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EX-23.1 - Orsus Xelent Technologies Inc | v181109_ex32-1.htm |
EX-21.1 - Orsus Xelent Technologies Inc | v181109_ex21-1.htm |
EX-31.2 - Orsus Xelent Technologies Inc | v181109_ex31-2.htm |
EX-31.1 - Orsus Xelent Technologies Inc | v181109_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2009
o 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
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20-1198142
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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29th 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)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, par value $0.001 per share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. Yes o No x
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 o
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 (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o
No x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
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 o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of June 30, 2009, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $11,465,298 based on the closing
price as reported on the American Stock Exchange.
There
were a total of 29,756,000 shares of the registrant’s Common Stock, par
value $0.001 per share, outstanding as of April 15, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
PART
I
Item
1.
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Business.
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Except as
otherwise indicated by the context, references to “we,” “us,” “our,” or the
“Company” in this Annual Report are to the combined business of Orsus Xelent
Technologies, Inc. and its wholly-owned subsidiaries, including its operating
subsidiaries, United First International Limited, Beijng Orsus Xelent Tech&
Trading Company (“Xelent”), Orsus Xelent Holdings (BVI) Limited and Orsus Xelent
Trading (HK) Company Limited.
Introduction
On March
31, 2005, we completed a stock exchange transaction (“Exchange Transaction”) with
the shareholders of United First International Limited (“UFIL”), a company
incorporated under the laws of Hong Kong. The Exchange Transaction
was consummated under Delaware law and pursuant to the terms of that certain
Securities Exchange Agreement dated effective as of March 31, 2005 (“Exchange
Agreement”).
Pursuant
to the Exchange Agreement, we issued shares of our common stock to the
shareholders of UFIL in exchange for
100% of the outstanding capital stock of UFIL and UFIL became a wholly-owned
subsidiary of the Company. We carry on our business through UFIL’s
wholly owned subsidiary, Xelent.
Description
of Business
Since May
of 2003 we have, through the operations of Xelent, been engaged in the business
of designing, and distributing economically priced cellular phones for retail
and wholesale distribution. We outsourced manufacturing to third
party factories. In February 2004, Xelent registered "ORSUS" with the
State Administration for Industry and Commerce in the People’s Republic of China
(“PRC”) as its product
trademark. The Company 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. Between April 2004
and the end of 2009, we have sold over 3.75 million mobile phones.
Our
cellular phones are equipped with many cutting-edge features such as 1.8 to
2.8-inch CSTN (Color Super Twisted Nematic) and TFT (Thin Film Transistor)
dual-color displays; capabilities for up to 160 minutes of video recording and
up to 3 million pixel photography; Moving Picture Experts Group Audio Layer III
(“MP3”), Moving Picture
Experts Group Audio Layer IV (“MPEG4”) and Universal disk
(“U disk”) support;
dual stereo speakers; e-mail and multimedia messaging; between 40 and 64
polyphonic ring tones; slim bar-phone and flip-phone technology with ultra-thin
lightweight design; and handwriting and PDA functions – all at low to moderate
price points.
The
Company has established an industrial design department for the purpose of
developing proprietary mobile phones that will be attractive to our PRC
customers. Most of the mobile phones we design are for the Company’s
exclusive sale and distribution; the remainder are developed in conjunction with
outside design firms. The long-term partners and manufacturers we
employ to produce our cell-phones and accessories are the same
experienced Original Equipment Manufacturer (“OEM”) plants used by
global brands like Motorola, Nokia and Ericsson. Our current operations include
the outsourcing of manufacturing and customization, oversight of production and
quality control at our OEM factories, and coordination of the distribution of
our products to retailers and customers. In an effort to reduce our reliance on
third-party manufacturers, we plan, eventually, to acquire a factory that will
give us the capacity to produce our own phones and accessories.
The
market for cellular phones in the PRC for has continued to expand and we have
taken advantage of that expansion with our 2.5G wireless products. As the new
Third Generation (“3G”)
standard matures, we anticipate producing 3G products as well. Our 3G
products will be developed based on our own research as well as the knowledge we
have gained from our cooperative efforts with strategic partners in the
industry.
Organizational
Structure
The
Company has a linear organizational structure comprised of nine separate
departments that have been developed to ensure proper project management and
control. The departments are:
1
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·
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Project
Management Department, which is responsible for coordinating the
management of cellular phone projects, exchanging concepts and ideas with
our research and development team, providing weekly project reports and
supervising project schedules;
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·
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Technology
Support and Quality Control Department, which is responsible for providing
technical support for our software and hardware designs, checking and
auditing our industrial and mechanical designs (“ID/IM”), and assisting
with tooling engineering and quality control during mass
production;
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·
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Business
Management Department, which is responsible for purchasing materials;
managing supply chains; coordinating Company business; and evaluating and
signing business agreements, contracts, and other documents for our
business partners;
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·
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Planning
and Finance Department, which is responsible for overall accounting
matters including oversight of accounting methods and processes, managing
expenses, auditing Company records, and compiling financial plans and
monthly/quarterly/yearly budgets and financial
statements;
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·
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Human
Resources Department, which is responsible for managing our
employment-related matters, including hiring and termination of
staff;
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·
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Financing
and Investment Department, which is responsible for overall accounting and
financial matters as well as investment research and
analysis;
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·
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Customer
Service Department, which is responsible for facilities maintenance;
ordering spare parts; authorized network management; after-sale data
analysis and service charge fees return; operating a hotline service
center and customer service training center; and providing technical
support and after-sale service quality assurance
systems;
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·
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Research
& Development (“R&D”) Department,
which is responsible for researching new mobile phone models and
developing new technologies; and
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Marketing
Development Department, which is responsible for helping the Company to find new
business partners who will act as countryside distributors, provincial dealers,
and/or overseas wholesalers. The Marketing Development Department
also helps the Company’s long-term partners to establish market campaigns and
business models that incorporate the Company’s products.
Market
Overview and Strategic Partners
In 2006,
about 35% of the population of the PRC subscribed to a mobile phone service.
According to statistics issued by the PRC’s Ministry of Information Industry, by
July 23, 2007, that figure had increased by almost 40 million to approximately
502 million mobile subscribers, representing about 38% of the PRC’s
population. Nokia, currently the industry’s most competitive mobile
manufacturer and supplier, has estimated that there will be about 630 million
mobile phone service subscribers in the PRC by 2010.
According
to In-Stat, a market research service provider, 165 million multimedia
phones will be sold in the PRC by 2011, representing a market penetration rate
of 81%. Around 70% of the current owners of music phones and camera
phones in the PRC express strong interest in more high-end equipment. And,
because PRC mobile users show a strong preference for combined MP3
players/mobile phones, phone makers targeting PRC customers are likely to focus
on producing these types of phones in the future.
Despite
these projections, data from 2009 captured in the charts below show that
development of the cellular phones industry in the PRC has been maintaining a
modest growth level for the whole of 2009. This is probably the
result of the global economic recovery as well as restructuring among the PRC
telecom carriers during this period.
The below
data is market size of fiscal year 2009. (The end-users developed.)
(Data in
thousands)
Jan
2009
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Feb
2009
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Mar
2009
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Apr
2009
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May
2009
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Jun
2009
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Jul
2009
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Aug
2009
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Sep
2009
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Oct
2009
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Nov
2009
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Dec
2009
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|||||||||||||||||||||||||||||||||||||
GSM
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||||||||||||||||||||||||||||||||||||||||||||||||
Market
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12,945 | 11,192 | 11,023 | 10,022 | 11,453 | 10,074 | 10,995 | 12,337 | 11,686 | 13,628 | 10,879 | 10,815 | ||||||||||||||||||||||||||||||||||||
Size
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||||||||||||||||||||||||||||||||||||||||||||||||
CDMA
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||||||||||||||||||||||||||||||||||||||||||||||||
Market
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1,876 | 2,122 | 2,740 | 2,504 | 2,012 | 2,010 | 2,178 | 2,409 | 2,874 | 2,676 | 2,700 | 3,427 | ||||||||||||||||||||||||||||||||||||
Size
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||||||||||||||||||||||||||||||||||||||||||||||||
Total
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||||||||||||||||||||||||||||||||||||||||||||||||
Market
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14,822 | 13,313 | 13,763 | 12,526 | 13,465 | 12,083 | 13,173 | 14,746 | 14,559 | 16,304 | 13,579 | 14,242 | ||||||||||||||||||||||||||||||||||||
Size
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Source:
SINO Market Research March 2010
On
February 26, 2006, the TD-SCDMA technology standard was officially announced as
the Third Generation (“3G”) standard in the
PRC. However, sales of 3G products have not developed as rapidly as
was generally anticipated (it was thought that 3G network construction and
issuance of 3G licenses would be approved by the end of 2006) and telecom
operators are having to keep trying to promote the 3G network’s commercial
utility. In the meantime, the Company has started developing our own
3G cellular phone products based on our existing technologies as well as
resources we have as a result of our cooperation with 3G solution and chips
providers. We are working towards obtaining 3G manufacturing licenses
from the PRC government and are planning to join the TD-SCDMA Industry
League.
Our
relationships with strategic partners including CEC Mobile Co., Ltd. (“CECM”), Beijing Xingwang
Shidai Tech & Trading Co., Ltd. (“XWSD”), and CECT-Chinacom
Communications Co., Ltd. (“CECT-Chinacom”) have helped
us increase our share of the cellular phone market in the PRC. CECM
manufactures our cellular phone products and also resells our products to its
provincial and national sales distributors and dealers through its own sales
network, thereby expanding our avenues for distribution. XWSD, another one of
our major agents, sells our cellular phones to provincial distributors, city
distributors, and dealers.
The
Company has maintained a modest sales level since the launch of our
first mobile phones in April 2004. The designs of our mobile phones
continue to reflect our consideration and understanding of the habits and tastes
of our customers in the PRC. For instance, our products incorporate
features that are popular in the PRC such as overlapped dual screens, powerful
color messaging, and photography capabilities. The Company’s products
are, and have always been, low and moderately priced, but of high quality. On
November 23, 2004, the premier consulting firm, CCIDNET Information Technology
Co., Ltd. granted the “2004 Prize for the Most Potential Wireless Terminal” to the Company’s mobile
phone model OS70 during its Annual Exhibition in the PRC. At the same
exhibition, our M62 model was awarded the “2004 Prize for the Most Fashionable
Wireless Terminal” in the high performance category. These awards are evidence
of public and industry appreciation and acceptance of the Company’s mobile
phones.
Building
on our success in 2004, the Company began to focus on our R&D efforts and
expand our sales channels. In 2005, the Company added various
multimedia features to our products in response to changes in consumer
preferences; the multimedia phones showed strong sales. We also
developed super-thin mobile phones which sold even more successfully than our
multimedia phones. We positioned ourselves well for the introduction of “smart
mobile” phones in 2007, partly because of a Letter of Intent for mobile
subscriptions that we executed with Unicom Huasheng, a wholly-owned subsidiary
of China Unicom. In 2008, we successfully launched products that are
adaptable to China Mobile Media Broadcasting (“CMMB”). In 2009, we will
continue to develop our product sales channels, cooperate with domestic mobile
operators, and focus our efforts on technology for business functions such as
embedded Global Positioning Systems (“GPS”), PUSH Mail, and
products related to information safety.
Description
of Products and Services
Since
2007, Xelent has developed and launched nearly 30 cellular phone
models. We outsource the manufacturing of our products to
unaffiliated third parties. Once our products are manufactured, they are
delivered to a network of unaffiliated national sales distributors (see Description of Current Business -
Market Overview and Strategic Partners) and dealers who, in turn,
distribute our products to provincial sales distributors and dealers who
distribute our products to retailers throughout the PRC.
2
The
Company established itself in the PRC mobile phone market with the introduction
of the first wristphone that combined wrist watch and mobile phone. Then, in
response to a rapid increase in demand for color screen mobile products in the
PRC, we produced single color dual screen mobiles (models F16 and F18), and a
dual screen multi-color screen mobile (model FG25). In response to
customer preferences, we also equipped models F16 and F18 with cameras, laying
the foundation for our R&D on camera and video functions and the
introduction of many models of 300,000 pixel camera mobile products, including
models FG830, FG850, OS83, OS85, OS70, OS86 and M851. We also met consumer
demand with our launch of the 1M camera mobiles, models OSM62 and OSM72, which
reflected a simple design style with multiple functions. We followed these early
successes with many more models of multimedia mobiles, such as K600, X188 and
D8120. In 2007 we launched our X180 mobile information terminals to
meet the market’s demand for information office products, providing swift and
convenient mobile terminal products for industrial application and specific
customers, such as China Unicom. In addition to the products listed
above, we have also developed many models of GSM/GPRS mobiles, including models
N3200 and H8801. In 2009, T303 and X780 ranked as our best selling
models, contributing 15.6% and 17.2% respectively, to our total sales revenue of
US$77,392 for the year. (by volume)
To meet
changing market demands, we will continue to introduce economically-priced, high
performance products that reflect our advantages in appearance, design, and
functional development and will continue to strengthen our competitiveness in
the domestic PRC mobile sector.
Research
and Development (R&D)
Our
R&D Department is responsible for researching new products and securing new
technologies. It has made significant contributions to the Company's
ability to adapt our overall strategies and operations to market demand, sustain
advanced product development, and, most importantly, enhance the technical
strength that lies at the core of the Company’s competitiveness in the market.
Most of our patented models and samples are developed exclusively by our R&D
Department. Some of our most innovative products include the first
telecommunications terminal to fully support the CDMA2000-1X protocol; the first
wrist watch style wireless mobile phone; the first mobile phone made in the PRC
using three-color OLED organic EL secondary display with TFT main display; the
first mobile phone made in the PRC supporting four frequencies
(850/900/1800/1900MHz); the first mobile phone made in the PRC with 64
polyphonic melodies; the first mobile phone supporting a USB interface and 16M
flash U-disk (NAND-FLASH); and the first mobile phone made in the PRC with an
internal 300K camera, Ultra-red, EMS, MMS, JAVA and USB. At the
Annual Conference on Network Application Technology held by CCID in Beijing in
November 2004, our Model M62 received the Most Fashionable Cell Phone of 2004
award and our Model OS70 won the Best Potential of 2004 award.
While 3G
technology is becoming the mainstream in the PRC, we anticipate developing our
own 3G cellular phones based on Company R&D efforts as well as cooperative
development efforts with our strategic industry partners. We plan to
develop products that will operate with the TD-SCDMA and WCDMA standards and
have established a technology development team that includes members of our
product planning division, project management division and industrial design
center. Our product planning division is responsible for constructing our
medium-term strategic plans and setting up schedules for our research and
development projects. Our project management division administers our R&D
efforts, oversees manufacturing and quality control of our products, and
monitors costs, including human resources costs. Our industrial design center is
responsible for evaluating design plans provided by the R&D Department or by
third party industrial design companies, confirming model configurations and
supervising module production and quality.
Additionally,
we have continued to negotiate with several parties to prepare for the launch of
3G services in the PRC next year. These parties include foreign 3G
technology providers such as Spreadtrum Communication (Shanghai) Inc. (“SCI”), and several 3G chipset
and solution providers. Our strategic partners, such as SCI, develop
2.5G and 3G integrated circuits and provide 2.5G GPRS and 3G TD-SCDMA chipset
and software development platforms and solutions. The Company
believes our negotiations with these 3G technology providers and our cooperation
with other companies on future R&D projects will help facilitate our entry
into the 3G wireless market.
We also
have agreements to cooperate with professional design houses such as Shanghai
Huntel Technology Limited and Tranzda Wireless, with whom we work mainly on the
design of MMI (“U2”),
software and hardware testing, China Type Approval (“CTA”) certification,
acquisition and
phone main board updating, and software
adaptability testing. We are also working with partners such as
Dalian Daxian Telecom Co., Ltd. on matters related to industrial and mechanical
design, including the layout of cellular phone main boards. Whenever
possible, we use and lease the instruments and equipment of other professional
design houses rather than purchasing it ourselves. In the area of software
compiling, testing, and updating, we utilize data cables and computers installed
with professional software in a testing environment. All the computers and data
cables are owned by Xelent.
3
In
general, PRC cellphone manufacturers mainly conduct their research and
development based on existing chip functions, a fact which is reflected in the
forms of applications chosen and interface-level development. Both
application-level and interface-level development are categorized as development
of adaptability systems - only protocol stack and source procedure development
is recognized as software development. Therefore, there is no exclusive right or
limited use of any such systems for these manufacturers, including the
Company.
Competition
The
Company faces substantial competition from other wireless phone manufacturers
such as Nokia, Samsung, and Motorola, who, together, controlled more than half
of the PRC cellular market in 2009. In addition, we face competition
from the domestic cellular phone producers, such as Tianyu, Huawei, Lenovo and
ZTE, who controlled 4.7%, 4.4%, 4.3% and 2.9%, respectively, of the cellular
market in the PRC in 2009. (From Sino Market Research, March 2010.)
In
addition to trying to increase inventory sales and turnover, the Company will
continue to pursue its two-year growth strategy, which we believe will result in
sound increases in profits and revenues. We also want to launch our
own 3G products as soon as possible in order to offer products that meet
consumer demands before our competitors. Because the 3G market is
virtually wide open and other companies have not yet developed many 3G products,
once we develop our own 3G phones, we anticipate being able to secure our share
of the market.
Government
Regulation
There are
limited government regulations that have material effects or create restrictions
on Xelent; neither are there judicial orders, writs, judgments, injunctions,
decrees, determinations or binding awards against Xelent. One
exception is that cellular manufacturers in the PRC are responsible for repair,
replacement and return of cellular phone to customers within the warranty period
in accordance with certain PRC rules and regulation.
The PRC’s
cellular phone industry is one of the most advanced in the world. It
has a huge customer base and an established network of manufacturers,
distributors, and service providers. The PRC government does not
promulgate policies that obstruct entry into the market or regulate it
heavily. We expect this relatively free market situation to continue
and do not expect government policies to adversely impact the development of our
industry.
Intellectual
Property and Proprietary Rights
Xelent
has been approved to use “”as a registered trademark
and the China Trademark Agency has distributed a “Notification of Acceptance” of
the trademark with serial number ZC3878232SL. Xelent has also applied to use
“Proxlink” as a trademark and the Company expects that Proxlink will become a
registered trademark following the customary two year waiting period, as
verified by the China Trademark Agency.
In
accordance with the governing laws and regulations of the PRC, we utilize the
intellectual property of our strategic partners pursuant to our contracts and
agreements with these partners.
Employees
We have
26 employees. Of the 26 employees, 6 people serve in management related
capacities. All employees are located in nine departments: the
Project Management Department employs 2 people, the Technology Support and
Quality Control Department employs 3 people, the Business Management Department
employs 3 people, the Planning and Finance Department employs 4 people, the
Human Resources Department employs 2 people, the Financing and Investment
Department employs 2 people, the Customer Service Department employs 5 people,
the R&D Department employs 2 people, and the Marketing Development
Department employs 3 people.
4
We
believe the Company has a good relationship with our employees and there are no
collective bargaining arrangements in place.
Item
1A.
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Risk
Factors.
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You
should carefully consider the following risks and the other information set
forth elsewhere in this Current Report. If any of these risks occur,
our business, financial condition and results of operations could be adversely
affected. As a result, the trading price of our common stock could
decline, perhaps significantly.
Loss
of significant or major customers could hurt our business by reducing our
revenues and profitability.
Our
success depends substantially upon retaining our major clients. We cannot
guarantee that we will be able to retain long-term relationships or secure
renewals of short-term relationships with our significant clients in the
future. For the twelve months ended December 31, 2009, we had one
major customer: Beijing Xingwang Shidai Tech & Trading Co., Ltd.,
which was responsible for over 90.6% of our revenues. We have developed and
enhanced our relationship and positioned ourselves for long-term cooperation
with them by taking the following steps:
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·
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assisting
the company in coordinating its sales channels and
carriers;
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·
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ensuring
that the company received high performance products at the specified
prices; and
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·
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responding
to feedback from the company’s customers regarding our products by
adjusting our product lines to better suit their customers’
needs.
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Competition
from providers of similar products and services could materially adversely
affect our revenues and financial condition.
