Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - REDtone Asia Incexhibit32_1.htm
EX-32.2 - EXHIBIT 32.2 - REDtone Asia Incexhibit32_2.htm
EX-31.1 - EXHIBIT 31.1 - REDtone Asia Incexhibit31_1.htm
EX-31.2 - EXHIBIT 31.2 - REDtone Asia Incexhibit31_2.htm
EXCEL - IDEA: XBRL DOCUMENT - REDtone Asia IncFinancial_Report.xls


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: February 28, 2014

 £ 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
(State or Other Jurisdiction of
Incorporation or Organization)
 
71-098116
(I.R.S. Tax I.D. No.)
Unit 15A, Plaza Sanhe, No. 121 Yanping Road, JingAn District 200042 Shanghai, PRC
(Address of Principal Executive Offices)
 
(86) 61032230
(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  

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  x    No  

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 February 28, 2014, 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.

 
 

 
REDtone Asia, Inc.

As of Quarter Ended February 28, 2014 (unaudited)

TABLE OF CONTENTS

 

REDTONE ASIA, INC. AND SUBSIDIARIES
At February 28, 2014 and May 31, 2013
 
 
February 28, 2014
   
May 31, 2013
 
 
(Unaudited)
   
(Audited)
 
           
Assets
         
Current assets
         
Cash and cash equivalents
$
         $5,502,271
   
 $
      $   5,479,091
 
Inventories
 
              12,533
     
              10,621
 
Accounts receivable
 
         1,154,909
     
         2,398,488
 
Tax recoverable
 
              23,539
     
              23,323
 
Other receivables and deposits
 
        1,376,808
     
            434,606
 
Total current assets
 
         8,070,060
     
         8,346,129
 
               
Property, plant and equipment, net
 
         1,468,996
     
         1,900,561
 
Intangible assets, net
 
         1,715,815
     
         1,559,471
 
Goodwill
 
            676,274
     
            610,386
 
Amount due from a related company
 
         3,333,576
     
         3,302,301
 
               
Total assets
$
      $ 15,264,721
   
 $
 $      15,718,848
 
               
Liabilities and stockholders’ equity
             
Liabilities
             
Current liabilities
             
Deferred income
 $
          $  860,301
   
 $
       $     840,740
 
Accounts payable
 
         1,912,430
     
         3,751,360
 
Accrued expenses and other payables
 
            734,453
     
            534,375
 
Amount due to a related company
 
            156,239
     
            116,318
 
Taxes payable
 
            988,357
     
            718,042
 
Total current liabilities
 
         4,651,780
     
         5,960,835
 
               
Deferred tax liabilities
 
                8,790
     
              19,739
 
               
Total liabilities
 
         4,660,570
     
         5,980,574
 
               
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
 
         1,775,801
     
         1,095,216
 
Accumulated other comprehensive income
 
            951,172
     
            887,933
 
Equity attributable to shareholders of the Company
 
       10,482,098
     
         9,738,274
 
Equity attributable to non-controlling interest
 
            122,053
     
                      -
 
Total stockholders’ equity
 
       10,604,151
     
         9,738,274
 
               
Total liabilities and stockholders’ equity
 $
       $15,264,721
   
 $
       $15,718,848
 
See accompanying notes to the condensed consolidated financial statements.
 
 
REDTONE ASIA, INC. AND SUBSIDIARIES
AND COMPREHENSIVE INCOME (UNAUDITED)

Three months and nine months ended February 28, 2014 and 2013

   
Three months ended
   
Nine months ended
 
   
Feb 28, 2014
   
Feb 28, 2013
   
Feb 28, 2014
   
Feb 28, 2013
 
                         
Revenue
  $ 1,460,418     $ 2,123,478       4,365,897     $ 5,736,338  
                                 
Other income and gains
    38,943     $ 55,946       185,245       134,242  
                                 
Service costs
    (630,545 )   $ (1,484,462 )     (1,862,821 )     (3,892,206 )
                                 
Personnel cost
    (276,115 )   $ (226,957 )     (681,413 )     (656,168 )
                                 
Depreciation expense
    (170,487 )   $ (162,345 )     (507,402 )     (484,742 )
                                 
Amortization expense
    (31,030 )   $ (30,447 )     (89,240 )     (91,331 )
                                 
Administrative and other expenses
    (207,576 )   $ (131,844 )     (530,839 )     (591,050 )
                                 
Income before provision for income taxes
    183,608       143,369       879,427       155,083  
                                 
