest -- (120)
Changes in assets and liabilities:
Accounts receivable - trade (1,895) (2,910)
Inventories, net 1,215 (9,183)
Trade deposits paid (207) (845)
Other current assets (142) 40
Trade deposits received 419 --
Accounts payable - trade (2,786) 13,000
Provision for warranty (94) 299
Accrued expenses and other accrued liabilities 930 708
Provision for taxation 23 --
----------- -----------
Net cash (used in) provided by operating activities (934) 7,663
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (579) (1,263)
Proceeds from sales of property, plant and equipment -- 43
Repayment from a related company 3,319 736
Loan to a related company -- (7,107)
Decrease in restricted cash 710 --
Advance to a director (6) --
----------- -----------
Net cash provided by (used in) investing activities 3,444 (7,591)
----------- -----------
Net increase in cash and cash equivalents 2,510 72
Cash and cash equivalents, beginning of the period 224 190
----------- -----------
Cash and cash equivalents, end of the period 2,734 262
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
4
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
================================================================================
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements as
of September 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 nine-month periods ended September 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 ("US GAAP") 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.
2. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of shares of common stock outstanding during each period as restated as a
result of the reorganization and recapitalization as described in Note 2.
The 29,756,000 shares in connection with the recapitalization were included
in the computation of 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 earnings per
share are the same.
3. 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. Provision
for income and other related taxes have been provided in accordance with
the tax rates and laws in effect in the various countries of operations.
5
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
================================================================================
3. 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. OXT was also incorporated in Hong Kong and Hong Kong
Profits Tax has been provided at the rate of 17.5% on OXT's estimated
assessable profits for the period. 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 fiscal year 2005.
Reconciliation from the expected statutory tax rate in PRC of 33% (2004:
33%) is as follows:
Nine months ended
September 30,
--------------------------
2005 2004
% %
(Unaudited) (Unaudited)
Statutory rate - PRC 24.0 33.0
Difference in tax rates in the countries that the Company
operates (22.7) (33.0)
Tax exemption (0.6) --
Others 0.9 --
----------- -----------
Effective tax rate 1.6 --
=========== ===========
4. RELATED PARTY TRANSACTION
a. Name and relationship of related parties
Related party Relationship with the Company as of September 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
6
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
================================================================================
4. RELATED PARTY TRANSACTION (CONTINUED)
b. Summary of related party balances
As of As of
September 30, December 31,
2005 2004
Note US$'000 US$'000
(Unaudited)
------------- -------------
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
Nine months ended
September 30
------------------------------
2005 2004
USD'000 USD'000
(Unaudited) (Unaudited)
------------- -------------
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 are unsecured, interest-free and repayable on demand.
* Ceased to be related party beginning on April 26, 2005.
7
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.
8
Pursuant to the 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. 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 in the year, and it represents
approximately 1% of the market in the People's Republic of China (the "PRC") for
cellular phones in 2004.
In July, 2005 a wholly owned subsidiary, namely Orsus Xelent Trading (HK)
Company Limited was incorporated in Hong Kong. The principal activities of the
Hong Kong subsidiary is engaged in the trading of cellular phones and
accessories with overseas customers.
According to research conducted by China Ministry of Information Industry, in
the first half of 2005, the PRC added 28 million cellular 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. The PRC cellular market is expected to reach $120 billion by
the year end of 2005 by the China Ministry of Information Industry.
BUSINESS REVIEW
Since the 4th quarter 2004 the growth rate of the cellular phones market in the
PRC slowed down as a result from the oversupply of cellular phones in the
market. The competition came from the counterfeit cellular phones in the PRC
market which forced the domestic branded manufacturers to clear inventories by
prices cutting or stop production. The tough environment remains in the first
three quarters of this year. 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 brand manufacturers have put much
investment on the promotion of middle- to low-end products. They have launched
many more new products into the PRC market and spent more to advertise on the
main media, which have led foreign manufacturers grasp more market share from
domestic manufacturers.
9
In response to the fierce competition in the PRC cellular phones market, we
enhanced the quality and function of our products to increase the competitive
edge. During the first three quarters of 2005, multimedia cellular phones are
the mainstream products in the market. In the first half of this year, we
successfully developed new platforms, namely Agere, SpreadTrum and MTK, which
enable us to develop a series of low to moderately priced new products namely
70A(70+), 62+, 8205, 60+ and M72, with innovative functions, such as
multi-media, MPEG4, FM radio, stereo sound, over one mega pixels photography and
large memory capacity, to meet the rapid change in the market since July 2005.
