REDtone Asia Inc - FORM 10-Q - October 13, 2011

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - REDtone Asia Inc	ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - REDtone Asia Inc	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - REDtone Asia Inc	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - REDtone Asia Inc	ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: August 31, 2011

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

For the transition period from ____________ to _____________

Commission File No. 333-129388


REDTONE ASIA, INC.
(Exact name of small business issuer as specified in its charter)

Nevada		71-098116
(State or other jurisdiction of		(I.R.S. Tax. I.D. No.)
incorporation or organization)

Room 1602, Aitken Vanson Centre, 61 Hoi Yuen Rd., Kwun Tong, Hong Kong
(Address of Principal Executive Offices)

(852) 2270-0688
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the issuer 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 o

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

Large accelerated filer	o	Non-accelerated filer	o
Accelerated filer	o (do not check if smaller reporting company)	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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 31, 2011, are as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.0001 par value	282,315,325

Transitional Small Business Disclosure Format (check one):

Yes o No x

REDtone Asia, Inc.

(Previously Hotgate Technology, Inc.)

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation or Plan of Operation	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4T.	Controls and Procedures	19

PART II -OTHER INFORMATION
Item 1.	Legal Proceedings.	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	[REMOVED AND RESERVED]	19
Item 5.	Other Information.	19
Item 6.	Exhibits	20

SIGNATURES		20

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REDtone Asia, Inc.

(Previously Hotgate Technology, Inc.)

As of Quarter Ended August 31, 2011 (unaudited)

Contents

Condensed Consolidated Balance Sheet as of August 31, 2011 (unaudited) and May 31, 2011 (Audited)	3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three months ended August 31, 2011 and 2010 (unaudited)	4
Condensed Consolidated Statement of Cash Flows (unaudited) for the Three months ended August 31, 2011 and 2010	5
Notes to the Condensed Consolidated Financial Statements (unaudited)	6-14

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	August 31, 2011		May 31, 2011
	(Unaudited)		(Audited)
Assets
Current assets
Cash and cash equivalents	$	4,040,665	$	4,580,189
Inventories		6,700		6,679
Accounts receivable		191,260		644,642
Tax recoverable		45,776		107,308
Other receivables and deposits		304,643		441,351
Total current assets		4,589,044		5,780,169

Property, plant and equipment, net		2,829,144		2,936,979
Intangible assets, net		1,766,196		1,798,397
Goodwill		610,386		610,386
Available-for-sale investments		627,849		308,734
Amount due from a related company		1,762,374		1,182,200

Total assets	$	12,184,993	$	12,616,865

Liabilities and stockholders’ equity
Liabilities
Current liabilities
Deferred income	$	2,367,879	$	1,841,152
Accounts payable		172,790		939,932
Accrued expenses and other payables		179,403		422,837
Amount due to a related company		66,992		101,818
Taxes payable		158,981		120,484
Total current liabilities		2,946,045		3,426,223

Deferred tax liabilities		45,445		47,927

Total liabilities		2,991,490		3,474,150

Stockholders’ equity
Common stock, US$0.0001 par value , 300,000,000 shares authorized; 282,315,325 shares issued and outstanding, respectively		28,232		28,232
Additional paid in capital		7,726,893		7,726,893
Retained earnings		755,215		787,825
Accumulated other comprehensive income		683,163		599,765
Total stockholders’ equity		9,193,503		9,142,715
Total liabilities and stockholders’ equity	$	12,184,993	$	12,616,865

See accompanying notes to the condensed consolidated financial statements.

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME (UNAUDITED)

	Three months ended August 31,
	2011			2010

Revenue	$	1,153,692		$	1,336,616

Other income and gains		37,688			4,111

Service costs		(439,867	)		(573,898	)

Personnel cost		(259,225	)		(142,338	)

Depreciation expense		(161,333	)		(107,654	)

Amortization expense		(29,403	)		(27,612	)

Administrative and other expenses		(285,317	)		(136,540	)

Income before provision for income taxes		16,235			352,685

Provision for income taxes		(48,845	)		(116,152	)

Net (loss)/income	$	(32,610	)	$	236,533

Other comprehensive income
Gain/(loss) on foreign currency translation		83,398			(10,504	)

Total comprehensive income	$	50,788		$	226,029

Net (loss)/income per share, basic and diluted	$	(0.00	)	$	0.01

Weighted average number of shares		282,315,325			19,642,162

See accompanying notes to the condensed consolidated financial statements.

