10-K 1 v218698_10k.htm Unassociated Document
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, 2010
 
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
(State or other jurisdiction of
incorporation or organization)
20-1198142
(I.R.S. Employer
Identification No.)
 
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, trading on NYSE Amex Equities

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. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o       Accelerated filer  o
 
Non-accelerated filer   o       Smaller reporting company x
 
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 December 31, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $5,143,520 based on the closing price as reported on the NYSE Amex Equities exchange. There were a total of 30,256,000 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding as of April 5, 2011.

DOCUMENTS INCORPORATED BY REFERENCE: None.
 
 
 

 

PART I

Item 1. Business.

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, Beijing 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 outsource 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.

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.

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:
 
 
·
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;
 
 
·
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;
 
 
·
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;
 
 
·
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;
 
 
·
Human Resources Department, which is responsible for managing our employment-related matters, including hiring and termination of staff;
 
 
·
Financing and Investment Department, which is responsible for overall accounting and financial matters as well as investment research and analysis;
 
 
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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;
 
 
·
Research & Development (“R&D”) Department, which is responsible for researching new mobile phone models and developing new technologies; and
 
 
·
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

Data from 2010 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 2010.  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 2010. (Number of end-users; data in thousands)
 
Market Volume
 
 
 
Jan
 
Feb
 
March
 
April
 
May
 
June
 
July
 
August
 
Sep
 
Oct
 
Nov
 
Dec
 
TTL
 
TTL
 
2009
     14,323      12,936     13,352      12,260     14,209     12,329     13,027     14,384     13,958     16,378     13,279     14,570      165,006  
   
2010
    16,617      16,419     14,922      13,994     16,200     14,360     14,646     15,957     15,728     18,054     15,473     16,609      188,980  
GSM
 
2009
     12,962     11,361     11,342      10,562     12,829     10,906     11,547     12,697     12,038     14,551     11,430     12,120     144,344  
   
2010
     14,140      14,045     12,416     11,562     13,784     11,866     12,425     13,588     13,373     15,519     12,622     13,691      159,030  
CDMA
 
2009
    1,362      1,576     2,010      1,698     1,379     1,423     1,481     1,688     1,920     1,826     1,850     2,449      20,662  
   
2010
    2,478      2,374     2,506      2,432     2,416     2,494     2,220     2,370     2,356     2,535     2,851     2,918      29,950  
 
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.
 
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.

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 2010, DX796 and DX9188 ranked as our best selling models, by sales, contributing 22.2% and 16.6% respectively, to our total sales revenue of US$24,407 for the year.
 
 
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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.

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.

In general, PRC cell phone 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 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.

Within the domestic market, Huawei and ZTE experienced rapid growth for their low price cellular phones through the support of telecom operator China Mobile such as incentives and allowances on the TD model. As a result, Tianyu, Huawei and ZTE controlled 4.2%5.3%and 5.1%, respectively, of the cellular market in the PRC in 2010.
 
 
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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 “orus_trademark”as a registered trademark and the China Trademark Agency has distributed a “Notification of Acceptance” of the trademark with serial number ZC3878232SL.
 
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.

We believe the Company has a good relationship with our employees and there are no collective bargaining arrangements in place.

Item 1A. Risk Factors.
 
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.

RISKS RELATED TO OUR BUSINESS

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, 2010, we had one major customer:  Beijing Xingwang Shidai Tech & Trading Co., Ltd., which was responsible for over 94.49% of our revenues. We have developed and enhanced our relationship and positioned ourselves for long-term cooperation with them by taking the following steps:

 
·
assisting the company in coordinating its sales channels and carriers;
 
 
·
ensuring that the company received high performance products at the specified prices; and
 
 
·
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.
 
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;
 
 
5

 
 
 
·
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.

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;

 
·
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.
 
 
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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.
 
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.
 
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.
 
 
7

 
 
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
 
 
·
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. As of December 31, 2010, we recognized an allowance for doubtful accounts in the amount of $33,836,000.

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.
 
 
8

 
 
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.

If we are unable to obtain additional funding, we may have going concern issue.

We experienced a net loss of $47,395,000 for the year ended December 31, 2010, of which US$33,836,000 was an allowance for doubtful accounts.  The Company is exploring, among other things, a strategic merger possibility and an offering and sale of equity, which, if successful, would improve our cash flow situation.  However, in order to realize the prudence principle, we also have the responsibility to disclose the possibility that a complete loss of investment in our common stock exists.

If we are unable to continue as a going concern, investors may face a complete loss of their investment.

Our auditors have included a “going-concern” emphasis paragraph in their audit report relating to our financial statements as of December 31, 2010, indicating that as a result of significant recurring losses, substantial doubt exists about our ability to continue as a going concern.
 
RISKS RELATED TO DOING BUSINESS IN THE PRC

There are substantial risks associated with doing business in the PRC; these risks are discussed below:

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;
 
 
9

 
 
 
·
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 30 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.
 
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.
 
 
10

 
 
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.
 
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.

 
11

 
 
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,
 
 
·
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, 20.22% 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.
 
 
12

 

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       4,417        
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.

