XOTC:RTAS Redtone Asia Inc Annual Report 10-K/A Filing - 5/31/2012

Effective Date 5/31/2012

XOTC:RTAS (Redtone Asia Inc): Fair Value Estimate
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XOTC:RTAS (Redtone Asia Inc): Consider Buying
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XOTC:RTAS (Redtone Asia Inc): Consider Selling
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XOTC:RTAS (Redtone Asia Inc): Fair Value Uncertainty
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XOTC:RTAS (Redtone Asia Inc): Economic Moat
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XOTC:RTAS (Redtone Asia Inc): Stewardship
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A-2
Amendment No. 2
(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
 
 
For the fiscal year ended May 31, 2012
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
 
For the transition period from ______ to______
   
 
Commission file number 333-129388
   
REDTONE ASIA, INC
(Exact Name of registrant as specified in its charter)
     
Nevada
 
71-098116
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
   
     
Unit 15A, Plaza Sanhe, No. 121,Yanping Road, JingAn District, 200042 Shanghai, PRC
   
(Address of principal executive offices)
 
(Zip Code)
   
)
Registrant’s telephone number, including area code (86) 6103 2230

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.0001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files). Yes o    No x
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
   
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
The issuer’s revenues for its most recent fiscal year were $8,423,049.

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of May 31, 2012 was $-0-.  Although listed on the OTCBB under the symbol RTAS, there is currently no active trading for the registrant’s common stock.  Therefore, the aggregate market value of the stock is deemed to be $-0-.  
 
At the date of this report, there were 282,315,325 outstanding shares of Redtone Asia, Inc. Common Stock, $0.0001 par value.

Documents Incorporated by Reference: None
 
Transitional Small Business Disclosure Format (check one) Yes o No x
 

 
1

 

 
Explanatory Note
 
This Amendment No. 2 on Form 10-K/A-2 amends the registrant’s Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended May 31, 2012  as filed with the Securities and Exchange Commission by the registrant on August 29, 2012, and August 31, 2012 respectively. This Amendment is filed to reflect the correct name of the registrants’  Chief Financial Officer, Hui Nooi Ng as listed under Item 15.  No other items are being amended except as described in this Explanatory Note and this Amendment does not reflect any events occurring after the filing of the original Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

 
   PART I  
ITEM 1. BUSINESS 3
ITEM 1A. UNRESOLVED STAFF COMMENTS 9
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
     
   PART II  
     
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 10
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7 MANAGEMENTS DISUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 14
ITEM 9A. CONTROLS AND PROCEDURES 14
ITEM 9B. OTHER INFORMATION 15
     
  PART III  
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 15
ITEM 11. EXECUTIVE COMPENSATION 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 18
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 18
     
   PART IV  
     
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 19
     
 

 
2

 

Note About Forward-Looking Statements

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,”  “possible,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (refer to Part I, Item 1A). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I
ITEM 1. BUSINESS

Historical Overview

Acquisition of Redtone China.

On August 2, 2010, Hotgate Technology, Inc. entered into a Share Exchange Agreement (“SEA”) with Redtone Technology Sdn. Bhd. and Redtone International Berhad, both of which are incorporated in Malaysia.  After the closing of the transactions contemplated in the SEA, the Company acquired 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. 

Pursuant to the reversed acquisition, Hotgate Technology, Inc. and subsidiaries (the “Company”) focus on e-sales and distribution for prepaid services such as prepaid discounted call services for consumers, prepaid mobile air-time and game reload.

On March 7, 2011, following the satisfactory completion of due diligence, the Company had through its wholly-subsidiary Shanghai Hongsheng Net Telecommunications Company Limited, entered into a share sales agreement (“SSA”) with Shanghai QianYue Information Technology Co., Ltd. ("QIT") for the acquisition of the entire paid-up capital of Shanghai QianYue Business Administration Co., Ltd. ("QBA"), amounting to RMB 10 million, for a cash consideration of RMB 7.9 million. QBA is an established prepaid shopping-card issuer in Shanghai known as “VeryPass”.  The effective date of control for QBA is April 1, 2011 for accounting purposes.

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


As of May 31, 2012, details of the Company 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 14.

On March 7, 2011, through its wholly-subsidiary Shanghai Hongsheng Net Telecommunications Company Limited ("Hongsheng "), entered into a share sales agreement with Shanghai QianYue Information Technology Co., Ltd. ("QIT") for the acquisition of the entire paid-up capital of QBA, amounting to RMB 10 million, for a cash consideration of $1,219,511.  QBA is an established prepaid shopping-card  issuer in Shanghai known as “VeryPass”.