REDTONE ASIA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three months ended August 31,
	2011			2010

Cash flows from operating activities
Net (loss)/income	$	(32,610	)	$	236,533
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax		(3,281	)		-
Amortization expense		29,403			27,612
Depreciation expense		161,333			107,654
Changes in operating assets and liabilities:
Decrease in accounts receivable		453,382			77,261
(Increase) in inventories		(21	)		(12	)
Decrease in other receivables and deposits		136,708			84,253
Decrease/(increase) in tax recoverable		61,532			(125,165	)
Increase/(decrease) in deferred income		526,727			(160,053	)
Decrease in accounts payable		(767,142	)		(134,644	)
Increase in tax payables		38,497			99,824
(Decrease)/increase in accrued liabilities and other payables		(243,434	)		66,751

Net cash provided by operating activities	$	361,094		$	280,014

Cash flows from investing activities
Purchase of property, plant and equipment		(61,876	)		(46,052	)
(Increase) in amount due from a related company		(580,174	)		(24,799	)
Purchase of available-for-sale investment		(319,115	)		-

Net cash used in investing activities	$	(961,165	)	$	(70,851	)

Cash flows from financing activities
(Decrease)/increase in amount due to related companies		(34,826	)		27,273

Net cash (used in)/provided from financing activities	$	(34,826	)	$	27,273

Net (decrease)/increase in cash and cash equivalents		(634,897	)		236,436

Effect of exchange rate changes on cash and cash equivalents		95,373			(11,261	)

Cash and cash equivalents at beginning of period		4,580,189			4,319,834

Cash and cash equivalents at end of period	$	4,040,665		$	4,545,009

Cash paid for interest	$	-		$	-

Cash paid for income taxes	$	2,217		$	128,769

See accompanying notes to the condensed consolidated financial statements.

REDTONE ASIA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

August 31, 2011

NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES

REDtone Asia, Inc. and subsidiaries (the “Company”) are a group of companies in the People’s Republic of China (“PRC”) that principally engaged in e-sales and distribution provider for prepaid services such as prepaid discounted call services for consumers, prepaid mobile air-time and game reload and prepaid shopping card or pass business.

On March 25, 2011, Hotgate Technology, Inc. changed its name from Hotgate Technology, Inc. to REDtone Asia, Inc. and having its new trading symbol in OTCBB as “RTAS”.

As of August 31, 2011, details of the Company’s major subsidiaries are as follows:

Name	Domicile and date of incorporation	Effective ownership	Principal activities

Redtone Telecommunication (China) Limited (“Redtone China”)	Hong Kong May 26, 2005	100%	Investment holding

Redtone Telecommunications (Shanghai) Limited (“Redtone Shanghai”)	The PRC July, 26, 2005	100%	Provides technical support services to group companies

Shanghai Hongsheng Net Telecommunication Company Limited (“Hongsheng”)	The PRC November 29, 2006	100%#	Marketing and distribution of discounted call services to PRC consumer market

Shanghai Huitong Telecommunication Company Limited (“Huitong”)	The PRC March, 26, 2007	100%#	Marketing and distribution of IP call and discounted call services in the PRC

Shanghai Jiamao E-Commerce Company Limited (“Jiamao”)	The PRC March 21, 2008	100%#	Marketing and distribution of products on the internet

Nantong Jiatong Investment Consultant Co., Ltd (“Nanjing Jiatong”)	The PRC May 17, 2011	100%#	Investment holding

Shanghai QianYue Business Administration Co., Ltd. ("QBA")	The PRC December 12, 2008	100%#	Provision of prepaid shopping-card services in the PRC

# - Variable interest entities. See also Footnote 15.

NOTE 2 – RECAPITALIZATION AND REORGANIZATION

Acquisition of Redtone China.

On August 2, 2010, the Company entered into a Share Exchange Agreement (“SEA”) with Redtone Technology Sdn. Bhd. and Redtone International Berhad, both of which are incorporated in Malaysia. Upon the closing of the transactions contemplated in the SEA, the Company will acquire 100% ownership of Redtone China.

For accounting purposes, the acquisition of Redtone China by Hotgate has been recorded as a reverse acquisition of a public company and a recapitalization of Redtone China based on factors demonstrating that Redtone is the acquirer for accounting purposes. This reverse acquisition is accounted for as a recapitalization of Redtone with the common stock of the public company. Therefore, the historical operations of Redtone are included in the consolidated statements of operations for the comparative period.

