- Quarterly Report (10-Q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

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FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission file number: 001-33456

ORSUS XELENT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of incorporation)

20-1198142 (I.R.S.  Employer Identification No.)

29 th Floor, Tower B, Chaowai MEN Office Building

26 Chaowai Street, Chaoyang Disc.

Beijing, People’s Republic Of China 100020

(Address of principal executive offices, including zip code)

86-10-85653777

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x      No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ¨      No   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).

Yes   ¨      No   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 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 August 16, 2010
Common Stock, US$.001 par value per share		29,756,000 shares

 

 

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	Page
Part I: Financial Information	1
Item 1 -Financial Statements (unaudited)	1
Consolidated Balance Sheets	1
Consolidated Statements of Income and Comprehensive Income	2
Consolidated Statements of Cash Flows	3
Notes to Consolidated Financial Statements	4
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	20
Item 4T - Controls and Procedures	21
Part II. Other Information	21
Item 1 - Legal Proceedings	21
Item 1A - Risk Factors	21
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3 - Defaults Upon Senior Securities	22
Item 4 – Removed and Reserved	22
Item 5 – Other Information	22
Item 6 - Exhibits	22
Signatures	23

 

 

 

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PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 

Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(US Dollars in thousands except share data and per share amounts)

		June 30 , 20 10				December 31,200 9
ASSETS
Current assets
Cash and cash equivalents		$	6			$	374
Restricted cash			4				4
Notes Receivable			-				2,779
Accounts receivable			90,973				81,130
Trade deposit paid, net			4,444				5,875
Other current assets, net			28				29
Pledged deposit			1,295				1,290
Total current assets			96,750				91,481
Property, plant and equipment, net			164				178
Deferred tax asset			4,359				4,095
		$	101,273			$	95,754
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans		$	9,429			$	9,390
Short-term loan payable			308				307
Accounts payable			9,229				7,652
Accrued expenses and other accrued liabilities			4,263				3,413
Due-to Shareholders			690				611
Income taxes payable			5,894				5,870
Other taxes payable			23,612				21,423
Liabilities for possible settlement to accounts payable			4,199				2,928
Non-Current liabilities
Trade deposit received			1,884				1,884
Total liabilities			59, 508				53,478
Stockholders’ equity
Preferred stock, par value US$0.001; authorized 100,000,000 shares; none issued
Common stock, par value US$0.001; authorized 100,000,000 shares;
Issued and outstanding 29,756,000 shares as of June 30, 2010 and December 31, 2009			30				30
Additional paid-in capital			3,209				3,209
Unappropriate retained earnings			1,042				1,042
Appropriated retained earnings			31,661				32,363
Accumulated other comprehensive income			5,82 3				5,632
Total stockholders’ equity			41,765				42,276
		$	101,273			$	95,754

See notes to consolidated financial statements.

 

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Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Statements of Income and Comprehensive Income

 (In thousands, except number of shares and per share data)

(Unaudited)

		Three months ended  June   3 0 ,								Six months ended June 30,
		2010				2009				2010				2009
Net sales		$	6,473			$	23,332			$	14,064			$	43,056
Cost of sales			5,997				20,242				12,992				36,874
Gross profit			476				3,090				1,072				6,182
Operating expenses:
Selling expenses			21				50				62				173
General and administrative expenses			115				103				142				369
Research and development expenses			4				11				9				28
Depreciation and amortization			7				19				15				42
Allowance for doubtful accounts			-				-				( 251	)			-
Total Operating Expenses			147				183				(23	)			612
Income from operations			329				2,907				1,095				5,570
Other income/(expenses)
Interest expense			(577	)			(266	)			(790	)			(488	)
Other (expenses)/income, net			-				-				( 1,252	)			17
(Loss)/income before income tax expense			(248	)			2,641				(947	)			5,099
Income tax (expenses)/benefit
Current tax expense			-				334				-				657
Deferred taxes benefit			-				-				245				-
Net (loss)/income			(248	)			2,307				(702	)			4,442
Other comprehensive income
Foreign currency translation adjustment			183				179				191				243
Comprehensive (loss)/income		$	(65	)		$	2,486			$	(511	)		$	4,685
(Loss)/earnings per share:
Basic and diluted		$	0.00			$	0.08			$	(0.02	)		$	0.15
Weighted average number of common shares outstanding – basic and diluted			29,756,000				29,756,000				29,756,000				29,756,000

See notes to consolidated financial statements.

 

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Orsus Xelent Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands, except number of shares and per share data)

(Unaudited)

		Six months ended June 30 ,
		2010				2009
Cash flows from operating activities
Net (loss)/income		$	(702	)		$	4,442
Adjustments to reconcile net (loss)/income to net cash used by operating activities:
Deferred tax			(245	)			-
Depreciation and amortization			14				43
Loss due to liability for possible settlement to accounts payable			1,252				-
Changes in assets and liabilities:
Accounts receivable			(9,466	)			(123	)
Notes receivable			2,780				-
Trade deposits paid, net			1,449				8,116
Other current assets, net			-				(19,888	)
Accounts payable			1,545				117
Accrued expenses, other accrued liabilities and other tax payable			3,005				6,622
Income tax payable			-				615
Net cash flows (used)/provided by operating activities			(36 8	)			(56	)
Cash flows from financing activities
Proceeds from banks and other loans			-				2,512
Repayment of bank loans			-				(2,687	)
Repayment of mortgage loans			-				(12	)
Net cash flows used by financing activities			-				(187	)
Net change in cash and cash equivalents			(368	)			(243	)
Effect of foreign exchange rate changes on cash and cash equivalent			0				173
Cash and cash equivalents - beginning of period			374				102
Cash and cash equivalents - end of period		$	6			$	32
Supplemental disclosure for cash flow information
Interest paid		$	-			$	43
Income taxes paid		$	-			$	41

 

See notes to consolidated financial statements.

 

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except number of shares and per share data)

1.	ORGANIZATION

Orsus Xelent Technologies Inc. (“ORS” or the “Company”), formerly known as Universal Flirts Corp., was organized under the laws of the State of Delaware on May 25, 2004.

Prior to reorganization with United First International Limited (“UFI”) on March 31, 2005, a company incorporated in the Hong Kong Special Administrative Region (“HK”) of the People’s Republic of China (the “PRC”), ORS was a development stage company which had no operations or revenues. ORS exited the development stage after the recapitalization.

Upon the completion of the reorganization, ORS assumed the business operations of UFI as primarily undertaken by its subsidiary, Beijing Orsus Xelent Technologies & Trading Co., Limited (“BOXT”) (English translation for identification purposes only), an enterprise incorporated in Beijing, PRC on November 10, 2004 which is engaged in the business of design, retail and wholesale distribution of cellular phones.