Provision for income taxes
    (154,282 )   $ (77,465 )     (225,875 )     (166,390 )
                                 
Net income
  $ 29,326     $ 65,904       653,552     $ (11,307 )
                                 
Share of loss by non-controlling interest
    27,035       -       27,035       -  
                                 
Net income attributable to shareholders of the Company
    56,361       65,904       680,587       (11,307 )
                                 
Other comprehensive income
                               
Total Gain/(loss) on foreign currency translation
    73,211       (7,775 )     62,740       51,870  
Share of other comprehensive income by non-controlling interest
    497       -       497       -  
Other comprehensive income attributable to shareholders of the Company
    73,708       (7,775 )     63,237       51,870  
                                 
                                 
Total comprehensive income attributable to shareholders of the Company
  $ 130,069     $ 58,129       743,824     $ 40,563  
                                 
Earnings per share – basic
    -       -       -       -  
                                 
Weighted average number of shares
    282,315,325       282,315,325       282,315,325       282,315,325  
See accompanying notes to the condensed consolidated financial statements.  


REDTONE ASIA, INC. AND SUBSIDIARIES
Nine months ended February 28, 2014 and 2013

             
   
Nine months ended February 28,
 
   
2014
   
2013
 
             
Cash flows from operating activities
           
Net income/(loss) before non-controlling interest
  $ 653,552     $ (11,307 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
               
Amortization expense
    89,240       91,331  
Depreciation expense
    507,402       484,742  
Deferred tax
    (11,110 )     (10,821 )
Loss on disposal of property, plant and equipment
    -       5,815  
Changes in operating assets and liabilities:
               
Decrease/(increase) in accounts receivable
    1,443,880       (125,863 )
(Increase)/decrease in inventories
    (1,912 )     7,934  
(Increase) in other receivables and deposits
    (942,202 )     (789,959 )
(Increase) in tax recoverable
    (216 )     (195 )
Increase/(decrease) in deferred income
    19,561       (358,694 )
(Decrease)/increase in accounts payable
    (1,838,930 )     856,169  
Increase in tax payables
    270,315       140,706  
Increase in accrued liabilities and other payables
    136,340       47,185  
                 
Net cash provided by operating activities
  $ 325,920     $ 337,043  
                 
Cash flows from investing activities
               
Purchase of property, plant and equipment
    (59,242 )     (85,254 )
Increase in amount due from a related company
    (31,275 )     (14,692 )
Sale/(purchase) of available-for-sale investment
    -       318,392  
Net cash used in acquisition of a subsidiary
    (254,112 )     -  
                 
Net cash (used in)/provided by investing activities
  $ (344,629 )   $ 218,446  
                 
Cash flows from financing activities
               
Increase in amount due to related companies
    39,921       15,140  
                 
Net cash provided by financing activities
  $ 39,921     $ 15,140  
                 
Net increase in cash and cash equivalents
    21,212       570,629  
                 
Effect of exchange rate changes on cash and cash equivalents
    1,968       17,657  
                 
Cash and cash equivalents at beginning of period
    5,479,091       3,520,248  
                 
Cash and cash equivalents at end of period
  $ 5,502,271     $ 4,108,534  
                 
Cash paid for interest
  $ -     $ -  
                 
Cash paid for income taxes
  $ 17,068     $ 28,100  
See accompanying notes to the condensed consolidated financial statements.  
 
 
REDTONE ASIA, INC. AND SUBSIDIARIES
February 28, 2014

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”). The principal activities of the Company are that of a Telecommunications provider for mobile, fixed and international gateway services. REDtone provides a wide range of telecommunication services, including prepaid and postpaid discounted call services to corporate customers and consumers as well as prepaid mobile air-time top-up. The Company also offers prepaid shopping card services.

The Company’s major subsidiaries as of the balance sheet dates are illustrated 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
             
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
             
Shanghai Jiamao E-Commerce Company Limited (“Jiamao”)#
 
The PRC
March 21, 2008
 
100%#
 
Marketing and distribution of products on the internet
             
Shanghai Xin Chang Information Technology Company Limited (“Xin Chang”)#
 
The PRC
January 13, 2006
 
56%
 
Marketing and distribution of IP call and discounted call services in the PRC
             
    # - Variable interest entities.  See also Footnote 14.
           

NOTE 2 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the three months and nine months ended February 28, 2014 and February 28, 2013 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 Chinese Renminbi (“RMB”), while the reporting currency is U.S. 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 February 28, 2014, the results of its operations and cash flows for the three months and nine months ended February 28, 2014 and February 28, 2013.