On May 17, 2011, Nantong Jiatong was incorporated for the purpose of investment holding.


Business of the Issuer

Business Overview

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

Products and Services

REDtone China offer the following services to customers:

1. Discounted call services for consumers (“EMS”)
2. Discounted call services for corporate customers
3. Reload services for prepaid mobile
4. Prepaid business solution
 
Competition
 
The telecommunications industry in China is dominated by three state-run corporations, i.e. China Telecom Corporation Limited, China Mobile Communications Corporation and China United Network Communications Group Co., Ltd, all of whom has 3G licenses and engaged fixed-line and mobile business in China. 

We see competition from:

(i) Direct Telecommunication Operators namely China Telecom Corporation Limited, China Mobile Communications Corporation and China United Network Communications Group Co., Ltd. These companies may adopt a more aggressive pricing on their local and international calls and have direct impact on our discounted call services for corporate segment. Likewise, if these operators offer very competitive rates for domestic, long distance and international calls, it could pose a substitution threat to our EMS services.
 
 


(ii) Other Discounted Service Providers
The discounted service providers such as Super E-Secretary operate domestic calls and the tool to compete is to provide discount on long distance calls. This company despite being a small player (less than 15% market share) in Shanghai discounted consumer call market may cause the price disruption when they compete on price aggressively.

(iii) Other Mobile air-time reload service providers
Other players like Smartpay, Defeng and YiQiao offers similar mobile air-time reload services in Shanghai. They have entered into this reload services earlier than us but we command slightly better price advantage and better system support for paperless mobile reload in comparison with conventional paper-based reload model.  

(iv) Prepaid Business Solution
Other players like Alipay, Tenpay and 99Bill offers similar third party payment services in China.


We believe our competitive advantage is derived from the following strengths:

 
(a)
Competitive Pricing

We, being one of the leading alternative voice service providers in Shanghai in terms of market share, could command the economies of scale to achieve lower minutes cost and lower operating cost per minute. Additional cost advantage is the low capital investment with self-developed technology.

By having advantage of longer market presence, credibility and dominant market share, we can afford to price its products and services competitively while maintaining healthy gross margins.

 
(b)
Superior Technology and Competent Technical Support

We use superior call routing technology and techniques, such as its own invention, the Smart Call System, for large corporate customers. As the products are developed in-house, we know the products well and are competent in supporting customers. Customers can expect hassle-free implementation of the products and services.

 
(c)
Innovation

Innovation which is embodied in all the products and services is the key to the competitive advantage of our operations. In addition, innovation also helps us to truly serve the needs of the customers and to provide value-added services and products to the customers.   

Close communication with our front line resellers will enable us to gather market intelligence and assist us in strategy formulation that is relevant to market needs

(d) Value Added Services

For the telecommunications services provided by us, customers would also benefit from value added services in our convenient reload, customer care services and support, e-billings and others.


Regulatory Matters

REDtone China does not provide direct telecommunication services in PRC. REDtone China acts as a distributor for CTT. REDtone China has a business licence issued by PRC’s State Administration for Industry and Commerce to carry out the distribution services.  REDtone China does not require a telecommunication licence to carry out its distribution activities.  

We do not anticipate having to expend significant resources to comply with any governmental regulations applicable to our operations. We are subject to the laws and regulations which are generally applicable to business operations, such as business licensing requirements, income taxes and payroll taxes.
 
 
 
 
However, the telecommunications industry is highly regulated in China. PRC laws and regulations will be modified and updated from time to time by the China government. In addition, many PRC laws and regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial uncertainty regarding the future interpretation and application of these laws or regulations.

Shanghai Hongsheng Net Telecommunication Co., Ltd. (“Hongsheng”), the subsidiary that carries out the telecommunication distribution services currently has a business license in connection with these services.  The business license is valid until November 28, 2026, and the Telecommunication Value-Adding Business Operating Permit is valid until November 5, 2013.  Both are subject to annual filing; however, the Company does not foresee any issue regarding renewal or material fees involved in the renewal.


Costs of Compliance with Environmental Laws

We are not presently affected by and do not have any costs associated with compliance with environmental laws.

Customers and Suppliers

Our major customers are end users and corporate clients in Shanghai. Our suppliers are mainly termination partners and telecommunication players such as CTT, China Mobile and China Unicom and China Telecom.