We will continue to launch new products timely with advanced features. A two
mega pixel camera and intelligent handwriting PDA cellular phone is scheduled to
launch before first quarter of 2006. Through the introduction of new products
with advanced features and low and moderate price, our products and brand would
penetrate the PRC market. We believe our revenues could be maintained at a
steady growth rate in the coming quarter.
In this quarter, we explored an opportunity to cooperate with a domestic
telecommunication operator and a cellular phone manufacturer to participate in
the production of CDMA cellular phone. Through the cooperation with
telecommunication operator, we entered into CDMA market. Since the
telecommunication operators in PRC are all big corporation, a good business
relationship with those telecommunication operators could assist the development
of a stable revenue stream. We will foster closer cooperation and target
business opportunities with telecommunication operators continually.
To establish a more diversified revenue base, we also successfully developed the
trading business in domestic and Hong Kong market. Although, the trading
activities only attributed minimal revenues to us now, through the development
of overseas market, the risk of concentration in single market could be
minimized and our brand could be further promoted.
To increase our competitiveness, we are seeking to apply for a license to
produce our own GSM cellular phone. We planned to obtain our own license through
a joint venture with a domestic cellular phone manufacturer, namely Chang Zhou
Moben Communication Co., Ltd. This is a way to apply the license in a time and
cost saving manner. In order to achieve our target as soon as possible, we are
also exploring to cooperate with other domestic cellular phone manufacturers in
this aspect. Although, the application of the license is still at its early
stage, we will make every effort to obtain a license to produce our own GSM
cellular phone.
Going forward, we will continue to adopt effective cost control measures to
enhance our competitiveness, launch new products in timely manner, explore
business opportunities with telecommunication operators and develop the sales in
overseas market. We have confidence that our profitability will be continued
with stable growth since this quarter.
10
Nine months ended September 30, 2005
- -----------------------------------------------------------------------------------------------------
Nine months ended Nine months ended Comparison
September 30, 2005 September 30, 2004
- -----------------------------------------------------------------------------------------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Revenues 16,604 52,917 (36,313) -68.62%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Cost of sales (13,257) 79.84% (42,592) 80.49% 29,335 68.87%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Sales & Marketing
expenses (1,131) 6.81% (2,396) 4.53% 1,265 52.80%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
General & Admin
expenses (769) 4.63% (988) 1.87% 219 22.17%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
R&D expenses (337) 2.03% (456) 0.86% 119 26.10%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Depreciation &
Amortization (164) 0.99% (514) 0.97% 350 68.09%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Interest expenses (25) 0.15% (90) 0.17% 65 72.22%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Other income, net 541 3.26% 32 0.06% 509 1590.63%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Income (loss) before tax 1,462 8.81% 5,913 11.17% (4,451) -75.27%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Income taxes (23) 0.14% - - (23) 100.00%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Minority interest - - 120 0.23% (120) -100.00%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
Net income (loss) 1,439 8.67% 6,033 11.40% (4,594) -76.15%
- -------------------------- ---------- -------------- ---------- -------------- --------- ------------
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 $16,604,000 for the Nine months ended September 30, 2005,
representing a decrease of 68.62% as compared to the same period in 2004. The
decrease was primarily due to fierce competition of the market. The cellular
phone manufactures' enlarging production capability and accelerating speed of
new products launch, lead to the shorter products lifecycle and the over supply.
For the purpose of meet to the changing market demands, in this quarter we
developed a series of new products with innovative functions to extend our
product lines by using our newly developed platform ADI, SpreadTrum and MTK.
Comparing with the 2nd quarter of 2005, our revenues had increased from
US$1,940,000 to US$13,164,000 this quarter, rising up about 578.56%. The
significant rise in the revenues was primarily due to the introduction of a
series of new products with innovative functions, such as 70A, 62+, 8205, 60+,
M72 and M36. During the first three quarters in 2005, multimedia cellular phones
are the mainstream product in the market. We captured the latest demand trend of
domestic consumption market to launch the new models with leading features
including MP3, MPEG4, FM radio and large memory capacity. Such new products also
generated a higher profit margin to us.