NOTE 3 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the three months ended August 31, 2011 and 2010 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however the Company believes that the following disclosures are adequate to make the information presented not misleading. All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is in Renminbi (“RMB”), while the reporting currency is US Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position as of August 31, 2011, the results of its operations and cash flows for the three months ended August 31, 2011.

The results of operations for the three months ended August 31, 2011 are not necessarily indicative of the results for a full year period.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in China and Hong Kong.

(b) Fair Value of Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, Other receivables and deposits, tax recoverable, amount due from/(to) related parties, accounts payable, accrued expenses and other payables, and taxes payable.

The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented, due to the short maturities of these instruments.

The Company assesses appropriate revenue recognition policy for each type of operation according to ASC 605-45

Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:

-	Persuasive evidence of an arrangement exists,

-	Delivery has occurred or services have been rendered,

-	The seller’s price to the buyer is fixed or determinable, and

-	Collectability is reasonably assured

Revenue recognition policy for each of the major products and services:

1.	Discounted call services for consumer (EMS) as follow:

Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilize by the consumer and it is on net basis which is computed based on a fixed sharing ratio of the total airtime utilize by consumers after netting of direct traffic termination cost and incidental expenses. Redtone China’s role for Business Collaboration with CTT would be as “Agent” as Redtone China is the sole distributor for EMS brand owned and controlled by CTT; and

Collaboration with other telecommunication providers – Redtone China will act as a discounted consumer call Reseller whereby Redtone China will determine the service and package specification, pricing policy whereas China Unicom acts as a passive termination partner for call traffic. Redtone China will pay China Unicom solely based on call traffic termination by China Unicom at prescribed rate (defined as traffic termination cost in the book of Redtone China). In this regard, Redtone China will recognize the revenue when airtime is utilized by the consumer and the value recognize is the call charges gross value. Redtone China role for Business Collaboration with China Unicom would be as “Principal” as China Unicom is playing passive role as traffic termination partner while Redtone China is fully responsible for the entire management of discounted call services.

As this is a prepaid product, there is an expiry date for the product sold. If the airtime is not utilize by the expiry date, which is currently one year from the activation date, it will be deemed expired and recognize as revenue based on the remaining gross value of the expired prepaid product.

2.	Discounted call services for corporate as follow:

o	Collaboration with CTT – the revenue recognize is the commission earn from distributing the discounted call services to corporate customer; and

o	Collaboration with other telecommunication providers –the revenue recognize is the commission earned from distributing the discounted call services to corporate customer.

3.	Reload services for prepaid mobile – revenue recognize is the commission earned.

4.	Prepaid shopping-card services – revenue recognize is the commission earned.

(d) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the year. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of August 31, 2011 and 2010, there were no dilutive securities outstanding.

(e) Foreign currency translation

The accompanying consolidated financial statements are presented in United States dollars (US$). The functional currencies of the Company are the Hong Kong dollar (HK$) and the Renminbi (RMB), respectively. Capital accounts of the financial statements are translated into United States dollars from HK$ or RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year. The translation rates are as follows:

	August 31, 2011	May 31, 2011	August 31, 2010
Year end RMB : US$ exchange rate	0.1544	0.1542	0.1464
Average yearly RMB : US$ exchange rate	0.1567	0.1544	0.1463
Year end HK$ : US$ exchange rate	0.1283	0.1285	0.1282
Average yearly HK$ : US$ exchange rate	0.1283	0.1287	0.1282

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(f) Fair Value of Financial Instruments

Fair value is defined 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. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

(g) Recent Accounting Pronouncements

New accounting rules and disclosure requirements may significantly impact the financial statements. We believe that there is no new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.

NOTE 5 – CASH & CASH EQUIVALENTS

As of the balance sheet dates, cash & cash equivalents are summarized as follows:


	August 31, 2011		May 31, 2011

Cash and bank	$	3,054,742	$	4,181,973
Fixed deposits		985,923		398,216

Total	$	4,040,665	$	4,580,189

As of the balance sheet dates, the fixed deposits had a maturity term of less than three months.