The
industry in which we compete is highly competitive, fragmented, and driven by
consumer preferences for quickly-evolving technologies. Our competitors include
both international brands like Nokia, Motorola, and Samsung, and domestic brands
like Lenovo, Tianyu, Oppo, Changhong and Gionee, among others. We believe
competitors in the cell phone industry compete on the following main factors:
effective marketing and sales, brand recognition, product quality, product
placement and availability, niche marketing and segmentation. We
expect competition to intensify in the future due to the increased number of
competitors and other factors discussed below. Other companies, foreign and/or
domestic, may also enter the PRC market with better products or services,
greater financial and human resources and/or greater brand recognition than our
Company. Competitors will also continue to improve and expand their current
product lines and introduce new products to market. We can make no
assurances that we will be able to compete effectively or that we will have the
resources needed for the technical innovation, business development, advertising
and marketing that are necessary to compete effectively and build awareness of
our brand. Staying competitive will require substantial human and capital
resources from the Company. We may also have to continue to rely on
strategic partnerships for critical branding and relationship leverage; there is
no guarantee these partnerships will prove sufficient. We cannot assure that the
Company will have enough resources to make these investments or that we will be
able to achieve the technological advances necessary to remain
competitive. Increased competition may result in price reductions,
lower gross margins, and/or loss of market share. Failure to compete
successfully against current or future competitors could have a material adverse
effect on the Company’s business, operating results and financial
condition.
We
depend on key personnel for the success of our business. Our business may be
severely disrupted if we lose the services of our key executives or employees or
fail to add new senior and mid-level managers to our management
team.
Our
future success depends heavily on the continued service of our key executives.
Our future success is also dependent upon our ability to attract and retain
qualified senior and middle managers to our management team. If one or more of
our current or future key executives or employees is unwilling or unable to
continue in their present positions, it may be difficult to replace them, and
our business may be severely disrupted. In addition, if any of our key
executives or employees joins one of our competitors or forms a competing
company, we could lose customers and/or suppliers and incur additional expenses
to recruit and train replacement personnel. Each of our executive
officers has entered into an employment agreement with us.
5
We also
rely on a number of key technology staff to operate our Company. Given the
competitive nature of our industry, the risk of key technology staff leaving our
Company is fairly high and could disrupt our operations.
We
rely on a third party production center.
We use a
third party production center to manufacture our products. Should we be required
to use a different production center, our costs could be negatively
affected.
The
acquisition of a manufacturing facility is costly and such acquisition may not
enhance our financial condition.
The
process of identifying and consummating the acquisition of our own manufacturing
facility could require substantial amounts of cash, which may require issuing
new securities, thereby diluting the interests of existing
stockholders. Acquiring a manufacturing facility could also expose
the Company to potential liabilities, some of which may not be disclosed by the
seller. In addition, even if we are successful in acquiring a
manufacturing facility, there are no assurances that owning it will enhance our
future financial condition. And, to the extent that the business
acquired does not remain competitive, some or all of the goodwill related to
that acquisition could be charged against our future earnings, if
any.
Any
acquisitions we undertake could be difficult to integrate, disrupt our business,
dilute stockholder value, and harm our operating results.
We plan
to review opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our markets and sales
channels, enhance our technical capabilities, or otherwise offer growth
opportunities. If we make any future acquisitions, we may issue stock, thereby
diluting existing stockholders’ percentage of ownership in the Company; incur
substantial debt; or assume contingent liabilities.
Our
experience in acquiring other businesses and technologies is limited. Potential
acquisitions also involve numerous risks, including:
|
·
|
problems
integrating the purchased operations, technologies, products, or services
with our own;
|
|
·
|
unanticipated
costs associated with the
acquisition;
|
|
·
|
diversion
of management’s attention from our core
businesses;
|
|
·
|
adverse
effects on existing business relationships with suppliers and
customers;
|
|
·
|
risks
associated with entering markets in which we have no or limited prior
experience;
|
|
·
|
potential
loss of key employees and customers of purchased
organizations;
|
|
·
|
increased
costs and efforts required for compliance with Section 404 of the
Sarbanes-Oxley Act; and
|
|
·
|
risk
of impairment charges related to potential write-downs of assets acquired
in future acquisitions.
|
Our
acquisition strategy entails reviewing and potentially reorganizing acquired
business operations, corporate infrastructure and systems, and financial
controls. Unforeseen expenses, difficulties, and delays frequently encountered
in connection with rapid expansion through acquisitions could inhibit our growth
and negatively impact our profitability. We may be unable to identify suitable
acquisition candidates or to complete the acquisitions of candidates that we
identify. In addition, we may encounter difficulties in integrating the
operations of acquired businesses with our own operations or managing acquired
businesses profitably without substantial costs, delays, or other operational or
financial problems.
6
Rapid growth and a rapidly changing
operating environment may strain our limited resources.
We will
need to increase investment in our technological infrastructure, facilities, and
other areas of operations, especially in the area of product development. If we
are unable to manage our growth and expansion effectively, the quality of our
products and services and, in turn, our customer support, could deteriorate and
cause our business may suffer. Our future success will depend on, among other
things, our ability to:
|
·
|
continue
to develop technologies that attract PRC
consumers;
|
|
·
|
continue
to train, motivate, and retain our existing employees and attract and
integrate new employees, including our senior managers, most of whom have
been with the Company for less than three
years;
|
|
·
|
develop
and improve our operational, financial, accounting and other internal
systems and controls, and
|
|
·
|
maintain
adequate controls and procedures to ensure that our periodic public
disclosures under applicable laws, including U.S. securities laws, are
complete and accurate.
|
Unless
we are able to take advantage of technological developments on a timely basis,
we may experience a decline in a demand for our services or may be unable to
implement our business strategy.
Our
industry is experiencing rapid change as new technologies are developed that
offer consumers an ever-expanding number of ways to meet their communications
needs. In order to grow and remain competitive, we will need to adapt to future
changes in technology, enhance our existing products, and introduce new products
that address our customers’ changing demands. If we are unable to continue
developing products that compare favorably to the products of our competitors in
terms of technology either on a timely basis and/or at acceptable costs, we
could lose customers to our competitors. Technological advances including the
introduction of new products, new designs, or new manufacturing techniques could
render our inventory obsolete or shift demand into areas in which we are not
currently engaged. If we fail to adapt to these types of changing conditions in
a timely and efficient manner, our revenues and profits would likely decline. To
remain competitive, we must continue to incur significant expenses for product
development, equipment, and facilities, and other capital investments. These
costs may increase, resulting in greater fixed costs and operating expenses. As
a result, we could be required to expend substantial funds for and commit
significant resources to the following: research and development required to
update existing and potential products; additional engineering and other
technical personnel; advanced design, production and test equipment;
manufacturing services that meet changing customer needs; and technological
changes in manufacturing processes. Our future operating results will depend to
a significant extent on our ability to continue to provide new products that
compare favorably to those of our competitors in terms of time to market, cost,
performance, design, and quality of manufacturing. Should our
production costs increase, failure to increase our net sales in a way sufficient
to offset these cost increases would reduce our profitability.
Our
research and development efforts may not lead to successful development of
commercially viable or acceptable products, which could cause a decline in
customer use of our products.
The
markets in which we compete are characterized by:
|
·
|
rapidly
changing technology;
|
|
·
|
evolving
industry standards and transmission
protocols;
|
|
·
|
frequent
improvements in products and services;
and
|
|
·
|
fierce
competition from well-funded and technologically advanced
companies.
|
7
To
succeed, we must continually improve our current products and develop and
introduce new or enhanced products that adequately address the requirements of
our customers and are competitive in terms of functionality, performance,
quality, and price. We are currently developing new 3G products, however, our
research and development efforts may not lead to any new or enhanced products or
generate sufficient market share to justify commercialization. 3G is
a new and evolving technology and we may not be able to recoup our research and
development costs and expenses or may not be able to serve our customers’ 3G
needs, leading customers to purchase competitors’ products instead of our
own.
Changes
in industry standards and technologies, customer preferences and government
regulation could limit our ability to sell our products.
The
mobile phone market is characterized by changing consumer demands for cellular
telephone functions and applications, rapid product obsolescence and price
erosion, intense competition, evolving industry standards, and wide fluctuations
in product supply and demand. These factors require us to continuously develop
new products and enhance our existing products to stay
competitive. In order to encourage widespread market adoption of 2G,
2.5G, 2.75G and 3G technologies, efforts have been made to develop industry
standards, and we have designed our products to comply with these standards.
Changes in industry standards, or the development of new industry standards, may
make our existing products obsolete or negate the cost advantages we believe we
have in our products.
Our
business, operating results, financial condition, and cash flows could be
adversely affected by declining demand for our existing products; the
introduction of products and technologies by our competitors that serve as
replacements, substitutes, or improvements over our existing products;
technological innovations or new standards that our existing products do not
address; or an inability to release enhanced versions of our existing products
on a timely basis. We have begun to offer products based on the 3G standard
promoted by the PRC government, and are focusing a significant portion of our
product design and sales and marketing efforts on products that comply with this
standard. We also are devoting significant resources to the
development of solutions that will support either the 2.5G or 2.75G wireless
standards. If the wireless standards for which we are developing products are
not widely adopted by the market, we may not be able to sell these 2.5G and
2.75G-oriented products and our revenue could decline. Because it is not
practicable to develop products that comply with all of the current standards
and standards that may be adopted in the future, our ability to compete
effectively will depend on our success at selecting the industry standards that
will be widely adopted by the market and designing our products to support those
standards. We may be required to devote significant expenses to redesigning our
products in order to address relevant standards. We may not have the financial
resources to fund future innovations. If our products do not meet relevant
industry standards that are widely adopted for a significant period of time, our
revenue would decline, adversely affecting our operating results, and future
prospects.
If the PRC’s wireless communication
sector does not maintain its current pace of growth, or the PRC government does
not issue the Company a 3G license in the near future, the profitability and
future prospects of our business and our liquidity could be materially and
adversely affected.
Our
future success depends on the continued growth of the PRC wireless communication
industry. A slowdown in the development of the wireless communication industry
in the PRC or reduction in our customers’ expenditures on mobile phone products
and services may reduce market demand for our products and services.
Alternatively, if the PRC government or other relevant regulatory authorities
fail to allow construction of new wireless communication networks, or decide to
terminate, delay or suspend construction or extension of new or existing
wireless communication networks, the profitability and future prospects for our
business could be materially and adversely affected.
The third
generation wireless communication, or 3G, network deployment will require
significant capital investment by PRC telecommunication operators, including
investments in wireless coverage products and services, RF parts and components
and wireless communication systems. Therefore, we believe that issuance of 3G
licenses will in general have a positive impact on the growth of our business.
Until we receive our 3G license from the PRC government, the expected return on
our investments in 3G technology is uncertain. Continued delay in the issuance
of 3G licenses will negatively impact our business growth and
liquidity.
8
Our ability to generate revenues
could suffer if the PRC market for cellular phones does not develop as
anticipated.
The
market for cellular phones in the PRC has evolved rapidly over the last four
years with the introduction of new products, development of consumer
preferences, market entry by new competitors, and adaptation of strategies by
existing competitors. We expect each of these trends to continue, and we must
continue to adapt our strategy to successfully compete in this market. It is
extremely difficult to accurately predict consumer acceptance of and demand for
both existing and potential technologies and services; neither can we know what
the future size, composition, or growth of this market will be.
We may not be able to adequately
protect our intellectual property, and we may be exposed to infringement claims
by third parties.
We rely
on the restrictions on disclosure contained in our business contracts to protect
our intellectual property rights. Monitoring unauthorized
use of our information services is difficult and costly, and we cannot be
certain that the steps we take will effectively prevent misappropriation of our
technology and content. In the future, our management may
decide to apply for copyright, trademark or trade secret protection if
management determines that such protection would be beneficial and
cost-effective for the Company.
From time
to time, we may have to resort to litigation to enforce our intellectual
property rights, which could result in substantial costs and diversion of our
resources. In addition, third parties may initiate litigation against us for
alleged infringement of their proprietary rights. In the event of a successful
infringement claim and our failure or inability to develop non-infringing
technology or content or to obtain a license for the infringed or similar
technology or content on a timely basis, our business could suffer. Moreover, if
this situation were to arise, even if we were able to license the infringed or
similar technology or content, license fees we would have to pay to licensors
could be substantial or even economically unfeasible.
Our
products may be subject to counterfeiting and/or imitation, which could harm our
business and our competitive position.
We cannot
guarantee that counterfeiting or imitation of our products will not occur in the
future or, if it does occur, that we will be able to detect it and deal with it
effectively. Any counterfeiting or imitation could negatively impact our
corporate and brand image. In addition, counterfeit or imitation products could
result in a reduction in our market share, a loss in revenue, or an increase in
our administrative expenses due to costs associated with detection or
prosecution.
We have limited business insurance
coverage.
The
insurance industry in the PRC is still at an early stage of
development. Insurance companies in the PRC offer limited business
insurance products, and do not, to our knowledge, offer business liability
insurance. As a result, we do not have any business liability insurance coverage
for our operations. Therefore, any business disruption, litigation or
natural disaster could result in substantial costs and diversion of Company
resources.
Product
defects or the failure of our products to meet specifications could cause us to
lose customers and revenue or to incur unexpected expenses.
If our
products do not meet our customers’ needs, our customer relationships may
suffer. Also, our products may contain defects or fail to meet product
specifications. Any failure or poor performance of our products could result
in:
|
·
|
delayed
market acceptance of our products;
|
|
·
|
delayed
product shipments;
|
|
·
|
unexpected
expenses and diversion of resources to replace defective products or
identify and correct the source of
errors;
|
|
·
|
damage
to our reputation and our customer
relationships;
|
|
·
|
delayed
recognition of sales or reduced sales;
and
|
9
|
·
|
product
liability claims or other claims for damages that may be caused by any
product defects or performance
failures.
|
If the
limited warranty provisions in our contracts are unenforceable in a particular
jurisdiction or if we are exposed to product liability claims that are not
covered by insurance, a claim could harm our business.
We
may have difficulty collecting our accounts receivable.
During
the normal course of business, we extend unsecured credit to our customers.
Typical credit terms require payment to be made within 90 days of the invoice
date. We do not require collateral from our customers.
We
regularly evaluate and monitor the creditworthiness of each customer on a
case-by-case basis. We include any account balances that are determined to be
uncollectible in our allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to management, the Company
believes that no allowance for doubtful accounts receivable is required as of
December 31, 2009 and December 31, 2008.
We
currently offer and intend to offer open account terms to certain of our
customers, which may subject us to credit risks, particularly in the event that
any receivables represent sales to a limited number of customers or are
concentrated in particular geographic markets. Collection of our
accounts receivable and our ability to accelerate our collection cycle through
the sale of accounts receivable is affected by several factors, including, but
not limited to:
|
·
|
our
credit granting policies,
|
|
·
|
contractual
provisions,
|
|
·
|
our
customers’ and our overall credit rating as determined by various credit
rating agencies,
|
|
·
|
industry
and economic conditions, and
|
|
·
|
our
recent operating results and our and our customers’ financial position and
cash flows.
|
Adverse
changes in any of these factors, certain of which may not be wholly in our
control, could create delays in collecting or an inability to collect our
accounts receivable which could impair our cash flows and our financial position
and cause a reduction in our results of operations.
Our
financial results may be affected by mandated changes in accounting and
financial reporting.
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. These principles are subject
to interpretation by the Securities and Exchange Commission and various bodies
formed to interpret and create appropriate accounting policies. A change in
these policies may have a significant effect on our reported results and may
even retroactively affect previously reported transactions.
The
cyclical nature of the aluminum industry causes variability in our production
costs and cash flows.
Our costs
of production depend on the market for primary aluminum, which is a highly
cyclical commodity with prices that are affected by global supply and demand as
well as other conditions. Historically, aluminum prices have been volatile and
we expect such volatility to continue. These prices are driven, in part, by
global demand for aluminum arising from favorable global economic conditions and
strong demand in the PRC.
RISKS
RELATED TO DOING BUSINESS IN THE PRC
There are
substantial risks associated with doing business in the PRC; these risks are
discussed below:
10
A
downturn in the PRC economy may slow down our growth and
profitability.
Growth of
the PRC economy has been uneven across geographic regions and economic sectors.
There can be no assurance that growth of the PRC economy will be steady or that
an economic downturn will not have a negative effect on our business because of
a decrease in expenditures for wireless services. More specifically, increased
penetration of wireless services in the less economically developed central and
western provinces of the PRC will depend on those provinces achieving certain
income levels so that cellular phones and related services become affordable to
a more significant portion of the population living in these areas.
Government regulation of the
telecommunications industry may become more complex.
Government
regulation of the telecommunications industry is highly complex. New
regulations could increase our costs of doing business and prevent us from
efficiently delivering our services. These regulations may stop or slow down the
expansion of our user base and limit access to our services.
Because
we depend on governmental agencies for a portion of our revenue, our inability
to win or renew government contracts could harm our operations and reduce our
profits.
Our
inability to win or renew PRC government contracts could harm our operations and
reduce our profits. PRC government contracts are typically awarded through a
regulated procurement process. Some PRC government contracts are
awarded to multiple competitors, causing increases in overall competition as
well as pricing pressure. The competition and pricing pressure, may, in turn,
require us to make sustained post-award efforts to reduce costs in order to
realize revenues under these contracts. If we are not successful in reducing the
costs we anticipate, our ability to profit on these contracts will be negatively
impacted. An additional potential risk is that contracts with the PRC government
can generally be terminated or modified at the government’s
convenience.
We
rely on sales to the PRC government and a significant decline in overall
government expenditures or a delay in the payment of our invoices by the
government could have a negative impact on our future operating
results.
We
believe that some of the success and growth of our business will continue to
depend on our ability to win government contracts. Many of our government
customers are subject to budgetary constraints and our continued performance
under these contracts, or award of additional contracts from these agencies,
could be jeopardized by spending reductions or budget cutbacks at these
agencies. Our operating results may also be negatively impacted by other
developments that affect these government programs generally, including the
following:
|
·
|
adoption
of new laws or regulations relating to government contracting or changes
to existing laws or regulations;
|
|
·
|
delays
or changes in the government appropriations process;
and
|
|
·
|
delays
in the payment of our invoices by government payment
offices.
|
The
uncertain legal environment in the PRC could limit the legal protections
available to us.
The PRC
legal system is a civil law system based on written statutes where, unlike in
common law systems, legal cases have little value as precedents for future
disputes. There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including, but not limited to, the laws
and regulations governing our business, or the enforcement and performance of
our arrangements with customers in the event of the imposition of statutory
liens, death of the principal parties to contracts, bankruptcy or criminal
proceedings. In the late 1970s, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters. The
overall effect of legislation enacted over the past 20 years has significantly
enhanced the protections afforded to enterprises in the PRC that are funded by
foreign investors. However, these laws, regulations and legal
requirements are relatively recent are still evolving rapidly, meaning that
their interpretation and enforcement involves a significant amount of
uncertainty. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. These uncertainties
could limit the legal protections available to foreign investors, such as the
right of foreign invested enterprises to hold licenses and permits such as
required business licenses.
11
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our business and results of
operations.
A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, and in Beijing where our operations are
headquartered, could have a negative effect on our operations. Our operations
may be impacted by a number of health-related factors, including the
following:
|
·
|
quarantines
or closures of some of our offices that would severely disrupt our
operations,
|
|
·
|
the
sickness or death of our key officers and employees,
and
|
|
·
|
a
general slowdown in the PRC
economy.
|
Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our business and results of operations.
Changes in the PRC’s political and
economic policies could harm our business.
The
economy of PRC has historically been a planned economy subject to governmental
plans and quotas and has, in certain aspects, been transitioning to a more
market-oriented economy. Although we believe that the economic reform and the
macroeconomic measures adopted by the PRC government have had a positive effect
on the economic development of the PRC, we cannot predict the future direction
of these economic reforms or the effects these measures may have on our
business, financial position or results of operations. In addition, the PRC
economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include:
|
·
|
economic
structure;
|
|
·
|
level
of government involvement in the
economy;
|
|
·
|
level
of development;
|
|
·
|
level
of capital reinvestment;
|
|
·
|
control
of foreign exchange;
|
|
·
|
methods
of allocating resources; and
|
|
·
|
balance
of payments position.
|
As a
result of these differences, our business may not develop in the same way or at
the same rate as might be expected if the PRC economy was more similar to that
of an OECD member country. As the PRC economy is transitioning from a planned
economy to a more market-oriented economy, the PRC government has implemented
various measures to encourage economic growth and guide the allocation of
resources by controlling payment of foreign currency-denominated obligations,
setting monetary policy and imposing policies that impact particular industries
or companies in different ways. While these measures may benefit the overall PRC
economy, they may also have a negative effect on our business, especially if
such measures create an unfriendly environment for businesses in the technology
sector of the economy.
Inflation
in the PRC may impair our ability to conduct business profitably in the
PRC.