On July 14, 2005, Orsus Xelent Holdings (BVI) Limited (“OXHBVI”) was incorporated by ORS in the British Virgin Islands (“BVI”) with issued capital of US$2.00. OXHBVI is a wholly-owned subsidiary of ORS; OXHBVI’s principal activity is investment holding. On July 22, 2005, Orsus Xelent Trading (HK) Company Limited (“OXTHK”) was incorporated by OXHBVI in HK with issued capital of HK$100.00 (equivalent to US$13.00); OXTHK is a company engaged in trading cellular phones and accessories, and is wholly-owned by OXHBVI.

2.	DESCRIPTION OF BUSINESS

The Company is principally engaged in the business of designing and distributing economically priced cellular phones for retail and wholesale distribution. The Company currently outsources its manufacturing to third party factories. In February 2004, the Company registered “ORSUS” with the State Administration for Industry and Commerce in the PRC as its trademark, which is also known as “Orsus Cellular” within the industry. In January 2007, the trademark “PROXLINK” was registered for the Company’s specialized application mobile series.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the financial statements of the Company and its subsidiaries.

The accompanying unaudited consolidated financial statements as of June 30, 2010, and for the six months ended June 30, 2010 and 2009 have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to smaller reporting companies. In the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods have been made and all adjustments are of a normal recurring nature (or a description of the nature and amount of any adjustments other than normal recurring adjustments). The unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2009 that are included in the Company’s 2009 annual report on 10-K filed with the Securities and Exchange Commission.

The unaudited consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2009.

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

Principle of consolidation

The consolidated unaudited financial statements include the accounts of Orsus Xelent Technologies, Inc. and its subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of unaudited interim Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. We evaluate our estimates on an ongoing basis, including those related to accounts receivable and sales allowances, useful lives of property and equipment, fair values of options to purchase our common stock, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Accounts Receivable

Accounts receivable are recognized and carried at original invoiced amount less an allowance for any potential uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. We generally do not require collateral from our customers.

 

Recently issued accounting pronouncements

In January 2010, the FASB issued the following ASC Updates:

ASU No. 2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.

ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to (a) sales of in substance real estate or (b) conveyances of petroleum and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in ASC 810 subtopic 10).

ASU No. 2010-05—Compensation—Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. This Update simply codifies EITF Topic D-110, “Escrowed Share Arrangements and the Presumption of Compensation and does not change any existing accounting standards.

ASU No. 2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  This Update amends ASC 820 subtopic 10 that requires new disclosures about transfers in and out of Levels 1 and 2 fair value measurements and activity in Level 3 fair value measurements. This Update also amends ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.

The Company expects that the adoption of the above updates issued in January 2010 will not have any significant impact on its financial position and results of operations.

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

4.	RESTRICTED CASH

There are three blocked bank accounts with restricted cash with the amount of US$4 as of June 30, 2010. Two bank accounts are related to the legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd. (“Songding”) provides the battery chargers and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”) provides the packing materials to BOXT. The third bank account was blocked because the loan from Beijing Rural Commercial Bank has been overdue since September 27, 2009, and the Company has not repaid any principle or interest. The balance of this account on June 30, 2010 was zero. (Refer to Note 13, “Commitments And Contingencies”.)

There are two blocked bank accounts with restricted cash with the amount of US$4 as of December 31, 2009, which related to Songding and Baoxin.

 

5.	ACCOUNTS RECEIVABLE

The Company’s business relies on a few distributors. US$90,973 and US$81,130 of accounts receivable as of June 30, 2010 and December 31, 2009, respectively, mainly consisted of a balance of US$83,871 and US$75,616 due from Beijing Xingwang Shidai Commerce Co., Ltd. (“Xingwang”), the major distributor of the Company. The reason for the large accounts receivable balance as of June 30, 2010 and December 31, 2009 is due to longer turnover days than before.  Longer turnover days occur due to the following: (i) industry profit has decreased, middle-level distributors have been removed and the national level distributor, Xingwang, had to sell the products to direct customers—the retailers—and (ii) the turn-over rate of the retailers is always slower than middle level distributors.

The long aged account receivable to Xingwang is guaranteed by a third-party gurantee company licensed by the PRC government, Zhong Hui Guarantee Corporation (“Zhonghui”). On December 25, 2008, Xingwang entered into an irrevocable Credit Guarantee Contract (the “Guarantee Contract”) with Zhonghui and BOXT under which Zhonghui agreed to guarantee up to Renminbi (“RMB”) 300 million (equivalent to US$43,885), for the principal debt, fine, damages arising out of breach of contract, and costs incurred for realizing those legal rights including but not limited to legal proceeding fees, attorney fees and travel expenses arising out of the distributor agreement entered into by BOXT and Xingwang. The Guarantee Contract was effective as of December 25, 2008 and provides a guarantee for all of the accounts receivable that are or may become outstanding from Xingwang to BOXT from January 1, 2008 through December 31, 2008. On December 31, 2009, the guarantee contract expired. A new guarantee contract was signed between BOXT, Xingwang Shidai and Zhonghui on January 1, 2010 and provides a guarantee for part of the accounts receivable with a maximum amount of US$43,885 that are or may become outstanding from Xingwang to BOXT from January 1, 2008 through December 31, 2010. Since most part account receivable is guaranteed by the abovementioned guarantee agreement, no allowance for doubtful accounts is accrued.

 

6.	TRADE DEPOSITS PAID, NET

 

US$4,444 and US$5,875 of trade deposits paid to suppliers on June 30, 2010 and December 31, 2009, is payment in advance to suppliers, which consisted of the following:

  

		June 30, 2010				December 31, 2009
		(US$’000)				(US$’000)
		(Unaudited)				(Audited)
Trade deposits paid		$	4,573			$	6,004
Less: allowance for doubtful accounts			(129	)			(129	)
Total		$	4,444			$	5,875

 

During the six months ended June 30, 2010, the Company accrued US$129 as the provision to the vendors with the aging over three years.

 

7.	OTHER CURRENT ASSETS, NET

As of June 30, 2010 and December 31, 2009, the other current assets of US$28 and US$29, respectively, are mainly composed of the advanced payment of employee travel expenses and the components and parts for post-sales maintenance of products stored in the maintenance vendors.

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

The allowance for doubtful accounts of US$1,794 as of June 30, 2010 and December 31, 2009 was due to the provision for receivables from Leimeng Times and other accounts with aging over three years. The management believes these accounts are uncollectable, and as such, the allowance for doubtful account is provided.

 

		June 30, 2010				December 31, 2009
		( US$ ’ 000)				( US$ ’ 000)
		(Unaudited)				(Audited)
Other current assets		$	1,822			$	1,816
Less: allowance for doubtful accounts			(1,794	)			(1,787	)
Total		$	28			$	29

 

8.	PLEDGED DEPOSIT

US$1,295 of pledged deposits at June 30, 2010 and US$1,290 of pledged deposits at December 31, 2009 were paid to Zhonghui, a guarantee company, in September 2008 as a pledge for US$6,874 (RMB47,000) of bank loans. Refer to Note 10, “Short-Term Bank Loans” for more discussion of the bank loans.