NOTE 6 – AVAILABLE-FOR-SALE INVESTMENTS

As of the balance sheet dates, available-for-sale investments are summarized as follows:


	August 31, 2011		May 31, 2011

Investment in trust funds	$	627,849	$	308,734
Shanghai Hai He Computing Technology Company Limited (“Hai He”)		-		390,603
		627,849		699,337
Less: Impairment of investments in Hai He		-		(390,603	)
Total	$	627,849	$	308,734

During the three months ended August 31, 2011, the Company fully wrote off the investment in Hai He.

NOTE 7 –OTHER RECEIVABLES AND DEPOSITS

Other receivables and deposits as of the balance sheet dates were summarized as follows:

	August 31, 2011		May 31, 2011

Deposits	$	68,647	$	68,775
Other receivables		235,996		372,576
Total	$	304,643	$	441,351

NOTE 8 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of the balance sheet dates are summarized as follows:


	August 31, 2011			May 31, 2011
At cost:
Computer and software	$	568,423		$	553,328
Telecommunication equipment		4,866,271			4,784,536
Furniture, fixtures and equipment		220,811			219,869
Motor vehicles		32,334			31,800
Leasehold improvement		30,213			29,907
		5,718,052			5,619,440

Less: Accumulated depreciation		(2,888,908	)		(2,682,461	)
Property, plant and equipment, net	$	2,829,144		$	2,936,979

Depreciation expense for the three months ended August 31, 2011 and 2010 amounted to $161,333 and $107,654, respectively.

NOTE 9 – INTANGIBLE ASSETS

Intangible assets of the Company consist primarily of licenses and software for the PRC operations.

Intangible assets as of the balance sheet dates are summarized as follows:

	August 31, 2011			May 31, 2011
At cost:
Licenses and software	$	2,269,581		$	2,273,118

Less: Accumulated amortization		(503,385	)		(474,721	)

Intangible assets, net	$	1,766,196		$	1,798,397

Amortization expense for the three months ended August 31, 2011 and 2010 amounted to $29,403 and $27,612, respectively.

NOTE 10 – AMOUNT DUE FROM/(TO) RELATED COMPANIES

Redtone Technology Sdn. Bhd. was previously the holding company of Redtone Telecommunications (China) Ltd. Pursuant to the reversed acquisition by Redtone Asia, Inc., Redtone Technology Sdn. Bhd. is now the related company of Redtone Asia, both of which are subsidiaries of penultimate holding company namely Redtone International Berhad.

Amount due from a related company as of the balance sheet dates were summarized as follows:

	August 31, 2011		May 31, 2011

Fellow subsidiary:
REDtone Technology Sdn. Bhd.	$	1,762,374	$	1,182,200

	$	1,762,374	$	1,182,200

The amount represents advances to the related company. As of the balance sheet dates, the amount is unsecured, non-interest bearing and is expected to be repaid within three to five years.

Amount due to a related company as of the balance sheet dates were summarized as follows:


	August 31, 2011		May 31, 2011
Fellow subsidiary:
Redtone Telecommunications Sdn Bhd	$	66,992	$	101,818

	$	66,992	$	101,818

The amount due to the related company is unsecured, non-interest bearing and has no fixed repayment date.

NOTE 11 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of the balance sheet dates were summarized as follows:


	August 31, 2011		May 31, 2011

Accrued expenses	$	64,432	$	62,811
Other payables		114,971		389,033
Total	$	179,403	$	451,844

Balance sheet at page 5, for May 2011 audited is $422,837, diff from above

NOTE 12 – DEFERRED INCOME

Deferred income consists of prepaid air-time sold which is yet to be utilized. The basis of revenue recognition for discounted call services is based on actual call charges made by end users. When calls are being made, the amount will be deducted from deferred income to the statement of income, net of call costs and expenses.

NOTE 13 – TAXES PAYABLE

Taxes payable at the balance sheet dates are summarized as follows:


	August 31, 2011		May 31, 2011

Business tax payable	$	104,400	$	120,449
Income tax payable		49,944		35
Others		4,637		-
Total	$	158,981	$	120,484

Business tax represents PRC sales tax imposed upon the Company’s services provided in the PRC. Tax rates range from 3% to 5% depending on the nature of the taxable activities.

