UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______.
Commission file number: 000-117718
ORSUS XELENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-11998142
(State of incorporation) (I.R.S. Employer Identification No.)
12th Floor, Tower B, Chaowai MEN Office Building
26 Chaowai Street, Chaoyang Disc.
Beijing, People's Republic Of China 100020
(Address of principal executive offices, including zip code)
86-10-85653777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell Registrant (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 15, 2006
- ----------------------------------------- -----------------------------
Common Stock, $.001 par value per share 29,756,000 shares
PART I --- FINANCIAL INFORMATION
Item 1. Financial Statements.
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(Unaudited)
Three months ended
March 31,
-------------------------
2006 2005
Note US$'000 US$'000
Operating revenues: 8,367 1,500
----------- -----------
Operating expenses:
Cost of sales 6,493 1,188
Sales and marketing 444 294
General and administrative 189 262
Research and development 81 34
Depreciation 25 26
----------- -----------
Total operating expenses 7,232 1,804
----------- -----------
Operating income (loss) 1,135 (304)
Interest expense -- (21)
Other income, net 2 330
----------- -----------
Income before income taxes 1,137 5
Income taxes 3 -- --
----------- -----------
Net income 1,137 5
=========== ===========
Earnings per share: 2
Basic $ 0.04 $ 0.00
=========== ===========
Weighted average number of common stock outstanding 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
March 31, December 31,
2006 2005
Note US$'000 US$'000
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents 888 2,974
Accounts receivable - Trade 14,366 12,034
Inventories 4,452 4,460
Trade deposit paid 14,377 10,580
Advance to third party 707 --
Other current assets 262 182
----------- -----------
Total current assets 35,052 30,230
Property, plant and equipment, net 845 781
----------- -----------
Total assets 35,897 31,011
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loan 4 991 --
Accounts payable - Trade 7,327 7,939
Accrued expenses and other accrued liabilities 2,599 2,238
Trade deposits received 8,519 5,432
Due to directors 6 320 320
Provision for warranty 44 122
Taxes payable 21 21
----------- -----------
Total current liabilities 19,821 16,072
----------- -----------
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$0.001 par value:
Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of March 31,
2006 andas of December 31, 2005 30 30
Additional paid-in capital 2,484 2,484
Dedicated reserves 1,042 1,042
Other comprehensive income 349 349
Retained earnings 12,171 11,034
----------- -----------
Total stockholders' equity 16,076 14,939
----------- -----------
Total liabilities and stockholders' equity 35,897 31,011
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
-3-
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Unaudited)
Three months ended
March 31,
-------- --------
2006 2005
US$'000 US$'000
Cash flows used in operating activities
Net income 1,137 5
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 25 26
Changes in assets and liabilities:
Accounts receivable -trade (2,332) 3,274
Inventories, net 8 (115)
Trade deposit paid (3,797) (4,800)
Other current assets (80) 1
Trade deposit received 3,087 (935)
Accounts payable - trade (612) (284)
Provision for warranty (78) (57)
Accrued expenses and other accrued liabilities 361 183
-------- --------
Net cash used in operating activities (2,281) (2,702)
-------- --------
Cash flows (used in) from investing activities
Purchase of property, plant and equipment (89) (372)
Repayment from a related company -- 3,319
Increase in restricted cash -- (347)
-------- --------
Net cash (used in) from investing activities (89) 2,600
-------- --------
Cash flows from financing activities
Bank loan raised 991 --
Loan to third parties (707) --
-------- --------
Net cash from financing activities 284 --
-------- --------
Net decrease in cash and cash equivalents (2,086) (102)
-------- --------
Cash and cash equivalents, beginning of the period 2,974 224
-------- --------
Cash and cash equivalents, end of the period 888 122
======== ========
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 March 31, 2006 and 2005 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, 2005 filed on April 3, 2006. The results of operations for the
three-month periods ended March 31, 2006 and 2005 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 re stated of
the reorganization and recapitalization. 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.
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.