The results of operations for the three months and nine months ended February 28, 2014 are not necessarily indicative of the results for a full year period. 


NOTE 3 - 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 mainland 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.

(c) Revenue recognition

The Company has adopted a 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 follows:

    ●           Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. Redtone China’s role for Business Collaboration with CTT is as an “Agent” as Redtone China is the sole distributor for the 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 determines the service and package specification and the 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 a prescribed rate (defined as traffic termination cost on the books of Redtone China). In this regard, Redtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges. Redtone China’s role for Business Collaboration with China Unicom is that of “Principal” as China Unicom is playing a passive role as the traffic termination partner while Redtone China is fully responsible for the entire management of the discounted call services.

As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is the remaining gross value of the expired prepaid product.
 

2.           Discounted call services for corporate consumers is as follows:

    ●           Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and

    ●           Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers.

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

4.           Prepaid shopping-card services – revenue recognized 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 period. 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 February 28, 2014 and February 28, 2013, 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:

 
February 28, 2014
 
May 31, 2013
 
February 28, 2013
Period/year end RMB : US$ exchange rate
0.1633
 
0.1618
 
0.1587
Average period/yearly RMB : US$ exchange rate
0.1630
 
0.1590
 
0.1592
Period/year end HK$ : US$ exchange rate
0.1289
 
0.1288
 
0.1289
Average period/yearly HK$ : US$ exchange rate
0.1289
 
0.1288
 
0.1290

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

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-04, Technical Corrections and Improvements. This ASU make technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The amendments in this ASU that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2013.
 

In October 2012, FASB has issued Accounting Standards Update (ASU) No. 2012-05, Statement of Cash Flows (Topic 230). This ASU addresses how cash receipts arising from the sale of certain donated financial assets, such as securities, should be classified in the statement of cash flows of not-for-profit entities (NFPs). Some NFPs classify those cash receipts as investing cash inflows, while other entities classify them as either operating cash inflows or financing cash inflows, consistent with their treatment of inflows arising from cash contributions. The objective of this Update is for an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without the NFP imposing any limitations for sale and were converted nearly immediately into cash. The amendments in the ASU are effective prospectively for fiscal years, and interim fiscal periods within those years, beginning after June 15, 2013. Retrospective application to all periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted.

In January 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification™ (Codification) or subject to a master netting arrangement or similar agreement. The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11.

In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.

The new amendments will require an organization to:

     
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.

     
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). A private company is required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated other comprehensive income for both interim and annual reporting periods. However, private companies are only required to provide the information about the effect of reclassifications on line items of net income for annual reporting periods, not for interim reporting periods. The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted.

In March 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights)within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This ASU is the final version of Proposed Accounting Standards Update EITF11Ar—Foreign Currency Matters (Topic 830), which has been deleted.
 

The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption.

In July 2013, The FASB has published Accounting Standards Update 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. This ASU defers indefinitely certain disclosures about investments held by nonpublic employee benefit plans in their plan sponsors’ own nonpublic equity securities. The ASU was approved by the FASB on June 12, 2013. ASU No. 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04, applies to disclosures of certain quantitative information about the significant unobservable inputs used in Level 3 fair value measurement for investments held by certain employee benefit plans.

In July 2013, The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force).

U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

The FASB has issued Accounting Standards Update (ASU) No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. The amendments in this ASU relate to glossary terms and cover a wide range of Topics in the FASB’s Accounting Standards Codification™ (Codification). These amendments are presented in four sections:

1. Deletion of Master Glossary Terms (Section A) arising because of terms that were carried forward from source literature (e.g., FASB Statements, EITF Issues, and so forth) to the Codification but were not utilized in the Codification.
2. Addition of Master Glossary Term Links (Section B) arising from Master Glossary terms whose links did not carry forward to the Codification.
3. Duplicate Master Glossary Terms (Section C) arising from Master Glossary terms that appear multiple times in the Master Glossary with similar, but not identical, definitions.
4. Other Technical Corrections Related to Glossary Terms (Section D) arising from miscellaneous changes to update Master Glossary terms.

The amendments do not have transition guidance and are effective upon issuance for both public entities and nonpublic entities.

The FASB has issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.
 

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations.

The amendments in this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted.