Income tax represents PRC income tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

NOTE 14 – PROVISION FOR INCOME TAXES

Income tax expense for the three months ended August 31, 2011 and 2010 are summarized as follows:

	Three months ended August 31,
	2011			2010

Current – PRC income tax provision	$	52,126		$	116,152
Deferred income tax		(3,281	)		-
Total	$	48,845		$	116,152

A reconciliation of the expected tax with the actual tax expense is as follows:

	Three months ended August 31,
	2011			2010
	Amount			Amount

Income before provision for income taxes	$	16,235		$	352,685

Expected PRC income tax expense at statutory tax rate of 25%		4,059			88,171
Different tax rate for PRC/Hong Kong local authority		(11,995	)		(2,094	)
Expenses not deductible for tax		12,931			25,911
Utilization of tax loss brought forward		(15,388	)		(6,140	)
Tax losses not provided for deferred tax		59,238			10,304

Actual tax expense	$	48,845		$	116,152

(i) All PRC subsidiaries are subject to PRC tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

(ii) VMS and Redtone China did not generate any assessable profits in Hong Kong and therefore are not subject to Hong Kong tax.

NOTE 15 – VARIABLE INTEREST ENTITIES (“VIEs”)

During the three months ended August 31, 2010, Hongsheng, Huitong and Jiamao were all VIEs of the Company. The status of these VIEs has not changed since the date of the combination. During the three months ended August 31, 2011, Nantong Jiatong, Hongsheng, Huitong, QBA and Jiamao were VIEs of the Company. Nantong Jiatong and QBA were acquired during the fourth quarter of fiscal year 2011.

Although the Company is not the shareholder of Nantong Jiatong, Hongsheng, Huitong, QBA and Jiamao, the Company has determined that it is the primary beneficiary of these entities, as the Company has 100% voting powers and entitled to receive all the benefit from operations of these entities. Hence, these entities are identified as VIEs and are consolidated as if wholly-owned subsidiaries of the Company.

We did not identify any additional VIEs in which we hold a significant interest.

The total consolidated VIE assets and liabilities reflected on the Company’s balance sheet are as follows:


	August 31, 2011		May 31, 2011
Assets
Cash and cash equivalents	$	2,430,796	$	4,003,765
Inventories		6,700		6,679
Accounts receivable		187,668		642,843
Tax recoverable		23,300		81,086
Amount due from a related company		532,221		-
Other receivables and deposits		283,507		363,823
Goodwill		610,386		610,386
Property, plant and equipment, net		644,508		646,972
Available-for-sale investments		313,925		-

Total assets (not include amount due from intra-group companies)	$	5,033,011	$	6,355,554

Liabilities
Deferred income	$	2,377,008	$	1,857,752
Accounts payable		151,648		913,504
Accrued expenses and other payables		81,733		314,925
Tax payables		-		15,560
Total liabilities	$	2,610,389	$	3,101,741

The statements of income of the consolidated VIEs for the three months ended August 31, 2011 and 2010 are as follows, and are included in the consolidated statements of income of the Company:

	Three months ended August 31,
	2011			2010

Revenue	$	963,045		$	1,206,595
Other income and gains		19,663			246
Service costs		(365,126	)		(557,360	)
Administrative and other expenses		(234,347	)		(102,166	)
Personnel cost		(229,031	)		(115,178	)
Depreciation expense		(54,429	)		(4,433	)

Income before provision for income taxes (Not including service costs payable to intra-group companies)		99,775			427,704

Provision for income taxes		(2,266	)		(72,675	)

Net income	$	97,509		$	355,029

NOTE 16 – COMMON STOCK

As of the balance sheet dates, the Company has a total of 300,000,000 shares of common shares authorized at US$0.0001 par value.

The calculation of weighted average number of shares for the three months ended August 31, 2011 is illustrated as follows:


	Number of shares			Weighted average number of shares

At June 1, 2010, as reported previously		186,684,199
Issuance of shares to Grand Trading Investment Limited on July 22, 2010		110,000,000
One-for-twelve reverse stock split		(271,960,515	)

At August 31, 2010, after reverse takeover transaction		24,723,684			19,642,162
Issuance of shares for acquisition of Redtone China		244,444,444

Issuance of shares on October 25, 2010 to satisfied debts to Redtone International Berhad		13,147,197

At August 31, 2011		282,315,325			282,315,325

NOTE 17 – CONTINGENCIES AND COMMITMENTS

Operating lease commitments

As of August 31, 2011, two PRC subsidiaries had arranged non-cancelable operating leases with third parties for their office premises. The expected annual lease payments under these operating leases are as follows:

Within 1 year	$	87,216

Total	$	87,216

NOTE 18 – SUBSEQUENT EVENT

There are no subsequent events for the reporting period.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "REDtone believes," "management believes" and similar language. The forward-looking statements are based on the current expectations of RTAS and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. The actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no obligation to update them.