Recently,
the PRC economy has experienced periods of rapid expansion. During the past ten
years, the rate of inflation in the PRC has been as high as 5.8% and as low as
-1.4% . These factors have led to the adoption by the PRC government, from time
to time, of various corrective measures designed to limit inflation. High
inflation in the future may cause the PRC government to impose
controls on credit or prices, or to take other actions which could inhibit
economic activity in the PRC, and thereby harm the market for our
products.
12
Likewise,
negative inflation could have an unfavorable effect on our business
profitability in the PRC. Negative inflation may cause a period where consumers
are reluctant to spend, as consumers anticipate lower prices for products in the
future. In the event of negative inflation, the PRC government may
impose controls on credit or prices, or take other actions which could inhibit
economic activity, harming the market for our products.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues are recorded in Renminbi and U.S. dollars, and any
future restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside the PRC or
to make dividends or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain. For
instance, foreign enterprises may only buy, sell or remit foreign currencies
after providing valid commercial documents at banks in the PRC authorized to
conduct foreign exchange business. In addition, conversion of Renminbi for
capital account items, including direct investment and loans, is subject to
governmental approval in the PRC, and companies are required to open and
maintain separate foreign exchange accounts for capital account items. The PRC
regulatory authorities may impose more stringent restrictions on the
convertibility of the Renminbi in the future.
We
are subject to the United States Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. In addition, we are required to maintain records that
accurately and fairly represent our transactions and have an adequate system of
internal accounting controls. Foreign companies, including some that may compete
with us, are not subject to these prohibitions, and therefore may have a
competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC, particularly
in our industry since it deals with contracts from the PRC Government, and our
executive officers and employees have not been subject to the United States
Foreign Corrupt Practices Act prior to the completion of the Exchange Agreement
(defined herein). If our competitors engage in these practices they may receive
preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give
them priority in obtaining new licenses, which would put us at a disadvantage.
We can make no assurance that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.
RISKS
RELATED TO OUR COMMON STOCK
The market price for our common stock
may be volatile.
The
market price for our common stock is likely to be highly volatile and subject to
wide fluctuations in response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results,
|
|
·
|
announcements
of new products and services by us or our
competitors,
|
|
·
|
changes
in financial estimates by securities
analysts,
|
|
·
|
changes
in the economic performance or market valuations of other companies
providing similar products and
services,
|
|
·
|
announcements
by our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital
commitments,
|
|
·
|
additions
or departures of key personnel,
|
13
|
·
|
potential
litigation, or
|
|
·
|
conditions
in the cellular phone market.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
Stockholders could experience
substantial dilution.
We may
issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
stockholders will experience dilution in their respective percentage ownership
in the Company.
We have no present intention to pay
dividends.
We have
never paid dividends or made other cash distributions on our common stock, and
do not expect to declare or pay any dividends in the foreseeable future. We
intend to retain future earnings, if any, for working capital and to finance
current operations and expansion of our business.
A large portion of our common stock
is controlled by a small number of stockholders.
Of the
total outstanding common stock, 20.56% is held by our executive officers and
directors. As a result, these shareholders could control the outcome of
stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
Item
2.
|
Properties.
|
We lease
office space in Beijing. Our Beijing office serves as our corporate headquarters
and is responsible for sourcing and coordination with cellular component
suppliers, coordination with our research and development partners and following
up the hardware and software testing aspects before mass production. The
following is relevant information on our Beijing office:
Address
|
Office
/
Production
|
Process
/
Lease
|
Monthly
Rental
(rmb)
|
Monthly
Rental
(usd)
|
Lease
period
|
||||||
29th
Floor, Tower B, Chaowai
MEN
Office Building, 26
Chaowai
Street, Chaoyang
Dist.,
Beijing (1)
|
Office
|
Lease
|
30,0000.00 |
4,309
|
January
2009 to December 2010
|
||||||
No.
1, Fuyou Street, Airport
Huoyun
Road, Shunyi Dist.,
Beijing
(2)
|
Office
|
—(2)
|
—
|
—
|
—
|
|
(1)
|
The
Company moved into the office space at 29th
Floor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
Dist., Beijing The Company renewed the rental contract recently
and the rental for this office space is now US$53,000 per
year.
|
(2) |
The
office listed as the second address is provided by Beijing Xin Ganxian
Logistic Company (a third party) free of charge to the
Company.
|
14
Item
3.
|
Legal
Proceedings
|
We are
party to certain litigation/arbitration related to amounts payable to suppliers
for goods with which the Company was not satisfied as to quality and timing of
delivery. However, the amounts in question are not substantial
enough that such litigation/arbitration are material to the Company or would
have a material adverse effect on our business. Furthermore, we
expect to be able to negotiate resolutions to these issues. Please refer to the
detailed description below about the pending legal
proceedings.
Legal
disputes with two suppliers arose from the unqualified accessories
andmaterials supplied by Shenzhen Songding Industry Ltd., (“Songding”) and
Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”). The management of Beijing
Orsus Xelent Techonologies & Trading Co., Ltd. (“BOXT”) decided to cease the
payment to Songding and Baoxin as a result of the unqualified accessories and
materials.
The
dispute between Baoxin and BOXT has been arbitrated by Beijing Arbitration
Commission. The ending balance of account payable to Baoxin as of December 31,
2009 was approximately US$36,000. Currently BOXT and Baoxin are processing the
final negotiation, as such, Baoxin applied for the property preservation to the
court and, accordingly, one of BOXT’s bank account was blocked until the
resolution of this dispute.
Final
arbitration for the dispute between Songding and BOXT is pending. The liability
in question was recorded as approximately US$54,000 at the end of December 31,
2009. Songding applied for the property preservation to the court and,
accordingly, one of BOXT’s bank accounts was blocked until the resolution of the
dispute.
Item
4.
|
Removed
and Reserved
|
PART
II
Item
5.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters andIssuer
Purchases of Equity Securities.
|
Company
common stock has been listed on the American Stock Exchange (“AMEX”) under the
ticker symbol “ORS” since May 10, 2007. The following table sets
forth the quarterly average high and low sales prices per share for our common
stock during the fiscal years ended December 31, 2008 and December 31,
2009:
Common Stock
|
||||||||
High
|
Low
|
|||||||
Fiscal
Year Ended
|
(US$)
|
|||||||
December
31, 2008
|
||||||||
First
Quarter
|
2.57 | 1.10 | ||||||
Second
Quarter
|
3.30 | 1.25 | ||||||
Third
Quarter
|
1.69 | 0.51 | ||||||
Fourth
Quarter
|
0.66 | 0.22 | ||||||
December
31, 2009
|
||||||||
First
Quarter
|
0.58 | 0.11 | ||||||
Second
Quarter
|
1.20 | 0.33 | ||||||
Third
Quarter
|
0.98 | 0.51 | ||||||
Fourth
Quarter
|
1.24 | 0.52 | ||||||
First
Quarter of 2010
|
0.69 | 0.39 |
15
The
source of this data is Bloomberg Profession Services. The data does
not reflect inter-dealer prices and the quotations are without retail mark-ups,
mark-downs or commissions, may not represent actual transactions, and have not
been adjusted for stock dividends or splits.
Holders.
As of
December 31, 2009, we had approximately 1,800 stockholders of our common stock
of record, and our common stock had a closing price of US$0.58 per share.
Outstanding Options, Conversions, and
Planned Issuance of Common Stock.
As of
December 31, 2009, options to purchase 614,000 shares of common stock at an
exercise price of US$2.26 (the close price on the grant date, April 2, 2008)
were issued under the Company’s 2007 Omnibus Long-Term Incentive
Plan. As of April 15, 2010, none of the grantees has exercised these
stock options. There are no other warrants or options
outstanding.
Preferred Stock.
Our
corporate charter permits the Company to issue up to 100 million shares of
preferred stock from time to time, as determined by resolutions of our Board of
Directors. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by stockholders and could adversely affect the rights and powers,
including voting rights, of holders of common stock, even though the Company
is acting in accordance with our corporate charter and bylaws. In
certain circumstances, the issuance of preferred stock could depress the market
price of the Company’s common stock.
As of
April 15, 2010, there are no shares of preferred stock outstanding.
Dividends and Related
Policy.
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future and the Company intends to retain future earnings, if any, to
finance the expansion of our business. The decision whether to pay
cash dividends on our common stock will be made at the discretion of our Board
of Directors and will depend on our financial condition, operating results,
capital requirements and other factors that the Board considers
significant.
Securities Authorized for Issuance
Under Equity Compensation Plans.
As of the
fiscal year ended December 31, 2009,
Plan
category
|
Number of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities remaining
available
for future issuance under
equity
compensation plans (excluding
securities
reflected at left)
|
||||||||
Equity
compensation plans approved by security holders
|
614,000
(1)
|
|
2.26
(1)
|
3,886,000
|
|||||||
Equity
compensation plans not approved by security holders
|
None
|
None
|
None
|
||||||||
Total
|
3,886,000
|
(1)
|
As
of December 31, 2009, options to purchase 614,000 shares of common stock
at an exercise price of US$2.26, the close price on the grant date, April
2, 2008, were issued under the 2007 Omnibus Long-Term Incentive
Plan. As of April 15, 2010, none of the grantees has executed
these stock options.
|
16
Transfer
Agent and Registrar.
Our
transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive
South, Suite 430, Denver, Colorado 80209. Their telephone number is
(303) 282-4800.
Recent
Sales of Unregistered Securities.
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item
6.
|
Selected
Financial Data.
|
The
following selected financial data has been extracted from our financial
statements for the year ended December 31, 2009. This selected financial data
should be read in conjunction with the consolidated financial statements and the
notes to the consolidated financial statements starting on page F-1 and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Consolidated
Statements of Operations
Year
Ended December 31
(in
thousands, except share and per share amounts)
2009
(US$’000)
|
2008
(US$’000)
|
2007
(US$’000)
|
2006
(US$’000)
|
2005
(US$’000)
|
||||||||||||||||
Sales
|
77,392 | 107,827 | 89,923 | 68,108 | 28,705 | |||||||||||||||
Cost
of sales
|
67,970 | 93,298 | 78,368 | 60,102 | 25,711 | |||||||||||||||
Other
(expenses)/income-net
|
(2,911 | ) | 2,785 | 765 | 75 | 544 | ||||||||||||||
Net
income (loss)
|
(6,368 | ) | 11,296 | 9,683 | 6,718 | 3,492 | ||||||||||||||
Weighted
Average Common Shares Outstanding (Basic and diluted)
|
29,756,000 | 29,756,000 | 29,756,000 | 29,756,000 | 29,756,000 | |||||||||||||||
Net
Earnings/(Loss) Per Common Share – Basic and Diluted
|
(0.21 | ) | 0.38 | 0.33 | 0.23 | 0.12 |
Consolidated
Balance Sheets
Year
Ended December 31
(in
thousands, except share and per share amounts)
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(US$’000)
|
(US$’000)
|
(US$’000)
|
(US$’000)
|
(US$’000)
|
||||||||||||||||
Current
Assets
|
91,481 | 93,765 | 66,916 | 45,567 | 30,230 | |||||||||||||||
Total
Assets
|
95,754 | 94,006 | 67,234 | 45,887 | 31,011 | |||||||||||||||
Current
Liabilities
|
53,478 | 45,605 | 33,332 | 23,604 | 16,072 | |||||||||||||||
Total
Liabilities
|
53,478 | 45,605 | 33,337 | 23,604 | 16,072 | |||||||||||||||
Total
Stockholders’ Equity
|
42,276 | 48,401 | 33,897 | 22,283 | 14,939 |
17
Item
7. Management Discussion and Analysis of Financial
Conditions and Results of Operations
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-K.
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”). Please refer the
following chart for the relationship between the Company’s subsidiaries
:
18
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.
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 mobiles 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 great efforts in its
marketing 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 win establish a presence in the
specialized application mobile terminal market.
In April
2007, the Company’s common shares were approved for listing on the American
Stock Exchange and began trading on AMEX on May 10, 2007 under the ticker symbol
“ORS”. The Company's CUSIP Number is 68749U106.
Business
Review
The
global economic turmoil during 2008 impacted the cell phone industry. The
industry achieved modest growth during the second half of
2009. Market indicators show that total cellular phone sales in the
PRC grew by 7% during the fiscal year ended December 31, 2009, a
slight increase from the 5% growth rate during fiscal year
2008.
As for the
Company, our sales volume reached 0.87 million cell phone units for the fiscal
year ended December 31, 2009. We achieved annual sales revenues of US$77,392,000
during fiscal year 2009, representing a decrease of 28.23% compared with the
US$107,827,000 in revenues earned during fiscal year 2008. The Company believes
the decrease in revenues is the result of the following
factors:
1)
|
External
Factors
|
n
|
The
company’s CDMA products are not put into manufacturing. We note from
industry data that CDMA products play the very important role in the
revenue structure of the cellular phone industry, totalling around
17.5% of the total market size in fiscal year 2009 as compared to 3.7% in
fiscal year 2008.
|
19
n
|
The
TDS-CDMA projects are still in process, but management maintains high
expectation for them.
|
n
|
The
significant decrease of GSM market. The consuming volume of
GSM cellular phones in 2008 was 157.7 million compared to 137.04
million in 2009. The total market volume decreased
15%.
|
2)
|
Internal Factors
|
The
positive adjustment of sales policy from the management. The largest customer of
the Company—XWSD maintains a significant accounts receivables ending
balance. As a management concern, a new strategy has been turned from
extending of the sales to reducing the balance of accounts
receivables.
The
Company believes there are two main influences on the current state of the
cellular 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
during 2009 was much lower than expected. 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.
The
Company is aware of the possibility that the market for cellular phones in the
PRC will experience a moderate increase in the early part of 2010, but it still
projects that the industry will be in a better position in 2010 because (a) the
reorganization of PRC telecom carriers is projected to lead to market
development, and (b) new 3G technology is also likely to encourage market
demand. With these projections in mind, the Company plans to employ
the following three operating strategies going forward:
|
1.
|
Safeguard
our traditional sales channels and explore the possibility of selling GSM
cell phones in traditional markets. The Company will use its
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 in the second half of 2010. Based on the strong
relationships we have already built with the telecom carriers, we believe
the Company will be able to achieve our market share in 3G area of telecom
industry.
|
|
3.
|
Expand
our industrial structure by consummating certain acquisitions using
capital market funds in order to enhance our business foundation and
long-term development.
|
In
summary, the Company predicts it will obtain healthy development
based on the strengthening of its financial position in the coming fiscal
year.
The
following table summarizes our operating results for the twelve months ended
December 31, 2009 and December 31, 2008, respectively:
Year
ended
|
Year
ended
|
|||||||||||||||||||||||
December
31, 2009
|
December
31, 2008
|
Comparison
|
||||||||||||||||||||||
US$’000
|
%
of Revenue
|
US$’000
|
%
of Revenue
|
US$’000
|
%
|
|||||||||||||||||||
Sales
|
77,392 | 100.00 | % | 107,827 | 100.00 | % | (30,435 | ) | (28.23 | %) | ||||||||||||||
Cost
of sales
|
67,970 | 87.83 | % | 93,298 | 86.53 | % | (25,328 | ) | (27.15 | %) | ||||||||||||||
Selling
expenses
|
350 | 0.45 | % | 486 | 0.45 | % | (136 | ) | (27.98 | %) | ||||||||||||||
General
& admin. expenses
|
831 | 1.07 | % | 2,151 | 1.99 | % | (1,320 | ) | (61.37 | %) | ||||||||||||||
R&D
expenses
|
54 | 0.07 | % | 429 | 0.40 | % | (375 | ) | (87.41 | %) | ||||||||||||||
Depreciation
and amortization
|
64 | 0.08 | % | 97 | 0.09 | % | (33 | ) | (34.02 | %) | ||||||||||||||
Loss
from write-off trade deposits
|
11,937 | 15.42 | % | - | - | 11,937 | 100.00 | % | ||||||||||||||||
Allowance
for doubtful accounts
|
1,914 | 2.47 | % | - | - | 1,914 | 100.00 | % | ||||||||||||||||
Interest
expenses
|
912 | 1.18 | % | 982 | 0.91 | % | (70 | ) | (7.13 | %) | ||||||||||||||
Other
(expenses)/income,net
|
(2,911 | ) | (3.76 | %) | 2,785 | 2.58 | % | (5,696 | ) | (204.52 | %) | |||||||||||||
(Loss)/income
before income tax expenses
|
(9,551 | ) | (12.34 | %) | 13,169 | 12.21 | % | (22,720 | ) | (172.53 | %) | |||||||||||||
Current
tax expenses
|
(910 | ) | (1.18 | %) | (1,873 | ) | (1.73 | %) | 963 | 51.41 | % | |||||||||||||
Deferred
income tax benefit
|
4,093 | 5.29 | % | - | - | 4,093 | 100.00 | % | ||||||||||||||||
Net
income (loss)
|
(6,368 | ) | (8.23 | %) | 11,296 | 10.48 | % | (17,664 | ) | (156.37 | %) |
20
CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The
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 our reported assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We evaluate our
estimates on an on-going basis and use them on historical experience and various
other assumptions that are believed to be reasonable under the circumstances as
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 because of different assumptions or
conditions.
Cash
and cash equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses adjusted to take into account
current market conditions and the customers’ financial condition, the amount of
receivables in dispute, and the current receivables aging and current payment
patterns. The Company reviews its allowance for doubtful accounts monthly. Past
due balances are reviewed individually for collectability. Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization.
The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing that asset to its present working condition and location for its
intended use. Expenditures incurred after the assets have been put
into operation, such as repairs and maintenance, overhaul and minor renewals and
betterments, are normally charged to operating expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the use of
the assets, the expenditure is capitalized.
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the year of disposition as an
element of other income, net.
Depreciation
is provided to write off the cost of property, plant and equipment over their
useful lives from the date on which they become fully operational and after
taking into account their estimated residual values, using the following
methods:
Mould
|
Sum-of-the-units
methods
|
Leasehold
improvement
|
Straight-line
method over the lease term
|
Machinery
and equipment
|
Straight-line
method over 5 years
|
Office
equipment
|
Straight-line
method over 5 years
|
Motor
vehicles
|
Straight-line
method over 5 years
|
21
Revenue
recognition
Net sales
represent the invoiced value of goods sold, net of value-added tax (“VAT”) and
returns. The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectability is probable.
Operating
lease
The
Company leases office premises under non-cancelable operating leases.
Payments made under operating leases are charged to the consolidated statements
of income on a straight-line basis over the lease term.
Research
and development expenses
All cost
of research and development activities are expensed as incurred. Research
and development costs for the years ended December 31, 2009 and 2008 was
US$54,000 and US$429,000, respectively.
Impairment
of long-lived assets
In
accordance with Impairment or Disposal of Long-Lived Assets Subsections of
FASB ASC Subtopic 360-10, Property, Plant, and Equipment -
Overall, (FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), long-lived assets, such as property,
plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If circumstances
require a long-lived asset or asset group be tested for possible impairment, the
Company first compares undiscounted cash flows expected to be generated by that
asset or asset group to its carrying value. If the carrying value of the
long-lived asset or asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying value exceeds
its fair value. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. No impairment of long-lived
assets was recognized for the years ended December 31, 2009 and
2008.
Advertising
expenses
Advertising,
which generally represents the cost of promotions to create or stimulate a
positive image of the Company or a desire to buy the Company’s products and
services, is expensed as incurred. The Company had no advertising expenses for
the years ended December 31, 2009 and 2008.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of income in the period that includes the enactment
date. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion or all of the
deferred tax assets will not be realized.
ASC
740-10-25 clarifies the accounting for uncertain tax positions and requires that
an entity recognizes in the consolidated financial statements the impact of a
tax position, if that position is more likely than not of being sustained upon
examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely
of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company has elected to
classify interest and penalties related to unrecognized tax benefits, if and
when required, as a component of income tax expense in the consolidated
statements of income.
22
Foreign
currency translation
The
financial position and results of operations of the Company’s subsidiaries in
the PRC are measured using the Renminbi as the functional currency, while the
Company’s reporting currency is the US dollar. Assets and liabilities of the
subsidiaries are translated at the prevailing exchange rate in effect at each
period end. Income statement accounts are translated at the average rate of
exchange during the period. Translation adjustments are included in the
cumulative translation adjustment account in the consolidated statements of
stockholders’ equity and comprehensive income.