 

9.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of June 30, 2010 and December 31, 2009 consisted of the following:

		June 30, 2010				December 31, 2009
		US$ ’ 000				US$ ’ 000
		(Unaudited)				(Audited)
Moulds			4				4
Leasehold improvements			131				131
Office equipment			323				323
Motor vehicles			303				303
			761				761
Less: Accumulated depreciation			(597	)			(5 83	)
			164				178

The depreciation expenses were US$7 and US$19 for the three months ended June 30, 2010 and 2009, respectively. The depreciation expenses were US$15 and US$42 for the six months ended June 30, 2010 and 2009, respectively.

 

10.	SHORT-TERM BANK LOANS

All bank loans outstanding at June 30, 2010 and December 31, 2009 were borrowed by BOXT. Details of short-term bank loans are summarized as follows:

At June 30, 2010		Amount (RMB’000)				Annual interest rate			Term	Guarantee provided by
		(Unaudited)
Loan from Beijing Rural Commercial Bank		47,000 (US$6,903)					10.08	%	From September 28, 2008 to September 27, 2009	Director Liu Yu; A guarantee company; pledged deposit of US$1,290
Loan from Huaxia Bank		17,200 (US$2,526)					6.3720	%	From February 20,2009 to February 20, 2010	Director Liu Yu; Two third party companies; Distributor Xingwang.
Total		64,200 (US$9,429)

 

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

At December 31, 2009		Amount (RMB’000)				Annual interest rate			Term	Guarantee provided by
Loan from Beijing Rural Commercial Bank		47,000 (US$6,874)					10.08	%	From September 28, 2008 to September 27, 2009	Director Liu Yu; A guarantee company; pledged deposit of US$1,290
Loan from Huaxia Bank		17,200 (US$2,516)					6.3720	%	From February 20, 2009 to February 20, 2010	Director Liu Yu; Two third party companies; Distributor Xingwang.
Total		64,200 (US$9,390)

Interest expense incurred for the three months ended June 30, 2010 and 2009 were US$577 and US$266, respectively. Interest expense incurred for the six months ended June 30, 2010 and 2009 were US$790 and US$488, respectively.

US$6,903 of a loan from Beijing Rural Commercial Bank was originally due on September 27, 2009. The Company is currently negotiating an extension of the term with the bank. The penalty interest rate on the principal and interest in default is 130% of the contracted interest rate and is chargeable from the due date of the principal. The Company accrued US$446 in penalty interest for the six months ended June 30, 2010, and US$682 in penalty interest from September 28, 2009 to June 30, 2010.

US$2,526 of a loan from Huaxia Bank was due on February 20, 2010.  The Company is currently negotiating an extension of the term with the bank. The penalty interest rate on the principal and interest in default is 150% of the contracted interest rate and is chargeable from the due date of the principal. The Company accrued US$323 in penalty interest for the six months ended June 30, 2010.

 

11.	SHORT-TERM LOAN FROM A NON-FINANCIAL INSTITUTION

 

The US$308 and US$307 short-term loan from a non-financial institution as of June 30, 2010 and December 31, 2009, respectively was provided by a third party company, Zhonghui. It was unsecured, interest-free and repayable on September 27, 2009. The Company is currently negotiating an extension of the term with Zhonghui. No default penalty interest is chargeable according to the loan agreement.

 

12.	AMOUNT DUE TO SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

(a)

Name and relationship of shareholders

Related party		Relationship
Mr. Liu Yu		Director and shareholder of the Company
Mr. Wang Xin		Shareholder and former director of the Company (Resigned on March 27, 2009)

(b)

Summary of balances due to shareholders and related party transactions

		June 30, 2010				December 31, 2009
		US$’000				US$’000
		(Unaudited)				(Audited)
Due to shareholders
Mr. Liu Yu			482				402
Mr. Wang Xin			2 0 8				2 09
			690				611
Bank loans guaranteed by Mr. Liu Yu			9,429				9,3 90

The amounts due to shareholders are unsecured, interest-free and repayable on demand.

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

13.	COMMITMENTS AND CONTINGENCIES

(a)	Operating lease commitments

As of June 30, 2010 and December 31, 2009, the Company had non-cancelable operating leases for its office premises, under which the expected rental payment due within the next year was US$26 and US$53, respectively.

(b)	Contingencies

Tax penalty

In accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17% of value added tax (“VAT”) upon the sales made to customers. BOXT follows the practice of reporting its revenue with VAT invoices issued to PRC tax authorities for VAT purposes.  For the six months ended June 30, 2010 and 2009, there were sales amounting to US$12,177 and US$217,623 respectively, for which VAT invoices have not yet been issued.

The sales revenue of the six months ended June 30, 2010 and 2009 was US$14,064 and US$43,056, respectively, representing US$2,391 and US$7,320 output VAT, respectively. Meanwhile, the input VAT for which the invoice had been received was US$301 and US$1,111for the six months ended June 30, 2010 and 2009, respectively. Therefore, the net VAT payable is US$2,090 and US$6,209 for the six months ended June 30, 2010 and 2009 respectively.

According to PRC tax law, only the input VAT supported with a sufficient invoice could be deducted from the current period’s output VAT.  If a purchase is made without obtaining an invoice, then the related input VAT is not allowed to be deducted.

As there is little tax payment made during the years, the accumulated VAT payable is US$23,612 and US$21,423 as of June 30, 2010 and December 31, 2009, respectively.

Furthermore, BOXT reports its revenue for PRC Enterprise Income Tax (“EIT”) purposes when VAT invoices are issued rather than when goods are delivered. All unbilled revenue will become taxable when invoices are issued.

The above practice is not in strict compliance with the relevant PRC laws and regulations in respect of VAT and EIT.  Despite the fact that BOXT has made full provision on VAT and EIT including any estimated surcharge in the consolidated financial statements, BOXT may be subject to a penalty for the deferred reporting of the above tax obligations.  The exact amount of penalty cannot be estimated with any reasonable degree of certainty.  The board of directors considers it is not probable the penalty will be imposed.

Litigation

 

There are two legal disputes with two suppliers of BOXT. Songding provides battery chargers and Baoxin provides packing materials to BOXT. The legal disputes with the abovementioned suppliers arose because the Company did not accept accessories and materials supplied by Songding and Baoxin due to quality issues. The management of BOXT determined to cease payment to Songding and Baoxin accordingly.

 

The dispute between Baoxin and BOXT commenced in arbitration initiated by Baoxin on October 2006, which was arbitrated by the Beijing Arbitration Commission on October 24, 2006. BOXT is obligated to pay Baoxin US$246. Currently, BOXT and Baoxin are in the process of the final negotiation based on the arbitration result. As such, Baoxin applied to the court for property preservation and one of BOXT’s bank accounts has been blocked accordingly. BOXT has recorded the arbitration result as an account payable to the supplier after the arbitration. The balance of account payable to Baoxin as of June 30, 2010 is US$36.