Investors are also advised to refer to the information in our filings with the Securities and Exchange Commission, specifically Forms 10-KSB, 10-QSB and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.

Except as otherwise indicated by the context, references in this Form 10-Q to “RTAS,” “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to REDtone Asia, Inc., a Nevada corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “RM” are to Malaysian Ringgit; (vi) “Securities Act” are to the Securities Act of 1933, as amended; and (vii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

Business Overview

We are principally involved in the business of offering discounted call services for end users and paperless reload services for prepaid mobile air-time reload for end users in Shanghai covering all three major telecommunication operators namely China Mobile, China Unicom and China Telecom. With the recent acquisition of QBA, the Company is also venturing into third party payment solutions for the e-commerce industry in China.

Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company recognizes revenue when persuasive evidence of an arrangement exists and upon utilisation of actual air-time traffic by users.

Pursuant to the reverse take-over of Redtone China, the majority of the Company's revenue is derived from consumer and corporate voice services. The majority of the Company call services are for the consumer market which is prepaid in nature and hence there are no bad debts. For the corporate market segment, credit background checks for new customers are conducted to reduce bad debts.

Recent Accounting Pronouncements

The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.

Results of Operations

Three months ended August 31, 2011 as Compared to Three months ended August 31, 2010

The following table summarizes the results of our operations during the three month periods ended August 31, 2011 and 2010, and associated percentage changes for comparisons purposes.

	Three months ended Aug 31,
	2011			2010			+/-		% changes

Revenue	$	1,153,692		$	1,336,616		(182,924	)		-14	%

Other income and gains		37,688			4,111		33,577			817	%

Service costs		(439,867	)		(573,898	)	134,031			-23	%

Personnel costs		(259,225	)		(142,338	)	(116,887	)		82	%

Depreciation expense		(161,333	)		(107,654	)	(53,679	)		50	%

Amortization expense		(29,403	)		(27,612	)	(1,791	)		6	%

Administrative and other expenses		(285,317	)		(136,540	)	(148,777	)		109	%

Income before provision for income taxes		16,235			352,685		(336,450	)		-95	%

Provision for income taxes		(48,845	)		(116,152	)	67,307			-58	%

Net (loss)/income	$	(32,610	)	$	236,533		(269,143	)		-114	%

Revenues

The Company generated revenue of US$1,153,692 in the first 3 months of the fiscal year ending May 31, 2010 representing a 14% drop as compared with the preceding year's corresponding quarter. The decrease is mainly due to a decrease in call-rate in the consumer call business.

Other income and gains:

Other income comprises mainly of interest income from bank deposits. The increase in interest income of US$33,577 is mainly due to high cash reserve recorded for the current quarter and higher return from the investment of idle funds in short term financial planning products managed by commercial banks in China.

Service Costs

Service costs decreased by US$134,031 or 23% in the first three months as we managed to secure traffic termination costs at a lower price compared to the preceding year's corresponding quarter.

Personnel costs

Personnel expenses totaled US$259,225, representing an 82% increase or US$116,887 as compared to the preceding year's corresponding quarter. The increase is mainly due to inclusion of QBA operations for the current year quarter and increase to the Company’s existing staff.

Amortization and depreciation expenses

Amortization and depreciation expenses totaled US$190,436, representing an increase of 41% as compared to the preceding year's corresponding quarter. The increase is mainly due to inclusion of QBA operation for the current quarter.

Administrative and other expenses

General and administrative expenses totaled US$285,317 representing an increase of 109% increase or US$148,777 as compared to the preceding year's corresponding quarter. The increase is mainly due to inclusion of QBA operations for the current quarter.

Income before provision for income tax

Income before provision for income tax totaled US$16,235, representing a 95% decrease as compared to the preceding year's corresponding quarter. This decrease is mainly due to a decrease in revenue due to a decrease in call-rate and higher operating expenses after the consolidation of QBA operations.

Provision for taxes

Provision for taxes made for the first three months was lower by US$67,307 due to decreased income before provision for income taxes as compared to the preceding year's corresponding quarter.

Liquidity and Capital Resources

Cash

Our cash balance at August 31, 2011, was US$4,040,665, representing a decrease of US$504,344 compared to our cash balance of US$4,545,009 at August 31, 2010.

