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 September 30, 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 [ ] No [X]
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 November 10, 2006
- --------------------------------------- --------------------------------
Common Stock, $.001 par value per share 29,756,000 shares
PART I --- FINANCIAL INFORMATION
Item 1. Financial Statements.
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
Note US$'000 US$'000 US$'000 US$'000
Operating revenues: 20,525 13,164 45,901 16,604
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 16,716 10,358 37,879 13,257
Sales and marketing 140 430 926 1,131
General and administrative 1,194 200 1,883 769
Research and development 40 195 187 337
Depreciation 24 89 149 164
----------- ----------- ----------- -----------
Total operating expenses 18,114 11,272 41,024 15,658
----------- ----------- ----------- -----------
Operating profit 2,411 1,892 4,877 946
Interest expense (41) -- (70) (25)
Other income, net (4) 89 1 541
----------- ----------- ----------- -----------
Income before income taxes 2,366 1,981 4,808 1,462
Income taxes 3 -- (23) (160) (23)
----------- ----------- ----------- -----------
Net income 2,366 1,958 4,648 1,439
Other comprehensive income -- -- -- --
----------- ----------- ----------- -----------
2,366 1,958 4,648 1,439
=========== =========== =========== ===========
Earnings per share: 2
Basic 0.08 0.07 0.16 0.05
=========== =========== =========== ===========
Weighted average number of common stock
outstanding 29,756,000 29,756,000 29,756,000 29,756,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- ------------------------------------------------------------------------------------------------------
-1-
Orsus Xelent Technologies, Inc.
Condensed Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------
As of As of
September 30, December 31,
2006 2005
Note US$'000 US$'000
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents 88 2,974
Accounts receivable, net of allowance for doubtful accounts
of $555,000 ($149,000 in 2005) 31,527 12,034
Inventories 2,361 4,460
Trade deposits paid 3,112 10,580
Advance to third party 125 --
Other current assets 125 182
------------- -------------
Total current assets 37,338 30,230
Property, plant and equipment, net 4 782 781
------------- -------------
Total assets 38,120 31,011
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loan 5 2,477 --
Accounts payable - Trade 11,764 7,939
Accrued expenses and other accrued liabilities 3,474 2,238
Trade deposits received 260 5,432
Due to directors 6 320 320
Provision for warranty 57 122
Taxes payable 181 21
------------- -------------
Total current liabilities 18,533 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$0.001 par value:
Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of September
30, 2006 and as of December 31, 2005 30 30
Additional paid-in capital 2,484 2,484
Dedicated reserves 1,042 1,042
Other comprehensive income 349 349
Retained earnings 15,682 11,034
------------- -------------
Total stockholders' equity 19,587 14,939
------------- -------------
Total liabilities and stockholders' equity 38,120 31,011
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- -----------------------------------------------------------------------------------------------------
-2-
Orsus Xelent Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------
(Unaudited)
Nine months ended
September 30,
------------------
2006 2005
US$'000 US$'000
Cash flows from operating activities
Net income 4,648 1,462
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 149 164
Changes in assets and liabilities:
Accounts receivable -trade (19,493) (1,895)
Inventories, net 2,099 1,215
Trade deposits paid 7,468 (207)
Other current assets 57 (142)
Trade deposits received (5,172) 419
Accounts payable - trade 3,825 (2,786)
Provision for warranty (65) (94)
Accrued expenses and other accrued liabilities 1,236 930
Provision for taxation 160 --
------- -------
Net cash used in operating activities (5,088) (934)
------- -------
Cash flows from investing activities
Purchase of property, plant and equipment (150) (579)
Repayment from a related company -- 3,319
Advance to a director -- (6)
Decrease in restricted cash -- 710
Loan to third parties (125) --
------- -------
Net cash (used in) / generated from investing activities (275) 3,444
------- -------
Cash flows generated from financing activities
Borrowing from bank 2,477 --
------- -------
Net cash generation from financing activities 2,477 --
------- -------
Net (decrease) / increase in cash and cash equivalents (2,886) 2,510
Cash and cash equivalents, beginning of the period 2,974 224
------- -------
Cash and cash equivalents, end of the period 88 2,734
======= =======
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. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements as
of September 30, 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 balance sheet as of December
31, 2005 and the related notes are derived from the audited financial
statements of the Company for the year ended December 31, 2005. The results
of operations for the nine-month periods ended September 30, 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 ("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.
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. 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.
- --------------------------------------------------------------------------------
-4-
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.