-5-
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INCOME TAXES (CONTINUED)
United First International Limited was incorporated in Hong Kong and has no
assessable profit for the periods presented. Orsus Xelent Trading (HK)
Limited ("OXTHK")was also incorporated in Hong Kong and Hong Kong Profits
Tax has been provided at the rate of 17.5% on OXTHK's estimated assessable
profits for the period. Since Beijing Orsus Xelent Technologies & Trading
Co., Limited 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 24% (2005:
24%) is as follows:
(Unaudited)
Three months ended
March 31,
------- -------
2006 2005
% %
Statutory rate - PRC 24.0 24.0
Tax exemption (27.8) (24.0)
Others 3.8 --
------- -------
Effective tax rate -- --
======= =======
4. SHORT-TERM BANK LOAN
The bank loan was secured by the director, Mr. Liu Yu, repayable on January
29, 2007 at interest rate 6.696% per annum.
5. RELATED PARTY TRANSACTION
a. Name and relationship of related parties
Related party Relationship with the Company as of March 31, 2006
------------- --------------------------------------------------
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
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTION (CONTINUED)
b. Summary of related party balances
As of As of
March 31, December 31,
2006 2005
Note US$'000 US$'000
(Unaudited)
Due to directors
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (i) 320 320
============ ============
Bank loan secured by a director
Mr. Liu Yu 991 --
============ ============
Note:
(i) The amounts are unsecured, interest-free and repayable on demand.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following is management's discussion and analysis of certain
significant factors which have affected our financial position and operating
results during the periods included in the accompanying consolidated financial
statements, as well as information relating to the plans of our current
management. This report includes forward-looking statements. Generally, the
words "believes," "anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative thereof or
comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters
set forth in this report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected. Undue reliance
should not be placed on these forward-looking statements which speak only as of
the date hereof. We undertake no obligation to update these forward-looking
statements.
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.
OVERVIEW
The Company was organized under the laws of State of Delaware in May 2004,
under the name of "Universal Flirts Corp.". On June 1, 2004, the Company
acquired all the issued and outstanding shares of Universal Flirts Inc., a New
York corporation, from Darrel Lerner, the sole shareholder, in consideration for
the issuance of 8,500,000 shares of the Company's common stock to Mr. Lerner
pursuant to a stock exchange agreement between Universal Flirts Inc. and the
Company. Pursuant to the 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
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. 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").
-8-
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.
In July, 2005 a wholly owned subsidiary, namely Orsus Xelent Trading (HK)
Company Limited ("OXHK") was incorporated in Hong Kong. This subsidiary is
engaged in the trading of cellular phones and accessories with overseas
customers.
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 CSTN and TFT dual-color
display, 1 to 120-minute video recording, 300K to 3 million pixel photography,
MP3, MPEG4 and U disk support, dual stereo speakers, e-mail messaging,
multimedia messaging, 40 to 64 ring tone storage, bar-phone & flip-phone
technology and innovative lightweight design. Xelent has sold approximately
240,000 cellular phones in the PRC in 2005.
According to a research conducted by China Ministry of Information
Industry, in 2005, new cellular phone users in the PRC increased by 58 million,
with total consumers reaching 393 million. Currently, the PRC has the largest
number of cellular phone users in the world, while the penetration rate in the
PRC was approximately 30%. The number of cellular phone users is also expected
to reach 500 million by 2007. With the market in the PRC for cellular phones
continues to develop, Xelent is gradually introducing a series of advanced
cellular phone models with R&D platform, manufacture and quality control
technology, incorporating with the new 3G (Third Generation) mobile technology.
On February 26, 2006, the technology of TDS-CDMA has been announced officially
as the 3G technology standard in the PRC. This technology is expected to be
approved by the China government to put into the application stage in 2006. The
PRC cellular market is expected to reach $120 billion by the year end of 2006
according to the China Ministry of Information Industry.