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

NOTE 4 – ACQUISITION OF A SUBSIDIARY

On January 22, 2014, Hongsheng completed the acquisition of a 56% equity interest in Xin Chang for a total consideration of RMB4.5 million (the “Acquisition”). The consideration are separated into two tranches: 1) $256,269 paid to Xin Chang’s then major shareholder upon signing of the Acquisition Agreement; and 2) another $489,900 to be paid to Xin Chang as an operating fund in batches based on Xin Chang’s financial needs as determined by the Company.

Management has assessed the fair value of the assets and liabilities of Xin Chang as of the acquisition date, and is analyzed as follows:

Assets
     
Cash and cash equivalents
 
$
2,157
 
Trade receivables
   
200,301
 
Prepaid expenses and other receivables
   
9,030
 
         
         
         
Intangible assets, net – Operating concession
   
245,655
 
Total assets
 
$
457,143
 
         
Liabilities
       
Accounts payable
 
$
44,145
 
Accrued expenses and other payables
   
63,738
 
Tax payable
   
9,294
 
Total liabilities
   
117,177
 
         
Net assets acquired
   
339,966
 
Less: Net assets attributable to non-controlling interests
   
(149,585)
 
Net assets acquired attributable to shareholders of the Company
   
190,381
 
         
Cash consideration
   
256,269
 
         
Goodwill
   
65,888
 

NOTE 5 – CASH & CASH EQUIVALENTS

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

   
February 28, 2014
   
May 31, 2013
 
Cash and bank
 
$
2,119,060
   
$
1,086,549
 
Time deposits
   
3,383,211
     
4,392,542
 
                 
Total
 
$
5,502,271
   
$
5,479,091
 
                 

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

NOTE 6 –OTHER RECEIVABLES AND DEPOSITS

Other receivables and deposits as of the dates were summarized as follows:
 
   
February 28, 2014
   
May 31, 2013
 
             
Deposits
 
$
97,684
   
$
176,191
 
Other receivables
   
1,279,124
     
258,415
 
Total
 
$
1,376,808
   
$
434,606
 
                 
 
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of the balance sheet dates are summarized as follows:
 
   
February 28, 2013
   
May 31, 2013
 
At cost:
           
   Computer and software
 
$
575,356
   
$
587,392
 
   Telecommunication equipment
   
 5,172,229
     
5,048,888
 
   Furniture, fixtures and equipment
   
 207,160
     
205,308
 
   Motor vehicles
   
 127,034
     
125,871
 
   Leasehold improvement
   
 35,484
     
35,253
 
     
6,117,263
     
    6,002,712
 
                 
Less: Accumulated depreciation
   
(4,648,267)
     
 (4,102,151)
 
Property, plant and equipment, net
 
$
1,468,996
   
$
1,900,561
 

Depreciation expense for the nine months ended February 28, 2014 and 2013 amounted to $507,402 and $484,742, respectively.

NOTE 8 – 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:
             
   
February 28, 2013
   
May 31, 2013
 
At cost:
           
   Licenses and software
 
$
2,279,461
   
$
2,278,603
 
Operating concession
   
244,950
     
-
 
     
2,524,411
     
2,278,603
 
                 
Less: Accumulated amortization
   
(808,596)
     
(719,132)
 
                 
Intangible assets, net
 
$
1,715,815
   
$
1,559,471
 

Amortization expense for the nine months ended February 28, 2014 and 2013 amounted to $89,240 and $91,331, respectively.
 
NOTE 9 – AMOUNT DUE FROM/(TO) RELATED COMPANIES

Redtone Technology Sdn. Bhd. was previously the holding company of Redtone Telecommunications (China) Ltd.  Pursuant to the reversed take-over 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:
             
   
February 28, 2014
   
May 31, 2013
 
Fellow subsidiary:
           
REDtone Technology Sdn. Bhd.
 
$
3,333,576
   
$
3,302,301 
 


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 Year 2015.  

 Amount due to a related company as of the balance sheet dates were summarized as follows:
             
   
February 28, 2014
   
May 31, 2013
 
Fellow subsidiary:
           
Redtone Telecommunications Sdn Bhd
 
$
156,239
   
$
116,318
 

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


NOTE 10 – ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables as of the balance sheet dates were summarized as follows:
             
   
February 28, 2014
   
May 31, 2013
 
             
Accrued expenses
 
$
355,436
   
$
336,609
 
Other payables
   
379,017
     
197,766
 
Total
 
$
734,453
   
$
534,375
 
                 

NOTE 11 – 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 12 – TAXES PAYABLE

Taxes payable at the balance sheet dates are summarized as follows:
             