Fair
value measurements
The
Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for
fair value measurements of financial assets and financial liabilities and for
fair value measurements of nonfinancial items that are recognized or disclosed
at fair value in the financial statements. ASC Subtopic 820-10 also
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
ASC
Subtopic 820-10 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
ASC
Subtopic 820-10 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels
of inputs that may be used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access at the
measurement date.
|
·
|
Level
2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.
|
·
|
Level
3 inputs are unobservable inputs for the asset or
liability.
|
The level
in the fair value hierarchy within which a fair value measurement in its
entirety falls is based on the lowest level input that is significant to the
fair value measurement in its entirety.
The
Company did not have any nonfinancial assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2009 and
2008.
Earnings
per share
Basic
earnings per share is computed by dividing net income (loss) attributable to the
Company by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that would
occur upon the exercise of outstanding warrants. Common share equivalents are
excluded from the computation of the diluted earnings per share when their
effect would be anti-dilutive.
Segment
reporting
The
Company has one operating segment, which is designing, manufacturing and
distributing economically priced cellular phones for retail and wholesale
distribution. Substantially all of the Company’s operations and customers are
located in the PRC. Consequently, no geographic information is
presented.
23
Contingencies
In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations and tax
matters. An accrual for a loss contingency is recognized when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated.
Stock-based
compensation
ASC
718-10 requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The Company records the cost as expense over the offering period
and vesting term in connection with compensation expense for stock-based
employee compensation plans.
Recently
issued accounting pronouncements
FASB Establishes Accounting
Standards Codification
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. GAAP. All existing accounting standards are
superseded. All other accounting guidance not included in the Codification will
be considered non-authoritative. The Codification also includes all relevant
Securities and Exchange Commission (“SEC”) guidance organized using the same
topical structure in separate sections within the Codification.
Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance
and provide the basis for conclusions on the changes to the
Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.
Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Subtopic
605-25
In
September 2009, the FASB amended the FASB ASC Subtopic 605-25 which applies to
multiple-deliverable revenue arrangements. FASB ASC Subtopic 605-25
requires an entity to allocate revenue in a multiple-deliverable
arrangement
using vendor-specific objective evidence (“VSOE”), if it exists, otherwise
third-party evidence of selling price (“TPE”). If neither VSOE nor TPE exists,
the entity shall use its best estimate of the selling price for the
deliverables. As a result, the use of the residual method is eliminated
and, instead, an entity is required to allocate revenue using the relative
selling price method. FASB ASC Subtopic 605-25 also expands disclosure
requirements with respect to multiple-deliverable revenue arrangements. FASB ASC
Subtopic 605-25 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Alternatively, an entity can elect to adopt the
provisions of these issues on a retrospective basis. Management is currently
evaluating the potential impact, if any, of adopting FASB ASC Subtopic 605-25 on
the Company’s financial position and results of operations.
In October 2009, the FASB
concurrently issued the following ASC Updates (ASU):
ASU No.
2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies
the revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction. This standard provides principles and application
guidance to determine whether multiple deliverables exist, how
the individual deliverables should be separated and how to allocate the
revenue in the arrangement among those separate deliverables. The standard also
expands the disclosure requirements for multiple deliverable revenue
arrangements.
24
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 EPS 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: (i) sales of in substance real estate; and (ii) 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 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.
RESULTS
OF OPERATIONS
Revenues
Revenues
were US$77,392,000 for the twelve months ended December 31, 2009, representing a
decrease of 28.23% as compared to US$107,827,000 in revenues for the
corresponding period last year. We have analyzed detailed reasons for the sales
revenue decrease in Business Review Part.
At
present, we have three product lines classified by their function, appearance,
price and target market. Our mid-level and low-end products have popular
features such as MP3, MPEG4, video recording and outer card storage; our
higher-end products have the same features as well as PDA, GPS, Mobile TV,
special industry applications and office software functions.
Products
Segment
In order
to offset the impact of reduced demand for customized cell-phones on our 2008
revenues, the Company took advantage of our long-standing ties to traditional
mass market distribution channels and was able to increase sales of our GSM
products. We also increased our trading activities in order to broaden our
sources of revenue. The number of different models we offered in 2008 increased
from the previous year; most of these models were new for 2008.
The
Company’s product segments that have contributed more than 1% to the total
revenues for the twelve months ended December 31, 2009 are listed
below:
25
Twelve months ended December 31, 2009
|
||||||||
US$’000
|
% of revenue
|
|||||||
X600
|
5,435 | 7.0 | % | |||||
X610
|
5,560 | 7.2 | % | |||||
X555
|
1,949 | 2.5 | % | |||||
T303
|
6,7974 | 8.8 | % | |||||
LM2820
|
1,402 | 1.8 | % | |||||
X780
|
12,556 | 16.2 | % | |||||
X650
|
3,711 | 4.8 | % | |||||
DX880
|
3,686 | 4.8 | % | |||||
LM2800
|
1,187 | 1.5 | % | |||||
LM2850
|
1,312 | 1.7 | % | |||||
CN747
|
2,568 | 3.3 | % | |||||
X98
|
2,749 | 3.6 | % | |||||
X666
|
8,544 | 11.0 | % | |||||
X8828
|
2,599 | 3.4 | % | |||||
X6102
|
2,667 | 3.4 | % | |||||
DX828
|
3,124 | 4.0 | % | |||||
AD919
|
4,123 | 5.3 | % | |||||
X4888
|
6,622 | 8.6 | % | |||||
LM7100
|
804 | 1.0 | % | |||||
Total
|
77,392 | 100 | % |
During the
twelve months ended December 31, 2009, total revenues from our GSM products were
US$77,392,000. A brief description of our major GSM products is set forth
below:
|
·
|
X600
(Dual SIM cards Simul-Standby, 1.3M Camera, Extended Standby, Blue tooth ,
Touch panel ), supplied by Beijing Tianhongbo Corporation
Ltd.(“THB”)
|
|
·
|
DX610
(Fold style, Single SIM cards Mono-Standby, 1.3M Pixel Camera, Bluetooth,
GPRS, MP3. MP4), supplied by
(“THB”);
|
|
·
|
X555
(Single SIM cards Mono-Standby, 2.4+TP, 0.3M Pixel Camera, MP3,MP4 ),
supplied by Beijing ShiTongChangCheng Corporation Ltd.
(STCC)
|
·
|
T303
(Dual SIM card Mono-Standby, 2.6+TP, 0.3M Pixel Camera, MP3, MP4, Radio,
T-flash card memory), supplied by
“STCC”;
|
·
|
LM2820
(Single SIM card Mono-Standby 2.4+TP,0.3M Pixel Camera, GPRS ), supplied
by Tianjin Meijiaxun Corporation
.Ltd.(“MJX”)
|
|
·
|
X780
(Single SIM card Mono-Standby, 2.6+TP 0.3Mega Pixel Camera, Bluetooth,
MP3, MP4,Music phone), supplied by
“STCC”;
|
|
·
|
X650
(Single SIM card Mono-Standby, 2.2 QVGA TFT, ,1.3 Mega Pixel Camera mini
phone), supplied by (“THB”)
|
26
|
·
|
DX880
(Slide phone, Single SIM card Mono-Standby, 2.4+TP, 300K Pixel Camera,
MP3, MP4,T-flash card), supplied by
(“THB”)
|
|
·
|
LM2800
(Dual SIM cards Simul-Standby, 2.6 TFT, GPRS, 1.3 Mega Pixel
Camera,MP3,MP4), supplied by
(“MJX”)
|
|
·
|
LM2850
(Dual SIM cards Simul-Standby, 2.8+TP, 0.3M Pixel Camera, Dual Speakers
music phone), supplied by (“MJX”).
|
|
·
|
X98(Dual
SIM cards, Simul-Standby, 2.8+TP, 0.3M Pixel Camera, MP3, MP4, GPRS long
time standby), supplied by (THB)
|
|
·
|
X666(Fold
phone Dual SIM cards, Simul-Standby, 2.6+TP, 1.3M Pixel Camera, MP3, MP4.
Fashion phone) supplied by (“STCC”)
|
|
·
|
X8828(Fold
phone Single SIM card Mono-Standby, 2.4 TFT, 0.3M Pixel camera. Large
speaker music phone) supplied by
(THB)
|
|
·
|
X6102(Dual
SIM cards, Simul-Standby, 2.8 TFT+TP, 0.3M Pixel camera, GPRS, media
phone) supplied by (STCC)
|
|
·
|
DX828(Single
SIM card, Mono-standby, 2.4 TP, 0.3M Pixel camera, MP3, MP4, Radio ,
T-flash card)supplied by (THB)
|
|
·
|
AD919(Dual
SIM cards, Simul-standby, 2.4 TP, 2M Pixel camera, MP3, MP4, camera phone
)supplied by (THB)
|
|
·
|
X4888
(Dual SIM cards, Simul-standby, 2.6 TP, 1.3M Pixel camera, MP3, MP4, Radio
, fashion phone)supplied by (STCC)
|
Customer
Segments
Revenues
by customer segment for the twelve months ended December 31, 2009 are as
follows:
Twelve months ended December 31, 2009
|
||||||||
US$’000
|
% of Revenue
|
|||||||
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
70,120 | 90.60 | % | |||||
Tianjin
Communications Broadcast Company
|
7,272 | 9.40 | % | |||||
Total
|
77,392 | 100.00 | % |
For
the twelve months ended December 31, 2009, our revenues were derived mainly from
sales to Beijing Xingwang Shidai Tech & Trading Co., Ltd. (“XWSD”)
and Tianjin Communications Broadcast Company (“TCB”) in
the amounts of US$70,120,000 and US$7,272,000 respectively. XWSD has been our
most important customer for a long period of time. It is one of the largest
distributors and dealers in mainland China and has sales networks in major
cities in the PRC.
Cost
of sales and Operating expenses
For the
twelve months ended December 31, 2009 our operating expenses were US$15,150,000,
which included sales and marketing expenses, general and administrative
expenses, R & D expenses, depreciation and allowance for doubtful
account. The following table shows operating expenses by category for
the twelve months ended December 31, 2009 and the corresponding period for
2008:
27
Twelve
months ended December 31, 2009
|
Twelve
months ended December 31, 2008
|
Comparison
|
||||||||||||||||||||||
|
US$’000
|
%
of Revenue
|
US$’000
|
%
of Revenue
|
US$’000
|
%
|
||||||||||||||||||
Cost
of sales
|
67,970 | 87.83 | % | 93,298 | 86.53 | % | (25,328 | ) | (27.15 | %) | ||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling
expenses
|
350 | 0.45 | % | 486 | 0.45 | % | (136 | ) | (27.98 | %) | ||||||||||||||
General
& Admin. expenses
|
831 | 1.07 | % | 2,151 | 1.99 | % | (1,320 | ) | (61.37 | %) | ||||||||||||||
R&D
expenses
|
54 | 0.07 | % | 429 | 0.40 | % | (375 | ) | (87.41 | %) | ||||||||||||||
Depreciation
and amortization
|
64 | 0.08 | % | 97 | 0.09 | % | (33 | ) | (34.02 | %) | ||||||||||||||
Loss
from write-off trade deposits
|
11,937 | 15.42 | % | - | - | 11,937 | 100.00 | % | ||||||||||||||||
Allowance
for doubtful accounts
|
1,914 | 2.47 | % |
-
|
-
|
1,914 | 100.00 | % | ||||||||||||||||
Total
operating expenses
|
15,120 | 19.58 | % | 3,073 | 2.85 | % | 12,077 | (393.00 | %) |
Cost
of sales
For the
twelve months ended December 31, 2009, our cost of sales was US$67,970,000, or
87.83% of revenues. The ratio of cost of sales to revenues increased by 1.3%, as
compared to 86.53% for the twelve months ended December 31, 2008. The increase
of the cost is due to the reducing of the profit margin in the
industry.
Selling
expenses
The
Company’s major selling expenses are the salaries of sales personnel and the
costs of marketing and transportation.
For the
twelve months ended December 31, 2009, the Company's selling expenses were
US$350,000, or 0.45% of revenues – a decrease of 27.98% compared to analogous
expenses of US$486,000, or 0.45% of the revenues, for the corresponding period
in 2008. This decrease was caused by a reduction in personnel while changing our
business model which, in turn, led to a decrease in monies needed for office
expenses, transportation costs, salaries and social
insurances.
In
addition, the cost of after-sale maintenance services was shifted to our
materials suppliers, and the cost of all after-sale services (other than
employee salaries), were borne by our cooperative partners. This resulted in a
significant reduction of our sales and marketing expenses.
Research
and development (R&D) expenses
Our
R&D expenses were US$54,000, or 0.07% of total revenue, for the twelve
months ended December 31, 2009, which represented a 87.41% decrease over the
US$429,000 (0.4% of total revenue) spent on R&D during 2008. The significant
decrease was due to the Company’s focus on more traditional 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
The
Company’s general and administrative expenses consisted primarily of
compensation for personnel, depreciation, travel expenses, rental costs,
materials expenses related to ordinary administration, and fees for professional
services.
28
For the
twelve months ended December 31, 2009, the Company’s general and administrative
expenses were US$831,000 or 1.07% of the total revenue, representing a decrease
of US$1,320,000 or 61.37% when compared with US$2,151,000 or 1.99% of the total
revenues for the corresponding period in 2008. The sharp decrease was primarily
a result of structural adjustments, internal control and cost
reduction.
At the
same time, there was an expense related to issuing stock options during the year
ended December 31, 2008, but there was no such expense in the year ended at
December 31, 2009.
Gross Margin and Gross Margin
percentage
For the
twelve months ended December 31, 2009, our gross margin was US$9,422,000,
reflecting a decrease of US$5,107,000, or 35.15%, compared to a US$14,529,000
gross margin for the same period of 2008. In addition, our gross margin
percentage for the year ended December 31, 2009 was 12.17%, representing a
decrease of 1.3% as compared to 13.47% for the same period of 2008.
The
Company believes that the change in its gross margin percentage can be
attributed to the significant decrease of sales volume in past year. We have
analyzed details reasons for this change in Item 7—Business Review.
It should
be noted that though our gross margin percentage was slowing down in 2009, it
was still above 12%. This fact reflects our relatively stable
customer group and sales channels.
Other
(expenses) income, net
For the
twelve months ended December 31, 2009, other expense was US$2,911,000,
representing a decrease of US$5,696,000 compared with other income of
US$2,785,000 for the same period of 2008. The significant decrease is due to
liability accrued for the 0.3% penalty arose from purchasing contract (please
refer to Note 16 of the financial statements),
Net Income (Loss)
For the
twelve months ended December 31, 2009, our net loss was US$6,368,000 and our net
loss margin percentage was 8.23% which represents a decrease of US$17,664,000,
or 156.37%, compared to the US$11,296,000 in net
profit and corresponding net profit margin percentage of 10.48% earned during
the same period of 2008.
The
significant decrease for the net profit (loss) compared with the year ended
December 31, 2008 arose from the significant bad debt provision with the amount
of US$13,851,000 and the loss from write-off trade deposit with the amounts of
US$11,937,000.
In 2010,
after splitting the possible bad debt out the receivable accounts, the Company
will strengthen the cash flow management and account receivables collection and
continue its on-going monitoring to maintain a more solid and strong net profit
level.
LIQUIDITY
AND SOURCE OF CAPITAL
We
generally finance our operations with internally-generated cash flow and
short-term financing from domestic banks.
As of
December 31, 2009, we had current assets of US$91,481,000. Current assets are
mainly comprised of accounts receivable of US$81,130,000, trade deposits paid of
US$5,875,000; cash and cash equivalents of US$374,000; pledged deposits of
US$1,290,000; other current assets of US$29,000 and restricted cash of
US$4,000.
As of
December 31, 2009, our current liabilities were US$53,478,000, which included
accounts payable of US$7,652,000; trade deposits received of US$1,884,000,
short-term loans of US$9,390,000, accrued expenses and other accrued liabilities
of US$3,413,000; taxes payable of US$27,293,000; and amounts due to directors of
US$611,000 and liability for possible settlement to accounts payable of
US$2,928,000.
29
The
liability for possible settlement to accounts payable of US$2,911,000 arose
from the provision of penalty for unpaid accounts payable to suppliers as of
December 31, 2009. 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 principle amount of contract liability. However, some of such purchase
contracts were signed before 2006, 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 be expired after two years from the date on which
the liability was due. We note that at the meanwhile, no any legal letters
related to this part (0.3% penalty arising from outstanding payment.) liability
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. At December 31,2009, the accrued possible penalty provided based
on such penalty term is US$2,911,000 and this liability has been recorded in the
“Other Expenses” of statement of operations for the year ended December 31,
2009.
We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days. As of December 31, 2009, our accounts receivable had
decreased by US$946,000 to US$81,130,000, as compared with US$82,076,000 on
December 31, 2008. The decrease in accounts receivable was due mainly to the
management of the company strengthening the payment collection policy. However,
since the business expansion and development, the new receivables are recorded
at the same time the old receivables were collected, and as such, the ending
balance of account receivables maintains a high level and no significant
decrease was noted.
We will
continue to pay close attention to the liquidity of our distributors. As
previously disclosed, in order to reduce the risk of default, we have limited
the terms of credit offered to our major distributor in the Master Distributor
Agreement and have asked a third-party surety company to guarantee the accounts
receivable due from this distributor. For additional information,
please see the Company’s Current Report on its Form 8-K dated August 20,
2008. As of December 31, 2009, we had certain accounts receivable that had been
outstanding for more than 120 days because adverse macro economic development
conditions had caused comparatively longer collection terms to our sales
channels as a whole. We decided it was in our best interest not to strictly
enforce the terms of collection in order to maintain our current cooperation
relationships, but we will modify the delivery schedule for future goods to
these customers.
As of
December 31, 2009, our trade deposits paid were US$5,875,000, which represented
a decrease of US$2,566,000 as compared to US$8,441,000 in trade deposits paid as
of December 31, 2008. The decrease was due to a deposit of approximately
US$11,937,000 that was written off during the year ended December 31,
2009.
As of
December 31, 2009, our “other current assets” were US$29,000, a decrease of
US$1,830,000 as compared to US$1,859,000 in “other current assets” we had as of
December 31, 2008. The “other current assets” are mainly composed of receivables
to individuals. The ending balance of the year 2009 is not material compared
with the year of 2008.
As of
December 31, 2009, we had pledged deposits of US$1,290,000 was paid to Zhonghui,
a guarantee company for the loan from Beijing Rural Commercial Bank. Changes in
currency exchange rates caused the value of the pledged deposits to increase by
US$3,000 over the course of the fiscal year.
As of
December 31, 2009, our accounts payable were US$7,652,000, which represented a
decrease of US$8,701,000, or 53.21%, as compared to US$16,353,000 in accounts
payable as of December 31, 2008. The main reason for this decease was
that the management encouraged the timely payment to the
suppliers.
As of
December 31, 2009, accrued expenses and liabilities were US$3,413,000, which
represented an increase of US$1,535,000 or 81.74%%, as compared to the
US$1,878,000 in accrued expenses and liabilities that the Company had as of
December 31, 2008. The increase was due to the accumulated accrued
interests in the year 2009.
During
fiscal year 2009 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.
30
As of
December 31, 2009, our income taxes payable were US$5,870,000, which represented
an increase of US$881,000 or 17.66%, as compared to our US$4,989,000 in taxes
payable as of December 31, 2008.
As of
December 31, 2009, our VAT taxes payable were US$21,423,000, which represented
an increase of US$11,289,000 or 111%, as compared to our US$10,134,000 in taxes
payable as of December 31, 2008.
As of
December 31, 2009, cash and bank balances were mainly denominated in Renminbi
(“RMB”). Our revenue
and expenses, assets and liabilities are, for the most part, denominated in RMB
and U.S. Dollars (“USD”). Our Company operations
are mainly denominated in RMB. During the accounting period, RMB currency is
quoted officially against USD currency according to a floating exchange rate.
However, appreciation of the RMB against the USD did not create currency
exchange risk for the Company because we had few USD in stock.
CASH
FLOWS
As of
December 31, 2009, we had cash and cash equivalents of US$374,000. This
represents an increase of US$272,000, or 266.67%, compared with the US$102,000
in cash and cash equivalents we had as of December 31, 2008.
As of
December 31, 2009, our short term loans aggregated to US$9,697,000, which
includes US$2,516,000 from Huaxia Bank and US$6,874,000 from Beijing Rural Bank,
and US$307,000 from a non-financial institution—Zhonghui Guarantee Co.,
Ltd.
Our
gearing ratio, calculated as total debts over total assets, was 55.85%, as of
December 31, 2009. It has increased slightly compared to 48.51% as of December
31, 2008.
CONTINGENT
LIABILITIES
As of
December 31, 2009, we had contingent liability issues.
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 year ended December 31, 2009 and
2008, there were sales amounted to US$70,465,000 and US$57,111,000 respectively
of which VAT invoices have not yet been issued.