Intellectual Property and Research and Development

The Company has no registered patents, trademarks or copyrights and no applications for patents, trademarks or copyrights are pending.

The Company utilized intellectual property pursuant to an agreement signed between REDtone Technology Sdn. Bhd,  and REDtone Telecommunications (China) Ltd on 11 August 2005 in respect of the acquisition of the software with regards to the Customer billing, commission management, top-up management, traffic management, cardless system and gateway interface system suite.

The “Redtone” logo in Chinese and “VeryPass” logo in English are registered trademarks in China valid until October 13, 2020 and October 6, 2020 respectively.

The Company did not incur any research and development expenses in the fiscal year ended May 31, 2012.


Number of Employees

Currently, we have our Chief Executive Officer to manage the Company. With the acquisition of REDtone China, as of May 31 2012, we had fifty five (55) employees including Twelve (12) in the Management/ team, Thirty Three (33) in Research & Development, Customer Care, Sales and Marketing as well as Finance and Administrative, and balance of Ten (10) in Technical supports.  None of our employees are represented by labor unions or subject to collective bargaining agreements. We believe our employee relations are good and have no employee related dispute recorded over the years.
.
ITEM 1A. RISK FACTORS

Risks Related to Our Business
 
Operational/Business Risk

We are principally involved in the provision of telecommunications services and solutions and office communication solutions. As such, we are subject to certain operational and business risk factors inherent in the telecommunications industry. The operational risks include, inter-alia, changes in conditions such as deterioration in prevailing market conditions, changes in labor, increase in labor cost and raw material costs and continued supply of electricity which is essential for the smooth operations of its telecommunications network(s). The business risks include, inter-alia, network disruption in respect of the provision of the telecommunications services and Although we seek to mitigate these operational and business risks through, inter-alia, efficient cost control, maintaining a diversified range of customers and suppliers, having good relationships with the customers, suppliers and employees of the Company and having contractual agreements for projects undertaken, there can be no assurance that any change to these factors will not have a material adverse effect on our business and financial performance.
 


 
Competition

We are in a very competitive and rapidly changing telecommunications industry and its future success will depend on its ability to increase its market share in its markets. As we are competing against well established telecommunications companies which offer related services which include, inter-alia, China Telecom, China Unicom and China Mobile on their pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. The increasing competition in this telecommunications industry has had, and is expected to continue to have, a significant impact on our business and financial performance. Competition is expected to increase with the emergence of new entrants into its markets. We believe that the provision of telecommunications services complemented with our innovative will provide the Group with a competitive edge and differentiate us from its competitors.
 
Although we seek to mitigate these risks, there can be no assurance that our competitors will not develop technologies and products that are more effective than those developed by us. We have a very clear strategy to replicate the business in other provinces in China.
 

 Dependence on key personnel

The technology industry is a growing and fast changing sector and management and operation of the business requires the employment of highly skilled knowledge workers, whether in technology or non-technology related fields. Our management recognizes and believes that our continuing success depends to a significant extent on the abilities and continuing efforts of its existing Executive Directors, Chief Executive Officers and key personnel. The labor market for skilled personnel in this field is highly competitive. We recognize that our success depends to a significant extent upon, amongst others, our ability to attract new personnel and retain its existing skilled personnel. We seek to mitigate this risk factor by offering its employees competitive salary/remuneration and benefits packages. There can be no assurance that the measures taken/to be taken will be successful and that any change in our existing skilled personnel will not have a material effect on our business and operations

Adverse Changes to the terms of business collaboration agreement with China TieTong
 
We currently have business collaboration agreements with China TieTong. The agreement provides for renewability and is subject to changes in the terms of the agreements on renewal. We will endeavour to seek and renew the agreement on terms favourable to us. There can be no assurance that any adverse changes to the terms of the agreement (for example, from failure to reach commercially acceptable terms) would not result in higher interconnection expenses. However, as we have emerged as a significant service provider, China TieTong may views this as a business opportunity to continue and further strengthen their working relationship with us.

Although individual members of our management team have experience as officers of publicly-traded companies, much of that experience came prior to the adoption of the Sarbanes-Oxley Act.
 
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.

If we need additional financing, the funding may not be available on satisfactory terms or at all.