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 defective accessories and materials supplied by Shenzhen Songding Industry Ltd., (“Songding”) and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”). The management of Beijing Orsus Xelent Technologies & Trading Co., Ltd. (“BOXT”) decided to withhold payment to Songding and Baoxin as a result of the defective 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, 2010 was approximately US$38,000. Currently BOXT and Baoxin are in final negotiations.  Baoxin applied to the court for property preservation 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$56,000 at the end of December 31, 2010. Songding applied to the court for property preservation and, accordingly, one of BOXT’s bank accounts was blocked until the resolution of the dispute.


Item 4. (Removed and Reserved).
 
 
13

 
 
PART II
 
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Company common stock has been listed on NYSE Amex Equities exchange (“NYSE 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, 2010 and December 31, 2009:
 
   
Common Stock
 
Fiscal Year Ended
  High     Low  
    (US$)  
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  
                 
December 31, 2010
               
First Quarter
    0.69       0.39  
Second Quarter
    0.55       0.22  
Third Quarter
    0.33       0.13  
Fourth Quarter
    0.23       0.14  
                 
First Quarter of 2011
    0.20       0.12  

The source of this data is Yahoo! Finance.  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, 2010, we had 19 stockholders of our common stock of record, and our common stock had a closing price of US$0.17 per share.

Outstanding Options, Conversions, and Planned Issuance of Common Stock.

As of December 31, 2010, 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, 2011, 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, 2011, 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, 2010,

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, 2010, 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, 2011, none of the grantees has executed these stock options.
 
 
14

 
 
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.

On August 25, 2010, the Company entered into a consulting agreement pursuant to which the Company agreed to issue 500,000 shares of its common stock as consideration to a consulting firm for management consulting and advisory services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering.

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, 2010. 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)

 
 
2010
   
2009
   
2008
   
2007
   
2006
 
   
(US$’000)
   
(US$’000)
   
(US$’000)
   
(US$’000)
   
(US$’000)
 
Sales
    24,407       77,392       107,827       89,923       68,108  
Cost of sales
    22,579       67,970       93,298       78,368       60,102  
Other (expenses)/income-net
    (9,337 )     (2,911 )     2,785       765       75  
Net income (loss)
    (47,395 )     (6,368 )     11,296       9,683       6,718  
Weighted Average Common Shares Outstanding (Basic and diluted)
    30,256,000       29,756,000       29,756,000       29,756,000       29,756,000  
Net Earnings/(Loss) Per Common Share – Basic and Diluted
    (1.55 )     (0.21 )     0.38       0.33       0.23  
 
Consolidated Balance Sheets
Year Ended December 31
(in thousands, except share and per share amounts)

 
 
2010
   
2009
   
2008
   
2007
   
2006
 
   
(US$’000)
   
(US$’000)
   
(US$’000)
   
(US$’000)
   
(US$’000)
 
Current Assets
    71,569       91,481       93,765       66,916       45,567  
Total Assets
    71,725       95,754       94,006       67,234       45,887  
Current Liabilities
    76,269       53,478       45,605       33,332       23,604  
Total Liabilities
    76,269       53,478       45,605       33,337       23,604  
Total Stockholders’ Equity
    (4,544 )     42,276       48,401       33,897       22,283  
 
 
15

 
 
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.
 
 
 
16

 
 
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 :

v218698_chart

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.
 
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 NYSE Amex on May 10, 2007 under the ticker symbol “ORS”.  The Company's CUSIP Number is 68749U106.

Business Review

For the overall cell phone market in the PRC, user volume increased over 12.7% in 2010 from 2009, while the GSM market increased by 9.2%.  In the GSM market, since the Personal Handy-Phone System was withdrawn from the market for policy reasons per government strategic arrangements, low priced GSM products become the preferred choice of PHP users.  At the same time, China Mobile, a telecom operator, provides stronger support to other domestic cell phone producers such as ZTE and Huawei which lead to a rapid growth of low priced GSM cell phones.  Middle and high priced GSM products are still controlled by leading multinational cell phone producers.  The CDMA market realized a rapid development with 31% increase in users and WCDMA products taking a leading position.  Smart phone producers such as Apple have taken advantage of this increased market.

The Company did not reach the objectives established at the beginning of 2010 for its products strategy and operation results.  For low priced products, the cost was not low enough to obtain the incentives and support from telecom operators; while for middle and high priced products, the establishment and development of successful sales channels were not strong enough.  Looking forward to 2011, we will focus on the R&D of products which match the requirements from telecom operators to maintain an established sales channel.

In the area of marketing development, we will focus on markets in developing regions such as Africa while maintaining our traditional domestic market and creating more commercial opportunities by focusing on the R&D of products which meet the requirements and plans of telecom operators and match market trends.

For the year ended December 31, 2010, we also had a going-concern issue.  We experienced a net loss of $47,395,000 for the year ended December 31, 2010. Among this significant loss figure, we recognized US$33,836,000 in allowances for doubt accounts which accounts for 71.5% of the total loss recognized.
 
 
17

 

Under our current business model, it is common to maintain a certain level of accounts receivable to our largest customer. We have confidence that we will be able to collect this significant accounts receivable from our largest customer in installments, given our long term relationship with this customer.  However, we still recognized this US$33,836,000 as an allowance for doubt accounts based on the prudence principle for the year ended December 31, 2010.