United First International Limited was incorporated in Hong Kong and has no
assessable profit for the periods presented. Orsus Xeleent 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 Xeleent 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 24% for two years
followed by a 50% reduction for the next three years, commencing with
fiscal year 2005.
Reconciliation from the expected statutory tax rate in PRC of 24% (2005:
24%) is as follows:
(Unaudited)
Nine months ended
September 30,
------------------
2006 2005
% %
Statutory rate 24.0 24.0
Difference in tax rates in the countries that the
Company operates (1.0) (0.6)
Tax exemption (22.3) (22.7)
Others 2.6 0.9
------- -------
Effective tax rate 3.3 1.6
======= =======
- --------------------------------------------------------------------------------
-5-
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
As of As of
September 30, December 31,
2006 2005
US$'000 US$'000
(Unandited)
Moulds 1,384 1,239
Leasehold improvement 112 112
Plant and machinery -- 14
Office equipment 275 255
Motor vehicles 86 86
-------------- --------------
1,857 1,706
Accumulated depreciation (1,075) (925)
-------------- --------------
782 781
============== ==============
5. SHORT-TERM BANK LOAN
The bank loan was guaranteed by the director, Mr. Liu Yu, repayable on
January 29, 2007 at interest rate 6.696% - 7.02% per annum.
6. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
Related party Relationship with the Company as at September 30, 2006
------------- ------------------------------------------------------
Mr. Wang Xin Director and stockholder of the Company
Mr. Liu Yu Director and stockholder of the Company
Mr. Wang Zhibin Director and stockholder of the Company
- --------------------------------------------------------------------------------
-6-
Orsus Xelent Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. RELATED PARTY TRANSACTIONS (CONTINUED)
b. Summary of related party balances
As of As of
September 30, December 31,
2006 2005
Note US$'000 US$'000
(Unandited)
Due to directors
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (i) 320 320
============= =============
Bank loan guaranteed by a director
Mr. Liu Yu 991 --
============= =============
Note:
(i) The amounts are unsecured, interest-free and repayable on demand.
- --------------------------------------------------------------------------------
-7-
Item 2. Managements' Discussion and Analysis or 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
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 OTC
Bulletin Board symbol is ORXT and its 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. In September 2005, OXHK commenced its Hong Kong operations to sell
and distribute our cellular phone products and technical support services to
customers outside the People's Republic of China (the "PRC").
The business operation of UFIL are conducted through its wholly-owned
subsidiary, Xelent, which is also commonly called "Orsus Cellular" within the
cellular phone industry . Xelent has 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 PRC State
Administration for Industry and Commerce as its product trademark. The cellular
phone products produced by Xelent are customarily equipped with leading features
including 1.8-inch to 2.2-inch CSTN or 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, slim bar-phone & flip-phone technology and ultra thin
innovative lightweight design. Xelent sold approximately 240,000 cellular phones
in the PRC in 2005.
According to a research conducted by the PRC Ministry of Information
Industry, new cellular phone users in the PRC increased by 58 million in 2005,
with total consumers reaching 393 million during that year. Currently, the PRC
has the largest number of cellular phone users in the world. The penetration
rate for cellular phones in the PRC was approximately 30% in 2005. The number of
cellular phone users is expected to reach 500 million by the year-end 2007. The
cellular phone market in the PRC is expected to reach $120 billion by the year
end of 2006 according to the PRC Ministry of Information Industry.
On February 26, 2006, the TDS-CDMA technology standard was officially
announced as the 3G (Third Generation) technology standard in the PRC. However,
sales of products incorporating the 3G has not developed as rapidly as generally
anticipated (it was that 3G network construction and issuance of 3G licenses
would be approved by the end of 2006). Although the granting of 3G licenses has
been delayed until the middle of 2007, once introduction to the market of
products utilizing the 3G technology is commenced, Xelent should be in a good
position to take advantage of this business opportunity.. We have commenced the
development of our owned 3G cellular phone products, including 3G PCBA (3G
technologies platform) and cellular phones with 3G PCBA, based on our existing
2G and 2.5G cellular technologies and cooperation with our 3G solution and chips
providers. Additionally, we are planning to join into the TDS-CDMA Industry
League, and we are working toward the granting of 3G cellular phones
manufacturing licenses from the PRC government in 2007.