The sales
revenue of the year ended December 31, 2009 and 2008 is US$77,392,000 and
US$107,827,000, respectively, representing US$13,157,000 and US$18,331,000
output VAT, respectively. At the meanwhile, the input VAT which the invoice has
been received was US$1,899,000 and US$9,599,000 for the year ended December 31,
2009 and 2008, respectively. Therefore, the net VAT payable is US$11,258,000
and US$8,732,000 for the year ended December 31, 2009 and 2008,
respectively.
According
to PRC tax law, only the input VAT supported with sufficient invoice could be
deducted from current period’s output VAT. For the purchasing without obtaining
any invoices, 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$21,423,000 and US$10,134,000 as of December 31, 2009 and 2008,
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.
31
Financial
guarantee contract
On June
20, 2007, BOXT entered into a guarantee contract for three years from June 20,
2007 to June 16, 2010 to serve as guarantor of a bank loan amounting to
approximately US$17,550,000 (equivalent to RMB120,000,000) to an independent
third-party, Chinacom Communications Co., Ltd. (“CECT”), from Beijing Rural Bank
to provide CECT with capital for equipment purchases. Under the guarantee
contract, BOXT shall perform all obligations of CECT under the loan contract
including principal and interest, late interest payments, fines and other
expenses incurred in the claiming process, if CECT fails to perform its
obligations as set forth in the loan contract, including, but not limited to,
ceasing production, going out of business, dissolving the business, having its
business license withdrawn and filing for bankruptcy.
According
to a March 20,2009 valuation report issued by an independent professional
appraiser, the fair value of the undiscounted maximum potential amount of future
payments as of December 31, 2008 that BOXT could be required to make under the
guarantee contract was approximately US$470,000. The Company’s management
assessed that the fair value of the undiscounted maximum potential amount of
future payments as of December 31, 2009 did not materially differ from the
same figure as of December 31, 2008. Management believes it is not probable BOXT
will need to fulfill any obligation under this contract.
Litigation
There are
two legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd.,
(“Songding”) provides battery chargers and Beijing Baoxin Packing Materials Co.,
Ltd. (“Baoxin”) provides packing materials to BOXT. The legal disputes with
above mentioned suppliers arised because the Company did not accept accessories
and materials supplied by Songding and Baoxin due to the quality issues.
The management of BOXT determined to cease the payment to Songding and Baoxin
accordingly. The dispute between Baoxin and BOXT started from the arbitration
applied by Baoxin on October 2006 which has been arbitrated by Beijing
Arbitration Commission on October 24, 2006. BOXT should pay Baoxin US$246,000.
Currently BOXT and Baoxin are processing the final negotiation based on the
arbitration result. As such, Baoxin applied for the property preservation to the
court and one of BOXT’s bank account is blocked accordingly. BOXT has recorded
the arbitration result as account payable to the supplier after the arbitration.
The balance of account payable to Baoxin as of December 31, 2009 is
US$36,000.
The
dispute between Songding and BOXT started from the arbitraction applied by
Songding on January 12, 2010 which is still pending for the final arbitration.
The argument amount is US$281,000 by Songding. BOXT recorded account payable to
the supplier with the amount of US$200,000 as of December 31, 2008. Since
Songding applied for the property preservation to the court, one of BOXT’s bank
accounts is blocked accordingly. The balance of account payable to Songding as
of December 31, 2009 is US$54,000.
Warranty
During
this year ended at December 31, 2009, we made no allowance for warranty for
product problems because, during this period, post-sale services for
newly-launched products were undertaken by 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 loan of US$6,874 from Beijing Rural
Commercial Bank at December 31, 2009. The Company is negotiating an extension of
the term of the loan with the bank. The Company accrued US$234,000 in
penalty interest from September 28, 2009 to December 31, 2009.
Payroll
Payable
The
Company has accrued the salaries and welfare to employees with the amount of
US$659,000 but with little payment made in 2009 and 2008.
32
OFF
BALANCE SHEET ARRANGEMENTS
As of
December 31, 2009, we had no off balance sheet arrangements.
CONTRACTUAL
COMMITMENTS
We are
obligated to make future payments under various contracts, which are mainly
operating leases. The Company does not have any long-term debt or capital lease
obligations. The operating lease amount is US$53,000 at the date of December 31,
2009.
Payments due by period
|
||||||||||||||||||||
Contractual Obligations
|
Total
(US$’000)
|
Less than
1 year
(US$’000)
|
1-3 years
(US$’000)
|
3-5 years
(US$’000)
|
More than
5 years
(US$’000)
|
|||||||||||||||
Operating
Lease Obligations
|
53 | 53 | - | - |
Item 7A. 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 its normal course of business, is exposed to market risk
through changes in interest rates with respect to bank loans. As of December 31,
2009, Company bank loans were US$9,390,000. The interest rate for the twelve
months ended December 31, 2009 was between 6.372% and 10.08% per
annum.
Currency
Risk
The
Company considers RMB its functional currency since a substantial portion of the
Company’s business activities are based in RMB. However, the Company has chosen
the United States dollar as its reporting currency. Our sales and purchases are
conducted within the PRC in RMB. Conversion of RMB into foreign currencies is
regulated by the People’s Bank of China through a unified floating exchange rate
system. Although the PRC government has stated its intention to support the
value of the RMB, there can be no assurance that its rate of exchange will not
again become volatile or that the RMB will not devalue significantly against the
U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S.
dollar terms, of our net assets and income derived from our operations in the
PRC. In addition, the RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through authorized
institutions.
Transactions
in currencies other than the functional currency during the period are
translated into the functional currency at the applicable rates of exchange 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. When there are material adjustments under
this process, they are recorded in accumulated other comprehensive income under
the stockholders’ equity section of the balance sheet.
Country
Risk
Our
business, assets and operations are located and conducted in the PRC. While the
PRC’s economy has experienced significant growth in the past twenty years,
growth has been uneven, both geographically and among various sectors of the
economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of the PRC, but may also have a negative effect on
us. For example, our operating results and financial condition may be adversely
affected by government control over capital investments or changes in tax
regulations applicable to us. If there are any changes in any policies by the
PRC government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.
33
Item
8. Financial
Statements and Supplementary Data.
Reference
is made to pages F-1 through F-20 comprising a portion of
this annual report on Form 10-K.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9A(T).
Controls and Procedures.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission (“SEC”) and that, when
appropriate, such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, in a
manner sufficient to allow timely decisions regarding required disclosures. Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls or procedures 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 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 or instances of fraud, if any, within the Company have
been detected. These inherent limitations include the reality that judgment
exercised in decision-making can be faulty, and that breakdowns can occur
because of simple error or honest mistake. Additionally, controls can be
circumvented by the individual acts of some persons, collusion of two or more
people, or by management override of the control system. 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.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Under the
supervision and participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2009, the end of the annual period covered by this
report. The evaluation of our disclosure controls and procedures included a
review of the objectives of our disclosure controls and procedures; their design
and implementation; and the effect of the controls and procedures on the
information generated for use in this report. In the course of our evaluation,
we sought to identify errors, control problems or acts of fraud and to confirm
that the appropriate corrective actions, including process improvements, were
being undertaken.
Based on
the foregoing, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were operating effectively and at a
reasonable level of assurance.
Internal
Control Over Financial Reporting
(a)
Management’s Annual Report on Internal Control Over Financial
Reporting.
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the
Securities Exchange Act, Rules 13a-15(f) and 15d-15(f). Under the supervision
and with the participation of the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, the Company has conducted an
evaluation of the effectiveness of its internal control over financial reporting
as of December 31, 2009, based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on management’s evaluation under the framework in Internal
Control – Integrated Framework, management concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2009.
34
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the SEC that permit the
company to provide only management's report in this annual report.
(b)
Changes in Internal Control Over Financial Reporting.
During
our fiscal year 2009, there were no 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.
Item 9B. Other
Information.
Submission
of Matters to a Vote of Security Holders
Our 2009
Annual Meeting of Stockholders was held on December 31, 2009. At the Annual
Meeting, (i) each of our five nominees was elected to serve as a Company
director until the next Annual Meeting of Stockholders, and (ii) the appointment
by the Company’s Board of Directors of Bernstin & Pinchuk LLP as the
Company’s independent registered public accountants for fiscal year 2009 (the
2009 Independent Auditors Ratification) was ratified by the stockholders. The
election results are as follows:
The
voting results for the election of Directors were as follows:
Nominated Person
|
Votes For
|
||
Guoji
Liu
|
21,948,805
|
||
Liu
Yu
|
21,975,166
|
||
Naizhong
Che
|
21,941,496
|
||
Peng
Wang
|
22,011,508
|
||
Zhixiang
Zhang
|
21,983,384
|
The
voting results for the ratification of Bernstein & Pinchuk LLP as the
Company’s independent public accounts for fiscal year 2009 were as
follows:
Votes received
|
|||
For
|
21,164,756
|
||
Against
|
143,659
|
||
Abstain
|
29,039
|
Although
ratification of the Board’s appointment of the Company’s independent public
accountants by stockholders is not required by our bylaws or otherwise, the
Board of Directors submitted the selection of Bernstein & Pinchuk LLP to our
stockholders for ratification as a matter of good corporate practice. Prior to
ratification of the appointment by stockholders, the Board’s Audit Committee had
selected and appointed Bernstein & Pinchuk as the Company’s independent
registered public accountants for the fiscal year ended December 31,
2009.
The
Board’s Audit Committee chose Bernstein & Pinchuk LLP after PKF Hong Kong
Certified Public Accountants, the Company’s independent auditors since October
22, 2008, resigned on August 10, 2009. On August 13, 2009 the Audit Committee
approved the resignation of PKF Hong Kong Certified Public Accountants and the
appointment of Bernstein & Pinchuk LLP Bernstein & Pinchuk as the
Company’s independent registered public accountants, both effective as of August
10, 2009. For additional information, please review the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on August 14, 2009 and
“Changes in and Disagreements with Accountants.”
35
PART
III
Item 10. Directors, Executive Officers and
Corporate Governance.
Our
current directors and executive officers were as follows:
Name
|
Age
|
Positions Held
|
|||
Guoji
Liu
|
40
|
Chief
Executive Officer and Director
|
|||
Hua
Chen
|
48
|
Chief
Financial Officer
|
|||
Yu
Liu
|
43
|
Director
|
|||
Naizhong
Che
|
66
|
Director
|
|||
Peng
Wang
|
37
|
Director
|
|||
Zhixiang
Zhang
|
41
|
Director
|
Guoji Liu
earned his undergraduate degree at China Science and Technology Management
University in 1993 and has over 15 years’ working experience in the cell phone
industry specializing in the marketing and management. Since September 2007,
Guoji Liu has served as a deputy General Manager of the Company and has helped
the Company capture a considerable market share of mid-level and low-end
products. Before joining the Company, Guoji Liu worked as a supervisor at
Pantech Beijing office (Mar. 2005 - Aug. 2007), a general manager at the
marketing department of Tianjin Sanyo Telecommunication Corp. (Nov. 2004 - Mar.
2005), the assistant of CEO for Beijing Huasong PYPO Group Co. Ltd. (Nov. 2003 -
Nov. 2004), a sales director for Xiamen Chabridge Telecom Equipment Co. Ltd.
(Oct. 2002 - Oct. 2003), an account manager for Beijing Nokia Telecommunication
Ltd. (1997 - 2002), and a sales director for Beijing Aurora telecommunication
Corp. Ltd. (1993 - 1997).
Prior to
his appointment as Chief Financial Officer of the Company, Mr. Hua Chen, age 48,
was the Acting CFO of Daye Transmedia Co. Ltd., one of the top media companies
in the PRC, from May 2008 to April 2009. In addition, from August 2005 to May of
2008 he was the Vice General Manager of Elight Capital Inc., a financial
consulting company, and from April 1999 to May 2008 he was the Chief Analyst of
Genes Capital Group, which performs assets management and investment
analysis.
Yu Liu
has served as a member of our Board of Directors since March 31, 2005 and a
member of the Board of Directors of Xelent since April 2003. From May 1998 to
present he has also served as Chairman of the Board of Beijing Huanyitong
Technology & Trading Co., Ltd and from May 1995 to April 1998 he served as
General Manager of Beijing Lianwanjia Telecommunication Trading
Center.
Naizhong
Che has served as a member of our Board of Directors since February 7, 2007. He
earned his B.S. from Beijing University of Posts and Telecommunications. Now
retired, he has broad experience in the communications industry including
R&D, production, imports and exports. For twelve years he worked in various
capacities for the Ministry of Information Industry of China Posts and
Telecommunications Industry Standardization Institute.
Peng Wang
has served as a member of our Board of Directors since February 7, 2007. He
earned his bachelor’s degree at Central University of Finance and Economics and
his master’s at Guanghua School of Management, Peking University. His expertise
includes formulating, planning and implementing marketing strategies for
technology companies. He is currently General Manager for Beijing Youlilianxu
Technology Co., Ltd. where he is responsible for products in the PRC, including
ViewSonic projection, Samsung MP4 and LG projection.
Zhixiang
Zhang has served as a member of our Board of Directors since February 7, 2007.
He earned his bachelor’s and master’s degrees at Central University of Finance
and Economics. He has extensive experience in corporate financial management,
audits, and financial strategy and, most recently, was the Financial Controller
for CECT-Chinacom Communications Co., Ltd.
36
Director
and Officer Changes
On March
27, 2009, Wang Xin resigned from his positions as Chief Executive Officer and as
a member of the Board of Directors of the Company. Mr. Wang had served as Chief
Executive Officer and a member of our Board of Directors since March 31,
2005.
On March
27, 2009, Jian Gao resigned from his position as a member of the Board of
Directors of the Company. Mr. Jian had served as a Company director since March
5, 2008.
On August
14, 2009, Zhao Hongwei resigned from his position as Chief Financial Officer of
the Company. Mr. Zhao had served as Chief Financial Officer since October 26,
2005.
On August
17, 2009, Hua Chen was appointed by the Board of Directors of the Company to
serve as Chief Financial Officer to replace Zhao Hongwei.
Family
Relationships
There are
currently no family relationships between the directors or executive officers of
the Company.
Involvement in Certain Legal
Proceedings.
None.
Board
of Directors Meetings and Committees
The Board
of Directors held six
meetings during the fiscal year ended December 31, 2009. Each of the directors
attended, either in person or telephonically, at least 75% of the aggregate
Board of Directors meetings and meetings of any committees on which he served
during his tenure as a director or committee member.
On
February 7, 2007, the Company’s Board of Directors approved and authorized the
establishment of three new committees to assist the Board of Directors in the
execution of its responsibilities: an Audit Committee, a Compensation Committee
and a Nominations/Corporate Governance Committee. In accordance with AMEX
listing standards, all the committees are comprised solely of non-employee,
independent Directors. Charters for each committee are available on the
Company’s website at www.orsus-xelent.com. The charter of each committee is also
available in print by stockholder request. The table below shows current
membership for each of the Board’s standing committees:
Audit Committee
|
Nominating/Corporate
Governance Committee
|
Compensation Committee
|
|||
Zhixiang
Zhang (Chair)
|
Naizhong
Che (Chair)
|
Naizhong
Che (Chair)
|
|||
Peng
Wang
|
Zhixiang
Zhang
|
Peng
Wang
|
Audit
Committee
The Audit
Committee is currently comprised of Zhixiang Zhang (Chair) and Peng Wang, both
of whom are “independent,” as defined in applicable SEC rules and the AMEX
Company Guide. The Audit Committee met four times during the fiscal
year ended December 31, 2009. The Board of Directors has determined that
Zhixiang Zhang qualifies as an “audit committee financial expert,” as defined in
applicable SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002.
The Board of Directors made a qualitative assessment of Mr. Zhang’s level of
knowledge and experience based on a number of factors, including his formal
education and experience.
The Audit
Committee is responsible for overseeing the Company’s corporate accounting,
financial reporting practices, audits of financial statements and the quality
and integrity of the Company’s financial statements and reports. In addition,
the Audit Committee oversees the qualifications, independence and performance of
the Company’s independent auditors. In furtherance of these responsibilities,
the Audit Committee’s duties include the following: evaluating the performance
of and assessing the qualifications of the independent auditors; determining and
approving the engagement of the independent auditors to perform audit, reviewing
and attesting to services and performing any proposed permissible non-audit
services; evaluating employment by the Company of individuals formerly employed
by the independent auditors and engaged on the Company’s account and any
conflicts or disagreements between the independent auditors and management
regarding financial reporting, accounting practices or policies; discussing with
management and the independent auditors the results of the annual audit;
reviewing the financial statements proposed to be included in the Company’s
annual report on Form 10-K; discussing with management and the independent
auditors the results of the auditors’ review of the Company’s quarterly
financial statements; conferring with management and the independent auditors
regarding the scope, adequacy and effectiveness of internal auditing and
financial reporting controls and procedures; and establishing procedures for the
receipt, retention and treatment of complaints regarding accounting, internal
accounting control and auditing matters and the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. The Audit Committee operates under the written Audit Committee
Charter adopted by the Board of Directors in February of 2007, a copy of which
may be obtained by writing the Secretary of the Company at 29th Floor, Tower B,
Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang Disc., Beijing,
People’s Republic of China 100020. The Report of the Audit Committee is included
elsewhere in this Form 10K.
37
Nominating/Corporate
Governance Committee
The
Nominating and Corporate Governance Committee (“Nominating Committee”) is
responsible for preparing a list of candidates to fill the expiring terms of
directors serving on our Board of Directors. The Nominating Committee submits
the list of candidates to the Board of Directors who determines which candidates
will be nominated to serve on the Board of Directors. The names of nominees are
then submitted for election at our Annual Meeting of Stockholders. The
Nominating Committee also submits to the entire Board of Directors a list of
nominees to fill any interim vacancies on the Board of Directors resulting from
the departure of a member of the Board of Directors for any reason prior to the
expiration of his term. In recommending nominees to the Board of Directors, the
Nominating Committee keeps in mind the functions of this body. The Nominating
Committee considers various criteria, including the ability of the individual to
meet the American Stock Exchange “independence” requirements, general business
experience, general financial experience, knowledge of the Company’s industry
(including past industry experience), education, and demonstrated character and
judgment. The Nominating Committee will consider director nominees recommended
by a stockholder if the stockholder mails timely notice to the Secretary of the
Company at its principal offices, which notice includes (i) the name, age and
business address of such nominee, (ii) the principal occupation of such nominee,
(iii) a brief statement as to such nominee’s qualifications, (iv) a statement
that such nominee consents to his or her nomination and will serve as a director
if elected, (v) whether such nominee meets the definition of an “independent”
director under the rules of the American Stock Exchange listing standards and
(vi) the name, address, class and number of shares of capital stock of the
Company held by the nominating stockholder. Any person nominated by a
stockholder for election to the Board of Directors will be evaluated based on
the same criteria as all other nominees. The Nominating Committee also oversees
our adherence to our corporate governance standards. The members of the
Nominating Committee are Naizhong Che (Chair) and Zhixiang Zhang, both of whom
are “independent” as defined by the Company Guide of the American Stock
Exchange. For the fiscal year ended December 31, 2009, the Nominating Committee
met three times. The
Nominating Committee operates under the written Nominating Committee Charter
adopted by the Board of Directors in February of 2007, a copy of which may be
obtained by writing the Secretary of the Company at 29th Floor, Tower B, Chaowai
MEN Office Building, 26 Chaowai Street, Chaoyang Disc., Beijing, People’s
Republic of China 100020.
During
the fiscal year ended December 31, 2009, there were no changes to the procedures
by which holders of our common stock may recommend nominees to the Board of
Directors.
Compensation
Committee
The Board
of Directors established the Compensation Committee in February 2007. The
Compensation Committee is currently comprised of the following Directors of the
Company: Naizhong Che (Chair) and Peng Wang, both of whom are “independent” as
defined by the Company Guide of the American Stock Exchange. For the fiscal year
ended December 31, 2009, the Compensation Committee met one time. The Compensation
Committee reviews and, as it deems appropriate, recommends to the Board of
Directors’ policies, practices and procedures relating to the compensation of
the officers and other managerial employees and the establishment and
administration of employee benefit plans. It advises and consults with the
officers of the Company as may be requested regarding managerial personnel
policies. The Compensation Committee also has such additional powers as may be
conferred upon it from time to time by the Board of Directors. The Compensation
Committee operates under the written Compensation Committee Charter adopted by
the Board of Directors in February of 2007, a copy of which may be obtained by
writing the Secretary of the Company at 29th Floor, Tower B, Chaowai MEN Office
Building, 26 Chaowai Street, Chaoyang Disc., Beijing, People’s Republic of China
100020.