In the meantime, we are exploring, among other things, a strategic merger possibility and an offering and sale of equity. If we are able to complete a strategic merger or sale of equity, we believe our cash flow situation will be improved significantly. As a further business strategy plan, we also plan to enter into new 3G markets in emerging countries in the coming quarters of 2011.

As explained above, the Company is experiencing cash flow issue, however, we are confident our efforts and solutions will be able to reduce this issue in the coming quarters of 2011.  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, 2010 and December 31, 2009, respectively:

   
Year ended
December 31, 2010
   
Year ended
December 31, 2009
   
Comparison
 
   
US$’000
   
% of Revenue
   
US$’000
   
% of Revenue
   
US$’000
   
%
 
Sales
    24,407       100.00 %     77,392       100.00 %     (52,985 )     (68.46 %)
Cost of sales
    22,579       92.51 %     67,970       87.83 %     (45,391 )     (66.78 %)
Selling expenses
    104       0.43 %     350       0.45 %     (246 )     (70.29 %)
General & admin. expenses
    420       1.84 %     831       1.07 %     (381 )     (45.85 %)
R&D expenses
    0       0.00 %     54       0.07 %     (54 )     (100.00 %)
Depreciation
    26       0.11 %     64       0.08 %     (38 )     (59.38 %)
Loss from write-off trade deposits
    0       0.00 %     11,937       15.42 %     (11,937 )     (100.00 %)
Allowance for doubtful accounts
    33,836       138.63 %     1,914       2.47 %     31,922       1,667.82 %
Interest expenses
    (1,280 )     (5.24 %)     (912 )     (1.18 %)     (368 )     40.35 %
Other (expenses)/income, net
    (9,337 )     (38.26 %)     (2,911 )     (3.76 %)     (6,426 )     220.75 %
(Loss)/income before income tax expenses
    (43,175 )     (177.02 %)     (9,551 )     (12.34 %)     (33,654 )     352.36 %
Current tax expenses
    0       0.00 %     (910 )     (1.18 %)     (910 )     (100.00 %)
Deferred income tax benefit
    (4,290 )     (17.58 %)     4,093       5.29 %     (8,383 )     (204.81 %)
Net income (loss)
    (47,465 )     (194.60 %)     (6,368 )     (8.23 %)     (41,127 )     645.84 %

 
18

 
 
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

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.
 
 
19

 
 
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, 2010 and 2009 was US$0 and US$54,000, 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, 2010 and 2009.

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, 2010 and 2009.

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.
 
 
20

 

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, 2010 and 2009.

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.
 
RESULTS OF OPERATIONS

Revenues

Revenues were US$24,407,000 for the twelve months ended December 31, 2010, representing a decrease of 68.46% as compared to US$77,392,000 in revenues for the corresponding period last year.  We have analyzed detailed reasons for the sales revenue decrease under the “Business Review” section of this Item 7.
 
 
21

 
 
Products Segment

In order to offset the impact of reduced demand for customized cell phones on our 2010 revenues, we 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 2010 increased from the previous year; most of these models were new for 2010.

The Company’s product segments that have contributed more than 1% to the total revenues for the twelve months ended December 31, 2010 are listed below:

   
Twelve months ended
December 31, 2010
 
   
US$’000
   
% of revenue
 
DX796
    5,422       22.21 %
LM7100B
    1,344       5.51 %
DX5388
    890       3.65 %
DX9188
    4,060       16.63 %
H808     1,538       6.30 %
DXX9
    927       3.80 %
DM2068
    1,942       7.96 %
6228     2,718       11.14 %
HC9999
    1,248       5.11 %
T6000     536       2.20 %
PF111
    662       2.71 %
DX9588
    3,120       12.78 %
Total
    24,407       100.00 %
 
Customer Segments

Revenues by customer segment for the twelve months ended December 31, 2010 are as follows:

   
Twelve months ended
December 31, 2010
 
   
US$’000
   
% of Revenue
 
Beijing Xingwang Shidai Tech & Trading Co., Ltd.
    23,063       94.49 %
Tianjin Communications Broadcast Company
    1,344       5.51 %
Total
    24,407       100.00 %

For the twelve months ended December 31, 2010, 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$23,063,000 and US$1,344,000, 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.
 
 
22

 

Cost of sales and Operating expenses

For the twelve months ended December 31, 2010 our operating expenses were US$2,230,000, 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, 2010 and the corresponding period for 2009:
 
   
Twelve months ended
December 31, 2010
   
Twelve months ended
December 31, 2009
   
Comparison
 
   
US$’000
   
% of Revenue
   
US$’000
   
% of Revenue
   
US$’000
   
%
 
Cost of sales
    22,579       92.51 %     67,970       87.83 %     (45,391 )     (66.78 %)
Operating expenses
 
 
   
 
   
 
   
 
   
 
   
 
 