The respective market shares of domestic PRC cellular phone manufacturers
decreased in the first quarter of 2006. The primary cause of this decrease was
increased competition among domestic and overseas manufacturers. Advancements in
technology prompted foreign cellular phone manufacturers to speed up the rollout
of new products. Also, foreign cellular phone manufacturers offered price
reductions to promote and clear their inventories of older products. This
increase in competition was compounded by the continuing proliferation of
-9-
counterfeit and "black market" cell phones in the PRC, which impacted sales of
cellular phone products by legitimate manufacturers such as Xelent.
By the second quarter of 2006, most of the domestic PRC cellular phone
manufacturers had adjusted their strategy to increase the competition by price
cutting, improving the quality of the products and accelerating the pace of new
product rollouts. These manufacturers are creating better efficiency by
introducing products designed for the local market and better using their supply
chain. As a result, they have adapted to the rapidly changing market in the PRC
and regained in the second quarter of 2006 some of the market share they lost in
the first quarter. Additionally, they are beginning to make a stronger move into
the overseas market to broaden their sales and increase their revenues.
According to our market research, the market of cellular phones equipped
with specialized applications for specific industry users has been developed
rapidly in the PRC. These products are custom designed and equipped with
specialized applications and software to meet the special requirements of users
in various specialized industries. In the third quarter of this year, we entered
into an Intent of Cooperation Agreement with a software development provider to
assist us in meeting the need for these customized cellular phones. The software
company developed specialized software to support an application platform called
the Industry & Commerce Law-Enforcement Platform ("ICEP"). The ICEP platform
uses the CDMA 1X wireless data networks of the PRC to integrate commercial and
government information resources. This includes a customized digital
administration system for State Administration for Industry & Commerce ("SAIC")
of the PRC that provides easy access by SAIC's professional law-enforcement
teams. It provides technical support for SAIC officials to conduct mobile
law-enforcement and food-safety monitoring. The public can also access business
information through the ICEP. We anticipate that business relating to our
specialized application cellular phone devices will grow rapidly as a
consequence of our cooperation with the software development company, the PRC
and SAIC, and that this could provide us a considerable advantage as we look to
broaden our presence in the larger commercial markets.
BUSINESS REVIEW
During the third quarter of 2006, we adopted a strategy of customization to
meet the requirements of our telecommunication operator customers. Sales of our
CDMA products contributed approximately 50% of total revenues in the quarter,
compared to 25.94% of total revenues for the six moths ended June 2006. This
significant increase in sales of our CDMA products was responsible for a 20%
growth in revenues in this third quarter as compared to the second quarter.
Demand for our cellular phone products has increased as a result of the
correct positioning of our products to meet the needs of the mid-level and
low-end markets in the PRC. Our mid-level and low-end products are all equipped
with a number of attractive features, such as MP3, MEPG4, camera and support
outer card storage card. Also, the overall reduction in the GSM charges of PRC
telecommunication providers, which caused an increase in the number of new
cellular phone subscribers, also enhanced the demand of new cellular phones.
After reduction of inventories by price cutting from domestic manufacturers in
the second quarter, the profit margin of domestic cellular phones manufacturers,
including Xelent, in the third quarter was comparable to profit margins in the
first quarter of 2006. We expect this trend to continue and we are, therefore,
optimistic with respect to our profits for the fourth quarter.