38
Audit
Committee Report
The Audit
Committee was established on February 7, 2007 and is composed of non-management
Directors. It is currently composed of two independent Directors, Zhixiang Zhang
(Chair) and Peng Wang, and operates under the written Audit Committee charter
adopted by the Board of Directors on February 7, 2007. For the fiscal year ended
December 31, 2009, the Audit Committee met four times.
Under its
charter, the Audit Committee provides assistance and guidance to the Board in
fulfilling its oversight responsibilities to the Company’s stockholders with
respect to the Company’s corporate accounting and reporting practices as well as
the quality and integrity of the Company’s financial statements and reports. The
Company’s principal executive officer and principal financial officer have the
primary responsibility for the financial statements and the reporting process,
including the systems of internal controls. The Company’s independent auditors
are responsible for auditing the Company’s financial statements and expressing
an opinion on the conformity of the audited financial statements with generally
accepted accounting principles. The Audit Committee’s responsibility is to
monitor and oversee these processes.
To this
end, the Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended December 31, 2009 with
management and Bernstein & Pinchuk, the Company’s independent auditor. The
Audit Committee discussed with Bernstein & Pinchuk certain matters related
to the conduct of the audit as required by Statement on Auditing Standards 61,
as amended by Statement on Auditing Standards 90. In addition, the Audit
Committee has received from Bernstein & Pinchuk the written disclosures and
the letter regarding the auditor’s independence required by Independence
Standards Board Standard No. 1 and has discussed with Bernstein & Pinchuk
its independence.
In
reliance on the reviews and discussions described above, the Audit Committee
recommended to the Board of Directors that the Company’s audited financial
statements for the fiscal year ended December 31, 2009 be included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and
the Board of Directors accepted the Audit Committee’s
recommendation.
The Audit
Committee selected Bernstein & Pinchuk Certified Public Accounts as the
Company’s independent auditors for the fiscal year ended December 31, 2009. The
selection of auditors is determined by the Audit Committee. Although
ratification by stockholders is not required by our Bylaws or otherwise, at our
Annual Meeting of Stockholders on December 31, 2009, the Board of Directors
submitted the selection of Bernstein & Pinchuck to our stockholders for
ratification as a matter of good corporate practice.
AUDIT
COMMITTEE
Zhixiang
Zhang (Chair)
Peng
Wang
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers and persons who own more than 10% of a registered
class of the Company’s equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Directors, officers and greater than 10%
stockholders are required to furnish the Company with copies of all
Section 16(a) forms they file.
To the
Company’s knowledge, based solely on a review of the copies of such reports
furnished to the Company, with respect to the fiscal year ended December 31,
2009, the officers, directors and beneficial owners of more than 10% of our
common stock have filed their initial statements of ownership on Form 3 on a
timely basis, and the officers, directors and beneficial owners of more than 10%
of our common stock have also filed the required Forms 4 or 5 on a timely basis,
except for the timely filing of the Form 4 for Wang Xin, the former Chief
Executive Officer of the Company, for the sale of stock pursuant to Rule 144 on
June 25, 26, and 29, 2009 due to unforeseen delays and was subsequently filed
with the SEC on July 2, 2009. The following are the transaction dates and
details. All transactions were made in the open market.
39
Transaction Details
|
||||||||
Transaction Date
|
Shares
|
Price
|
||||||
25-Jun-09
|
60,000 | $ | 0.7692 | |||||
26-Jun-09
|
60,000 | $ | 0.7289 | |||||
29-Jun-09
|
60,000 | $ | 0.8140 |
Code
of Ethics
On
February 7, 2007, the Company adopted a Code of Business Conduct and Ethics that
applies to all its employees including its executive officers, which was filed
as Exhibit 14 to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 7, 2007. A copy of the Company’s Code of
Business Conduct and Ethics may be obtained without charge by writing the
Secretary of the Company at Orsus Xelent Technologies, Inc., 29th Floor,
Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang Disc.,
Beijing, People’s Republic of China 100020.
Item
11. Executive Compensation.
General
Philosophy
We
currently compensate our senior management and key employees using a single
method for computing base salary. However, a mixed compensation program of base
salary, bonus and equity compensation is under consideration that will set
general levels of compensation for all employees and help to create an
environment with discernible goals, rewards and expectations. Because we believe
the performance of every employee is important to our success, we are mindful of
the effect of executive compensation and incentive programs on all of our
employees.
At the
most senior levels, compensation will reflect company-wide performance by tying
awards primarily to earnings growth and stock appreciation. At lower levels,
compensation will be tied to the achievement of specific operational goals
within areas under the control of the relevant employees as well as company-wide
performance.
The 2007
Omnibus Long-Term Incentive Plan (the “Plan”) will assist the
Company in attracting, retaining, and rewarding high-quality executives,
employees, directors and other persons who provide services to the Company,
enabling such persons to acquire or increase a proprietary interest in the
Company, strengthening the mutuality of interests between such persons and the
Company, and providing annual and long-term incentives for such persons expend
maximum efforts in the creation of stockholder value. The Plan will be
administered by the Compensation Committee, such other committee as determined
by the Board of Directors, or a subcommittee consisting solely of non-employee,
outside directors. The Plan does not limit the availability of awards to any
particular class or classes of Eligible Employees. Awards granted under the Plan
are not transferable, except in the event of the participant's death. Under the
Plan, 4,500,000 shares are currently reserved and available for delivery in
connection with awards under the Plan.
Base
Salaries
We want
to provide our senior management with a level of assured cash compensation in
the form of base salary that facilitates an appropriate lifestyle given their
professional status and accomplishments. For our chief executive officer, we
concluded that a base salary of between US$65,000 and US$75,000 was appropriate
in this regard for the fiscal year ended December 31, 2009. Similarly, we
concluded that a base salary of between US$40,000 and US$50,000 was appropriate
for our chief financial officer for the fiscal year ended December 31, 2009.
These ranges were not objectively determined, but instead reflect levels that we
concluded were appropriate based upon our general experience. We performed a
similar analysis with respect to other senior management. We provide a
competitive level of compensation for our senior vice presidents. We believe
that this gives us the opportunity to attract and retain talented managerial
employees both at the senior executive level and below.
40
Summary
Compensation Table
Name &
Principal
Position
|
Year
|
Salary
(3)
(US$)
|
Bonus
(US$)
|
Stock
Awards
(US$)
|
Option
Awards
(4)
(US$)
|
All Other
Compensation
(US$)
|
Total
(US$)
|
||||||||||||||||||||
Guoji,
Liu
|
2009
|
0 | N/A | N/A | 0 | N/A | 0 | ||||||||||||||||||||
CEO
and director
|
20008
|
0 | N/A | N/A | 0 | N/A | 0 | ||||||||||||||||||||
Hua
Chen
|
2009
|
0 | N/A | N/A | 0 | N/A | 0 | ||||||||||||||||||||
CFO
|
2008
|
0 | N/A | N/A | 0 | N/A | 0 | ||||||||||||||||||||
Prior
CEO -
|
2009
|
18,000 | N/A | N/A | 0 | N/A | 18,000 | ||||||||||||||||||||
Xin
Wang (1)
|
2008
|
71,529 | N/A | N/A | 177,000 | N/A | 248,529 | ||||||||||||||||||||
Prior
CFO -
|
2009
|
30,730 | N/A | N/A | 0 | N/A | 30,730 | ||||||||||||||||||||
Hongwei
Zhao (2)
|
2008
|
56,017 | N/A | N/A | 94,400 | N/A | 150,417 |
|
(1)
|
Mr.
Xin Wang resigned from his positions as Chief Executive Officer and as a
member of the Board of Directors of the Company on March 27, 2009. Mr.
Guoji Liu was appointed as Chief Executive Officer of the Company on March
27, 2009.
|
|
(2)
|
Mr.
Hongwei Zhao resigned from his position as Chief Financial Officer of the
Company on August 14, 2009. And Mr. Hua Chen was appointed as Chief
Financial Officer on August 14,
2009.
|
|
(3)
|
“Salary”
listed above represents the amount of compensation that each person is
owed for the fiscal year ended December 31, 2009 and December 31,
2008.
In
response to the international financial market recession that began during
the second half of 2008, our officers have agreed to extend the payment
for a portion of their salaries until a time mutually agreed upon by the
Company and the officer. As of December 31, 2008, they only received a
portion of their cash compensation and have recorded unpaid salaries as
liabilities
|
|
§
|
Mr.
Wang Xin received $4,077.39 during the period, deferring $67,451.61 of
compensation.
|
|
§
|
Mr.
Zhao Hongwei received $27,444.31 during the period, deferring $28.572.69
of compensation.
|
As of
December 31, 2009, all of their salaries are deferring.
|
(4)
|
“Option
Awards” refer to the dollar amount recognized for financial statement
reporting purposes in accordance with FAS 123R for options awarded during
the reporting period. The charts on pages 51 and 52 illustrate the options
that were awarded by the Company on April 2,
2008.
|
Other
than those listed in the table above, there was no officer of the Company whose
combined salary and bonus for the fiscal year ended December 31, 2009 exceeded
US$100,000. The amounts listed in the table above were paid by Xelent, the
wholly owned subsidiary of our wholly owned subsidiary UFIL. While we do have
employment agreements with our executive officers, the salary for our executive
officers is at the discretion of our Board of Directors. We expect to pay
substantially similar compensation to our executives in the future and
anticipate continuing to pay them through Xelent.
The
Company adopted our 2007 Omnibus Long-Term Incentive Plan (the “Plan”), as
approved by our stockholders at the Annual Meeting on December 18, 2007. For
additional information on the Plan, please see the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 11, 2008. On April
2, 2008, the Board of the Company agreed to grant certain options to management
officers who made major contributions to the formation and development of the
Company as one-time awards. The number of shares of stock and the Company
officials who received awards under the Plan are as follows:
41
Designated
Grantees
|
Shares of Stock
Options
|
Exercise
Price
(US$)
|
Exercisable
Date
|
Expiration
Date
|
|||||
Xiaolong
Wang
|
96,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Wei
Wu
|
28,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Hongyu
Che
|
50,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Feng
Wan
|
40,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Shulin
Yang
|
20,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Hongwei
Zhao (1)
|
80,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Yu
Liu
|
150,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|||||
Xin
Wang (2)
|
150,000
|
2.26
|
July
2, 2008
|
April
2, 2018
|
|
(1)
|
Mr.
Zhao Hongwei resigned from his position as Chief Financial Officer on
August 14, 2009.
|
(2)
|
Mr.
Xin Wang resigned from his positions as Chief Executive Officer and as a
member of the Board of Directors of the Company on March 27,
2009.
|
Outstanding Equity Awards at
December 31, 2009
Option awards
|
||||||||||||||||||
Name
|
Number of securities
underlying
unexercised options
(#) [exercisable]
|
Number of securities
underlying unexercised
options
(#) [unexercisable]
|
Equity incentive plan awards:
Number of securities
underlying unexercised
unearned options
(#)
|
Option
exercise
price
(US$’)
|
Option
expiration date
|
|||||||||||||
Xin
Wang, CEO (1)
|
150,000 | 0 | 0 | 2.26 |
April
2, 2018
|
|||||||||||||
Hongwei
Zhao, CFO (2)
|
80,000 | 0 | 0 | 2.26 |
April
2, 2018
|
(1)
|
Mr.
Xin Wang resigned from his positions as Chief Executive Officer and as a
member of the Board of Directors of the Company on March 27,
2009.
|
(2)
|
Mr.
Hongwei Zhao resigned from his position as Chief Financial Officer on
August 14, 2009.
|
As of as
of December 31, 2009, the Company did not have nonqualified deferred
compensation and did not have any post-employment payments to
report.
As
stipulated by PRC regulations, the Company maintains a defined contribution
retirement plan for all of its employees who are residents of the PRC. All
retired employees of the Company are entitled to an annual pension equal to
their basic annual salary upon retirement. The Company contributed to a state
sponsored retirement plan approximately 20% of the basic salary of its 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$3,000 and US$59,000 for the years ended
December 31, 2009 and 2008 respectively.
Director Compensation for the fiscal
year ended December 31, 2009
Name
|
Fees Earned or
Paid In Cash
(US$’000)
|
Stock
Awards
(US$’000)
|
Option
Awards
(US$’000)
|
All Other
Compensation
(US$’000)
|
Total
(US$’000)
|
|||||||||||||||
GuojiLiu
|
0 | [N/A | N/A | N/A | N/A | |||||||||||||||
Yu
Liu
|
0 | N/A | 102 |
(1)
|
N/A | 102 | ||||||||||||||
Naizhong
Che
|
0 | N/A | N/A | N/A | 0 | |||||||||||||||
Peng
Wang
|
0 | N/A | N/A | N/A | 0 | |||||||||||||||
Zhixiang
Zhang
|
0 | N/A | N/A | N/A | 0 | |||||||||||||||
Jian
Gao (2)
|
0 | N/A | N/A | N/A | 0 |
42
|
(1)
|
As
of December 31, 2009, Yu Liu had 150,000 option awards outstanding.
Therefore, US$102,000 have been recognized for financial statement
reporting purposes in accordance with FAS 123R for such
awards.
|
|
(2)
|
Jian
Gao resigned from his position as a member of the Company’s Board of
Directors on March 27, 2009.
|
On March
27, 2008, the Board adopted a proposal to compensate Directors for their service
to the Company. The compensation for all Directors was set at US$2,000 per month
for service from February 7, 2007 to March 4, 2008, with each Director being
paid in accordance with their term on the Board of Directors. For service from
March 5, 2008 to December 31, 2008, the compensation for committee chairpersons
was increased to US$2,500, but compensation for other Directors or committee
members remained at US$2,000 per month. Any income tax owed by Directors in PRC
on such compensation is deducted from the salary and paid to the tax authority
by the Company, with any Directors outside of PRC arranging for the payment of
any applicable income taxes. Previously, the Company did not pay compensation to
its Directors. All Directors are reimbursed for out-of-pocket expenses in
connection with attendance at Board of Director’s and/or committee meetings. The
Company is in the process of evaluating whether to establish other compensation
plans (e.g. options) in the future.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
During
the last fiscal year, none of the members of the Company’s Compensation
Committee was an officer or employee of the Company, was a former officer of the
Company, or had any relationship required to be disclosed under Item 404 of
Regulation S-K.
During
the last fiscal year, none of the Company’s executive officers served on the
board of directors or compensation committee of any other entity whose executive
officers served either the Company’s Board of Directors or Compensation
Committee.
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The
following table sets forth information regarding the beneficial ownership of our
common stock as of April 15 2010, for each person known by the Company to be the
beneficial owner of more than 5% of our outstanding shares of common stock.
Unless otherwise indicated, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of Company common
stock beneficially owned by them.
Amount and Nature of Beneficial Ownership(2)
|
||||||||||
Title of
Class
|
Name and Address of Beneficial Owner(1)
|
Number
of Shares (3)
|
Percent of
Voting Stock (4)
|
|||||||
Common
|
Yu
Liu, Director
|
6,150,000 | 20.56 | % |
|
(1)
|
Unless
otherwise noted, the address is that of the
Company.
|
|
(2)
|
On
April 15, 2010, there were 29,756,000 shares of our common stock
outstanding. Each person named above has sole investment and voting power
with respect to all shares of the common stock shown as beneficially owned
by the person, except as otherwise indicated
below.
|
|
(3)
|
Under
applicable rules promulgated by the U. S. Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”), a person is deemed the “beneficial owner” of a security with
regard to which the person, directly or indirectly, has or shares (a) the
voting power, which includes the power to vote or direct the voting of the
security, or (b) the investment power, which includes the power to dispose
or direct the disposition of the security, in each case irrespective of
the person’s economic interest in the security. Under these SEC rules, a
person is deemed to beneficially own securities which the person has the
right to acquire within 60 days through (x) the exercise of any option or
warrant or (y) the conversion of another
security.
|
43
|
(4)
|
In
determining the percent of our common stock owned by a person (a) the
numerator is the number of shares of our common stock beneficially owned
by the person, including shares the beneficial ownership of which may be
acquired within 60 days upon the exercise of options or warrants or
conversion of convertible securities, and (b) the denominator is the total
of (i) the 29,756,000 shares of our common stock outstanding on April 15, 2010 and
(ii) any shares of our common stock which the person has the right to
acquire within 60 days upon the exercise of options or warrants or
conversion of convertible securities. Neither the numerator nor the
denominator includes shares which may be issued upon the exercise of any
other options or warrants or the conversion of any other convertible
securities.
|
The
following table sets forth information regarding the beneficial ownership of
Company common stock of each of our officers and directors and all our officers
and directors as a group as of April 15, 2010. Unless otherwise indicated, we
believe that all persons named in the table have sole voting and investment
power with respect to all shares of Company common stock beneficially owned by
them.
Amount and Nature of Beneficial Ownership(2)
|
||||||||||
Title of
Class
|
Name and Address of Beneficial Owner(1)
|
Number
of Shares (3)
|
Percent of
Voting Stock (4)
|
|||||||
Common
|
Guoji
Liu, Chief Executive Officer and Director
|
— | — | |||||||
Common
|
Yu
Liu, Director
|
6,150,000 | 20.56 | % | ||||||
Common
|
Hua
Chen, Chief Financial Officer
|
— | — | |||||||
Common
|
Naizhong
Che, Director
|
— | — | |||||||
Common
|
Peng
Wang, Director
|
— | — | |||||||
Common
|
Zhixiang
Zhang, Director
|
— | — | |||||||
Common
|
Directors
and executive officers as a group (6 persons)
|
6,150,000 | 20.56 | % |
|
(1)
|
Unless
otherwise noted, the address is that of the
Company.
|
|
(2)
|
On
April 15 2010, there were 29,756,000 shares of our common stock
outstanding. Each person named above has sole investment and voting power
with respect to all shares of the common stock shown as beneficially owned
by the person, except as otherwise indicated
below.
|
|
(3)
|
Under
applicable rules promulgated by the U. S. Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange
Act”), a person is deemed the “beneficial owner” of a security with
regard to which the person, directly or indirectly, has or shares (a) the
voting power, which includes the power to vote or direct the voting of the
security, or (b) the investment power, which includes the power to dispose
or direct the disposition of the security, in each case irrespective of
the person’s economic interest in the security. Under these SEC rules, a
person is deemed to beneficially own securities which the person has the
right to acquire within 60 days through (x) the exercise of any option or
warrant or (y) the conversion of another
security.
|
|
(4)
|
In
determining the percent of our common stock owned by a person (a) the
numerator is the number of shares of our common stock beneficially owned
by the person, including shares the beneficial ownership of which may be
acquired within 60 days upon the exercise of options or warrants or
conversion of convertible securities, and (b) the denominator is the total
of (i) the 29,756,000 shares of our common stock outstanding on April 15, 2010 and
(ii) any shares of our common stock which the person has the right to
acquire within 60 days upon the exercise of options or warrants or
conversion of convertible securities. Neither the numerator nor the
denominator includes shares which may be issued upon the exercise of any
other options or warrants or the conversion of any other convertible
securities.
|
Securities Authorized for Issuance
Under Equity Compensation Plans.
As of the
fiscal year ended December 31, 2009,
44
Plan category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected at left)
|
||||||||
Equity
compensation plans approved by security holders
|
614,000
(1)
|
|
2.26
(1)
|
|
3,886,000
|
||||||
Equity
compensation plans not approved by security holders
|
None
|
None
|
None
|
||||||||
Total
|
3,886,000
|
(1)
|
As
of December 31, 2009, options to purchase 614,000 shares of common stock
at an exercise price of US$2.26, the close price on the grant date, April
2, 2008, were issued under the 2007 Omnibus Long-Term Incentive Plan. As
of April 15, 2010, none of the grantees has executed these stock
options.
|
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
Related Party Transaction
Policy
Other
than the Company's Code of Business Conduct and Ethics, the Board does not have
a specific written policy regarding the review of related party transactions.
The Board does, however, follow certain procedures relating to the approval of
transactions involving related parties. Related parties generally include
executive officers and directors, stockholders owning more than 5% of the
Company’s common stock or immediate family members of any such persons. A
related party transaction will be approved only if it is disclosed to the Board
and is approved by a majority of the disinterested members of the Board. Prior
to approving any related party transaction, the members of the Board reviewing
such transaction must (i) be satisfied that they received all material facts
relating to the transaction, (ii) have considered all relevant facts and
circumstances available to them and (iii) have determined that the transaction
is in (or not inconsistent with) the best interests of the Company’s
stockholders. No director that is an interested party in a transaction may
participate in the discussion or approval of such transaction. Other than as
disclosed below, during fiscal year ended December 31, 2009, based on written
representations from the executive officers and directors of the Company, there
were no related party transactions.