Selling expenses
    104       0.43 %     350       0.45 %     (246 )     (70.29 %)
General & Admin. expenses
    450       1. 84 %     831       1.07 %     (381 )     (45.85 %)
R&D expenses
    0       0.00 %     54       0.07 %     (54 )     (100.00 %)
Depreciation and amortization
    26       0.11 %     64       0.08 %     (38 )     (59.38 %)
Loss from write-off trade deposits
    0       0.00 %     11,937       15.42 %     (11,937 )     (100.00 %)
Allowance for doubtful accounts
    33,836       138.63 %     1,914       2.47 %     31,922       1,667.82 %
Total operating expenses
    34,416       141.01 %     15,150       19.58 %     19,266       127.17 %

Cost of sales

For the twelve months ended December 31, 2010, our cost of sales was US$22,579,000, or 92.51% of revenues. The ratio of cost of sales to revenues increased by 4.68%, as compared to 87.83% for the twelve months ended December 31, 2009.  The increase of the cost is due to the reduction of profit margins 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, 2010, the Company’s selling expenses were US$104,000, or 0.43% of revenues – a decrease of 70.29% compared to analogous expenses of US$350,000, or 0.45% of the revenues, for the corresponding period in 2009. 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$0, or 0.00% of total revenue, for the twelve months ended December 31, 2010, which represented a 100.00% decrease over the US$54,000 (0.07% of total revenue) spent on R&D during 2009.  The significant decrease was because the Company did not conduct any new R&D activities in 2010 and the payroll of the R&D employees were recorded into the G&A expense.

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.
 
 
23

 

For the twelve months ended December 31, 2010, the Company’s general and administrative expenses were US$450,000 or 1.84% of the total revenue, representing a decrease of US$381,000 or 45.85%  when compared with US$831,000 or 1.07% of the total revenues for the corresponding period in 2009. The sharp decrease was primarily a result of structural adjustments, internal control and cost reduction.

Gross Margin and Gross Margin percentage

For the twelve months ended December 31, 2010, our gross margin was US$1,828,000, reflecting a decrease of US$7,594,000, or 80.60%, compared to a US$9,422,000 gross margin for the same period of 2009. In addition, our gross margin percentage for the year ended December 31, 2010 was 7.49%, representing a decrease of 4.68% as compared to 12.17% for the same period of 2009.

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.

Other (expenses) income, net

For the twelve months ended December 31, 2010, other expense was US$9,337,000, representing an decrease of US$6,426,000 compared with other expense of US$2,911,000 for the same period of 2009. The significant decrease is due to liability accrued for the 0.3% penalty under purchasing contracts (please refer to Note 16 of the financial statements).

Net Income (Loss)

For the twelve months ended December 31, 2010, our net loss was US$47,395,000 and our net loss margin percentage was 194.60% which represents a decrease of US$(41,027,000), or 654.84%, compared to the US$6,368,000 in net loss and corresponding net loss margin percentage of 8.23% during the same period of 2009.

The significant decrease for the net profit (loss) compared with the year ended December 31, 2009 arose from the significant other expenses connecting with 0.3% penalty under purchasing contracts (please refer to Note 16 of the financial statements). And at the same time, per prudence consideration, management of Company recognized US$33,836,000 in bad debt for which the aging has exceeded 360 days and are not guaranteed.

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, 2010, we had current assets of US$71,569,000. Current assets are mainly comprised of accounts receivable of US$60,046,000, trade deposits paid of US$10,161,000; cash and cash equivalents of US$5,000; pledged deposits of US$1,334,000; other current assets of US$19,000 and restricted cash of US$4,000.

As of December 31, 2010, our current liabilities were US$76,269,000, which included accounts payable of US$10,923,000; trade deposits received of US$4,846,000, short-term loans of US$9,710,000, accrued expenses and other accrued liabilities of US$5,030,000; taxes payable of US$32,165,000; and amounts due to directors of US$676,000 and liability for possible settlement to accounts payable of US$12,601,000.

The liability for possible settlement to accounts payable of US$12,601,000 arose from the provision of penalty for unpaid accounts payable to suppliers as of December 31, 2010. In the purchase contracts signed between suppliers and the Company since 2006, an agreed term between BOXT and the suppliers acknowledges that any outstanding payment which exceeds the agreed payment schedule, will be imposed on an additional 0.3% per day delayed payment penalty based on principle amount of contract liability. However, some of the 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 from 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 present, no 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 31,2010, the accrued possible penalty provided based on such penalty term is US$10,161,000 and this liability has been recorded in the “Other Expenses” of statement of operations for the year ended December 31, 2010.

We offer two different trading terms to our customers: cash-on-delivery or credit terms of 45-120 days.  As of December 31, 2010, our accounts receivable had increased by US$11,737,000 to US$92,867,000, as compared with US$81,130,000 on December 31, 2009. The increase in accounts receivable was due mainly to the poor collection of outstanding receivables. As of December 31, 2010, per prudence consideration, the Company recognized US$33,836,000 of bad debt for which the aging has exceeded 360 days and the debt is not guaranteed.
 
 
24

 

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, 2010, 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, 2010, our trade deposits paid were US$10,161,000, which represented an increase of US$4,286,000 as compared to US$5,875,000 in trade deposits paid as of December 31, 2009. The increase was due to more strict deposit policies from our suppliers in 2010.