BUSINESS REVIEW
In the first half of 2005, we experienced the slow down in growth rate of
the cellular phones market, most of the domestic cellular phones manufacturers
in the PRC were operated with negative growth and at loss in the first half of
2005 because of mismanagement, lack of capital and the competition from
counterfeit and "black market" cellular phones in the PRC market. At the same
time, the cellular phones market continues to change rapidly that a series of
innovative functions such as MP3, FM radio, MPEG4, large memory capacity
(function with dynamic memory card supported such as T-FLASH card, MINI SD card,
etc) became the most popular products in the second half of 2005. With the
development of 3G mobile technology in 2006, both the domestic and multinational
cellular phones manufacturers expect to seize this good opportunity to launch
their own 3G mobile products. Based on our 2G and 2.5G cellular technologies and
our mature 3G solutions and chips providers, we will commence the development of
our 3G cellular phone products, such as 3G PCBA, which is a 3G technologies
-9-
development platform and 3G cellular phone incorporating with the 3G PCBA
technologies in the second half of 2006. We will seek to join into the TDS-CDMA
Industry League, in order to enhance the application of 3G manufacture license
in 2007.
During the first quarter of 2006, we continued our diversification strategy
and successfully developed our CDMA products which resulted in increase in our
products mix. Through the closer cooperation with telecommunication operator,
our CDMA products contributed about 62.25% of our revenues during this quarter.
In this quarter, multimedia cellular phones with fashionable functions,such as
MP3 and MPEG4 ,continue to be popular and became the mainstream products in the
PRC market. Our efforts on the development of new platform and the technology
cooperation with cellular phones solution providers would facilitate the
development of the middle-class and low-end MP3 music cellular phones. We expect
such new models will be launched into the market by the next quarter. The MP3
cellular phones are expected not only generate profits from the domestic market,
but also from the overseas market in this year.
The following table summarizes our operation result for the three months ended
March 31, 2006 and 2005:
- ------------------- -------------------------- --------------------------- -----------------------
Three months ended March Three months ended March Comparison
31, 2006 31, 2005
- ------------------- -------------------------- --------------------------- -----------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Revenues 8,367 ii 1,500 ii 6,867 457.80%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Cost of sales 6,493 77.60% 1,188 79.20% 5,305 446.55%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Sales & Marketing 444 5.31% 294 19.60% 150 51.02%
expenses
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
General & Admin 189 2.26% 262 17.47% -73 -27.86%
expenses
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
R&D expenses 81 0.97% 34 2.27% 47 138.24%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Depreciation & 25 0.30% 26 1.73% -1 -3.85%
Amortization
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Interest expenses -ii 0.00% 21 1.40% -21 -100.00%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Other income, net 2 0.02% 330 22.00% -328 -99.39%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Income before tax 1,137 13.59% 5 0.33% 1,132 22640.00%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Income taxes -ii 0.00% - 0.00% - 0.00%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
Net income 1,137 13.59% 5 0.33% 1,132 22640.00%
- ------------------- --------- ---------------- ---------- ---------------- --------- -------------
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our discussion and analysis on our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
-10-
RESULTS OF OPERATION
Revenues
Our revenues were $8,367,000 for the three months ended March 31, 2006,
representing an increase of 457.80% as compared to the same period in 2005. In
the first half of 2005, the PRC cellular phone market experienced a reformation
stage. The oversupply of cellular phones, mass production of simple function
products and competition from counterfeit and "black market" cellular phones
caused the difficult operating environment. We were well positioned and adjusted
our direction in the second half of 2005 to diversify our product mix. Although
we are not satisfied with our profitability, we are in a right track to develop
CDMA products, new fashionable functions and customized products. Of which,
super-slim appearance and PDA function models are newly launched into market,
which enriched our products mix in the PRC cellular phones market.
Through the closer co-operation with telecommunication operator and other
cellular phones manufacturer, we extended to manufacture CDMA cellular phones
and obtained steady orders from the telecommunication operator by customization.
The revenues from the customized CDMA products has became a substantial part of
our revenues in this quarter.