We may seek to raise additional capital through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital by issuing debt securities, we would incur substantial interest obligations, may be required to pledge assets as security for the debt and may be constrained by restrictive financial and/or operational covenants. Debt financing would also be superior to your interest in bankruptcy or liquidation. To the extent we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or product candidates, or grant licenses on unfavorable terms.


 
 
If the market does not accept our other new products or upgrades to existing products that we launch from time to time, our operating results and financial condition would be materially adversely affected.  

From time to time, we plan on launching new products and upgrades to existing products.  Our future success with our next generation product offerings will depend on our ability to accurately determine the functionality and features required by our customers, as well as the ability to enhance our products and deliver them in a timely manner. We cannot predict the present and future size of the potential market for our next generation of products, and we may incur substantial costs to enhance and modify our products and services in order to meet the demands of this potential market.

If we experience delays in product development or the introduction of new products or new versions of existing products, our business and sales will be negatively affected.  

There can be no assurance that we will not experience delays in connection with our current product development or future development activities.  If we are unable to develop and introduce new products, or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements, it may materially and adversely affect our operating results and financial condition.  Because we have limited resources, we must effectively manage and properly allocate and prioritize our product development efforts.  There can be no assurance that these efforts will be successful or, even if successful, that any resulting products will achieve customer acceptance.

We have only limited protection of our proprietary rights and technology.  

Our success is heavily dependent upon our proprietary technology. We rely on a combination of the protections provided under applicable copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements, to establish and protect our proprietary rights. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our developers, distributors and marketers.  Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or obtain and use information that we regard as proprietary, to use our products or technology without authorization, or to develop similar technology independently. Moreover, the laws of some other countries do not protect our proprietary rights to the same extent as do the laws of the United States. Furthermore, we have no patents and existing copyright laws afford only limited protection.  There can be no assurance that we will be able to protect our proprietary software against unauthorized third party copying or use, which could adversely affect our competitive position.

We have never paid cash dividends and are not likely to do so in the foreseeable future.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.

Risks Associated With Doing Business in China and Asia

There are substantial risks associated with doing business in China and Asia, as set forth in the following risk factors.

Our operations and assets in China are subject to significant political and economic uncertainties.

Changes in PRC laws and regulations, their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results from operations and financial condition. Under current leadership of the PRC, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

 

 
Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, the Chinese legal system is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and evolving rapidly, and their interpretation and enforcement involve various uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold business licenses and permits. In addition, all of our executive officers and directors are not residents of the U.S., and most of the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to serve process on these individuals in the U.S., or to enforce a judgment obtained in the U.S. against the Company or any of these persons.

The Chinese governments exert substantial influence over the manner in which we must conduct our business activities which could have an adverse effect on our ability to operate in China

China has only recently permitted provincial and local economic autonomy and private economic activities. The Chinese governments continue to exercise substantial control over virtually every sector of the economy through regulation and state ownership. Our ability to operate may be harmed by changes in laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy could have a significant effect on economic conditions in China.  Additionally, regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in particular regions of China, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

The substantial portion of our revenues will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to pay dividends or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.

The value of our securities will be affected by the foreign exchange rate between U.S. dollars and RMB and other local currencies.

The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into RMB for our operational needs and should the RMB appreciate against the U.S. dollar at that time, our financial position, the business of the company, and the price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, then the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
 
 

 
The Company relies on contractual agreements (VIE structure) for all of its revenues; further, the Company has no equity interest in these subsidiaries and there are risks associated with this type of arrangement in light of the legal structure in the PRC.

Redtone China has placed tremendous reliance on contractual arrangements (VIE structure) for asserting management and controls in its wholly owned subsidiaries without equity interest.  The existence of such VIE structure is due to the fact that the PRC government limits the foreign investment in the value-added telecommunication industry.  These subsidiaries account for all of the Company’s revenue.
The VIE structure, while effective, does involve some associated risks, which may include:

(i)
While each agreement under the Contractual Arrangements as governed by PRC laws is valid, biding, and enforceable, there is the possibility that these Contractual Arrangements will not be deemed by the relevant government authorities to be in compliance with PRC laws and regulation; or, that other government authorities will not in the future interpret existing laws, regulations or policies, or issue new laws, regulations or policies, with the result that all or some of these Contractual Arrangements would be deemed to be in violation of PRC laws.
 
(ii)
The PRC laws referred to herein are laws currently in force.  There is the possibility that any of such laws, or the interpretation thereof or enforcement thereof, will be changed, amended or replaced in the immediate future or in the long-term with or without retrospective effect.
 