As of December 31, 2010, our “other current assets” were US$19,000, a decrease of US$10,000 as compared to US$29,000 in “other current assets” we had as of December 31, 2009. The “other current assets” are mainly composed of receivables to individuals. The ending balance of the year 2010 is not material compared with the year of 2009.

As of December 31, 2010, we had pledged deposits of US$1,334,000 which 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$11,000 over the course of the fiscal year.
 
As of December 31, 2010, our accounts payable were US$10,923,000, which represented an increase of US$3,271,000, or 42.75%, as compared to US$7,652,000 in accounts payable as of December 31, 2009.  The main reason for this increase was the management decided to improve the Company’s cash flow situation by delaying certain payment to vendors temporarily.

As of December 31, 2010, accrued expenses and liabilities were US$5,030,000, which represented an increase of US$1,617,000 or 47.38%, as compared to the US$3,413,000 in accrued expenses and liabilities that the Company had as of December 31, 2009.  The increase was due to the accumulated accrued interests in the year 2010.

During fiscal year 2010 we made no allowance for warranty problems because, during this period, after-sale services for newly-launched products were undertaken by OEM factories, rather than the Company. Therefore, allowances were not made accordingly for these after-sale services.

As of December 31, 2010, our income taxes payable were US$6,068,000, which represented an increase of US$198,000 or 3.37%, as compared to our US$5,870,000 in taxes payable as of December 31, 2009.

As of December 31, 2010, our VAT taxes payable were US$26,097,000, which represented an increase of US$4,674,000 or 21.82%, as compared to our US$21,423,000, in taxes payable as of December 31, 2009.

As of December 31, 2010, 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, 2010, we had cash and cash equivalents of US$5,000. This represents an decrease of US$369,000, or 98.66%, compared with the US$374,000 in cash and cash equivalents we had as of December 31, 2009.

As of December 31, 2010, our short term loans aggregated to US$10,028,000, which includes US$2,601,000 from Huaxia Bank and US$7,109,000 from Beijing Rural Bank, and US$318,000 from a non-financial institution—Zhonghui Guarantee Co., Ltd.

Our gearing ratio, calculated as total debts over total assets, was 69.27%, as of December 31, 2010. It has increased slightly compared to 55.85% as of December 31, 2009.
 
 
25

 
 
We anticipate that our cash reserves will be sufficient to fund our cash requirements only until the second quarter of 2011. We are evaluating various alternatives that may include, among other things, a strategic merger possibility and an offering and sale of equity, which, if successful, would improve our cash flow situation.  However, there can be no assurance that we will be successful in our efforts.  If we are unsuccessful in our efforts, our ability to continue to operate will be significantly curtailed and possibly terminated.
 
LITIGATION ISSUES

As of December 31, 2010, we had the following litigation issues.

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 arose 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, 2010 is US$38,000.
 
The dispute between Songding and BOXT started from the arbitration applied by Songding on January 12, 2010 which is still pending for final arbitration. The disputed 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, 2010 is US$56,000.

Warranty

During this year ended at December 31, 2010, 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.
 
OFF BALANCE SHEET ARRANGEMENTS

As of December 31, 2010, 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, 2010.

   
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         -       -  
 
 
26

 
 
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, 2010, Company bank loans were US$9,710,000. The interest rate for the twelve months ended December 31, 2010 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.

Item 8. Financial Statements and Supplementary Data.
 
Reference is made to pages F-1 through F-18 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.
 
 
27

 

Item 9A. 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, 2010, 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, 2010, 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, 2010.

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 Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permits the Company to provide only management's report in this annual report on Form 10-K.

(b)  Changes in Internal Control Over Financial Reporting.

During our fiscal year 2010, 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.

None.
 
 
28

 
 
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
 
41
 
Chief Executive Officer and Director
Hua Chen
 
49
 
Chief Financial Officer
Yu Liu
 
44
 
Director
Naizhong Che
 
67
 
Director
Guowei Zhang
 
36
 
Director
Changhui Guo
 
49
 
Director
 
Guoji Liu earned his undergraduate degree at China Science and Technology Management University in 1993 and has over 16 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, 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.

Guowei Zhang has served as a member of our Board of Directors since December 30, 2010.  He earned his B.S. from Guangdong Industrial University and masters degree in Communications at Huazhong University of Science and Technology. He has 10 years of experience in the communications industry.  He is currently the vice president of Guangzhou YueXiu Electronics Technologies Ltd. (Aug. 2004 – Present). Before that, he worked as a project manager for Guangzohu JinPeng Group Ltd. (May. 2000 – Jul. 2004) and as an engineer for Guangzhou GuangDan Group Ltd. (Jul. 1996 – 2000).

Changhui Guo has served as a member of our Board of Directors since December 30, 2010.  He earned his B.S. from Beijing University of Posts and Telecommunications in accounting and is a CPA.  He has been the CFO for HongXinHuaTong Ltd. since 2003. He previously worked as a vice manager of PTAC Communications Services Co., Ltd. (1999-2003). He also worked in the Foreign Trade Accounting Department of PTAC (1997-1998) and the accounting department of PTAC (1988-1996).