 

The resolution of the dispute between Songding and BOXT is still pending final arbitration. Songding has argued for BOXT to pay the amount of US$281 by Songding. Songding prepared the arbitration application on December 28, 2009 and applied to the court for property preservation to block the bank account of BOXT. The application was formally accepted by the Beijing arbitration commission on January 12, 2010. Since Songding applied for the property preservation to the court, one of BOXT’s bank accounts has been blocked accordingly. The balance of accounts payable to Songding as of June 30, 2010 is US$54.

 

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

Warranty

During the six months ended June 30, 2010, we made no allowance for the warranty for product problems because, during this period, post-sale services for newly-launched products were undertaken by Original Equipment Manufacturers (“OEM”) factories rather than the Company. Therefore, allowances were not made accordingly for these post-sale services.

Overdue Bank Loan

The Company currently has an overdue bank loan of US$6,903 from Beijing Rural Commercial Bank and US$2, 526 from Huaxia Bank that were loaned on June 30, 2010. The Company is negotiating an extension of the term of the loan with the banks.

 

14.	UNAPPROPRIATED RETAINED EARNINGS

The Company’s subsidiary, BOXT, was required to allocate at least 10% of its after tax profits as determined under generally accepted accounting principle in the PRC to a statutory dedicated reserve until the reserve balance reaches 50% of its registered capital. For the six months ended June 30, 2010, BOXT made appropriations to this statutory reserve of US$0 due to net loss incurred for the period. The accumulated balance of the dedicated reserve at BOXT as of June 30, 2010 and December 31, 2009 were US$1,042 and US$1,042, respectively.

 

15.	STOCK OPTIONS

On March 27, 2008, a stock option plan named the “2007 Omnibus Long-Term Incentive Plan” (the “Plan”) was approved by the board of directors. The purpose of the Plan is to promote the long-term performance goals and general prosperity of the Company. The Plan, which provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and cash awards, is designed to help the Company and its subsidiaries and affiliates attract and retain senior officers for positions of substantial responsibility and to provide non-employee directors and key employees with additional motivation and an incentive to improve the business results and contribute to the success of the Company.

On April 2, 2008, stock options to a subscribed total of 614,000 shares were granted to certain directors, senior officers and other key employees of the Company at an exercise price of US$2.26 per share. The options granted are exercisable from July 2, 2008. The expiration date of the options is April 2, 2018.

In accordance with the terms of the share-based payment arrangement, the aforementioned options were vested at the date of grant. According to a valuation report, dated August 1, 2008, issued by an independent professional appraiser, the fair value of these options was US$725, which was estimated on the date of grant using the Binomial Lattice option pricing model. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate for the effects of transferability, exercise restrictions and behavioral consideration. Compensation expense of US$725 is charged to income as the benefit was fully vested at the date of grant. Key assumptions included in the estimation are as follows:

Expected dividend yield			-
Expected stock price volatility			85.07	%
Risk free interest risk			3.61	%
Expected life of share options		10		Years

A summary of the share option plan activity during the six month period ended June 30, 2010 is presented below:

		Number of share options
		(Unaudited)
As of January 1, 2010			614,000
Granted			-
Exercised			-
Cancelled/lapsed			-
As of June 30, 2010			614,000

 

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

16.	LIABILITIES FOR POSSIBLE SETTLEMENT OF ACCOUNTS PAYABLE

Liabilities for possible settlement of accounts payable of US$4,182 arose from the provision of a penalty for unpaid accounts payable to suppliers on June 30, 2010. In the purchase contracts signed between suppliers and the Company since 2006, an agreed term between BOXT and the suppliers acknowledges that any outstanding payment which exceeds the agreed payment schedule will be imposed on an additional 0.3% per day delayed payment penalty based on the principle amount of contract liability. However, some of such purchase contracts were signed before 2006, and according to relevant PRC civil laws and regulations, if the creditors did not claim for the right in writing to the Company within two years since the date on which the liability was due, the periods of prescription will expire after two years from the date on which the liability was due. We note that in the meantime, no legal letters related to this liability (0.3% penalty arising from the outstanding payment.) were issued from our suppliers in past 4 years. However, from the point of prudence principle, we accrued this liability based on the terms of the contract. As of June 30, 2010, the Company has accrued a possible penalty for the purchase contracts signed after June 30, 2008 based on such penalty term in the amount of US$1,252,000. Such possible liability was accrued during the six months ended June 30, 2010.

 

17.	PENSION COSTS

 

As stipulated by the PRC regulations, the Company maintains a defined contribution retirement plan for all of its employees who are residents of the PRC.  All retired PRC employees of the Company are entitled to an annual pension equivalent to their basic annual salary upon retirement.  The Company contributed to a state sponsored retirement plan approximately 20% of the basic salary of its PRC employees and has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions.  The state sponsored retirement plan is responsible for the entire pension obligation payable to all employees. The pension expenses were US$2 and US$0 for the three months ended June 30, 2010 and 2009 respectively. The pension expenses were US$19 and US$29 for the six months ended June 30, 2010 and 2009 respectively.

 

18.	INCOME TAXES

 

The Company and its subsidiaries file separate income tax returns.

The United States of America

Orsus Xelent Technologies, Inc. is incorporated in the State of Delaware in the United States and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Delaware does not impose any corporate state income tax.

British Virgin Islands

OXHBVI is incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, OXHBVI is not subject to tax on income or capital gains. In addition, upon payments of dividends by OXHBVI, no British Virgin Islands withholding tax is imposed.

Hong Kong

UFI and OXTHK are incorporated in Hong Kong. UFI and OXTHK did not earn any income that was derived in Hong Kong for the six months ended June 30, 2010 and 2009 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

Effective from January 1, 2008, the PRC’s statutory income tax rate is 25%. According to prior Corporate Income Tax Law, BOXT is characterized as a “Manufacturing Foreign Invested Enterprise” and enjoyed a 5 year period of reduced taxes. In the first 2 years, the Corporate Income Tax was exempted and during the remaining 3 years, an incentive tax rate (12.5%) was provided to the enterprise. Fiscal year 2009 was the last year of the five year period of reduced taxes. BOXT has to declare and pay 25% tax rate from the year 2010.

The Company’s effective income tax rate was 0% and 13.14% for the six-month periods ended June 30, 2010 and 2009, respectively. The difference between effective tax rate and statutory tax rate primarily represented the tax effects on the non-taxable income and non-deductible expenses.

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements

 

The Company had deferred tax assets of approximately $4,359 and $4,095 as of June 30, 2010 and December 31, 2009, respectively, which arose from the allowance for doubtful accounts and the provision for liability for possible settlement to accounts payable. The Company had no other temporary differences as of June 30, 2010 and December 31, 2009.