   
February 28, 2014
   
May 31, 2013
 
             
Business tax payable
 
$
195,485
   
$
152,131
 
Income tax payable
   
789,038
     
563,497
 
Others
   
3,834
     
2,414
 
Total
 
$
988,357
   
$
718,042
 
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 13 –PROVISION FOR INCOME TAXES/(INCOME TAX INCOME)

Income tax for nine months ended February 28, 2014 and 2013 are summarized as follows:
   
Nine months ended February 28,
 
   
2014
   
2013
 
             
Current – PRC income tax
 
$
236,985
   
$
177,211
 
Deferred income tax income
   
(11,110)
     
(10,821)
 
Total
 
$
225,875
   
$
166,390
 
                 

A reconciliation of the expected tax with the actual tax expense is as follows:
 
   
Nine months ended February 28, 2014
   
Nine months ended February 28, 2013
 
             
             
                 
                 
                 
                 
                 
Income before provision for income taxes
   
879,427
     
155,083
 
                 
Expected PRC income tax expense at statutory tax rate of 25%
 
$
219,857
   
$
38,771
 
Different tax rate for PRC/Hong Kong local authority
   
15,233
     
(3,167)
 
Expenses not deductible for tax
   
4,616
     
28,738
 
Utilization of tax loss brought forward
   
(107,635)
     
-
 
Tax loss not provided for deferred tax
   
93,804
     
102,048
 
                 
Total
 
$
225,875
   
$
166,390
 
 
(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)          All Hong Kong subsidiaries did not generate any assessable profits in Hong Kong and therefore are not subject to Hong Kong tax.

NOTE 14 – VARIABLE INTEREST ENTITIES (“VIEs”)

On November 30, 2006, the Company entered into loan agreements with Huang Bin (“HB”) and Mao Hong (“MH”) for the establishment of Shanghai Hongsheng Net Telecommunications Co., Ltd (“Hongsheng”) and on November 30, 2006, an equity pledge agreement which provides that HB and MH will pledge all their equities in Hongsheng to the Company and REDtone Telecommunications (Shanghai) Limited (“REDtone Shanghai”). The agreement also provides that control of Hongsheng by the Company shall take effect from June 1, 2007.
 
On April 30, 2007, the Company entered into the loan agreements with Mao Junbao (“MJ”) and MH for the establishment of Shanghai Huitong Telecommunications Co., Ltd (“Huitong”) and on April 30, 2007, an equity pledge agreement which provides that MJ and MH would pledge all their equities in Huitong to the Company and REDtone Shanghai

On May 24, 2011, Hongsheng had entered into the Nominee Agreement among Wang Jianping and Xu Lanying provided that Hongsheng would commission Wang Jianping and Xu Lanying to establish Nantong Jiatong Investment Consultant Co., Ltd (“Nantong Jiatong”) and the nominee shareholders of Nantong Jiatong is Wang Jianping and Xu Lanying.

On May 24, 2011, the Company entered into the loan Agreement with Nantong Jiatong to extend a loan of RMB22,000,000 for the additional capital injection into Hongsheng for establishment of QBA, an equity pledge agreement entered by and amongst the Company, Nantong Jiatong and Hongsheng, provided that Nantong Jiatong would pledge all its equities in Hongsheng to the Company.

On January 22, 2014, Hongsheng completed the acquisition of a 56% equity interest in Xin Chang, as a direct subsidiary.
 
Although the Company is not the shareholder of Hongsheng, Huitong, Nantong Jiatong, QBA, Jiamao and Xin Chang, 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 four entities. Hence, Hongsheng, Huitong, Nantong Jiatong, QBA, Jiamao and Xin Chang 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:
             
   
February 28, 2014
   
May 31, 2013
 
Assets
           
Cash and cash equivalents
 
$
1,899,619
   
$
1,945,614
 
Inventories
   
 12,533
     
10,621
 
Accounts receivable
   
 1,154,909
     
2,392,819
 
Tax recoverable
   
 23,539
     
23,323
 
Other receivables and deposits
   
 1,229,669
     
283,603
 
Goodwill
   
676,274
     
610,386
 
Property, plant and equipment, net
   
117,481
     
285,823
 
Intangible asset, net
   
244,924
     
-
 
                 
Total assets (not include amount due from intra-group companies)
 