Director and Officer Changes

On December 30, 2010, Peng Wang resigned from his position as a member of the Board of Directors of the Company. Mr. Wang had served as a member of the Board of Directors of the Company since February 7, 2007.

On December 30, 2010, Zhxiang Zhang resigned from his position as a member of the Board of Directors of the Company. Mr. Zhang had served as a member of the Board of Directors of the Company since February 7, 2007.

Family Relationships

There are currently no family relationships between the directors or executive officers of the Company.

Involvement in Certain Legal Proceedings.

None.
 
 
29

 

Board of Directors Meetings and Committees
 
The Board of Directors held four meetings during the fiscal year ended December 31, 2010.  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 NYSE Amex listing standards, all the committees are comprised solely of non-employee, independent Directors.  The charter of each committee is 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
Guowei Zhang (Chair)
 
Naizhong Che (Chair)
 
Naizhong Che (Chair)
Changhui Guo
 
Guowei Zhang
 
Changhui Guo

Audit Committee

The Audit Committee is currently comprised of Guowei Zhang (Chair) and Changhui Guo, both of whom are “independent,” as defined in applicable SEC rules and the NYSE Amex Company Guide.  The Audit Committee met two times during the fiscal year ended December 31, 2010. The Board of Directors has determined that Guowei 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 10-K.

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 NYSE Amex 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 NYSE Amex Company Guide (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 Guowei Zhang, both of whom are “independent” as defined by the NYSE Amex Company Guide. For the fiscal year ended December 31, 2010, the Nominating Committee met one time.  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.
 
 
30

 

During the fiscal year ended December 31, 2010, 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 Changhui Guo, both of whom are “independent” as defined by the NYSE Amex Company Guide. For the fiscal year ended December 31, 2010, the Compensation Committee met zero 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.

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, Guowei Zhang (Chair) and Changhui Guo, 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, 2010, the Audit Committee met two 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, 2010 with management and Kabani & Company, Inc., the Company’s independent auditor. The Audit Committee discussed with Kabani & Company, Inc. 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 Kabani & Company, Inc the written disclosures and the letter regarding the auditor’s independence required by Independence Standards Board Standard No. 1 and has discussed with Kabani & Company, Inc. 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, 2010 be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and the Board of Directors accepted the Audit Committee’s recommendation.
 
The Audit Committee selected Kabani & Company, Inc. Certified Public Accounts as the Company’s independent auditors for the fiscal year ended December 31, 2010.  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 30, 2010, the Board of Directors submitted the selection of Kabani & Company, Inc. to our stockholders for ratification as a matter of good corporate practice.
 
AUDIT COMMITTEE
Guowei Zhang (Chair)
Changhui Guo
 
 
31

 

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, 2010, 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.

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”) assists 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 is 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 US$30,000 was appropriate in this regard for the fiscal year ended December 31, 2010. Similarly, we concluded that a base salary of US$20,000 was appropriate for our chief financial officer for the fiscal year ended December 31, 2010. These base salaries 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.
 
 
32

 
 
Summary Compensation Table

Name & Principal Position
 
Year
 
Salary
(1)
(US$)
   
Bonus
(US$)
   
Stock Awards
(US$)
   
Option Awards
(2)
(US$)
   
All Other Compensation
(US$)
   
Total
(US$)
 
Guoji, Liu
 
2010
    0       N/A       N/A       0       N/A       0  
CEO and director
 
2009
    0       N/A       N/A       0       N/A       0  
Chen, Hua
 
2010
    0       N/A       N/A       0       N/A       0  
CFO
 
2009
    0       N/A       N/A       0       N/A       0  


(1)
“Salary” listed above represents the amount of compensation that each person is owed for the fiscal year ended December 31, 2010 and December 31, 2009.  As of December 31, 2010, in consideration for the Company’s cash flow, the CEO and CFO declined their current year’s salary. As such, both the CEO and CFO recognized zero salary.
 
(2)
“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, 2010 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.

There were no equity awards to the Company's named executive officers in the year ended December 31, 2010.  As of December 31, 2010, none of the Company's named executive officers had any outstanding equity awards.

As of December 31, 2010, 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.

Director Compensation for the fiscal year ended December 31, 2010
 
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)
 
Guoji Liu
    0       N/A       N/A       N/A       N/A  
Yu Liu
    0       N/A       25.5 (1)     N/A       25.5  
Naizhong Che
    0       N/A       N/A       N/A       0  
Guowei Zhang (2)
    0       N/A       N/A       N/A       0  
Changhui Guo (2)
    0       N/A       N/A       N/A       0  
Peng Wang (3)
    0       N/A       N/A       N/A       0  
Zhixiang Zhang (3)
    0       N/A       N/A       N/A       0  
 

(1)
As of December 31, 2010, Yu Liu had 150,000 option awards outstanding. Therefore, US$25,500 have been recognized for financial statement reporting purposes in accordance with FAS 123R for such awards.
 
(2)
Elected to the Board of Directors on December 30, 2010.
 
(3)
Resigned from the Board of Directors on December 30, 2010.

 
33

 

No compensation was awarded to directors in the year ended December 31, 2010.