As of June 30, 2010 and the year ended December 31, 2009, the Company and its subsidiaries did not have unrecognized tax benefits and therefore no interest or penalties related to unrecognized tax benefits were accrued. The Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 9 months.

The Company and its subsidiaries mainly file income tax returns in the United States and PRC. The Company is subject to U.S. federal income tax examination by tax authorities for tax years beginning in 2008.  According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under special circumstances where the underpayment of taxes is more than RMB100 (US$15). In the case of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The PRC tax returns for the Company’s PRC subsidiary are open to examination by the PRC state and local tax authorities for the tax years beginning in 2008.

 

19.	EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the periods presented:

 

		Six months ended June 30,
		2010				2009
		(Unaudited)				(Unaudited)
Numerator used in basic net income per share:
Net (loss)/income			(702	)			4,442
Shares (denominator):
Weighted average common shares outstanding			29,756,000				29,756,000
Plus: weighted average incremental shares from assumed exercise of warrants			-				-
Weighted average common shares outstanding used in computing diluted net income per common share			29,756,000				29,756,000
Earnings per ordinary share-basic and diluted		$	(0.024	)		$	0.15

As of June 30, 2010 and 2009, the Company had 614,000 outstanding options that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted income per share in the periods presented, as their effect would have been anti-dilutive since the exercise price of these options was higher than average market price during six months ended June 30, 2010 and 2009.

 

20.	CONCENTRATIONS AND CREDIT RISKS

At June 30, 2010, the Company had a credit risk exposure of uninsured cash in banks of approximately US $6.  To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings.

During the six months ended June 30, 2010, the Company was engaged principally in the design and trading of cellular phones to two primary distributors in the PRC.  The Company’s policy is that the sole agent arrangement gives the dealers more incentive to promote the Company’s products and reduce the Company’s exposure to the distribution market.

 

 

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Orsus Xelent Technologies, Inc.

Unaudited Condensed Consolidated Financial Statements  

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The Company buys certain major materials from one major supplier (over 63% of materials purchased). In addition, the Company subcontracts material purchasing and assembly works of cellular phones primarily to two subcontracting factories. The diversification of suppliers will reduce the risk of increasing production cost.

 

(a)

During the six months ended June 30, 2010 and 2009, the Company’s operating revenue was mainly derived from two distributors. For six months ended June 30, 2010 and 2009, 92.2% and 82%, respectively, of total revenue was derived from our largest distributor Xingwang. There were no trade deposits received from Xingwang as of June 30, 2010 and 2009. Accounts receivable from Xingwang were US$83,871 and US$75,616 as of June 30, 2010 and December 31, 2009, respectively. As mentioned in Note 5, “Accounts Receivable”, in the year 2008, a guarantee company provided a guarantee of up to US$43,829 (RMB300 million) for the accounts receivable from Xingwang for two years from the date they are due. The agreement has been renewed and re-signed as of January 20, 2010, and the guaranteed period was extended to the year ended December 31, 2010.

(c)

Suppliers accounting for over 10% of the Company’s purchases are as follows:

 

		Three months ended June 30								Six months ended June 30
		20 10				200 9				20 10				200 9
		%				%				%				%
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Supplier A			63	%			53				29	%			49
Supplier B			37	%			31				61	%			42
Supplier C							16				10	%			-
Total			100				100				100				9 1

Advances to the above suppliers were US$4,444 and US$3,815 as of June 30, 2010 and December 31, 2009, respectively. Accounts payable owed to the above suppliers were US$3,672 and US$0 as of June 30, 2010 and December 31, 2009, respectively. 

 

(c)

The Company’s revenue for the six months ended June 30, 2010 and 2009, respectively, were all derived from the PRC. Geographical information of the carrying amount of long-lived assets is as follows:

 

		30-Jun-10				31-Dec-09
		US$’000				US$’000
		(unaudited)				(audited)
PRC			162				176
Hongkong			2				2
Total long-lived assets			164				178

 

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

21.	SUBSEQUENT EVENTS

Management has considered all events occurring through August 16 , 2010, the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

 

 

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 Item 2. Management Discussion and Analysis of Financial Conditions and Results of Operations

The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.

OVERVIEW

 

 The Company was organized under the laws of the State of Delaware in May 2004 under the name “Universal Flirts Corp.” On June 1, 2004, the Company acquired all the issued and outstanding shares of Universal Flirts, Inc., a New York corporation, from its sole shareholder, Darrel Lerner, in consideration for the issuance of 8,500,000 shares of the Company’s common stock to Mr. Lerner pursuant to a stock exchange agreement between Universal Flirts Inc. and the Company. Pursuant to the stock exchange transaction, Universal Flirts Inc. became a wholly-owned subsidiary of the Company.

Pursuant to a Stock Transfer Agreement dated March 29, 2005, the Company transferred all of the common stock of Universal Flirts, Inc. to Mr. Darrell Lerner in exchange for the cancellation of 28,200,000 shares of the Company’s common stock. Immediately following the cancellation, the Company had 14,756,000 shares of its common stock outstanding.

On March 31, 2005, Universal Flirts Corp. completed a stock exchange transaction with the stockholders of United First International Limited (“ UFIL ”), a company incorporated under the laws of Hong Kong. The exchange was consummated under the laws of the State of Delaware and pursuant to the terms of the Securities Exchange Agreement dated as of March 31, 2005 (“ Exchange Agreement ”). In connection with its acquisition of UFIL, the Company authorized a 4-1 forward split of its common stock.

Pursuant to the Exchange Agreement, Universal Flirts Corp. issued 15,000,000 shares of its common stock, par value US$0.001 per share, to the stockholders of UFIL, representing approximately 50.41% of the Company’s issued and outstanding common stock, in exchange for the 20,000,000 outstanding shares of UFIL and a cash payment of US$50,000 from UFIL. Immediately after giving effect to the exchange, the Company had 29,756,000 shares of its common stock outstanding. Pursuant to this exchange, UFIL became a wholly-owned subsidiary of the Company and most of the Company’s business operations are now conducted through UFIL’s wholly-owned subsidiary, Beijing Orsus Xelent Technology & Trading Company Limited (“ Xelent ”).

 

On April 19, 2005, the Company, formerly known as Universal Flirts Corp., changed its list name to Orsus Xelent Technologies, Inc.

 

In July, 2005, a wholly owned subsidiary of Orsus Xelent Trading (HK) Company Limited (“ OXHK ”), was incorporated under the laws of Hong Kong. This subsidiary is engaged in the trading of cellular phones and accessories with overseas customers. In September 2005, OXHK commenced its Hong Kong operations to sell and distribute our cellular phone products and technical support services to customers outside the People’s Republic of China (“ PRC ”).