11
During this quarter, we also cooperated with telecommunication operator and
other cellular phone manufacturers to provide solution consultation in the
production of CDMA cellular phones, model C100. The solution consulting included
the knowledge of software application, field testing, mechanical and molding
design and marketing. Through the co-operation with telecommunication operator
and other cellular phones manufacturer, we participated in the CDMA cellular
phones production and also built up a relationship with the telecommunication
operator, which would provide us an opportunity to develop a potential CDMA
market, and also generate a higher profit and stable orders from the
telecommunication operator in future. During this quarter, the sales of C100
were $2,970,000, represents 18% of our revenues.
In addition, during this quarter, we commenced cellular phone trading activities
with domestic and overseas customers. In the domestic market, although the
margin would be lower than the sales of self-produced cellular phones, we still
can earn profit by using our existing strategic partners' sales networks. In the
overseas market, we have successfully stepped out from PRC domestic market that
10,000 unit M18+ was sold to a customer in Hong Kong during this quarter. We
will further develop our product to overseas market, including Southeast Asia,
Hong Kong and Middle East so as to further broaden our profit base.
Breakdown by products
- ---------------------
For the nine months ended September 30, 2005, products attributed over 5% of our
revenues are shown as follows:
- --------------------------- ----------------------------------------------------
Nine months ended September 30, 2005
- --------------------------- ----------------------------------------------------
$'000 % of revenue
- --------------------------- --------------------------- ------------------------
C100 2,970 17.89%
- --------------------------- --------------------------- ------------------------
N108 2,302 13.86%
- --------------------------- --------------------------- ------------------------
70A 1,926 11.60%
- --------------------------- --------------------------- ------------------------
FG830 1,364 8.21%
- --------------------------- --------------------------- ------------------------
N917 978 5.89%
- --------------------------- --------------------------- ------------------------
M86 865 5.21%
- --------------------------- --------------------------- ------------------------
M18+ 862 5.19%
- --------------------------- --------------------------- ------------------------
62+ 817 4.92%
- --------------------------- --------------------------- ------------------------
The sales of 70A and 62+ represents 16.52% of our revenues which were the new
products launched into market during this quarter. In this quarter, total sales
of new products were over $12,049,000, represented 72.57% of total revenues. The
sales of C100 amounting to $2,970,000, represented 17.87% of revenues, are the
cooperation with a telecommunication operator. The trading activities generated
from the sales of N108 and N917 were $3,280,000 represented 19.75% of revenues.
Through the introduction of new innovative features models and the development
of new business streams, we believe, our revenues would have a stable growth
since this quarter.
12
Breakdown by customers
- ----------------------
- -------------------------------------------------- ------------------------------------
Nine months ended September 30, 2005
- -------------------------------------------------- ------------------------------------
$'000 % of revenue
- -------------------------------------------------- ---------------- -------------------
Beijing Xingwang Shidai Tech & Trading Co., Ltd. 11,479 69.13%
- -------------------------------------------------- ---------------- -------------------
CEC Cellular Limited 2,372 14.29%
- -------------------------------------------------- ---------------- -------------------
Hebei Mascot Communication Equipment Co., Ltd 1,875 11.29%
- -------------------------------------------------- ---------------- -------------------
Others 878 5.29%
- -------------------------------------------------- ---------------- -------------------
Our revenues were primarily derived from three major customers. For the
nine-months ended September 30, 2005, our revenues mainly generated from Beijing
Xingwang Shidai Tech & Trading Co., Ltd. ("XWSD"), CEC Cellular Limited ("CECM")
and Hebei Mascot Communication Equipment Co., Ltd ("MASCOT") were $11,479,000,
$2,372,000 and $1,875,000 respectively, which representing a, 69.13%, 14.29% and
11.29% of the revenue respectively. We have established strategic partnership
with CECM and XWSD for a long period of time, both are provincial and national
distributors and dealers, and the sales networks cover most of the main cities
all over the PRC. MASCOT is a newly developed provincial distributor, its sales
networks covers most of the main cities all the PRC, particularly in the
northern region.
It is our primary policy to broaden our distribution channels so as to minimize
the concentration risk to few distributors. We will explore other opportunity
continually to further develop our distribution channels. To enhance a health
competition, MASCOT is mainly responsible to distribute our old products.