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 2011, 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       20.22 %
 

(1)
Unless otherwise noted, the address is that of the Company.

(2)
On April 5, 2011, there were 30,256,000 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 30,256,000 shares of our common stock outstanding on April 5, 2011 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 5, 2011.  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.
 
 
34

 

       
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       20.22 %
Common
 
Hua Chen, Chief Financial Officer
           
Common
 
Naizhong Che, Director
           
Common
 
Guowei Zhang, Director
           
Common
 
Changhui Guo, Director
           
Common
 
Peng Wang, Director (resigned December 30, 2011)
           
Common
 
Zhixiang Zhang, Director (resigned December 30, 2011)
           
Common
 
Directors and executive officers as a group (8 persons)
    6,150,000       20.22 %
 

(1)
Unless otherwise noted, the address is that of the Company.

(2)
On April 5, 2011, there were 30,256,000 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 30,256,000 shares of our common stock outstanding on April 5, 2011 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, 2010,

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, 2010, 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, 2011, none of the grantees has executed these stock options.

 
35

 
 
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, 2010, 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 Company) and Mr. 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, 2010 is $676,000.  The amount outstanding as of December 31, 2009 is $611,000. 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, 2010 is $9,710,000 compared with outstanding bank loan of $9,390,000 for the same period of 2009.

Director Independence

Messrs. Naizhong Che, Guowei Zhang and Changhui Guo are all non-employee Directors, and all of whom our Board of Directors has determined are independent pursuant to the NYSE Amex Company Guide 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 NYSE Amex Company Guide and the rules of the Securities and Exchange Commission.
 
Item 14.Principal Accounting Fees and Services.

Our independent accountant is Kabani & Company, Inc. Our previous independent accountant was Bernstein & Pinchuk LLP who has reviewed and commented on our Form 10-K for the fiscal year ended December 31, 2009 and our Form 10-Q for the quarter ended March 31, 2010.

Audit Fees

During the fiscal year ended December 31, 2010, the fees for our principal accountant were US$85,000 which included US$30,000 for three quarterly reviews, and US $55,000 for the preparation of this annual report on Form 10-K. During the fiscal year ended December 31, 2009, the fees for our principal accountant were US$115,000, which was composed of US$30,000 for two quarters review and US$85,000 for the preparation of the annual report on Form 10-K.

Audit Related Fees

During the fiscal years ended December 31, 2010 and December 31, 2009, our principal accountants did not render assurance and related services reasonably related to the performance of the audit or review of financial statements.
 
 
36

 

Tax Fees

During the fiscal years ended December 31, 2010 and December 31, 2009, 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, 2010 and December 31, 2009, 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, 2010 and 2009, 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.

 
37

 
 
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 Orsus Xelent Technologies, Inc.*
     
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)
     
10.3
 
Lease Contract, dated as of January 1, 2009, by and between Beijing Longyida Property Management Co. Ltd. and Orsus Xelent Technologies, Inc.*
     
10.4
  Extension of Lease Contract, dated as December 31, 2009, by and between Beijing Longyida Property Management Co. Ltd. and Orsus Xelent Technologies, Inc.*
     
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 Bernstein & Pinchuk LLP Certified Public Accountants to the Securities and Exchange Commission dated July 22, 2010 (incorporated by reference from Exhibit 16.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 22, 2010)
     
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.
 
 
38

 

Orsus Xelent Technologies, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Year ended December 31, 2010 and 2009

   
Page
 
Report of Independent Registered Public Accounting Firm
    F-1  
         
Report of Independent Registered Public Accounting Firm
    F-2  
         
Consolidated Balance Sheets
    F-3  
         
Consolidated Statements of Operations and Comprehensive Income
    F-4  
         
Consolidated Statements of Cash Flows
    F-5  
 
       
Consolidated Statements of Changes in Stockholders’ Equity
    F-6  
         
Notes to Consolidated Financial Statements
    F-7 – F-18  

 
39

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
 
The Board of Directors
 Orsus Xelent Technologies, Inc. and its subsidiaries

We have audited the accompanying consolidated balance sheet of Orsus Xelent Technologies Inc. and its subsidiaries (the "Company") as of December 31, 2010, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. As of and for the year ended December 31, 2009, we did not audit the financial statement of the Company.  Those statements were audited by other auditors whose reports have been furnished to us, and in our opinion, insofar as it relates to the amounts included for the Company for the year ended December 31, 2009 are based solely on the report of the other auditors.
 
We conducted our audit of these statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 and the report of the other auditors provide a reasonable basis for our opinion.
 
In our opinion, based on our audit and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orsus Xelent Technologies, Inc. and its subsidiaries and the results of its consolidated operations and its cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended December 31, 2010, the Company incurred net losses of $ 47,465,000. In addition, the Company has working capital deficit of $4,700,000 and accumulated deficit of $15,102,000 as of December 31, 2010.  These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
/s/ Kabani & Company, Inc.
 