The business operations of UFIL are conducted through its wholly-owned subsidiary, Xelent, also known as “Orsus Cellular” within the cellular phone industry. Xelent sells its handsets and total solutions, including economically priced and fully-loaded cell phones for both Global System for Mobile communications (“ GSM ”) and Code Division Multiple Access (“ CDMA ”) platforms, to a diverse base of customers and dealers, such as ordinary users, tailored operators, and specialized users from all fields of business and government. Most of our mobile phone models are either designed by us for both our exclusive distribution and joint sales under established co-brands, or developed in conjunction with outside design firms. In February 2004, Xelent registered “ORSUS” with the PRC State Administration for Industry and Commerce as its product trademark.

 

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Many of Xelent’s cellular phone products are equipped with industry cutting-edge features such as 1.8 to 2.8-inch CSTN, TFT or QVGA dual-color display; capacity to record videos lasting one minute up to four hours; 300K to 3 million pixel photography; MP3, MPEG4 and U disk support; dual stereo speakers; e-mail messaging; multimedia messaging; 40 to 64 ring tone storage; slim bar-phone and flip-phone technology; and innovative ultra-thin lightweight design.

 

Xelent has provided its handsets to many different types of consumers in the market for GSM mobile devices. At present, the GSM mobile devices constitute a significant percentage of the sales and profit of the Company. In addition, Xelent has emphasized the development of specialized application mobile terminals in accordance with market changes and popular features. The Company has established itself in the specialized application field and made significant marketing efforts since entering the field in September 2006. Based on its evaluation of the market and the engagement proposals received from its major customers, the Company began to produce GSM model X180 in large volumes starting in April 2007, thereby taking advantage of the opportunity to establish a presence in the specialized application mobile terminal market.

 

In April 2007, the Company’s common shares were approved for listing on NYSE Amex (formerly known as the American Stock Exchange) and began trading on NYSE Amex on May 10, 2007 under the ticker symbol “ORS”. The Company's CUSIP Number is 68749U106.

The Company’s cell phone products are mainly produced through OEMs and the products were delivered from OEMs to distributors directly. The Company keeps no inventory or very limited quantity.

Business Review

The Company sold 97,000 cell phone units during the second quarter of 2010. For the three months ended June 30, 2010, the Company generated revenue of US$6,473,000, representing a decrease of 72.25% as compared to US$23,332,000 for the same period in 2009, in contrast with the entire cell phone market, the whole GSM market size was down 11.6% than last quarter and 2.2% than the second quarter of 2009. While CMDA1X market size was decline of 5.7% compared to the last quarter but an increase of 37.1% compared to the same time in 2009, as recently reported by Sino Market Research Limited. Meanwhile, the Company achieved a gross profit margin of 7.35%, a decrease of 5.89% as compared to 13.24% earned for the same period in 2009. The Company believes this decrease is due to the fact that our major customers didn’t get several large orders from their customers. The Company continued to supply feature-rich, economically-priced, mid-level and low-end products—a different strategy from that of foreign brands, which tend to have higher costs and higher output prices.

 

The Company believes there are four main influences on the current state of the cell phone market in the PRC. First, the reorganization of domestic telecommunication operators has created a lag in market demand. In particular, the market demand for high-margin products was much lower than expected, because telecom operators applied preferential service packages to low-priced cell phones in order to safeguard increases in their customer base and control costs while dealing with increased competition. Second, the major force driving current cell phone sales in the PRC is rural customers, a majority of whom tend to favor less expensive, lower-end products. This strength is expected to grow continually as the PRC government further implements its national policies to bring more home appliances to rural households. Third, it is unknown when the far-reaching international financial crisis will hit its bottom and the PRC’s economic stimulus programs have mainly focused on infrastructure projects, rather than the consumer demand. Fourth, cell phones are gradually shifting from high-tech products to fast-moving consumer goods, which, inevitably, will lead to a decrease in cell phone prices in the near future.

 

The Company is aware that the cell phone market in the PRC may continue to experience some difficulty in 2010, but it still projects that the industry will be in a better position in upcoming quarters because (a) the reorganization of PRC telecom carriers is projected to lead to market development, and (b) new 3G technology is likely to encourage market demand. With these projections in mind, the Company will continue to employ the following three operating strategies going forward:

1.

Safeguard our traditional sales channels and explore the possibility of selling more GSM cell phones in traditional markets. The Company will use its key ability to create telephone models that respond precisely to market opportunities to target customer needs.

	2.	Launch our own 3G products while telecom carriers are promoting the commercial use of 3G. Based on the relationships we have already built with the telecom carriers, we believe the Company will be able to establish a beneficial market share in this new era of the telecom industry.

 

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3.

Expand our industrial structure by consummating certain acquisitions using funds obtained from the capital markets in order to enhance our business foundation and long-term development.

In summary, the Company predicts modest decline in both sales revenues and net income during the fiscal year ending December 31, 2010.

 

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

 

The following table summarizes our operating results for the six months ended June 30, 2010 and 2009, respectively (in thousand USD):

 

		Six months ended								Six months ended
		June  30,  2010								June  30,  2009								Comparison
		(US$000)				%  of Revenue				(US$000)				%  of Revenue				(US$000)				%
Net sales			14,064				100.00	%			43,056				100.00	%			(28,992	)			(67.34	)%
Cost of sales			12,992				92.38	%			36,874				85.64	%			(23,882	)			(64.77	)%
Sales expenses			62				0.44	%			173				0.40	%			(111	)			(64.16	)%
General & administrative expenses			142				1.01	%			369				0.86	%			(227	)			(61.52	)%
Research and development expenses			9				0.06	%			28				0.07	%			(19	)			(67.86	)%
Depreciation and amortization			15				0.11	%			42				0.10	%			(27	)			(64.29	)%
Allowance for doubtful accounts			(251	)			(1.78	)%			-				-				(251	)			100.00	%
Interest expenses			(790	)			(5.62	)%			(488	)			(1.13	)%			(302	)			61.89	%
Other (expenses)/income, net			(1,252	)			( 8.90	) %			17				0.04	%			( 1,269	)			(7466.06	) %
Income before income tax expense			(947	)			(6.74	)%			5,099				11.84	%			(6,046	)			(118.58	)%
Current tax expense			-				-				(657	)			(1.53	)%			657				100.00	%
Deferred taxes benefit			245				1.74	%			-				-				245				100.00	%
Net (loss)/income			( 702	)			( 4.99	) %			4,442				10.32	%			( 5,144	)			( 115.81	) %

  

 