Cash Flow

	Three months ended August 31,
	2011			2010
Net cash provided by operating activities		361,094			280,014		29	%
Net cash used in investing activities		(961,165	)		(70,851	)	1257	%
Net cash (used in)/provided from financing activities		(34,826	)		27,273		N/A
Net (decrease)/increase in cash and cash equivalents		(634,897	)		236,436		N/A

Cash inflows from operations during the three months ended August 31, 2011 amounted to US$361,094 as compared to US$280,014 in the same period of 2010. This is mainly due to a decrease in traffic termination cost .

Our cash outflows in investing activities during the three months ended August 31, 2011 amounted to US$961,165 as compared to cash outflows of US$70,851 for the same period in 2010. The cash outflow in the investing activities for the first three months is primarily due to advances made to the holding company and the purchase of available-for-sale investments.

The Company has cash outflow of US$34,826 from financing activities for the period ended August 31, 2011 as compared to cash inflow of US$27,273 in same period last year. The cashflow changes for these two periods are mainly due to the repayment of amount due to related parties.

Working Capital

Our working capital recorded a surplus of US$1,642,999 as of August 31, 2011. This increase is mainly due to an increase in our consumer call services which is prepaid in nature and therefore results in generating an increase in cash reserves for the Company.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.

Foreign Currency Exchange Rate Risk

Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies in Chinese Renminbi (“RMB”), Malaysian Ringgit (“RM”) and Hong Kong Dollar (“HK$”) could adversely affect our financial results. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency. All of our sales and expenses denominated in foreign currencies are denominated in the RMB, RM and HK$. Our principal exchange rate risk therefore exists between the U.S. dollar and these currencies. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other (income) expense, net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

Interest Rate Risk

Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.

Inflation

Inflation has not had a material impact on the Company's business in recent years.

Currency Exchange Fluctuations

The Company's revenues and its expenses are denominated in RMB, RM and HK$. The value of these foreign currency-to-U.S. dollars may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China, which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of RMB to U.S. dollars had generally been stable and RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the RMB from the United States dollar. At the recent quarterly regular meeting of People's Bank of China, its Currency Policy Committee affirmed the effects of the reform on RMB exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of RMB has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so.

Concentration of Credit Risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:

1. The Company's business is characterized by new product and service development and evolving industry standards and regulations. Inherent in the Company's business are various risks and uncertainties, including the impact from the volatility of the stock market, limited operating history, uncertain profitability and the ability to raise additional capital.

2. The Company's revenue is deriving from China and Hong Kong. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.

3. If the Company is unable to derive any revenues from these countries, it would have a significant, financially disruptive effect on the normal operations of the Company.

ITEM 4T. CONTROL AND PROCEDURES

Evaluation of disclosure controls and procedures

As of August 31, 2011, the end of the period covered by this Form 10-Q, our management performed, under the supervision and with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of August 31, 2011, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

Changes in internal controls

There were no material changes in the Company’s internal controls or in other factors that could materially affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

Sarbanes - Oxley Act 404 compliance

The Company anticipates that it will be fully compliant with section 404 of the Sarbanes-Oxley Act of 2002 by the required date for non-accelerated filers and it is in the process of reviewing its internal control systems in order to be compliant with Section 404 of the Sarbanes Oxley Act. However, at this time the Company makes no representation that its systems of internal control comply with Section 404 of the Sarbanes-Oxley Act.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company may from time to time be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination, or breach of contract actions incidental to the operation of its business. The Company is not currently involved in any such litigation that it believes could have a materially adverse effect on its financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no unregistered sales of equity for the quarter ended August 31, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There have been no material defaults for the quarter ended August 31, 2011.

ITEM 4. [REMOVED AND RESERVED]

ITEM 5. OTHER INFORMATION

The Company has evaluated for disclosure all subsequent events occurring through October 13, 2011, the date the financial statements were issued.

ITEM 6 - EXHIBITS

The following exhibits are furnished as part of the Quarterly Report on Form 10-Q:

Exhibit Number		Description
31.1		Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: October 13, 2011	REDtone Asia, Inc.

	By:	/s/ Chan Beng Wei
		Name: Chuan Beng Wei
		Title: Chief Executive Officer


	By:	/s/ Chee Keong Lee
		Name: Chee Keong Lee
		Title: Chief Financial Officer

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REDtone Asia Inc Reports

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