Through the cooperation with different strategic partners in different areas, we
believe further extend our distribution channels would stimulate our revenues in
short-run and also strengthen our brand awareness finally.
>> OTHER INCOME, NET
For nine months ended September 30, 2005, other income, net were $541,000,
accounting for 3.26% of the total revenues, as compared to $32,000, or 0.06% 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$309,000 in the 2nd quarter of 2005.
13
>> OPERATING EXPENSES
For the nine months ended September 30, 2005, operating expenses mainly include
sales and marketing expenses, general and administrative expenses and R & D
expenses and shown as follows:
- ------------------------- ------------------------ --------------------------- ------------------
Nine months ended Nine months ended Comparison
September 30, 2005 September 30, 2004
- ------------------------- ------------------------ --------------------------- ------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
Cost of sales 13,257 79.84% 42,592 80.49% (29,335) -68.87%
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
Sales & marketing 1,131 6.81% 2,396 4.53% (1,265) -52.80%
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
General & admin 769 4.63% 988 1.87% (219) -22.17%
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
R&D 337 2.03% 456 0.86% (119) -26.10%
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
Depreciation 164 0.99% 514 0.97% (350) -68.09%
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
Total 15,658 46,946 (31,288)
- ------------------------- --------- -------------- --------- ---------------- --------- ----------
Cost of sales
- -------------
For the nine months ended September 30, 2005, our cost of sales were
$13,257,000, representing 79.84% of revenue, compared to $42,592,000 and 80.49%
of the corresponding period of last year. Compared to the corresponding period
in 2004, the cost of sales had a period-to-period decrease of 68.87%, it is
varied in line with our sales revenues. Although the fierce competition lead to
selling price cutting in old products, the cost of sales percentage to revenues
can be maintained through our effectively control of raw materials used and,
lower materials price by negotiation with suppliers.
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 the nine months ended September 30, 2005, sales and marketing expenses were
$1,131,000, accounting for 6.81% of the total revenues, as compared to
$2,396,000, or 4.53% of total revenues for the corresponding period in 2004.
Sales and marketing expenses had a period-to-period decrease of 52.80% and the
percentage represented in the total revenues increased from 4.53% to 6.81%
compared to the corresponding period in 2004 are due to the total revenue's
decrease and the approximately steady absolute expense. A large portion of sales
and marketing expenses was fixed expenses, such as remunerations for sales
personnel. Compared to the period ended June 30, 2005, the percentage
represented in the total revenues decreased from 20.38% to 6.81% is due to sharp
recovery of our revenues, and we effectively controlled the cost of marketing,
including remunerations for sales personnel and development of market and
free-gift and product model to customers and dealers.
R&D expenses
- ------------
The R&D cost was $337,000 for the nine months ended September 30, 2005, which
represents 2.03% of total revenue, compared with $456,000 and 0.86% respectively
in the same period in 2004. R&D expenses incurred in the nine months ended
September 30, 2004 mainly represented the ADI platform development expense and
14
several models of mobile phone research expense. R&D expenses incurred in the
nine months ended September 30, 2005 mainly for the development cost on AGERE
and MTK platform, some innovative features function, such as MP3, MPEG4 and U
disk could be developed with utilization of these new platforms.
Our R&D investment would allow us to respond to the market change quickly. We
introduced many models of cellular phones with innovative functions this
quarter, such as OS70+, M62+, OX8205. We expect the investment in R&D activities
would be continued 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 nine months ended September 30, 2005, general and administrative
expenses were $769,000, accounting for 4.63% of the total revenues, as compared
to $988,000, or 1.87% of the total revenues for the corresponding period in
2004. General and administrative expenses had a period-to-period sharply
decrease of 22.17%. The period-to-period sharp decrease were mainly due to
reduction of compensation for personnel by simplifying personnel and lower
personnel compensation, and reduction of daily expense by economizing travel
expenses and administrative expense.
>> GROSS PROFIT AND GROSS MARGIN
For the nine months ended September 30, 2005, our gross profit was $ 3,347,000,
which represented a decrease of 67.58% as compared to the gross profit of
$10,325,000 in the same period in 2004. Our gross margin for the reporting
period increased slightly from 19.51% in 2004 to 20.15% in 2005.