(iii)
Under the current Contractual Arrangements, if the PRC Entities, and/or any of their individual shareholders fails to perform its/his/her respective obligations under these Contractual Arrangements, the Company may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC laws, including, but not limited to, seeking specific performance or injunctive relief, and claiming damages, which we cannot assure the Company would achieve the full remedy therefrom.
 

ITEM 1A. UNRESOLVED STAFF COMMENTS

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.


ITEM 2. PROPERTIES

The Company’s principal executive offices are located at Suites 15A, E,F, Plaza Sanhe, No. 121 Yanping Road, Jing An District, Shanghai, PRC.  The Company’s management believes that all facilities occupied by the Company are adequate for present requirements, and that the Company’s current equipment is in good condition and is suitable for the operations involved.


ITEM 3. LEGAL PROCEEDINGS

We are not a party to and none of our property is subject to any material pending or threatened legal, governmental, administrative or judicial proceedings.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year covered by this Annual Report.

 

PART II


ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Articles of Incorporation provide that the Company has the authority to issue 300,000,000 shares of common stock at par value of $0.0001 per share. As of May 31, 2012, we had 282,315,325 outstanding shares of Common Stock, after the reverse stock split as disclosed in Item 9B(d).

On March 25, 2011, our common stock began being quoted on the OTCBB under the symbol “RTAS”. We have not had any active trading in our stock as of the date of this report.

The Company has never paid any cash dividends on its stock and does not plan to pay any cash dividends in the foreseeable future.

As of August 23, 2012, we had approximately 48 shareholders of record.

 Equity Compensation Plans
The Company does not have any equity compensation plans in place as of the date of this report, and had no options, warrants or other convertible securities outstanding as of that date.

Sales of Unregistered Securities

For the period from 1 June 2011 to the date of this report, there is no sale of  unregistered securities.


ITEM 6.  SELECTED FINANCIAL DATA

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are principally involved in the business of offering discounted call services for end users and corporate segment and paperless reload services for prepaid mobile air-time reload for end user 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 e-business, or an internet business as third party payment solution for e-commerce industry in China.
 
 
 
 
Results of Operations

Financial Presentation

The following sets forth a discussion and analysis of the Company’s financial condition and results of operations for the two years ended May 31, 2012 and 2011. This discussion and analysis should be read in conjunction with our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors” of this Annual Report on Form 10-K.

     
Year ended
         
 
 
 
May 31, 2012
 
 
 
May 31, 2011
 
 
 
Increase/ (decrease) from previous year
 
                                 
Revenue
    $ 8,423,049       $ 5,465,564  
 
    2,957,485  
 
    54%  
Other income and gains
 
    209,154  
 
    137,494  
 
    71,660  
 
    52%  
Service costs
 
    5,224,044  
 
    2,362,519  
 
    2,861,525  
 
    121%  
Administrative expenses
      718,366         1,028,504         (310,138 )
 
    -30%  
Personnel cost
 
    1,232,640  
 
    705,265  
 
    527,375  
 
    75%  
Provision for obsolete inventories
      31,703         -         31,703  
 
    N/A  
Depreciation expense
 
    647,538  
 
    491,442  
 
    156,096  
 
    32%  
Amortization expense
 
    121,632  
 
    118,875  
 
    2,757  
 
    2%  
Other operating expenses
 
    68,356  
 
    46,472  
 
    21,884  
 
    47%  
Income before provision for income taxes
 
    587,924  
 
    849,981  
 
    (262,057 )
 
    -31%  
Provision for income taxes
 
    329,938  
 
    200,078  
 
    129,860  
 
    655  
Net income
    $ 257,986       $ 649,903  
 
    (391,917 )
 
    -60%  
                                         
Other comprehensive income
 
 
 
 
 
 
 
 
 
       
 
       
Gain/(loss) on foreign currency translation
      136,254         150,482         (14,228 )
 
    -9%  
Total comprehensive income
    $ 394,240       $ 800,385         (406,145 )
 
    -51%  
 
 
 
 
 
 
 
 
 
 
       
 
       

Year ended May 31, 2012 compared to year ended May 31, 2011

Revenues.   Revenues from operations for the year ended May 31, 2012 of $8,423,049 reflected an increase of $2,957,485 over the fiscal year ended May 31, 2011.  This is due to call traffics increase in consumer voice business as well as inclusion of the newly acquired subsidiary, namely QBA.