-10-
The following table summarizes our operating result for the nine months
ended September 30, 2006 and 2005, respectively:
- ----------------------------- ------------------------------ ------------------------------ ---------------------------
Nine months ended Nine months ended Comparison
September 30, 2006 September 30, 2005
- ----------------------------- ------------------------------ ------------------------------ ---------------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Revenues 45,901 16,604 29,297 176.45%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Cost of sales 37,879 82.52% 13,257 79.84% 24,622 185.73%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Sales & Marketing expenses
926 2.02% 1,131 6.81% -205 -18.13%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
General & Admin expenses
1,883 4.10% 769 4.63% 1,114 144.86%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
R&D expenses 187 0.41% 337 2.03% -150 -44.51%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Depreciation & Amortization 149 0.32% 164 0.99% -15 -9.15%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Interest expenses 70 0.15% 25 0.15% 45 180%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Other income, net 1 0.00% 541 3.26% -540 -99.82%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income before tax 4,808 10.47% 1,462 8.81% 3,346 228.86%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income taxes 160 0.35% 23 0.14% 137 595.65%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Net income 4,648 10.13% 1,439 8.67% 3,209 223.00%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
The following table summarizes our operating result for the three months
ended September 30, 2006 and 2005, respectively:
- ----------------------------- ------------------------------ ------------------------------ ---------------------------
Three months ended Three months ended Comparison
September 30, 2006 September 30, 2005
- ----------------------------- ------------------------------ ------------------------------ ---------------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Revenues 20,525 100.00% 13,164 100.00% 7,361 55.92%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Cost of sales 16,716 81.44% 10,358 78.68% 6,358 61.38%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Sales & Marketing expenses
40 0.68% 430 3.27% -290 -67.44%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
General & Admin expenses
1,194 5.82% 200 1.52% 994 497.00%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
R&D expenses 40 0.19% 195 1.48% -155 -79.49%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Depreciation & Amortization 24 0.12% 89 0.68% -65 -73.03%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Interest expenses 41 -0.20% - 0.00% 41 0.00%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Other income, net 4 -0.02% 89 0.68% -93 -104.49%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income before tax 2,366 11.53% 1,981 15.05% 385 19.43%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Income taxes - 0.00% 23 -0.17% 23 -100.00%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
Net income 2,366 11.53% 1,958 14.87% 408 20.84%
- ----------------------------- ------------- ---------------- ------------ ----------------- ------------ --------------
-11-
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our discussion and analysis on our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
RESULTS OF OPERATION
Revenues
Our revenues were $45,901,000 for the nine months ended September 30, 2006,
representing an increase of 176.45% as compared to the same period in 2005.
After going through an environment of reformation in the cellular phone market
in the first half year of 2005, we adjusted our business model, our market
position and our strategy and improved our technology and the quality of our
products, in terms of both function and appearance. We believe that we are now
in a much better position to deal with the rapidly changing and competitive
market for cellular phone products in the PRC and that we are better prepared to
take advantage of the rejuvenated cellular phone market that has resulted from
the reduction in the monthly fee charged by telecommunication providers in
second quarter of 2006.
We expanded the sales of our CDMA products, which accounted for 38.73% of
our total revenues for the nine months period ended September 30, 2006,
representing an increase of 435%, compared to the same period in 2005.
Meanwhile, the sales of traditional GSM products have remained relatively
stable.
Our mid-level and low-end products contain a number of attractive features,
such as MP3, MPEG4, video recording and outer card storage. Our high-end
products contain those same features as well as PDA, GPRS and office software
function, special industry applications and other attractive features and
functions. The appearance of all our products are in line with the latest
trends, including being ultra slim and containing a wide use of metals, and they
have been well received by our customers. We introduced a middle-grade dual mode
cellular phone with both GSM & CDMA applications in the third quarter to meet
the demand in the market for this type of product.
-12-
Products Segment
-------------------------- ------------------------------------------------
Nine months ended September 30, 2006
------------------------------------------------
$'000 % of revenue
-------------------------- -------------------------- ---------------------
X5 8,337 18.16%
-------------------------- -------------------------- ---------------------
D8120 4,912 10.70%
-------------------------- -------------------------- ---------------------
C300 4,155 9.05%
-------------------------- -------------------------- ---------------------
C8000 3,705 8.07%
-------------------------- -------------------------- ---------------------
C200 3,335 7.27%
-------------------------- -------------------------- ---------------------
C109 2,446 5.33%
-------------------------- -------------------------- ---------------------
TDA6028 2,250 4.90%
-------------------------- -------------------------- ---------------------
X5+ 2,011 4.38%
-------------------------- -------------------------- ---------------------
Others 14,750 32.14%
-------------------------- -------------------------- ---------------------
The total revenues for the first nine months of 2006 amounted to
$45,901,000, of which the sale of GSM products in this period accounted for
$28,123,000, or 61.27%, of our total revenues. The GSM products mainly included
X5 ($8,337,000), D8120 ($4,912,000), X5+ (2,011,000), and others ($12,863,000).
The sales of CDMA was $17,778,000, representing 38.73% of our total revenues,
which included C300 ($4,155,000), C8000 ($3,705,000), C200 ($3,335,000), C109
($2,446,000), TDA6028 ($2,250,000) and others ($1,887,000).
Our GSM products are purchased from China Electronic Apparatus Company and
Beijing Dong Fang Long Yu Trading Company, which include D8120 (ultra thin,
slide PDA with MP3, MP4, Camera, T-Flash Card, handwriting touch screen), X5
(ultra thin with MP3, MP4, Camera, T-Flash Card), D8110 (ultra thin, slide PDA
with MP3, MEPG4, Camera, T-Flash Card). Our CDMA products are purchased from
Tian Feng Ju Yuan Technology Company Limited and Beijing Tian Hong Bo
Communication Apparatus Company Limited, and include C200 (a low-end shell phone
with colorful screen, MP3, Camera), C300 (a high-end cell phone with colorful
screen, MP3, Camera and IM System), C8000 (a high-end PDA with MP3, MEPG4,
Camera, T-Flash Card, GSM & CDMA Simultaneous Standby Dual Mode handset).