The
following is a description of related party transactions involving more than US
$120,000, since the beginning of our last fiscal year, between us and our
directors, nominees, executive officers, stockholders owning more than 5% of the
Company’s common stock or members of their immediate family:
Mr. Xin
Wang (former officer, Director and significant shareholder of the Orsus Xelent)
and Yu Liu (Chairman of the Board of the Company) have outstanding loans to the
Company, which are unsecured, interest-free and repayable by the
Company on demand of the creditor. The amount outstanding as of December 31,
2009 is $611,000. The amount outstanding as of December 31, 2008 is
$457,000. The amount of principal paid on these loans since January 1, 2008 is
$0.
The
Company has bank loans that were guaranteed by a Director, Mr. Yu
Liu. The amount outstanding as of December 31, 2009 is $9,390,000
compared with outstanding bank loan of $9,484,000 for the same period of 2008.
The Company repaid a bank loan in February 2009 with the amount of $2,690,000
and got a new bank loan with the amount of $2,822,000. The interests rate of
above bank loans arose from 6.372% to 10.08%. As of December 31, 2009, interest
expenses incurred for the year ended December 31, 2009 and 2008 were US$911 and
US$979, respectively.
Director
Independence
Messrs.
Naizhong Che, Peng Wang and Zhixiang Zhang are all non-employee Directors, and
all of whom our Board of Directors has determined are independent pursuant to
the AMEX Rules and the rules of the Securities and Exchange Commission. All of
the members of our Board of Directors’ Audit Committee, Nominating/Corporate
Governance Committee and Compensation Committee are independent pursuant to the
AMEX Rules and the rules of the Securities and Exchange
Commission.
45
Item
14. Principal Accounting Fees and Services.
Our
independent accountant is Bernstein & Pinchuk LLP. As reported in our Form
8K filed on August 14, 2009, the Company appointed Bernstein & Pinchuck LLP
as its independent accountant effective as of August 10, 2009. Our previous
independent accountant was PKF Certified Public Accountants who has reviewed and
commented our Form 10-K for the fiscal year ended December 31, 2008 and our Form
10Q for the quarter ended March 31, 2009.
Audit
Fees
During
the fiscal year ended December 31, 2009, the fees for our principal accountant
were US$115,000 which included US$30,000 for three quarterly reviews, andUS
$85,000for the preparation of this annual report on Form 10-K. During the fiscal
year ended December 31, 2008, the fees for our principal accountant were
US$90,000, which was composed of US$23,000 for two quarters review and US$68,000
for the preparation of the annual report on Form 10-K.
Audit
Related Fees
During
the fiscal years ended December 31, 2009 and December 31, 2008, our principal
accountants did not render assurance and related services reasonably related to
the performance of the audit or review of financial statements.
Tax
Fees
During
the fiscal years ended December 31, 2009 and December 31, 2008, our principal
accountant did not render services to us for tax compliance, tax advice and tax
planning.
All
Other Fees
During
the fiscal years ended December 31, 2009 and December 31, 2008, there were no
fees billed for products and services provided by the principal accountants
other than those set forth above.
The Audit
Committee has reviewed the above fees for non-audit services and believes such
fees are compatible with the preservation of the independent registered public
accountants’ independence.
Policy on Audit Committee
Pre-Approval of Audit and Non-Audit Services of Independent
Accountant
The
policy of the Audit Committee, and the Board of Directors acting as a whole
prior to the establishment of the Audit Committee, is to pre-approve all audit
and non-audit services provided by the independent accountants. These services
may include audit services, audit-related services, tax fees, and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is subject to a specific budget. The Audit Committee, and the Board of
Directors acting as a whole prior to the establishment of the Audit Committee,
has delegated pre-approval authority to certain committee members when
expedition of services is necessary. The independent accountants and management
are required to periodically report to the full Audit Committee, and the Board
of Directors acting as a whole prior to the establishment of the Audit
Committee, regarding the extent of services provided by the independent
accountants in accordance with this pre-approval delegation, and the fees for
the services performed to date. None of the fees paid to the independent
accountants during fiscal years ended December 31, 2009 and 2008, under the
categories Audit-Related and All Other fees described above, were approved by
the Audit Committee, or the Board of Directors acting as a whole prior to the
establishment of the Audit Committee, after services were rendered pursuant to
the de minimis exception established by the SEC.
46
PART IV
Item 15. Exhibits and Financial Statement
Schedules
(a)
Financial Statements.
Our
financial statements as set forth in the Index to Financial Statements attached
hereto commencing on page F-1 are hereby incorporated by
reference.
(b)
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)
|
||
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from Exhibit 14
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007)
|
||
16.1
|
Letter
from PKF Hong Kong Certified Public Accountants to the SEC dated August
13, 2009 (incorporated by reference from Exhibit 16.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 14, 2009)
|
||
21.1
|
List
of Subsidiaries *
|
||
24.1
|
Power
of Attorney (included on signature page)
|
||
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 and Principal Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002 *
|
||
99.1
|
Credit
Guarantee Contract, dated as of August 7, 2008, by and among Beijing Orsus
Xelent Technology & Trading Company Limited, Beijing Xingwang Shidai
Commerce Co., Ltd. And Zhong Hui Guarantee Corporation (incorporated by
reference from Exhibit 99.1 to the Current Report on Form 8-K filed with
the SEC on August 20, 2008)
|
* Filed
herewith.
47
Orsus
Xelent Technologies, Inc. and Subsidiaries
Index
to Consolidated Financial Statements
Year
ended December 31, 2009 and 2008
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations and Comprehensive Income
|
F-4
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
– F-20
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of
Orsus
Xelent Technologies, Inc.
We have
audited the accompanying consolidated balance sheet of Orsus Xelent
Technologies, Inc. and its subsidiaries (“the Company”) as of December
31, 2009, and the related consolidated statements of operations and
comprehensive income, changes in stockholders’ equity and cash flows for the
year then ended. The Company’s management is responsible for these
financial statements. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2009, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Bernstein & Pinchuk LLP
New York,
New York
April
15,
2010
F-1
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except number of shares and per share data)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 374 | $ | 102 | ||||
Restricted
cash
|
4 | - | ||||||
Notes
Receivable
|
2,779 | - | ||||||
Accounts
receivable
|
81,130 | 82,076 | ||||||
Trade
deposit paid, net
|
5,875 | 8,441 | ||||||
Other
current assets, net
|
29 | 1,859 | ||||||
Pledged
deposit
|
1,290 | 1,287 | ||||||
Total
current assets
|
91,481 | 93,765 | ||||||
Property,
plant and equipment, net
|
178 | 241 | ||||||
Deferred
tax asset
|
4,095 | - | ||||||
$ | 95,754 | $ | 94,006 | |||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
bank loans
|
$ | 9,390 | $ | 9,484 | ||||
Short-term
loan payable
|
307 | 364 | ||||||
Current
portion of mortgage loan
|
- | 12 | ||||||
Accounts
payable
|
7,652 | 16,353 | ||||||
Accrued
expenses and other accrued liabilities
|
3,413 | 1,878 | ||||||
Trade
deposits received
|
1,884 | 1,934 | ||||||
Due
to shareholders
|
611 | 457 | ||||||
Income
taxes payable
|
5,870 | 4,989 | ||||||
Other
taxes payable
|
21,423 | 10,134 | ||||||
Liabilities
for possible settlement to accounts payable
|
2,928 | - | ||||||
Total
current liabilities
|
53,478 | 45,605 | ||||||
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 at both years
|
30 | 30 | ||||||
Additional
paid-in capital
|
3,209 | 3,209 | ||||||
Unappropriated
retained earnings
|
1,042 | 1,042 | ||||||
Appropriated
retained earnings
|
32,363 | 38,731 | ||||||
Accumulated
other comprehensive income
|
5,632 | 5,389 | ||||||
Total
stockholders’ equity
|
42,276 | 48,401 | ||||||
$ | 95,754 | $ | 94,006 |
See notes
to the consolidated financial statements
F-3
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In
thousands, except number of shares and per share
data)
Year ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
sales
|
$ | 77,392 | $ | 107,827 | ||||
Cost
of sales
|
67,970 | 93,298 | ||||||
Gross
profit
|
9,422 | 14,529 | ||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
350 | 486 | ||||||
General
and administrative expenses
|
831 | 2,151 | ||||||
Research
and development expenses
|
54 | 429 | ||||||
Depreciation
and amortization
|
64 | 97 | ||||||
Loss
from write-off trade deposits
|
11,937 | - | ||||||
Allowance
for doubtful accounts
|
1,914 | - | ||||||
(Loss)/income
from operations
|
(5,728 | ) | 11,366 | |||||
Other
income/(expenses)
|
||||||||
Interest
expense
|
(912 | ) | (982 | ) | ||||
Other
(expenses)/income, net
|
(2,911 | ) | 2,785 | |||||
(Loss)/income
before income tax expense
|
(9,551 | ) | 13,169 | |||||
Income
tax (expenses)/benefit
|
||||||||
Current
taxes expense
|
(910 | ) | (1,873 | ) | ||||
Deferred
taxes benefit
|
4,093 | - | ||||||
Net
(loss)/income
|
(6,368 | ) | 11,296 | |||||
Other
comprehensive income
|
||||||||
Foreign
currency translation adjustment
|
243 | 2,483 | ||||||
Comprehensive
(loss)/income
|
$ | (6,125 | ) | $ | 13,779 | |||
Earnings/(loss)
per share:
|
||||||||
Basic
and diluted
|
$ | (0.21 | ) | $ | 0.38 | |||
Weighted
average number of common shares outstanding – basic and
diluted
|
29,756,000 | 29,756,000 |
See notes
to the consolidated financial statements
F-4
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’S EQUITY
(In
thousands, except number of shares)
Accumulated
|
||||||||||||||||||||||||||||
Common
stock issued
|
Additional
|
Appropriated
|
Other
|
|||||||||||||||||||||||||
Shares
of
|
|
paid-in
|
Unappropriated
|
Retained
|
comprehensive
|
|||||||||||||||||||||||
Common
stock
|
Amount
|
capital
|
Retainer
Earnings
|
earnings
|
income
|
Total
|
||||||||||||||||||||||
Balance
as of December 31, 2007
|
29,756,000 | 30 | 2,484 | 1,042 | 27,435 | 2,906 | 33,897 | |||||||||||||||||||||
Net
income
|
11,296 | 11,296 | ||||||||||||||||||||||||||
Compensation
costs for stock options granted
|
- | - | 725 | - | - | - | 725 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 2,483 | 2,483 | |||||||||||||||||||||
Balance
as of December 31, 2008
|
29,756,000 | 30 | 3,209 | 1,042 | 38,731 | 5,389 | 48,401 | |||||||||||||||||||||
Net
loss
|
(6,368 | ) | (6,368 | ) | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 243 | 243 | |||||||||||||||||||||
Balance
as of December 31, 2009
|
29,756,000 | 30 | 3,209 | 1,042 | 32,363 | 5,632 | 42,276 |
See notes
to the consolidated financial statements
F-5
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
Year ended December 31
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
(loss)/income
|
$ | (6,368 | ) | $ | 11,296 | |||
Adjustments
to reconcile net (loss)/income to net cash used by operating
activities:
|
||||||||
Deferred
tax
|
(4,093 | ) | ||||||
Depreciation
and amortization
|
64 | 97 | ||||||
Write-back
of trade accounts payable
|
- | 2,401 | ||||||
Loss
due to liability for possible settlement to accounts
payable
|
2,927 | |||||||
Compensation
costs for stock options granted
|
- | 725 | ||||||
Changes
in assets and liabilities:
|
||||||||
Change
in restricted cash
|
(4 | ) | - | |||||
Accounts
receivable
|
1,150 | (20,142 | ) | |||||
Note
receivable
|
(2,777 | ) | ||||||
Inventories
|
- | 4 | ||||||
Trade
deposits paid, net
|
2586 | (7,400 | ) | |||||
Other
current assets, net
|
1,837 | 2,549 | ||||||
Accounts
payables
|
(8,734 | ) | 2,338 | |||||
Accrued
expenses, other accrued liabilities and other tax
payable
|
12,548 | 3,582 | ||||||
Trade
deposits received
|
(51 | ) | 168 | |||||
Provision
for warranty
|
- | (129 | ) | |||||
Income
tax payable
|
868 | 1,713 | ||||||
Net
cash flows used by operating activities
|
(47 | ) | (2,798 | ) | ||||
Cash
flows from financing activities
|
||||||||
Advances
from shareholders
|
153 | 120 | ||||||
Proceeds
from banks and other loans
|
2,822 | 9,393 | ||||||
Repayment
of bank loans
|
(2,690 | ) | (9,689 | ) | ||||
Repayment
of mortgage loans
|
(12 | ) | - | |||||
Net
cash flows provided/(used) by financing activities
|
273 | (176 | ) | |||||
Net
change in cash and cash equivalents
|
226 | (2,974 | ) | |||||
Effect
of foreign exchange rate changes on cash and cash
equivalent
|
46 | 148 | ||||||
Cash
and cash equivalent - beginning of year
|
102 | 2,928 | ||||||
Cash
and cash equivalent - end of year
|
$ | 374 | $ | 102 | ||||
Supplemental
disclosure for cash flow information
|
||||||||
Interest
paid
|
$ | 6 | $ | 977 | ||||
Income
taxes paid
|
$ | 41 | $ | 140 |
See notes
to the consolidated financial statements
F-6
ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
(Dollars
in thousands except share data and per share amounts)
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. We outsourced 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
|
Principles
of consolidation and basis of presentation
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
of America (“GAAP”) and include the financial statements of the Company and its
subsidiaries. The accompanying consolidated balance sheets as of December 31,
2009 and 2008, and the related consolidated statements of income and
comprehensive income, changes in stockholders’ equity and cash flows for the
year ended December31, 2009 and 2008 include ORS, UFI, BOXT, OXHBVI and
OXTHK.
All
significant intercompany transactions and balances are eliminated on
consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant items subject to such
estimates and assumptions include the useful lives of fixed assets; the
allowance for doubtful accounts; the fair value determination of financial and
equity instruments, the realizability of deferred tax assets and inventories;
the recoverability of goodwill, intangible assets, land use right and property,
plants and equipment; and accruals for income tax uncertainties and other
contingencies. The current economic environment has increased the degree of
uncertainty inherent in those estimates and assumptions.
F-7
Cash
and cash equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses adjusted to take into account
current market conditions and the customers’ financial condition, the amount of
receivables in dispute, and the current receivables aging and current payment
patterns. The Company reviews its allowance for doubtful accounts monthly. Past
due balances are reviewed individually for collectability. Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered
remote.
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization.
The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing that asset to its present working condition and location for its
intended use. Expenditures incurred after the assets have been put
into operation, such as repairs and maintenance, overhaul and minor renewals and
betterments, are normally charged to operating expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the use of
the assets, the expenditure is capitalized.
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the year of disposition as an
element of other income, net.
Depreciation
is provided to write off the cost of property, plant and equipment over their
useful lives from the date on which they become fully operational and after
taking into account their estimated residual values, using the following
methods:
Mould
|
Sum-of-the-units
methods
|
Leasehold
improvement
|
Straight-line
method over the lease term
|
Machinery
and equipment
|
Straight-line
method over 5 years
|
Office
equipment
|
Straight-line
method over 5 years
|
Motor
vehicles
|
Straight-line
method over 5 years
|
Revenue
recognition
Net sales
represent the invoiced value of goods sold, net of value-added tax (“VAT”) and
returns. The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectability is probable.
Operating
lease
The
Company leases office premises under non-cancelable operating leases.
Payments made under operating leases are charged to the consolidated statements
of income on a straight-line basis over the lease term.
Research
and development expenses
All cost
of research and development activities are expensed as incurred. Research
and development costs for the years ended December 31, 2009 and 2008 was US$54
and US$429, respectively.
F-8
Impairment
of long-lived assets
In
accordance with Impairment or Disposal of Long-Lived Assets Subsections of
FASB ASC Subtopic 360-10, Property, Plant, and Equipment -
Overall, (FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), long-lived assets, such as property,
plant and equipment, and purchased intangible asset subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If circumstances
require a long-lived asset or asset group be tested for possible impairment, the
Company first compares undiscounted cash flows expected to be generated by that
asset or asset group to its carrying value. If the carrying value of the
long-lived asset or asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying value exceeds
its fair value. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. No impairment of long-lived
assets was recognized for the years ended December 31, 2009 and
2008.
Advertising
expenses
Advertising,
which generally represents the cost of promotions to create or stimulate a
positive image of the Company or a desire to buy the Company’s products and
services, is expensed as incurred. The Company had no advertising expenses for
the years ended December 31, 2009 and 2008.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the consolidated statements of income in the period that includes the enactment
date. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion or all of the
deferred tax assets will not be realized.
ASC
740-10-25 clarifies the accounting for uncertain tax positions and requires that
an entity recognizes in the consolidated financial statements the impact of a
tax position, if that position is more likely than not of being sustained upon
examination, based on the technical merits of the position. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely
of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company has elected to
classify interest and penalties related to unrecognized tax benefits, if and
when required, as a component of income tax expense in the consolidated
statements of income.
Foreign
currency translation
The
financial position and results of operations of the Company’s subsidiaries in
the PRC are measured using the Renminbi as the functional currency, while the
Company’s reporting currency is the US dollar. Assets and liabilities of the
subsidiaries are translated at the prevailing exchange rate in effect at each
period end. Income statement accounts are translated at the average rate of
exchange during the period. Translation adjustments are included in the
cumulative translation adjustment account in the consolidated statements of
stockholders’ equity and comprehensive income.
Fair
value measurements
The
Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for
fair value measurements of financial assets and financial liabilities and for
fair value measurements of nonfinancial items that are recognized or disclosed
at fair value in the financial statements. ASC Subtopic 820-10 also
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
ASC
Subtopic 820-10 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
F-9
ASC
Subtopic 820-10 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels
of inputs that may be used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
·
|
Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement
date.
|
·
|
Level 2 inputs are inputs other
than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or
indirectly.
|
·
|
Level 3 inputs are unobservable
inputs for the asset or
liability.
|
The level
in the fair value hierarchy within which a fair value measurement in its
entirety falls is based on the lowest level input that is significant to the
fair value measurement in its entirety.
The
Company did not have any nonfinancial assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2009 and
2008.
Earnings
per share
Basic
earnings per share is computed by dividing net income (loss) attributable to the
Company by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that would
occur upon the exercise of outstanding warrants. Common share equivalents are
excluded from the computation of the diluted earnings per share when their
effect would be anti-dilutive.
Segment
reporting
The
Company has one operating segment, which is designing, manufacturing and
distributing economically priced cellular phones for retail and wholesale
distribution. Substantially all of the Company’s operations and customers are
located in the PRC. Consequently, no geographic information is
presented.
Contingencies
In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations and tax
matters. An accrual for a loss contingency is recognized when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated.
Stock-based
compensation
ASC
718-10 requires the Company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The Company records the cost as expense over the offering period
and vesting term in connection with compensation expense for stock-based
employee compensation plans.
Recently
issued accounting pronouncements
FASB Establishes Accounting
Standards Codification
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. GAAP. All existing accounting standards are
superseded. All other accounting guidance not included in the Codification will
be considered non-authoritative. The Codification also includes all relevant
Securities and Exchange Commission (“SEC”) guidance organized using the same
topical structure in separate sections within the Codification.
F-10
Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.
Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification
(“ASC”) Subtopic
605-25
In
September 2009, the FASB amended the FASB ASC Subtopic 605-25 which applies to
multiple-deliverable revenue arrangements. FASB ASC Subtopic 605-25
requires an entity to allocate revenue in a multiple-deliverable arrangement
using vendor-specific objective evidence (“VSOE”), if it exists, otherwise
third-party evidence of selling price (“TPE”). If neither VSOE nor TPE exists,
the entity shall use its best estimate of the selling price for the
deliverables. As a result, the use of the residual method is eliminated
and, instead, an entity is required to allocate revenue using the relative
selling price method. FASB ASC Subtopic 605-25 also expands disclosure
requirements with respect to multiple-deliverable revenue arrangements. FASB ASC
Subtopic 605-25 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Alternatively, an entity can elect to adopt the
provisions of these issues on a retrospective basis. Management is currently
evaluating the potential impact, if any, of adopting FASB ASC Subtopic 605-25 on
the Company’s financial position and results of operations.