Breakdown by products
- ---------------------
For the three months ended March 31, 2006, products attributed over 10% of our
revenues are shown as follows:
- ------------------------- ------------------------------------------------------
Three months ended March 31, 2006
- ------------------------- ------------------------------------------------------
$'000 % of revenue
- ------------------------- --------------------------- --------------------------
TDA6028 2,250 26.89%
- ------------------------- --------------------------- --------------------------
C100 1,887 22.55%
- ------------------------- --------------------------- --------------------------
X718 1,667 19.93%
- ------------------------- --------------------------- --------------------------
C109 1,072 12.81%
- ------------------------- --------------------------- --------------------------
D9000 985 11.77%
- ------------------------- --------------------------- --------------------------
The total revenues for the first quarter were amounted to $8,367,000, which
was attributed to the products launched into market in the last quarter of
2005.The sales of CDMA products had a great increase from $1,443,000 in the
whole year of 2005 to $5,209,000, which represented 62.25% of total revenues in
the first quarter of 2006. The increase of revenues were mainly attributed to
the sales of TDA6028, C100 and C109, amounted to $2,250,000, $1,887,000 and
$1,072,000 respectively. The sales of GSM products amounted to $3,158,000,
represented 37.75% of total revenues, which are mainly generated from the sales
of X718 and D9000 amounting to $1,667,000 and $985,000. Through the co-operation
with Tian Feng Ju Yuan Technology Company Limited, we successfully launched
TDA6028, a high-end cellular phone with PDA, GPRS, 2.8-inch TFT LCD handwriting
touch screen, figure print identification, MPEG4, extended scanner, RFID and
WIFI functions; X718, a cellular phone with MPEG4, external memory card support
function with super-slim appearance; and D9000, a low-end product with PDA
function. Additionally, the CDMA products C100 and C109 were developed through
-11-
the cooperation with Dalian Daxian Communication Company Limited. We
successfully captured the demand of consumers to launch our new products with
innovative functions, trendy appearance, high quality and features riched with
reasonable price, which are the main reasons that we can recover from the tough
operating environment in the first half of 2005.
Breakdown by customers
- ----------------------
- ---------------------------------------------- ---------------------------------
Three months ended March 31, 2006
- ---------------------------------------------- ---------------------------------
$'000 % of revenue
- ---------------------------------------------- ------------- -------------------
CEC Cellular Limited 8,273 98.88%
- ---------------------------------------------- ------------- -------------------
Beijing Xingwang Shidai Tech & Trading 94 1.12%
Co., Ltd.
- ---------------------------------------------- ------------- -------------------
Our revenues were primarily derived from two major customers. For the three
months ended March 31, 2006, our revenues generated from CEC Cellular Limited
("CECM") and Beijing Xingwang Shidai Tech & Trading Co., Ltd. ("XWSD") were
$8,273,000 and $94,000 respectively, which representing a, 98.88% and 1.12% of
the revenue respectively. The revenues generated from CECM which represented the
substantial part of our revenues, was due to our strengthening of the
receivables management. To reduce the credit risk on XWSD, we concentrated the
products supply to CECM which has better payment record. Both CECM and XWSD are
distributors and dealers in Mainland China, and their sales networks cover most
of the major cities in PRC. Because of outstanding balance of Hebei Mascot
Communication Equipment Co., Ltd ("MASCOT") over our credit limit, we have
frozen the trading with MASCOT until the clearance of the outstanding balance.
Other income, net
For the three months ended March 31, 2006, other income, net was $2,000,
accounted to 0.02% of the total revenues. Compared to $330,000 for the
corresponding period in last year, other income,had a decrease of 99.39%, which
is mainly due to an one-off royalty fee rebate in 2005.
Operating expenses
For the three months ended March 31, 2006, operating expenses amounted to
$7,232,000 mainly include sales and marketing expenses, general and
administrative expenses and R & D expenses and depreciation were shown as
follows:
- ------------------- -------------------------- -------------------------- ---------------------
Three months ended March Three months ended March Comparison
31, 2006 31, 2005
- ------------------- -------------------------- -------------------------- ---------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
Cost of sales 6,493 77.60% 1,188 79.20% 5,305 446.55%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
Sales & marketing 444 5.31% 294 19.60% 150 51.02%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
General & admin 189 2.26% 262 17.47% -73 -27.86%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
R&D 81 0.97% 34 2.27% 47 138.24%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
Depreciation 25 0.30% 26 1.73% -1 -3.85%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
Total 7,232 ii 1,804 ii 5,428 300.89%
- ------------------- --------- ---------------- --------- ---------------- --------- -----------
-12-
Cost of sales
- -------------
For the three months ended March 31, 2006, our cost of sales was
$6,493,000, representing 77.60% of revenue. Compared to the corresponding period
in 2005, the cost of sales percentage to revenues had a decrease of 1.60%.