X188 (Low-end product with MP3, MEPG4, MINI SD support functions), X5+
(ultra thin, MP3, MEPG4, Camera, T-Flash Card), TDA6028 (a high-end cellular
phone with PDA, GPRS, 2.8-inch TFT LCD handwriting touch screen, finger print
identification, MPEG4, extended scanner, RFID and WIFI functions), X718 (a
cellular phone with MPEG4, external memory card support function in a super-slim
case) and D9000 (a low-end product with PDA function). Our CDMA products C100
and C109 were developed in cooperation with Dalian Daxian Communication Company
Limited.
-13-
- ----------------------------- --------------------------------------------------
Three months ended September 30, 2006
--------------------------------------------------
$'000 % of revenue
- ----------------------------- ----------------------- --------------------------
D8120 4,912 23.93%
- ----------------------------- ----------------------- --------------------------
C300 4,155 20.24%
- ----------------------------- ----------------------- --------------------------
C8000 3,705 18.05%
- ----------------------------- ----------------------- --------------------------
C200 3,335 16.25%
- ----------------------------- ----------------------- --------------------------
X5 2,181 10.63%
- ----------------------------- ----------------------- --------------------------
D8110 1,426 6.95%
- ----------------------------- ----------------------- --------------------------
Others 811 3.95%
- ----------------------------- ----------------------- --------------------------
In the third quarter of 2006, sales reached $20,525,000, as compared with
$13,164,000 in the same period in 2005, which represents a growth in sales of
55.92%.Sales of our CDMA products in the third quarter of 2006 generated
revenues of $11,195,000 and accounted for 55% of sales in this quarter, as
compared to 18% in the same period of 2005. The growth in the sales of our CDMA
products also lead to 20.67% increase in our revenues in the third quarter as
compared to the second quarter of 2006.
The increase of the revenue is primarily attributable the launch of our
ultra-thin, slim bar modes which are currently in demand by the market; and our
cooperation with telecommunication operators with respect to our CDMA products
in various grades.
Customers Segment
- -----------------
- ------------------------------------- ------------------------------------------
Nine months ended September 30, 2006
------------------------------------------
$'000 % of revenue
- ------------------------------------- --------------------- --------------------
Beijing Xingwang Shidai Tech &
Trading Co., Ltd. 24,816 54.06%
- ------------------------------------- --------------------- --------------------
CEC Cellular Limited 12,756 27.79%
- ------------------------------------- --------------------- --------------------
Singapore ST 6,124 13.34%
- ------------------------------------- --------------------- --------------------
Singapore CEO 2,000 4.36%
- ------------------------------------- --------------------- --------------------
Others 205 0.45%
- ------------------------------------- --------------------- --------------------
Our revenues were primarily derived from two major domestic customers. For
the nine months ended September 30, 2006, our revenues generated from Beijing
Xingwang Shidai Tech & Trading Co., Ltd. ("XWSD") and CEC Cellular Limited
("CECM") were $24,816,000 and $12,756,000, respectively. These two major
domestic customers aggregated to account for $37,572,000, or 81.85%, of total
revenue. Both XWSD and CECM are distributors and dealers in Mainland China, and
their sales networks cover most of the major cities in the PRC. XWSD is the
major customer of our company, and account for 54.06% of total sales. In the
overseas market, we have secured two new Singapore customers, which are ST
Electronics (Info-Software Systems) Pte Ltd. and Chartered Electro-Optics Pte
Ltd. The revenues generated from these two companies were $8,124,000, or 17.70%,
of the total revenue.
-14-
- ------------------------------------ -------------------------------------------
Three months ended September 30, 2006
-------------------------------------------
$'000 % of revenue
- ------------------------------------ -------------------- ----------------------
Beijing Xingwang Shidai Tech &
Trading Co., Ltd. 16,021 78.06%
- ------------------------------------ -------------------- ----------------------
CEC Cellular Limited 4,491 21.88%
- ------------------------------------ -------------------- ----------------------
Others 13 0.06%
- ------------------------------------ -------------------- ----------------------
In the third quarter, XWSD and CECM were also our major domestic customers.