CERTIFIED PUBLIC ACCOUNTANTS
 
Los Angeles, California
 
April 14, 2011
 
 
F-1

 

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 provides 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-2

 
 
ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands, except  number of shares and per share data)
 
   
December 31,
2010
   
December 31,
2009
 
ASSETS
           
Current assets
           
      Cash and cash equivalents
  $ 5     $ 374  
      Restricted cash
    4       4  
      Notes Receivable
    -       2,779  
      Accounts receivable, net
    60,046       81,130  
      Trade deposit paid, net
    10,161       5,875  
      Other current assets, net
    19       29  
      Pledged deposit
    1,334       1,290  
                 
      Total current assets
    71,569       91,481  
                 
Property, plant and equipment, net
    156       178  
Deferred tax asset
    -       4,095  
                 
    $ 71,725     $ 95,754  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
               
Current liabilities
               
    Short-term bank loans
  $ 9,710     $ 9,390  
    Short-term loan payable
    318       307  
    Accounts payable
    10,923       7,652  
    Accrued expenses and other accrued liabilities
    5,030       3,413  
    Trade deposits received
    4,846       1,884  
    Due to shareholders
    676       611  
    Income taxes payable
    6,068       5,870  
    Other taxes payable
    26,097       21,423  
    Accrued penalties
    12,601       2,928  
                 
Total current liabilities
    76,269       53,478  
                 
Stockholders’ equity/(deficit)
               
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 30,256,000 and 29,756,000 as of December 31, 2010 and 2009, respectively
    31       30  
Additional paid-in capital
    3,278       3,209  
Statutory reserve
    1,042       1,042  
Retained earnings/(accumulated deficit)
    (15,029 )     32,363  
Accumulated other comprehensive income
    6,134       5,632  
                 
Total stockholders’ equity/(deficit)
    (4,544 )     42,276  
                 
    $ 71,725     $ 95,754  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 

ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands, except  number of shares and per share data)
 
   
Year ended
December 30,
2010
   
Year ended
December 30,
2009
 
             
Net sales
  $ 24,407     $ 77,392  
                 
Cost of sales
    22,579       67,970  
                 
Gross profit
    1,828       9,422  
                 
Operating expenses:
               
Selling expenses
    104       350  
General and administrative expenses
    347       831  
Research and development expenses
    -       54  
Depreciation and amortization
    26       64  
Loss from write-off trade deposits
    -       11,937  
Allowance for doubtful accounts
    33,836       1,914  
                 
(Loss)/income from operations
    (32,485 )     (5,728 )
                 
Other income/(expenses)
               
Interest expense
    (1,280 )     (912 )
Other (expenses)/income, net
    (9,337 )     (2,911 )
                 
(Loss) before income tax expense
    (43,102 )     (9,551 )
                 
Income tax expense
    -       (910 )
Deferred taxes
    (4,290 )     4,093  
                 
Net (loss)
    (47,392 )     (6,368 )
                 
Other comprehensive income
               
Foreign currency translation adjustment
    502       243  
                 
Comprehensive (loss)
  $ (46,890 )   $ (6,125 )
                 
Basic and diluted
  $ (1.57 )   $ (0.21 )
                 
Weighted average number of common shares outstanding – basic and diluted
    30,256,000       29,756,000  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 
 
ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands, except  number of shares and per share data)
 
   
Year ended
December 31,
2010
   
Year ended
December 31,
2009
 
Cash flows from operating activities
           
Net (loss)/income
  $ (47,392 )   $ (6,368 )
Adjustments to reconcile net (loss)/income to net cash used by operating activities:
               
      Deferred tax
    4,290       (4,093 )
      Depreciation
    26       64  
      Bad debt expenses
    33,836       -  
      Issuance of common stock for service
    70       -  
      Loss due to liability for possible settlement to accounts payable
    9,337       2,927  
Changes in assets and liabilies                
Change in restricted cash
    -       (4 )
Accounts receivable
    (8,750 )     1,150  
Note receivable
    2,803       (2,777 )
Trade deposits paid
    (5,809 )     2,586  
Other current assets
    10       1,837  
Accounts payables
    2,961       (8,734 )
Accrued expenses, other accrued liabilities and other tax payable
    5,383       12,548  
Trade deposits received
    2,863       (51 )
Income tax payable
    -       868  
Net cash flows used in operating activities
    (372 )     (47 )
                 
Cash flows from financing activities
               
Advances from shareholders
    -       153  
Proceeds from banks and other loans
    -       2,822  
Repayment of bank loans
    -       (2,690 )
Repayment of mortgage loans
    -       (12 )
                 
Net cash flows provided by financing activities
    -       273  
                 
Net change in cash and cash equivalents
    (372 )     226  
                 
Effect of foreign exchange rate changes on cash and cash equivalent
    3       46  
                 
Cash and cash equivalent - beginning of year
    374       102  
                 
Cash and cash equivalent - end of year
  $ 5     $ 374  
                 
Supplemental disclosure for cash flow information
               
Interest paid
  $ -     $ 6  
Income taxes paid
  $ -     $ 41  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 
 
ORSUS XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(In thousands, except number of shares)
 
   
Common stock issued
                               
   
Shares of
Common
         
Additional
paid-in
   
Statutory
   
Retained
earnings(accumulated
   
Accumulated other
comprehensive
       
   
stock
   
Amount
   
capital
    reserve     deficit)    
income
   
Total
 
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
    -       -