Other income and gains.  During the fiscal year ended May 31, 2012, the Company recorded other income and gains of $209,154, an increase of $71,660 or 52% compared with last year.   Included in the other income are interest income from placement in financial products and incentives from local governments.

Service cost. Service costs from operations for the year ended May 31, 2012 of $5,224,044 reflected an increase of $2,861,525 over the fiscal year ended May 31, 2011.
 


 
The increase in service cost is due to discounted consumer voice services come with different cost structure with increase in the sales from the collaboration agreement with China Unicom for discounted consumer voice services whereby we recognize both revenue and cost on the gross basis for China Unicom model.
Redtone China’s role for Business Collaboration with China Unicom would meet the criteria for revenue recognition on gross basis and therefore the same gross basis is applicable for the recognition of traffic termination cost paid for China Unicom in the account.

Administrative expenses.  The general and administrative expenses has reduced $310,138 or 30% to $718,366, mainly due to we have recognized an impairment losses of $436,862 in aggregate foryear ended May 31, 2011, of which impairment loss for an available-for-sale investment amounted to $390,603 and impairment loss for intangible assets amounted to $46,259. There was no impairment loss recognized during the year ended May 31, 2012.

Personnel expenses.  The personnel expenses has increase 75% or $527,375 to $1,232,640 for the year ended May 31, 2012,  This is mainly contributed by annual increment in payroll and additional headcount due to the inclusion of the newly acquired QBA operation.

Provision for obsolete inventories. During the year ended May 31, 2012 the Company has provided obsolete inventories of $31,703. There was no provision provided during the year ended May 31, 2011.

Depreciation and amortization expenses.   Depreciation and amortization has increase by 32% and 2% respectively year on year for the year ended May 31, 2012. The increase in depreciation expense is mainly contributed by the inclusion of the newly acquired QBA operation.

Other operating expenses.  The other operating expenses has increase 47% or $21,884 to $68,356 for the year ended May 31, 2012,  This is mainly contributed by the inclusion of the newly acquired QBA operation.

Income before provision for income taxes.  For the financial year under review, as the increase in operating cost outweighs the increase in revenue, the net income before provision for income taxes has been lower at $587,924 as compared to $849,981 over the financial year 2011.

Liquidity and Capital Resources.

Cash
 
Our cash balance at May 31, 2012, was $3,520,248, representing a decrease of $1,059,941, from previous cash balance of $4,580,189 as of May 31, 2011.

Cash Flow (before effect of exchange rate changes).

     
Fiscal year ended May 31,
             
     
2012
     
2011
      +/-    
% changes
 
Net cash provided by operating activities
    $ 995,346       $ 1,260,356       (265,010 )     -21 %
Net cash used in investing activities
    $ (2,092,656 )     $ (1,065,341 )     1,027,315       96 %
Net cash (used in)/provided from financing activities
    $ (24,690 )     $ (25,361 )     (671 )     -3 %
Net (decrease)/increase in cash and cash equivalents (before effect on exchange rate changes)
 
    (1,122,000 )
 
    169,654       (1,291,654 )     N/A  

Net cash provided by operations during the fiscal year ended May 31, 2012 amounted to $995,346 as compared to net cash used in operations of $1,260,356 in the same period of FY2011, a decrease of 21% as a result of operating expenses increase.

Net cashflow used in investing activities for the fiscal year ended May 31, 2012 amounted to $2,092,656 mainly aroused from intercompany advances..

There was net cash used in financing activities for the year ended May 31, 2012 total $24,690 represented by movement in intercompany balances.  In the same period of FY2011, the amount was $25,361 of the same nature.
 

 
 
Working Capital
 
Our working capital was $1,335,037 at May 31, 2012, decrease of 43% as compared to last year. The largest current asset comprises cash and cash equivalent total $3,520,248 or represents 77% of total current assets. This is because the core businesses of Redtone are prepaid in nature.

At May 31, 2012, we had stockholders’ equity of $9,536,955; total assets of $12,813,362 and total current liabilities of $3,276,407.

We do not currently anticipate any material capital expenditures for our existing operations. We do not currently anticipate purchasing or leasing any plant and equipment during approximately the next twelve (12) months.

We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurances that our business will not be affected by inflation in the future.

We have no off balance sheet arrangements.