Our deliveries to CECM were terminated in the second quarter due to the fact
that CECM had an outstanding receivable over our credit limit. The supply of our
products was re-commenced after we received a substantial payment from CECM in
the third quarter of 2006.
Other net income
For the nine months ended September 30, 2006, other net income was $1,000,
or 0.002%, of the total revenue. There was a significant decrease as compared
with $541,000 of other net income in the same period of 2005. The decrease in
other income for the nine months ended September 2006 was attributable primarily
to the fact that no toll free income was earned from cooperative partners in
2006 because our cooperative partners changed their toll fee policy.
Operating expenses
For the nine months ended September 30, 2006, our operating expenses
amounted to $41,024,000. The operating expenses mainly includes sales and
marketing expenses, general and administrative expenses and R & D expenses and
depreciation were shown and compared with the same period in 2005 as follows:
- ------------------------- ---------------------------- --------------------------- ------------------------
Nine months ended Nine months ended Comparison
September 30, 2006 September 30, 2005
---------------------------- --------------------------- ------------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Cost of sales 37,879 82.52% 13,257 79.84% 24,622 185.73%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Sales & marketing exp. 926 2.02% 1,131 6.81% -205 -18.13%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
General & admin. exp. 1,883 4.10% 769 4.63% 1,114 144.86%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
R&D 187 0.41% 337 2.03% -150 -44.51%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Depreciation 149 0.32% 164 0.99% -15 -9.15%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Total 41,024 89.37% 15,658 94.30% 25,366 162.00%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
-15-
For the three months ended September 30, 2006, our operating expenses
increased by 51.36%, as compared to the third quarter of 2005.
- ------------------------- ---------------------------- --------------------------- ------------------------
Three months ended Three months ended Comparison
September 30, 2006 September 30, 2005
- ------------------------- ---------------------------- --------------------------- ------------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Cost of sales 16,716 81.44% 10,358 78.68% 6,358 61.38%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Sales & marketing. exp. 140 0.68% 430 3.27% -290 -67.44%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
General & admin. exp. 1,194 5.82% 200 1.52% 994 497.00%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
R&D 40 0.19% 195 1.48% -155 -79.49%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Depreciation 24 0.12% 89 0.68% -65 -73.03%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Total 18,114 11,272 85.63% 6,842 60.70%
- ------------------------- ---------- ----------------- ---------- ---------------- ---------- -------------
Cost of sales
- -------------
For the nine months ended September 30, 2006, our cost of sales was
$37,879,000, or 82.52%, of revenue. Other than the factor of provision for slow
moving stock of $626,000, the percentage of cost of sales to total revenues
dropped to 81.16%. The cost of sales to revenues was 79.11% for the
corresponding period in 2005, resulting in an increase of 2.05%. The principal
reasons for this increase was the keen competition in the cellular phone
industry as exemplified by the price cutting pressure in our selling price that
was greater than the reduction in our purchase cost, and nearly half of the
sales in the second quarter of 2006 were from overseas trade, which carry
smaller margins as compared to our domestic sales.
For the three months ended September 30, 2006, our cost of sales was
81.44%. Other than the factor of provision for slow moving stock, the percentage
of cost of sales to total revenues was 79.08%, which amounted to a 1.32%
increase when comparing to 77.76% over the same period in 2005. This however
resulted in a decrease when compared to 85.41% in the second quarter of 2006,
and was the result of a higher percentage of overseas trade in second quarter of
2006.
Sales and marketing expenses
- ----------------------------
Sales and marketing expenses mainly represent payments made to sales
personnel, cost of provision for after-sales services, and marketing and
transportation costs.
For the nine months ended September 30, 2006, sales and marketing expenses
were $926,000, or 2.02%, of the total revenues, as compared to $1,131,000, or
6.81%, of total revenues for the corresponding period in 2005. This constituted
a decrease of 18.13% as compared to the corresponding period in 2005. This
decrease was due to the reduction in the number of personnel.
For the three months ended September 30, 2006, sales and marketing expenses
were reduced to $140,000 from $342,000, representing a 57.49% decrease that is
attributable to the fact that we laid off some redundant staff and restructured
our marketing department. It represents a decrease of 67.44%, as compared with
$430,000 in the third quarter of 2005.