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		Three months ended								Three months ended
		June  30,  2010								June  30,  2009								Comparison
		(US$000)				%  of Revenue				(US$000)				%  of Revenue				(US$000)				%
Net sales			6,473				100.00	%			23,332				100.00	%			(16,859	)			(72.26	)%
Cost of sales			5,997				92.65	%			20,242				86.76	%			(14,245	)			(70.37	)%
Sales expenses			21				0.32	%			50				0.21	%			(29	)			(58.00	)%
General & administrative expenses			115				1.78	%			103				0.44	%			12				11.65	%
Research and development expenses			4				0.06	%			11				0.05	%			(7	)			(63.64	)%
Depreciation and amortization			7				0.11	%			19				0.08	%			(12	)			(63.16	)%
Interest expenses			(577	)			(8.91	)%			(266	)			(1.14	)%			(311	)			116.92	%
Income before income tax expense			(248	)			(3.83	)%			2,641				11.32	%			(2,889	)			(109.39	)%
Current tax expense		-					-				(334	)			(1.43	)%			(334	)			(100.00	)%
Net (loss)/income			(248	)			(3.83	)%			2,307				9.89	%			(2,555	)			(110.75	)%

Net sales

Our revenue was US$14,064,000 for the six months ended June 30, 2010, representing a decrease of 67.34% compared to US$43,056,000 for the same period in 2009. For the three months ended June 30, 2010, the total revenues of the Company were US$6,473,000, representing a decrease of 72.26% as compared to US$23,332,000 in the same period of 2009.

As stated in the Business Review section above, despite the global economic turmoil, we believe China's economy has begun to improve gradually. However, it seems that the economy has mainly focused on large-scale projects instead of the consumer goods markets, as the sector has experienced a much slower recovery. Under this situation, the Company continuously focuses its production and sales strategies on low-priced cell phones. However, less of 3G products and the decline of market demand for low end products led to poor sales performance of the second quarter of 2010.

Products Segment

 

For the three months ended June 30, 2010, the Company’s sales were primarily attributable to the following products:

 

Cellular		Three months ended June 30, 2010
phones model		Amount				% of total revenue
		(US$’000)
DX9188			4,025				62	%
H808			1,526				24	%
DXX9			919				14	%
Total			6,473				100	%

 

Customer Segments

For the six months ended June 30, 2010, our sales in the aggregate amount of US$14,064,000 were derived mainly from Xingwang. Xingwang has been our most important distributor for a long period of time. It is one of the largest distributors in mainland China and has sales networks in major cities across the PRC.

 

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		Three months ended June 30, 2010
		Amount				% of total Accounts
		(US$’000)				Receivable
Beijing Xingwang Shidai Tech & Trading Co., Ltd.			83,871				92	%
Tianjin Tongguang			7,102				8	%
Total			90,973				100.00	%

Gross Margin

For the three months ended June 30, 2010, gross margin was US$476,000, representing a decrease of US$2,614,000 in gross profit when compared to the same period of 2009. During this period, to cope with the global financial crisis and the increasing competition in the Chinese cell phone market, many manufacturers were involved in price wars, clearance sales and capital recalls, regardless of the losses they might suffer from in the short term. As a result, normal selling prices of products were unstable and products’ gross profits dropped severely. The Company’s gross margin for the period decreased to 7.35% as compared to 13.24% for the same period of 2009.

For the three months ended June 30, 2010, DX9188 products have contributed approximately 62% of our revenue in the quarterly financial results. Marketed at a very reasonable price, DX9188 products were sold in such a large quantity that they indeed boosted the Company’s overall gross margin for this quarter.

 

 Under the guidance of its previously planned products strategy, the Company will be focused on broadening sales channels for high-profit customized products and enhancing the existing customer base and sales channel in the traditional market. To maintain a sustainable growth in gross margin, the Company is planning to extend its product development in line with telecom operators’ requirements.

 

Selling expenses

Selling expenses mainly represent payments made to sales personnel and transportation costs.

 

For the three months ended June 30, 2010, selling expenses were US$21,000, or 0.32% of revenues, representing a US$29,000 decrease compared with US$50,000 for the corresponding period in 2009.

 

The decrease in selling expenses is created as the sales performance of second quarter of 2010 does not meet the management’s expectation.
 

Research and Development (R&D) expenses

For the three months ended June 30, 2010, R&D expenses were US$4,000, or 0.06% of revenue, representing a decrease of US$7,000 or 63.64%, compared with the numbers for the corresponding period in 2009. The significant decrease in R&D expenses was a result of the Company’s focus on more regular R&D initiatives and the fact that it did not launch full R&D projects for development of new products during the current year. This decision was considered prudent in light of the potential impact from the pending telecom industrial reorganization in the PRC.

 

General and administrative expenses

General and administrative expenses primarily consist of compensation for personnel, travel expenses, rental, materials expenses related to ordinary administration and fees for professional services.

 

For the three months ended June 30, 2010, total general and administrative expenses were US$115,000, or 1.78% of total revenues, representing an increase of US$12,000, or 11.65% as compared to US$103,000, or 0.44%, of the total revenues for the corresponding period in 2009. For the six months ended June 30, 2010, total general and administrative expenses were US$142,000, or 1.01% of total revenues, representing an decrease of US$227,000, or 61.52% as compared to US$369,000, or 0.86%, of the total revenues for the corresponding period in 2009.

 

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From the longer periods, the sharp decrease in general and administrative expenses was primarily attributable to structural adjustment, internal management control and costs reduction.

 

Interest expenses

For the three months ended June 30, 2010, interest expenses decreased by US$311,000 compared with same period in 2009. The decrease is mainly due to the Company not paying the outstanding interest expenses in a timely manner.

Other (expenses) income, net

For the six months ended June 30, 2010, other expenses accounted for US$(1,252,000). It was mainly comprised of reversals of accrued allowance for contingent liabilities that might be raised pursuant to the penalty terms of the purchasing contract.

Provision for income taxes

For the three months ended June 30, 2010, provision for income taxes decreased by US$334,000 compared with same period in 2009. The decrease is mainly attributable to a decline in taxable income.

 

Net income

 

For the six months ended June 30, 2010, our net income was US$702,000 or a net profit margin of −4.99%, representing a decrease of US$−5,144,000, or 115.81%, as compared to US$4,442,000, or a net profit margin of 10.32% in the same period of 2009. The significant decrease was mainly due to our business shrinking in the current economic downturn.

LIQUIDITY AND SOURCES OF CAPITAL

 

The Company’s business relies on few distributors. In the current economic environment, turnover days of accounts receivable due from these distributors are longer. The Company has not provided any bad debt provision to the significant accounts receivable balance considering the historically good cooperative relationship with these distributors and believes no provision is needed as of June 30, 2010.

 

The Company is discussing with those distributors to try to collect a portion of account receivable in third quarter of 2010.

The Company has limited cash and cash equivalents in hand for a long time and may obtain loans from banks to finance business operation from time to time. The Company currently has certain overdue loan from Beijing Rural Commercial Bank at June 30, 2010. The Company is negotiating an extension of the term with the bank.

 

The Company has not paid salaries and welfare to employees for certain months in 2010 due to difficulty in cash flow.