$
5,358,948
   
$
5,552,189
 
                 
Liabilities
               
Deferred income
 
$
 887,308
   
$
867,804
 
Accounts payable
   
 1,891,969
     
3,730,907
 
Accrued expenses and other payables
   
 601,123
     
379,035
 
Tax payables
   
30,962
     
31,188
 
Total liabilities
 
$
3,411,362
   
$
5,008,934
 

The statements of income of the consolidated VIEs for nine months ended February 28, 2014 and 2013 are as follows, and are included in the consolidated statements of income of the Company:

   
Nine months ended February 28, 2014
   
Nine months ended February 28, 2013
 
             
Revenue
 
$
 4,093,086
   
$
5,347,191
 
Other income and gains
   
 34,397
     
 32,949
 
Service costs (Not including service costs payable to intra-group companies)
   
 (1,852,309)
     
 (3,875,423)
 
Administrative and other expenses
   
(290,799)
     
 (280,298)
 
Personnel cost
   
 (550,068)
     
 (538,180)
 
Depreciation expense
   
 (165,056)
     
 (164,736)
 
Other operating expenses
   
(37,590)
     
-
 
                 
Income before provision for income taxes (Not including service costs payable to other intra-group companies)
   
 
1,231,661
     
521,503
 
Income tax
   
(17,032)
     
(28,136)
 
Net income
 
$
1,214,629
   
$
493,367
 
 
 
NOTE 15 – SEGMENTAL ANALYSIS

Information of the Company’s business segment is as follows:-

   
Nine months ended February 28, 2014
   
Nine months ended February 28, 2013
 
Revenues from:
           
Telecommunications
  $ 4,365,689     $ 5,007,451  
Prepaid business solution
    208       728,887  
      4,365,897       5,736,338  
                 
Segment profit/(loss) from:
               
Telecommunications
  $ 1,109,320     $ 417,877  
Prepaid business solution
    (229,893 )     (262,794 )
      879,427       155,083  
                 
Depreciation and amortization expenses:
               
Telecommunications
  $ 450,311     $ 431,539  
Prepaid business solution
    146,331       144,534  
      596,642       576,073  
                 
Segment assets:
               
Telecommunications
  $ 13,482,154     $ 11,443,576  
Prepaid business solution
    3,123,523       3,407,689  
Eliminations
    (1,340,956 )     (1,307,398 )
      15,264,721       13,543,867  
                 
Capital expenditure
               
Telecommunications
  $ 313,354     $ 85,254  
Prepaid business solution
    -       -  
      313,354       85,254  
 
 
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.    The Company is also venturing into e-POS business of providing e-payment channel to the registered retail shops for their ease of payment convenient..

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 has adopted a 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 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 follows:

Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. Redtone China’s role for Business Collaboration with CTT is as an “Agent” as Redtone China is the sole distributor for the 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 determines the service and package specification and the 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 a prescribed rate (defined as traffic termination cost on the books of Redtone China). In this regard, Redtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges. Redtone China’s role for Business Collaboration with China Unicom is that of “Principal” as China Unicom is playing a passive role as the traffic termination partner while Redtone China is fully responsible for the entire management of the discounted call services

As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is the remaining gross value of the expired prepaid product.
 
2.
Discounted call services for corporate consumers is as follows:

Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and

Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers.

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

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


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.

Year-to-date Results of Operations

Year-to-date Results for Nine-month period ended February 28, 2014 as Compared to period ended February 28, 2013

The following table summarizes the results of our operations during the nine-month periods ended February 28, 2014 and February 28, 2013, and associated percentage changes for comparisons purposes.
   
9-month ended
           
   
Feb 28, 2014
   
Feb 28, 2013
      +/-    
% changes
                         
Revenue
  $ 4,365,897     $ 5,736,338       (1,370,441)       -24%
                               
Other income and gains
    185,245       134,242       51,003       38%
                               
Service costs
    (1,862,821 )     (3,892,206 )     (2,029,385)       -52%
                               
Personnel cost
    (681,413 )     (656,168 )     25,245       4%
                               
Depreciation expense
    (507,402 )     (484,742 )     22,660       5%
                               
Amortization expense
    (89,240 )     (91,331 )     (2,091)       -2%
                               
Administrative and other expenses
    (530,839 )     (591,050 )     (60,211)       -10%
                               
Income before provision for income taxes
    879,427       155,083       724,344       467%
                               
Provision for income taxes
    (225,875 )     (166,390 )     59,485       36%
                               
Net income
  $ 653,552     $ (11,307 )     664,859       N/A%

 
Revenues

Information of the Company’s segmental revenue as follows:

   
Nine months ended February 28, 2014
   
Nine months ended February 28, 2013
 
Revenues from:
           
Telecommunications
  $ 4,365,689     $ 5,007,451  
Prepaid business solution
    208       728,887  
      4,365,897       5,736,338  
The Company generated revenue of $4,365,897 in the first 9 months of the fiscal year ending May 31, 2014, representing a 24% decrease as compared with the preceding year’s corresponding quarters. The decrease in revenues was mainly due to the decrease in revenue from telecommunication segment by $0.6 million and the decrease in revenue from prepaid business solution segment by $0.7 million.