-16-
R&D expenses
- ------------
Our R&D expenses were $187,000 for the nine months ended September 30,
2006, which represents 0.41% of total revenue as compared with $337,000 and
2.03% respectively in the same period of 2005. This decrease of 44.51% in R&D
expenses was attributed to the adjustment of strategy, which involves
forecasting market demand and choosing the most popular products in the market
for salesso that internal investment is reduced.
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 nine months ended September 30, 2006, general and administrative
expenses was $1,883,000, which represents 4.10% of total revenue. Included in
general and administrative expenses was a provision for doubtful accounts
amounting to $1,364,000, due primarily to the uncertainty of long outstanding
account receivables and trade deposits. Except for the provision for doubtful
accounts, the general and administrative expenses were $519,000, or 1.13% of the
total revenues, which represented a $250,000, or 32.51%, decrease as compared to
the second quarter of 2005. The decrease in the expenses was mainly due to the
fact that we laid off redundant personnel. Since the second half year of 2005,
we have adjusted our business strategy, and this resulted in the redundant
personnel. We incurred some one-time compensation expenses as a result, while
the ordinary staff costs, including the wages and insurance for personnel,
decreased in relation to the decrease in the numbers of staff.
For the three months ended September 30, 2006, general and administrative
expenses were $1,194,000. Except for the provision of doubtful debts, the
expenses were only $141,000, which decreased $59,000,or 29.5%, as compared to
$200,000, for the corresponding period in 2005. General and administrative
expenses decreased 25.4% in the third quarter of2006, as compared to the second
quarter, which was mainly due to personnel layoff.
Gross profit and gross profit margin
For the nine months ended September 30, 2006, our gross profit was
$8,022,000, which represented an increase of $5,301,000 or 158.39%, as compared
to the gross profit of $3,347,000 in the same period in 2005. Our gross profit
margin for the reporting period decreased from 20.16% in 2005 to 17.48% in 2006.
Included in the cost of sales in 2006 was a provision for slowing moving
inventory amounting to $626,000. Except for the effect of the provision for slow
moving inventory, the gross profit margin would have been 18.84%.
The gross profit in the third quarter of 2006 is $3,809,000. Except for the
effect of the provision for slow moving inventory, the gross profit margin would
have been 20.92%, and compared with the second quarter of 2006, representing a
6.33% growth. However, it represents a slight decline of 0.40%, as compared with
21.32% in the third quarter of 2005. The decline in our gross profit margin is
attributable to:
1. The gross profit of overseas trade being relatively low. We have continued
to develop our overseas customers since the second quarter of 2006, and the
-17-
overseas sales accounted for 18% of the total sales in the first nine
months of 2006. At the beginning stage of the development of overseas
customers, the price of our products was designed to be very favorable and
attractive to our customers, and the gross profit of overseas is
approximately 14%. As a result, the gross profit for the first nine months
was lower in 2006 when comparing with the same period in 2005.
2. The gross profit margin of trade sales is relatively low, ranging from 12%
to 16%, and is continuing to decline as a result of competitive factors.
3. Due to seasonal factors and price cutting by domestic manufacturers in the
second quarter, our gross margin dropped to 14.59% in the second quarter of
2006. Along with the recovery of the cellular phone market in the third
quarter, the profit margin increased in the third quarter..
Net income
For the nine months ended September 30, 2006, our net income was
$4,647,000, or 10.12%, of revenue. Except for the provisions described above,
our ordinary net income was $6,637,000, or 14.46%, of the total revenues, which
presents an increase of $5,077,000, as compared with the corresponding period in
2005. The improvement in our net profit is due primarily to the fact that we
have been successful in overcoming a difficult operating environment in the
first half year of 2005, and the growth of sales and the development in oversea
customers played an important part in the increase in our net income.
Furthermore, the sharp decline in the operating expenses resulting from our cost
control efforts is another reason for the improvement in net income.
For the three months ended September 30, 2006, our net income was
$2,366,000, which represents 51% of total net profit in the first nine months of
2006. It increased by 20.84%, as compared to the same period of in 2005. Except
for the provisions described above, net imcome increased 99.28%, as compared to
the same period in 2005. The substantial increase in net profit is due primarily
to adjustment in our marketing strategy and improvements in the cellular phone
market in the third quarter.
We expect that the competition in the cellular phone market will be remain
intense in the PRC for the foreseeable future. Fortunately, as a result in the
change of our business strategy, we anticipate that the market will move towards
healthier development and a more favorable environment for domestic legitimate
manufacturers such as Xelent. In the future, we will continue to develop our
overseas operations with the objective of establishing a more diversified
revenue base, fostering closer cooperation with telecommunication providers and
making an determined effort top collect our long outstanding trade receivables
and trade deposits and reduce our inventory level.