Although the keen competition lead to cut price in old products, we effectively
controlled the cost of sales through the control of raw materials used and lower
materials cost by negotiation with suppliers.
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses mainly represent remunerations for sales
personnel, cost of provision for after-sales services, cost of development of
market and transportation costs.
For the three months ended March 31, 2006, sales and marketing expenses
were $444,000, accounted for 5.31% of the total revenues, as compared to
$294,000 and 19.6% of total revenues for the corresponding period in 2005. Sales
and marketing expenses had an increase of 51.02% while its percentage
represented on total revenues decreased from 19.6% to 14.29% compared to the
corresponding period in 2005. This is due to the sharp increase on total
revenues of 446.55% and the approximately steady absolute expense. A large
portion of sales and marketing expenses was fixed expenses, such as
remunerations for sales personnel, and other variable expenses were controlled
effectively.
R&D expenses
- ------------
The R&D expenses was $81,000 for the three months ended March 31, 2006,
which represents 0.97% of total revenue, compared with $34,000 and 2.27%
respectively in the same period of 2005. Compared to the period-to-period
increase of R&D expenses, our sales revenues had a larger period-to-period
increase, and the percentage represented in the total revenues decreased 1.30%.
Our R&D investment would allow us to have quick response to the market
change. In this quarter, we introduced newly developed models of cellular phones
with innovative functions, which cater to the customers' demand, such as
TDA6028, X718. We expect the investment in R&D activities will be continue
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 primarily consist of compensation for
personnel, depreciation, travel expenses, rental, materials expenses related to
ordinary administration and fees for professional services.
For the three months ended March 31, 2006, general and administrative
expenses were $189,000, accounting for 2.26% of the total revenues, as compared
to $262,000, and 17.47% of the total revenues for the corresponding period in
2005. General and administrative expenses had a sharp decrease of 27.86%. Which
was mainly due to the compensation and insurance for personnel. These are fixed
expenses and do not change with the variety of our revenues. Besides, and we
effectively controlled other expenses by our management with the development of
the Company.
-13-
Gross profit and gross profit margin
For the three months ended March 31, 2006, our gross profit was $1,874,000,
which represented an increase of 500.64% as compared to the gross profit of
$312,000 in the same period in 2005. Our gross profit margin for the reporting
period increased from 20.80% in 2005 to 22.40% in 2006.
The increase in our gross profit margin under keen competition is
attributable to:
1. New products with innovative functions successfully launched into the
market; generally new products would have a higher profit margin;
2. Further development of the sales of CDMA product; CDMA products have gross
profit margin around 23%, which is higher than our average gross profit
margin;
3. We controlled usage of raw materials effectively and reduced materials cost
by negotiation with suppliers, so as to control our direct cost.
Net income
For the three months ended March 31, 2006, our net income was $1,137,000
representing 13.59% of revenue, compared to $5,000 and 0.33% of the
corresponding period in 2005. The improvement of our profit is because we have
successful overcome of tough operating environment in the first half of 2005.
LIQUIDITY AND SOURCE OF CAPITAL
We generally finance our operations from cash flow generated internally.
As of March 31, 2006,, we had current assets of $35,052,000. Current assets
are mainly comprised of inventories of $4,452,000, accounts receivable of
$14,366,000, trade deposits and other receivables aggregated of $14,377,000,
other current assets of $969,000 and restricted cash, cash and cash equivalents
of $888,000. Current liabilities included accounts payable of $7,327,000, trade
deposit received of $8,519,000, accrued expenses and other accrued liabilities
of $2,599,000, short-term bank loan of $991,000, due to directors of
$320,000,provision for warranty of $44,000 and tax payable of $21,000.
We offer two trading terms to our customers, i.e. cash-on-delivery and on
credit term within 90 days. As of March 31, 2006, our accounts receivable were
$14,366,000, compared to $12,034,000 as of December 31, 2005. We offer credit
term within 90 days to our customers who had a long-term cooperation with us,
such as CECM.