In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):
ASU No.
2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies
the revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction. This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.
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 EPS 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: (i) sales of in substance real estate; and (ii) 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.
F-11
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 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.
4.
Restricted Cash
There are
two blocked bank accounts with restricted cash with the amount of US$4 which
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. Refer to Note 13, “Commitments And Contingencies ” for more
discussion.
5.
ACCOUNTS RECEIVABLE
The
Company’s business relies on a few distributors.The main component of US$81,130
of accounts receivable as of December 31, 2009, was mainly a balance of
US$75,616 due from Beijing Xingwang Shidai Commerce Co., Ltd. (“Xingwang”). The
reason for the large accounts receivable balance as of December 31, 2009
is due to longer turnover days than before. The main reasons for
longer turnover days are: since the industry profit is decresed, the middle
level distributors are removed and the national level distributor
Xingwang has to sell the products to direct customers (the retailers)
which the turn-over rate of the retailers is always slower than middle level
distributors.
However,
the long aged account receivable to Xingwang is guaranteed by a third gurantee
company, Zhong Hui Guarantee Corporation (“Zhonghui”). On December 25, 2008,
Xingwang entered into an irrevocable Credit Guarantee Contract (the “Guarantee
Contract”) with Zhong Hui Guarantee Corporation (“Zhonghui”), a third-party
guarantee company licensed by the PRC government, and BOXT under which Zhonghui
agreed to guarantee up to Renminbi (“RMB”) 300 million (equivalent to
US$43,829), 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. At December 31 2009, the
guarantee contract has expired. A new guarantee contract was
signed between BOXT, Xingwang Shidai and Zhonghui Guarantee on January 1, 2010
and provides a guarantee for all the accounts receivable that are or may become
outstanding from Xingwang to BOXT from January 1, 2008 through December 31,
2010. Since this account receivable is guaranteed by above mentioned guarantee
agreement, no allowance for doubtful account is accrued.
6 TRADE DEPOSIT PAID, NET
US$5,875 and
US$8,441 of trade deposit paid to suppliers on December 31, 2009 and 2008, is
payment in advance to suppliers, which consisted of the following:
December 31, 2009
|
December 31, 2008
|
|||||||
(US$’000)
|
(US$’000)
|
|||||||
Trade
deposit paid
|
$
|
6,004
|
$
|
8,441
|
||||
Less:
allowance for doubtful accounts
|
(129)
|
-
|
||||||
Total
|
$
|
5,875
|
$
|
8,441
|
During
the year ended December 31, 2009, the Company wrote off total trade deposit paid
with balance of US$11,937 to two suppliers, Beijing Runyu Kebo Trading Co., Ltd.
(“Runyu Kebo”) and Beijing Kebo Hongyuan Trading Center. (“Kebo Hongyuan”),
which were liquidated by Beijing Industry and Commerce Bureau, as of December 31
2009. The details are listed below:
Name
of the Suppliers
|
Balance
of trade deposit written-off (US$’000)
|
|||
Runyu
Kebo
|
11,686 | |||
Kebo
Hongyuan
|
251 | |||
Total
|
11,937 |
7. OTHER CURRENT ASSETS, NET
As of
December 31, 2009, other current assets of US$29 are mainly composed of the
advanced payment for employee travelling and the components and parts for
post-sales maintenance stored in the maintainence vendors.
The
decreased amount compared with 2008 is due to the provision for one doubtful
account—Leimeng Times and other accounts with the aging over three years. The
management believes these accounts are uncollectable, as such, the allowance for
doubtful account is provided.
December 31, 2009
|
December 31, 2008
|
|||||||
(US$’000)
|
(US$’000)
|
|||||||
Other
current assets
|
$ | 1,816 | $ | 1,859 | ||||
Less:
allowance for doubtful accounts
|
(1,787 | ) | - | |||||
Total
|
$ | 29 | $ | 1,859 |
F-12
8.
PLEDGED DEPOSIT
US$1,290
of deposit at December 31, 2009 and US$1,287 of deposit at December 31, 2008 was
paid to Zhonghui, a guarantee company for the guarantee provided by Zhonghui to
the loan from Beijing Rural Commercial Bank. Refer to Note 10, “Short-term Bank
Loans” for more discussion of the bank loans.
9.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are summarized as follows:
December
31,,2009
|
December
31,2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Moulds
|
4 | 4 | ||||||
Leasehold
improvements
|
131 | 131 | ||||||
Office
equipment
|
323 | 323 | ||||||
Motor
vehicles
|
303 | 303 | ||||||
761 | 761 | |||||||
Accumulated
depreciation
|
(583 | ) | (520 | ) | ||||
178 | 241 |
The
depreciation and amortization expenses were US$64 and US$97 for the years ended
December 31, 2009 and 2008, respectively.
10. SHORT-TERM
BANK LOANS
All bank
loans outstanding at December 31, 2009 and December 31, 2008 were borrowed by
BOXT. Details of short-term bank loans are summarized as follows:
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)
|
At
December 31, 2008
|
Amount
(RMB’000)
|
Annual
interest
rate
|
Term
|
Guarantee
provided by
|
||||
Loan
from Beijing Rural Commercial Bank
|
47,000
(US$6,857)
|
10.08%
|
From
September 28, 2008 to September 27, 2009
|
Director
Liu Yu; A guarantee company; pledged deposit of
US$1,287.
|
||||
Loan
from Huaxia Bank
|
18,000
(US$2,627)
|
8.964%
|
From
February 18, 2008 to February 18, 2009
|
Director
Liu Yu; Two third party companies; Distributor
Xingwang.
|
||||
Total
|
65,000
(US$9,484)
|
F-13
Interest
expenses incurred for the year ended December 31, 2009 and 2008 were US$911
and US$979, respectively.
US$6,874
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$234 in penalty interest from September 28,
2009 to December 31, 2009.
11. SHORT-TERM
LOAN FROM A NON-FINANCIAL INSTITUTION
The
US$307 short-term loan outstanding as of December 31, 2009 was provided by
a third party company Zhonghui. It is unsecured, interest-free and repayable on
September 27, 2009. The Company is currently negotiating an extension of the
term with Zhonghui. No default penalty interest is chargeable according to the
loan agreement.
12. AMOUNT
DUE TO SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
(a)
|
Name
and relationship of shareholders
|
Related party
|
Relationship
|
|
Mr.
Liu Yu
|
Director
and shareholder of the Company
|
|
Mr.
WangXin
|
Shareholder
and former director of the Company (Resigned on March 27,
2009)
|
(b)
|
Summary
of balances due to shareholders and related party
transactions
|
December
31,
2009
|
December 31,
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Due
to shareholders
|
||||||||
Mr.
Liu Yu
|
402
|
219
|
||||||
Mr.
Wang Xin
|
209
|
238
|
||||||
611
|
457
|
|||||||
Bank
loans guaranteed by Mr. Liu Yu
|
9,390
|
9,484
|
The
amounts due to shareholders are unsecured, interest-free and repayable on
demand.
13. COMMITMENTS
AND CONTINGENCIES
(a)
|
Operating
lease commitments
|
As of
December 31, 2009 and December 31, 2008, the Company had non-cancelable
operating leases for its office premises, under which the expected rental
payment due within the next year was US$53 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 year ended December 31, 2009 and
2008, there were sales amounted to US$70,465 and
US$57,111 respectively of which VAT invoices have not yet been
issued.
The sales
revenue of the year ended December 31, 2009 and 2008 is US$77,392 and
US$107,827, respectively, representing US$13,157 and US$18,331 output
VAT, respectively. At the meanwhile, the input VAT which the invoice has been
received was US$1,899 and US$9,599 for the year ended December 31, 2009 and
2008, respectively. Therefore, the net VAT payable is US$11,258
and US$8,732 for the year ended December 31, 2009 and 2008,
respectively.
F-14
According
to PRC tax law, only the input VAT supported with sufficient invoice could be
deducted from current period’s output VAT. For the purchasing without obtaining
any invoices, 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$21,423 and US$10,134 as of December 31, 2009 and 2008,
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.
Financial guarantee
contract
On June
20, 2007, BOXT entered into a guarantee contract for three years from June 20,
2007 to June 16, 2010 to serve as guarantor of a bank loan amounting to
approximately US$17,550 (equivalent to RMB120,000) to an independent
third-party, Chinacom Communications Co., Ltd. (“CECT”), from Beijing Rural Bank
to provide CECT with capital for equipment purchases. Under the guarantee
contract, BOXT shall perform all obligations of CECT under the loan contract
including principal and interest, late interest payments, fines and other
expenses incurred in the claiming process, if CECT fails to perform its
obligations as set forth in the loan contract, including, but not limited to,
ceasing production, going out of business, dissolving the business, having its
business license withdrawn and filing for bankruptcy.
According
to a March 20,2009 valuation report issued by an independent
professional appraiser, the fair value of the undiscounted maximum potential
amount of future payments as of December 31, 2008 that BOXT could be required to
make under the guarantee contract was approximately US$470. The Company’s
management assessed that the fair value of the undiscounted maximum potential
amount of future payments as of December 31, 2009 did not materially
differ from the same figure as of December 31, 2008. Management believes it is
not probable BOXT will need to fulfill any obligation under this
contract.
Litigation
There are
two legal disputes with two suppliers of BOXT. Shenzhen Songding Industry Ltd.,
(“Songding”) provides battery chargers and Beijing Baoxin Packing Materials Co.,
Ltd. (“Baoxin”) provides packing materials to BOXT. The legal disputes with
above mentioned suppliers arised because the Company did not accept accessories
and materials supplied by Songding and Baoxin due to the quality issues.
The management of BOXT determined to cease the payment to Songding and Baoxin
accordingly.
The
dispute between Baoxin and BOXT started from the arbitration applied by Baoxin
on October 2006 which has been arbitrated by Beijing Arbitration Commission on
October 24, 2006. BOXT should pay Baoxin US$246. Currently BOXT and Baoxin are
processing the final negotiation based on the arbitration result. As such,
Baoxin applied for the property preservation to the court and one of BOXT’s bank
account is blocked accordingly. BOXT has recorded the arbitration result as
account payable to the supplier after the arbitration. The balance of account
payable to Baoxin as of December 31, 2009 is US$36.
The
dispute between Songding and BOXT is still pending for the final arbitration.
The argument amount is US$281 by Songding. BOXT recorded account payable to the
supplier with the amount of US$200 as of December 31, 2008. Songding has
prepared the arbitration application at the end of 2009 (December 28, 2009) and
asked the property preservation to the bank to block the bank account of BOXT at
the meanwhile. And the application was accepted by arbitration commission
formally at January 2010. Since Songding applied for the property preservation
to the court, one of BOXT’s bank accounts is blocked accordingly. The balance of
account payable to Songding as of December 31, 2009 is US$54.
F-15
Warranty
During
this year ended at December 31, 2009, we made no allowance for warranty for
product problems because, during this period, post-sale services for
newly-launched products were undertaken by 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 loan of US$6,874 from Beijing Rural
Commercial Bank at December 31, 2009. The Company is negotiating an extension of
the term of the loan with the bank. The Company accrued US$234 in penalty
interest from September 28, 2009 to December 31, 2009.
Payroll
Payable
The
Company has accrued the salaries and welfare to employees with the amount of
US$659 but with little payment made in 2009 and
2008.
14. UNAPPROPRIATED
RETAINED EARNINGS
The
Company’s subsidiary, BOXT, was required to allocate at least 10% of its after
tax profits as determined under GAAP in the PRC to a statutory dedicated reserve
until the reserve balance reaches 50% of its registered capital. For the year
ended December 31, 2009, BOXT since the Company has an operating loss for the
year ended December 31, 2009.
The
accumulated balance of the unappropriated retained earnings at BOXT as of
December 31, 2009 and December 31, 2008 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 year ended December 31, 2009 is
presented below:
Number
of
share
options
|
||||
As
of January 1, 2009
|
614,000
|
|||
Granted
|
-
|
|||
Exercised
|
-
|
|||
Cancelled/lapsed
|
-
|
|||
As
of December 31, 2009
|
614,000
|
F-16
16.
LIABILITIES FOR POSSIBLE SETTLEMENT FOR ACCOUNTS PAYABLE
Liabilities
for possible settlement for accounts payable of US$2,911 for the year ended
December 31, 2009 is arising from the provision of penalty for unpaid accounts
payable to suppliers at December 31 2009. 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 principle amount of contract liability. However, some of such
purchase contracts were signed before 2006, 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 be expired after two years from the
date on which the liability was due. We noted that at the meanwhile, no any
legal letters related to this part (0.3% penalty arising from the outstanding
payment.) liability were issued from our suppliers in past 4 years. Howevr, from
the point of prudence principle, we accrued this liability based on the terms of
the contract. At December 31,2009, the Company accrued possible
penalty for the purchase contracts signed after December 31, 2007 based on
such penalty term with amount of US$2,911.
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 accrued for the year ended December 31, 2009 and December 31, 2008 are
US$64 and US$ 42 respectively;
The
pension paid for the year ended December 31, 2009 and December 31, 2008 are US$3
and US$42 respectively;
F-17
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
U.S., 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 years ended December 31, 2009, and 2008 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 entitled as “Manufacturing Foreign
Invested Enterprise” and enjoyed 5 years tax holiday, in the first 2 years, the
Corporate Income Tax is exempted and the remaining 3 years, an incentive tax
rate (12.5%) was provided to the enterprise. Fiscal year 2009 is the last year
of the five years holiday. BOXT has to declare and pay 25% tax rate since
2010.
The
components of income (losses) before income taxes are as follows:
For
the Years Ended
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
PRC,
excluding Hong Kong
|
$
|
(9,277
|
)
|
14,203
|
||||
U.S.
|
-
|
-
|
||||||
Others
|
(274
|
)
|
(1,034
|
)
|
||||
Total
|
$
|
(9,551
|
)
|
13,169
|
Income
tax expense for the years ended December 31, 2008 and 2009 represents PRC
current income taxes.
Reconciliation
between income tax expense and the amounts computed by applying the PRC
statutory tax rate of 25% to earnings before income taxes is as
follows:
December
31, 2,009
|
December
31, 2,008
|
|||||||
USD'000
|
USD'000
|
|||||||
Computed
expected tax expenses
|
(1,820 | ) | (3,648 | ) | ||||
Expenses
not deductible for tax purposes
|
4,093 | - | ||||||
Tax
rate differential
|
910 | 1,775 | ||||||
Income
tax expense
|
3,183 | (1,873 | ) |
F-18
The PRC
tax rate has been used because the majority of the Company’s consolidated
pre-tax earnings arise in the PRC.
The
Company had deferred tax assets of approximately $0 and $4,093 as of
December 31, 2008 and 2009, respectively that consisted of tax loss
carryforwards. The Company had no other temporary differences as of December 31,
2009 and 2008.
As of
January 1, 2008 and for the years ended December 31, 2008 and 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. It does not expect that the amount of unrecognized tax benefits will
change significantly within the next 12 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 limitation is
ten years. There is no statute of limitation 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:
Year
ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
Numerator
used in basic net income per share:
|
||||||||
Net
income (loss)
|
(6,368 | ) | 11,296 | |||||
Shares
(denominator):
|
||||||||
Weighted
average common shares outstanding
|
29,756,000 | 29,756,000 | ||||||
PlPlus:
weighted average incremental shares from assumed exercise of
options
|
- | - | ||||||
WWeighted
average common shares outstanding used in computing diluted net
income per common share
|
29,756,000 | 29,756,000 | ||||||
Earnings
(Loss) per ordinary share-basic and diluted
|
$ | (0.21 | ) | $ | 0.38 |
As of
December 31, 2009, the Company had 614,000 outstanding options that could
potentially dilute basic income per share in the future, 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 the year ended December 31,
2009.
20. CONCENTRATIONS
AND CREDIT RISKS
At
December 31, 2009 and 2008, the Company had a credit risk exposure of uninsured
cash in banks of approximately US $374,and US$102 respectively. 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 years ended December 31, 2009 and 2008, 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.
F-19
The
Company buys certain major materials from one major supplier (over 40%
purchasing). In addition, the Company subcontracts material purchasing and
assembly works of cellular phones primarily to five subcontracting factories.
The diversification of suppliers will reduce the risk of increasing production
cost.
|
(a)
|
During
the years ended December 31, 2009 and 2008, the Company’s operating
revenue was mainly derived from two distributors. For the years ended
December 31, 2009 and 2008, 90.6% and 87%, respectively, of total revenue
was derived from our largest distributor Xingwang. There was no trade
deposit received from Xingwang as of December 31, 2009 and 2008. Accounts
receivable from Xingwang were US$75,616 and US$77,695 as of December 31,
2009 and 2008, respectively. As mentioned in note 4, “Accounts
Receivable”, in year 2008, a guarantee company provided a guarantee up to
US$43,875 (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 at January 20, 2010, the guaranteed period was extended to
the year ended December 31, 2010.
|
|
(b)
|
Suppliers
accounting for over 10% of the Company’s purchases are as
follows:
|
The year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
%
|
%
|
|||||||
Supplier
A
|
50 | 36 | ||||||
Supplier
B
|
40 | 19 | ||||||
Supplier
C
|
5 | 15 | ||||||
Supplier
D
|
4 | 10 | ||||||
99 | 100 |
Advances
to the above suppliers were US$3,815 and US$8,129 as of December 31, 2009
and December 31, 2008 respectively. Accounts payable owed to the above suppliers
were US$2,829 and US$12,188 as of December 31, 2009 and December 31, 2008,
respectively.
|
(c)
|
The
Company’s revenue for the year ended December 31, 2009 and 2008,
respectively, were all derived from the PRC. Geographical information of
the carrying amount of long-lived assets is as
follows:
|
December 31,
2009
|
December
31,2008
|
|||||||
US$’000
|
US$’000
|
|||||||
PRC
|
176
|
237
|
||||||
Hong
Kong
|
2
|
4
|
||||||
Total
long-lived assets
|
178
|
241
|
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. RECLASSIFICATION
The
financial statements for periods prior to December 31, 2009 have been
reclassified to conform to the headings and classifications used in the December
31, 2209 financial statements which are mainly reflected in the loan payable and
VAT payable.
22. SUBSEQUENT
EVENT
Management
has considered all events occurring through April 15, 2009, the date the
financial statements have been issued, and has determined that except for below
event there are no such events that are material to the financial statements, or
all such material events have been fully disclosed.
Songding’s
application for arbitraction of dispute between BOXT and Songding was accepted
on January 12, 2010 which is still pending for the final arbitration. (See
note 13)
F-20
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
|
DATED: April
15, 2010
POWER
OF ATTORNEY
The
registrant and each person whose signature appears below hereby appoint Guoji
Liu as attorney-in-fact with full power of substitution, severally, to execute
in the name and on behalf of the registrant and each such person, individually
and in each capacity stated below, one or more amendments to the annual report
which amendments may make such changes in the report as the attorney-in-fact
acting deems appropriate and to file any such amendment to the report with the
U. S. Securities and Exchange Commission.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Guoji Liu
|
Chief
Executive Officer (Principal
|
|||
Guoji
Liu
|
Executive
Officer) and Director
|
April
15, 2010
|
||
/s/ Hua Chen
|
Chief
Financial Officer (Principal
|
April
15, 2010
|
||
Hua
Chen
|
Accounting
Officer)
|
|||
/s/ Liu Yu
|
Chairman
of the Board of Directors
|
April
15, 2010
|
||
Liu
Yu
|
||||
/s/ Naizhong Che
|
Director
|
April
15, 2010
|
||
Naizhong
Che
|
||||
/s/ Peng
Wang
|
Director
|
April
15, 2010
|
||
Peng
Wang
|
||||
/s/ Zhixiang
Zhang
|
Director
|
April
15, 2010
|
||
Zhixiang
Zhang
|
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)
|
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from Exhibit 14
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007)
|
|
16.1
|
Letter
from PKF Hong Kong Certified Public Accountants to the SEC dated August
13, 2009 (incorporated by reference from Exhibit 16.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission on
August 14, 2009)
|
|
21.1
|
List
of Subsidiaries *
|
|
24.1
|
Power
of Attorney (included on signature page)
|
|
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 and Principal Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002 *
|
|
99.1
|
Credit
Guarantee Contract, dated as of August 7, 2008, by and among Beijing Orsus
Xelent Technology & Trading Company Limited, Beijing Xingwang Shidai
Commerce Co., Ltd. And Zhong Hui Guarantee Corporation (incorporated by
reference from Exhibit 99.1 to the Current Report on Form 8-K filed with
the SEC on August 20, 2008)
|
* Filed
herewith