LIQUIDITY AND SOURCE OF CAPITAL
We generally finance our operations from cash flow generated internally.
As of September 30, 2006, we had current assets of $37,338,000. Current
assets are mainly comprised of inventory of $2,361,000, accounts receivable of
$31,527,000, trade deposits and other receivables aggregated of $3,112,000,
other current assets of $250,000, and restricted cash, cash and cash equivalents
of $88,000. Current liabilities included accounts payable of $11,764,000, trade
deposit received of $260,000, other accrued expenses and accrued liabilities of
-18-
$3,474,000, short-term bank loan of $2,477,000, amounts due to directors of
$320,000, provision for warranty of $57,000 and tax payable of $181,000.
We offer two different trading terms to our customers, i.e.
cash-on-delivery and on credit term within 45-90 days. As of September 30, 2006,
our accounts receivable were $31,527,000, which was an increase $19,493,000 as
compared to $12,034,000 on December 31, 2005. The increase in our account
receivables was due primarily to trading with our two major customers, XWSD and
CECM. As of September 30, 2006, these receivables all remain within our approved
credit terms. We have taken steps to control credit extended to our major
customers and we review their outstanding balances regularly. To reduce further
risk exposure, we may in the future terminate our supply of products to those
customers if the credit limit is reached.
As of September 30, 2006, our inventories were $2,361,000, which
represented a decrease of $2,099,000 or 47.06%, as compared to $4,460,000 on
December 30, 2005. This decrease was due in large part to our use of old
materials during the production of our older models. In addition, our newly
developed products do not require us to carry large level of inventories because
the component parts are readily available. We have critically and regularly
evaluated our inventory and a provision for slow-moving inventory was made. An
aggregate of $1,001,000 was taken as a provision for slow moving inventory as of
September 30, 2006.
As of September 30, 2006, our trade deposits were $3,112,000, which
represented a decrease of $7,468,000 or 70.59%, as compared to $10,580,000 on
December 31, 2005. This decrease was due primarily to delivery of our purchased
goods from our vendors, which are Tian Feng Ju Yuan Technology Company Limited
and China Electronic Apparatus Company, in the third quarter.
As of September 30, 2006, our accounts payable were $11,764,000, which
represented an increase of $3,825,000 or 48.18%, as compared to $7,939,000 on
December 31, 2005. The increase in accounts payable was attributable mainly to
unpaid products from our vendor China Electronic Apparatus Company.
As of September 30, 2006, 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. Our activities, assets and
liabilities are mainly denominated in RMB, any further possible inflation of RMB
would be beneficial to us. We consider that the exposure to exchange
fluctuations is relatively low and therefore we have not engaged in any hedging
activity.
-19-
CASH FLOWS
As of September 30, 2006, we have the cash and cash equivalents of $88,000,
as compared to $2,974,000 on December 31, 2005. This represented a decrease of
$2,886,000, or 97.04%. This decrease was mainly due to the increase in the
account receivables resulting from the growth in the revenues in the third
quarter of 2006 and long collection period. As of September 30, 2006, we had
account receivables of $31,527,000, as compared to $12,034,000 as of December
31, 2005. This represented an increase of $19,493,000, which was due to the
trade with XWSD and CECM in the third quarter that increased the account
receivables. As a result, the cash coming to us was slower.
Our gearing ratio, calculated as total debts over total assets, was 48.62%
as of September 30, 2006, as compared to 51.83% as of December 31, 2005.
CONTINGENT LIABILITIES
As of September 30, 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 September 30, 2006, we had no off balance sheet arrangements.
CONTRACTUAL COMMITMENTS
We are obligated to make future payments 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 September 30, 2006, reported by maturity of
obligation.
Payments due by period
------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than
1 year 5 years
- ---------------------------- ---------- ---------- ---------- ---------- ----------
$'000 $'000 $'000 $'000 $'000
Long-term Debt Obligations
2,477 2,477 -- -- --
Capital Lease Obligations
-- -- -- -- --
Operating Lease Obligations
31 11 20 -- --
Purchase Obligations
82 82 -- --
Other long-term liabilities reflected on the
registrant's balance sheet under GAAP -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total
2,590 2,570 20 -- --
========== ========== ========== ========== ==========
-20-
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.
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.
-21-
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).
-22-
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: November 14, 2006
-23-
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