We generally finance our operations from cash flow generated internally and short-term financing from domestic banks in China.

As of June 30, 2010, we had current assets of US$96,750,000. Current assets are mainly comprised of accounts receivable of US$90,973,000, advance to suppliers of US$4,444,000, cash and cash equivalents of US$6,000, pledged deposits of US$1,295,000, restricted cash of US$4,000 and other current assets of US$28,000.

As of June 30, 2010, our current liabilities were US$59,508,000 and included short-term bank loans of US$9,429,000, short-term loan payable of US$308,000, accounts payable of US$9,229,000, accrued expenses and other accrued liabilities of US$4,263,000, trade deposits received of US$1,884,000, amounts due to shareholders of US$690,000, income taxes payable of US$5,894,000, other taxes payable of US$23,612,000 and liabilities for possible settlement to accounts payable of US$4,199,000.

 

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We offer two different trading terms to our customers: cash-on-delivery or credit terms of 45-120 days. As of June 30, 2010, our accounts receivable had increased by US$9,843,000 to US$90,973,000, as compared to US$81,130,000 on December 31, 2009. The increase in accounts receivables was mainly due to a longer turn over period in the current economic recession environment. We will pay close attention to the liquidity progress of our distributors. As previously disclosed, in order to reduce the risks of default, we have limited terms of credit to our major distributor in the Master Distributor Agreement and have the third-party guarantee company to guarantee the accounts receivable due from this major distributor.

As of June 30, 2010, our advance to suppliers was US$4,444,000, which represented a decrease of US$1,431,000 as compared with US$5,875,000 as of December 31, 2009. The decrease was primarily because the Company offsets the advance to suppliers when the goods are received properly.

As of June 30, 2010, our other current assets were US$28,000, which represented a decrease of US$1,000, as compared to US$29,000 as of December 31, 2009. There are no any significant changes between these two periods.

 

As of June 30, 2010, our accounts payable were US$9,229,000, which represents an increase of US$1,577,000, or 20.61%, as compared to US$7,652,000 as of December 31, 2009. The increase was mainly because we delayed the payment to certain suppliers to meet our working capital demand.

As of June 30, 2010, accrued expenses and liabilities were US$4,263,000, representing an increase of US$850,000 or 24.90%, compared to US$3,413,000 as of December 31, 2009. The increase was mainly due to accrued salary and accrued VAT in past period.

During this quarter, we made no allowance for warranty problems because, during this period, after-sale services for newly-launched products were undertaken by OEM factories, rather than the Company. Therefore, allowances were not made accordingly for these after-sale services.

As of June 30, 2010, income tax payable was US$5,894,000, representing an increase of US$24,000 or 0.41%, compared to US$5,870,000 as of December 31, 2009. The increase was mainly due to the foreign exchange rate change.

As of June 30, 2010, cash and bank balances were mainly denominated in Renminbi (“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated in RMB and U.S. Dollars (“USD”). The Company operations are mainly denominated in RMB.

 

It seems that the global financial crisis has made it difficult for companies to raise capital through equity financing. In order to ensure its liquidity, the Company will attempt to recover accounts receivable due from customers and to raise funds, as necessary, through loans from Chinese domestic banks.

 

CASH FLOWS

 

As of June 30, 2010, we had cash and cash equivalents of US$6,000. This represented a decrease of US$368,000 when compared with US$374,000 as of December 31, 2009. During the three months ended June 30, 2010, we had a fast moving cash flow to ensure desirable goods supplies. We made timely payments to our suppliers so that we had shortened goods supply terms to deal with the fierce competition in the cell phone market.

 

As of June 30, 2010, our aggregate short term loans were US$9,737,000, which were comprised of US$2,526,000 from Huaxia Bank, US$6,903,000 from Beijing Rural and Commercial Bank and US$308,000 from a third party company.

 

OFF BALANCE SHEET ARRANGEMENTS

As of June 30, 2010, we had no off-balance sheet arrangements.

 

Item 3.                 Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, commodity prices, equity prices and other market-driven rates or prices. The Company, in the normal course of doing business, is exposed to market risk through changes in interest rates with respect to bank loans. Aggregate bank loans as of June 30, 2010, were US$9,737,000. The interest rate for the three months ended June 30, 2010 was charged at 6.372% to 10.080% per annum.

 

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Item 4T.               Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and regulations and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Although the management of our Company, including the Chief Executive Officer and the Chief Financial Officer, believes that our disclosure controls and internal controls currently provide reasonable assurance that our desired control objectives have been met, management does not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Changes in Internal Controls over Financial Reporting

 

There were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

PART II – OTHER INFORMATION
 

Item 1.                  Legal Proceedings.

 

We are party to certain litigation/arbitration with regards to amounts payable to suppliers for which the Company was not satisfied with the quality and timing of the goods supplied. However, the amount in question is not material to the Company and we believe that such litigation/arbitration will not have a material adverse effect on us or our business and that we will be able to resolve these issues through further business negotiations.

 

Item 1A.               Risk Factors.

 

Not required.

 

Item 2.                  Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a)           None.

 

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(b)           Not applicable.

(c)           None.

 

Item 3.                  Defaults Upon Senior Securities.

 

None.

Item 4.                  Removed and Reserved.

Item 5.                  Other Information.

 

(a)           None.

(b)           There were no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors during the fiscal quarter ended June 30, 2010.

 

Item 6.                  Exhibits.
 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

Exhibit Number		Exhibit Description
3.1		Certificate of Incorporation of Orsus Xelent Technologies, Inc. (incorporated by reference from Exhibit 3.1 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on July 28, 2004 as amended by that Plan of Merger and Agreement of Merger attached as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on April 20, 2005)
3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007, as amended by the Current Report on Form 8-K filed with the SEC on March 5, 2007)
4.1		Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to Amendment 2 to the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on October 19, 2004)
10.1		2007 Omnibus Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2008)
10.2		Master Distributor Agreement, dated as of August 7, 2008, by and between Beijing Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2008)
31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1		Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2		Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 *

* Filed herewith

 

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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/ Guoji Liu
	Guoji Liu
	Chief Executive Officer
By:	/s/ Hua Chen
	Hua Chen
	Chief Financial Officer

 

DATED: August 16, 2010

 

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INDEX TO EXHIBITS
 

Exhibit Number		Exhibit Description
3.1		Certificate of Incorporation of Orsus Xelent Technologies, Inc. (incorporated by reference from Exhibit 3.1 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on July 28, 2004 as amended by that Plan of Merger and Agreement of Merger attached as Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on April 20, 2005)
3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2007, as amended by the Current Report on Form 8-K filed with the SEC on March 5, 2007)
4.1		Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to Amendment 2 to the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on October 19, 2004)
10.1		2007 Omnibus Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2008)
10.2		Master Distributor Agreement, dated as of August 7, 2008, by and between Beijing Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2008)
31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1		Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2		Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 *

* Filed herewith

 

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