The decrease in revenue from telecommunication segment by $0.6 million was mainly due to lower consumption from the competitive market.

The decrease in revenue from prepaid business solution segment by $0.7 million was due to the absent of revenue in the first 9 months of the fiscal year ending May 31, 2014, while there was a one-off revenue from prepaid business solution segment of $0.73 million generated in the third quarter of last fiscal year.

Service Costs

Information of the Company’s segmental service costs as follows:

   
Nine months ended February 28, 2014
   
Nine months ended February 28, 2013
 
Cost of services from:
           
Telecommunications
  $ 1,862,821     $ 3,211,398  
Prepaid business solution
    -       680,808  
      1,862,821       3,892,206  
 
Service costs reduce by $2,029,385 or 52% in the first nine months in fiscal year 2014. The decrease in service costs was mainly due to the decrease in service costs from telecommunication segment by $1.3 million and the decrease in service costs from prepaid business solution segment by $0.68 million.

The decrease in service costs from telecommunication segment by $1.3 million was mainly due to our diversification cost structure to various vendors which provide better rate with better quality.

The decrease in service costs from prepaid business solution segment by $0.68 million was due to the absent of revenue in the first 9 months of the fiscal year ending May 31, 2014, while there was a one-off revenue from prepaid business solution segment and the cost associated with this revenue is $0.68 million generated in the third quarter of last fiscal year.

Personnel costs

Personnel expenses totaled $681,413, representing a marginal increase of 4% or $25,245 as compared to the preceding year’s corresponding quarters. The increase was mainly due to additional payroll attributable to the newly acquired subsidiary of $23,811. 

Amortization and depreciation expenses

Amortization and depreciation expenses totaled $596,642, generally comparable to the preceding year’s corresponding quarter.
 
Administrative and other expenses
General and administrative expenses totaled $530,839 representing a decrease of 10% or $60,211 as compared to the preceding year’s corresponding quarters due to some cost saving practices by the Company.
 
 
Income before provision for income tax
Profit before provision for income tax totaled $879,427, as compared to $155,083 for the preceding year’s corresponding quarters. This is due to the improvement in operating performance.

3nd Quarter Results for period ended February 28, 2014 as Compared to period ended February 28, 2013

The following table summarizes the 3rd quarter results of our operations during the three month periods ended February 28, 2014 and February 28, 2013, and associated percentage changes for comparisons purposes.

   
Three months ended
           
   
Feb 28, 2014
   
Feb 28, 2013
      +/-    
% changes
                         
Revenue
  $ 1,460,418     $ 2,123,478     $ (663,060)       -31%
                               
Other income and gains
    38,943     $ 55,946       (17,003)       -30%
                               
Service costs
    (630,545 )   $ (1,484,462 )     (853,917)       -58%
                               
Personnel cost
    (276,115 )   $ (226,957 )     49,158       22%
                               
Depreciation expense
    (170,487 )   $ (162,345 )     8,142       5%
                               
Amortization expense
    (31,030 )   $ (30,447 )     583       2%
                               
Administrative and other expenses
    (207,576 )   $ (131,844 )     75,732       57%
                               
Income before provision for income taxes
    183,608       143,369       40,239       28%
                               
Provision for income taxes
    (154,282 )   $ (77,465 )     76,817       99%
                               
Net income
  $ 29,326     $ 65,904     $ (36,578)       -56%
 
 
Revenues

Information of the Company’s segmental revenue as follows:

   
Three months ended February 28, 2014
   
Three months ended February 28, 2013
 
Revenues from:
           
Telecommunications
  $ 1,460,418     $ 1,419,089  
Prepaid business solution
    -       704,389  
      1,460,418       2,123,478  
The Company generated revenue of $1,460,418 in the third quarter of the fiscal year ending May 31, 2014, representing a 31% decrease as compared with the preceding year’s corresponding quarters. The decrease in revenues was mainly due to the decrease in revenue from prepaid business solution segment by $0.7 million, a one-off revenue from prepaid business solution in the third quarter of last fiscal year.