As of March 31, 2006, our inventories were $4,452,000, as compared to
$4,460,000 as of December 31, 2005. We have critically and regularly evaluated
our inventories and provision of slow-moving inventories was made,if any ,to
their estimated net realizable value.
As of March 31, 2006, our cash and bank balances were mainly denominated in
Renminbi ("RMB") and Hong Kong Dollar. Our revenue and expenses, assets and
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liabilities are mainly denominated in RMB. 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 have not engaged in any hedging
activity.
CASH FLOWS
As of March 31, 2006, we have the restricted cash, cash and cash
equivalents of $888,000, compared to $2,974,000 as of December 31, 2005, which
representing an decrease of 70.14%. It is mainly due to increase in advance to
our materials suppliers and increase in accounts receivable as a result of
growth in revenue during this quarter.
Our gearing ratio, calculated as total debts over total assets, was 55.22%
as of March 31, 2006, compared to 51.83% as of December 31, 2005.
CONTINGENT LIABILITIES
As of March 31, 2006, we had not entered into any guarantee contracts nor
non-disclosed contracts which will affect stockholders' equity or share
structure.
OFF BALANCE SHEET ARRANGEMENTS
As of March 31, 2006, we had no off balance sheet arrangements.
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CONTRACTUAL COMMITMENTS
The Company is obligated to make future under various contracts, including
purchase and operating leases. The Company does not have any long-term debt or
capital lease obligations. The following table summarized the Company's
contractual obligations at March 31, 2006, reported by maturity of obligation.
Payments due by period
-----------------------------------------------------
Contractual Obligations Total Less than More than
1 year 1-3 years 3-5 years 5 years
- -------------------------------- --------- --------- --------- --------- ---------
$ '000 $ '000 $ '000 $ '000 $ '000
Long-term Debt Obligations
-- -- -- -- --
Capital Lease Obligations
-- -- -- -- --
Operating Lease Obligations
36 25 11 -- --
Purchase Obligations
104 104 -- -- --
Other long-term liabilities reflected on the
registrant's balance sheet under GAAP -- -- -- -- --
--------- --------- --------- --------- ---------
Total
140 129 11 -- --
========= ========= ========= ========= =========
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the sensitivity of income to changes in interest rates,
foreign exchanges, commodity prices, equity prices and other market-driven rates
or prices. We are not presently engaged in and, if a suitable business target is
not identified by us prior to the prescribed liquidation date of the trust fund,
we may not engage in, any substantive commercial business. Accordingly, we are
not and, until such time as we consummate a business combination, we will not
be, exposed to risks associated with foreign exchange rates, commodity prices,
equity prices or other market-driven rates or prices. The net proceeds of our
initial public offering held in the trust fund have been invested only in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the
Investment Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be significant.
The Company considers Renminbi as its functional currency as a substantial
portion of the Company's business activities are based in Renminbi. However, the
Company has chosen the United States dollar as its reporting currency.
Transactions in currencies other than the functional currency during the
period are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than functional currency are
translated into functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
combined statements of operations.
For translation of financial statements into the reporting currency, assets
and liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period.
Translation adjustments, when material resulting from this process are
recorded in accumulated other comprehensive income (loss) within stockholders'
equity.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules, regulations and related forms, and that such information is
accumulated and communicated to our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Company, under the supervision of our chief executive officer and chief
financial officer, carried out an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures as of the balance sheet
date. Based upon that evaluation, management, including our chief executive
officer and chief financial officer, concluded that the Company's disclosure
controls and procedures were effective in alerting it in a timely manner to
information relating to the Company required to be disclosed in this report.
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During the period, there were no significant changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
PART II --- OTHER INFORMATION
Item 1. Legal Proceedings.
There is no litigation pending or threatened against the Registrant, other
than certain legal proceedings arising in the ordinary course of business, none
of which are expected to have a material impact on the Registrant's financial
condition, operating results or liquidity.
Item 1A. Risk Factors.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) None.
(c) None.
Item 3. Defaults Upon Senior Securities.
(a) None.
(b) 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).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORSUS XELENT TECHNOLOGIES, INC.
By: /s/ Wang Xin
-------------------------------
Wang Xin
Chief Executive Officer
DATED: May 18, 2006
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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
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