Slightly increase in our gross margin under a fierce competition is attributable
to:
1. New products successfully launched into the market, generally new products
with innovative functions would have a higher profit margin;
2. Change in our products mix. Although our gross margin decreased due to
price reduction for sales promotion, it is compensated by the high gross
margin new products such as CDMA cellular phone C100. Overall, the gross
margin has slightly increased;
3. We controlled usage of raw materials effectively and reduced materials
price by negotiation with suppliers, so as to control our cost of sales.
>> NET INCOME
For the nine months ended September 30, 2005, our net income was $1,439,000, as
compared to net income of $6,033,000 of the same period in 2004. The recession
in our profit is due to the tough environment since the 4th quarter 2004.
Comparing with the 2nd quarter of 2005, our net income had increased sharply
from net loss US$524,000 to net income US$1,958,000
15
>> LIQUIDITY AND SOURCE OF CAPITAL
We generally finance our operations from cash flow generated internally.
As of September 30, 2005, we had current assets of $27,759,000. Current assets
are mainly comprised of inventories of $4,566,000, accounts receivable of
$10,145,000, trade deposits and other receivables aggregated of $8,333,000, and
restricted cash, cash and cash equivalents of $4,357,000. Current liabilities
comprised accounts payable of $11,054,000, trade deposit received of $2,906,000,
accrued expenses and other accrued liabilities of $2,033,000, due to directors
of $311,000, and provision for warranty of $88,000.
We offer two trading terms to our customers, i.e. cash-on-delivery and on credit
term within 90 days. As of September 30, 2005, our accounts receivable were
$10,145,000, compared to $5,658,000 as of June 30, 2005. A large increase in the
accounts receivable is due to significant growth in revenue generated during
this 3rd quarter. We strictly request our customers to settle the outstanding
receivables before new order is made. There is no particular change in our
credit policy that three months credit period is offered to XWSD, and two months
credit period is offered to our new distributor, MASCOT.
As of September 30, 2005, our inventories were $4,566,000, as compared to
$5,781,000 as of December.31, 2004, which represented moderate decrease of
21.02%. 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 selling price. Furthermore, we modify our old products, such as OS70, M62 by
adding new functions (such as MP3, MPEG4 etc.) on old products. As a result, our
slow moving materials have been used up Modification will be carried out to
further utilize our existing materials. In the future, we will critically and
regularly evaluate our inventories to consider if any provision is required to
reduce the value of the excess or obsolete inventories to their estimated net
realizable value.
As of September 30, 2005, our cash and bank balances were mainly denominated in
Renminbi ("RMB") and Hong Kong Dollar. Our revenue and expenses, assets and
liabilities are mainly denominated in RMB. Renminbi had been pledged at a
relative constant rate to the United States dollar for the entire period.
Although Renminbi had been slightly appreciated against the US dollar in July
2005, as a result of the pegging Renminbi against a basket of currencies instead
of pegging to the US dollar, our activities, assets and liabilities are mainly
denominated in Renminbi, any further possible inflation of Renminbi would be
benefit to us. We consider that the exposure to exchange fluctuations is
relatively low and therefore we has not engaged in any hedging activity.
>> CASH FLOWS
As of September 30, 2005, we have the restricted cash, cash and cash equivalents
of $4,357,000, compared to $2,557,000 as of December 31, 2004, which
representing an increase of 70.39%. It is mainly due to the repayment from a
related company in the first quarter of 2005. $1,895,000 increase in accounts
receivable and $2,786,000 decrease in accounts payable are due to significant
growth in revenue during this 3rd quarter. In addition, $1,215,000 decrease in
inventories is due to the clearance of old products by price cutting.
16
Our gearing ratio, calculated as total debts over total assets, was 56.70% as of
September 30, 2005, 53.87% as of June 30, 2005, and 61.76% as of September 30,
2004 respectively.
>> CONTINGENT LIABILITIES
As of September 30, 2005, we had not entered into any guarantee contracts nor
any non-disclosed contracts which will affect stockholders' equity or share
structure.
17
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) The information required is set forth in the Registrant's Form
10-Q for the period ended June 30, 2005, and is incorporated
herein by reference.
(b) None
(c) None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
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).
18
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: November 16, 2005
19
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
20