Service Costs

Information of the Company’s segmental service costs as follows:

   
Three months ended February 28, 2014
   
Three months ended February 28, 2013
 
Cost of services from:
           
Telecommunications
  $ 630,545     $ 803,654  
Prepaid business solution
    -       680,808  
      630,545       1,484,462  

Service costs reduce by $853,917 or 58% in the third quarter of the fiscal year 2014. The decrease in service costs was mainly due to the decrease in service costs from telecommunication segment by $0.17 million and the decrease in service costs from prepaid business solution segment by $0.68 million.

The decrease in service costs from telecommunication segment by $0.17 million was mainly due to our diversification cost structure to various vendors which provide better rate with better quality.

The decrease in service costs from prepaid business solution segment by $0.68 million was due to the absent of revenue in the third quarter of the fiscal year ending May 31, 2014, while there was a one-off revenue from prepaid business solution segment and the cost associated with this revenue is $0.68 million generated in the third quarter of last fiscal year.

Personnel costs

Personnel expenses totaled $276,115, representing an increase of 22% or $49,158 as compared to the preceding year’s corresponding quarters. This increase is mainly due to payroll attributable to the newly acquired subsidiary of $23,811.

Amortization and depreciation expenses

Amortization and depreciation expenses totaled $201,517, generally comparable to the preceding year’s corresponding quarter.
 
Administrative and other expenses

General and administrative expenses totaled $207,576 representing an increase of 57% or $75,732 as compared to the preceding year’s corresponding quarters. The increase is mainly due to the consolidation on the newly acquired subsidiary.
 
Income before provision for income tax

Profit before provision for income tax totaled $183,608, as compared to $143,369 for the preceding year’s corresponding quarters. This is due to the improvement in operating performance.
 

Liquidity and Capital Resources
 
Cash
Our cash balance at February 28, 2014 was $5,502,271, representing an increase of $23,180 compared to our cash balance of $5,479,091 at May 31, 2013.

Cash Flow
   
Nine months ended
             
   
Feb, 28 2014
   
Feb, 28 2013
      +/-    
% Changes
 
Net cash provided by operating activities
  $ 325,920     $ 337,043       (11,123)       -3%  
Net cash (used in)/provided by investing activities
  $ (344,629 )   $ 218,446       (563,075)       N/A  
Net cash provided by financing activities
  $ 39,921     $ 15,140       24,781       164%  
Net increase in cash and cash equivalents
    21,212       570,629       (549,417)       -96%  
 
Cash inflows from operations during the nine months ended February 28, 2014 amounted to $325,920, which is generally comparable to the corresponding period last year.
 
Our cash outflows in investing activities during the nine months ended February 28, 2014 amounted to $344,629 as compared to an inflow of $218,446 for the same period in 2013. Difference of $563,075 mainly represents a net outflow of $254,112 in the acquisition of a subsidiary during the third quarter of 2014 (2013: nil), and proceeds of $318,392 from disposal of available-for-sale investment in 2013 (2014: nil).

The Company has cash inflows of $39,921 from financing activities for the nine months ended February 28, 2014, which is generally comparable to the corresponding period last year.
 
Working Capital
Our working capital recorded a surplus of $3,418,280 as of February 28, 2014.


Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
 
 
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.

 
 
Controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting officer to allow for timely decisions regarding required disclosure.
 
As of February 28, 2014, the end of our third quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our principal executive officer and our principal financial and accounting officer concluded that our disclosure controls and procedures were effective in providing reasonable assurance in the reliability of our financial reports as of the end of the period covered by this quarterly report.
 
Inherent limitations on effectiveness of controls

Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in internal controls

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended February 28, 2014, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
 


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.
 

There have been no unregistered sales of equity for the quarter ended February 28, 2014.
 

There have been no material defaults for the quarter ended February 28, 2014.
 
 
 
The Company has evaluated for disclosure all subsequent events occurring through April 15, 2014, the date the financial statements were issued.
 
 
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.
 
 
 
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:  April 18, 2014
REDtone Asia, Inc.
Dated:  April 18, 2014
REDtone Asia, Inc.
 
By:
/s/
By:
/s/
Name:
Chuan Beng Wei
Name:
Hui Nooi Ng
Title:
Chief Executive Officer
Title:
Chief Financial Officer
 
(Principal Executive Officer)
 
(Principal Financial Officer)

 
26