Critical Accounting Policies and Estimates

Revenue Recognition

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:

 
·
oPersuasive evidence of an arrangement exists,
 
·
oDelivery has occurred or services have been rendered,
 
·
oThe seller’s price to the buyer is fixed or determinable, and
 
·
oCollectability 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 CTT – Redtone China is appointed as the sole distributor for EMS and we will recognize the 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 as per the collaboration agreement with CTT. Redtone China’s role for Business Collaboration with China TieTong Telecommunications (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 discounted consumer call Reseller whereby Redtone China will decide on service and package specification, pricing policy while China Unicom merely acts as 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:
 
·
Collaboration with CTT – the revenue recognize is the commission earn from distributing the discounted call services to corporate customer; and


 
·
Collaboration with other telecommunication providers –the revenue recognize is the commission earn from distributing the discounted call services to corporate customer;
3.
Reload services for prepaid mobile – revenue recognize is the commission earn

4.
Prepaid business solution  – a flexible payment solution in order to eliminate cumbersome processes and overhead while increasing convenience, flexibility, security and profitability’ This revenue is recognize in the net commission/fee earned basis.
 
 

Recent Accounting Pronouncements.

The Company does not expect the adoption of any recent accounting pronouncements which are further elaborated in Note 3 (o) of Notes to Consolidated Financial Statements will have any material impact on its financial statements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide disclosure required by this item.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s audited financial statements and the notes thereto appear in Part IV, Item 15, of this report.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The accounting firm of Madsen and Associates CPA’s, Inc., (“Madsen”) was engaged on September 8, 2008 as independent auditor of the Company.

During the period that Madsen served as our independent auditor, we have not had any disagreements with Madsen, whether resolved or unresolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to said accountants' satisfaction, would have caused it to make reference to the subject matter of the disagreements(s) in connection with its report.


ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

 
As of May 31, 2012, the end of the year covered by this Form 10-K, 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 May 31, 2012, 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.


ITEM 9B. OTHER INFORMATION

There were no items required to be disclosed in a report on Form 8-K during the fourth quarter of the fiscal year ended May 31, 2012 that have not been already disclosed on a Form 8-K filed with the SEC.


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The following table sets forth as of the date hereof, except as otherwise noted, the names, ages and positions held with respect to each director, executive officer, and significant employee expected to make a significant contribution to the Company:

       
Name
Age
Position
Period
       
Chuan Beng Wei
 
 
Zainl Amanshah bin Zainal
46
 
 
45
Director
CEO
 
Director
July 2008 - Present
October 2010- Present
 
October 2010-July 2011
 
       
Lau Bik Soon
 
Lee Chee Keong
40
 
38
 
Director
 
CFO
October 2010-Present
 
October 2010-March 2012
 
       
Ng Hui Nooi
39
CFO
March 2012-Present

Mr Chuan Beng Wei, age 46, is now the Chief Executive Officer of the Company.  Mr Wei has been and will continue serving on the Board of Directors of the Company. He obtained his Bachelor’s Degree in Electrical Engineering from University of Technology Malaysia in 1989 and Diploma in Management (Gold Medalist Award Winner) from the Malaysian Institute of Management, Kuala Lumpur in 1995.  He also completed an Entrepreneur Development Program from the renowned MIT Sloan School of Management in USA in January 2006.

He began his career with Hewlett Packard Sales Malaysia Sdn Bhd in 1989 as a Systems Engineer responsible for information technology (“IT”) technical and customer relations, and was subsequently promoted to Major Account Manager. Having gained wide exposure in IT, electronics and the telecommunications industry, he began his entrepreneur pursuit. He started Redtone Telecommunications Sdn Bhd in 1996 with two other partners. As one of the founding members of the Redtone Group, he is instrumental in shaping the Group’s business relations and policies. His main responsibilities include management of the Group’s overall business, expanding its overseas markets and financial-related matters. Mr Wei also serves as the Managing Director of the Redtone Group, which was listed in January 2004 in the ACE Market of Bursa Malaysia. In addition, in 2007, Mr Wei started Redtone China where he played a significant role in developing business strategy in China. He was the past Chairman for The Association of Computer and Multimedia Malaysia and the past Deputy Chapter Chairperson for the exclusive Young Presidents’ Organization (YPO).  
 


 
Mr. Bik Soon Lau, age 40, obtained his first-class honors degree in electrical engineering from the University of Technology in Malaysia. He joined REDtone in 2008, as an executive director responsible for expanding the Group’s Malaysia business which include data, broadband, Wifi and discounted call services.  Prior to joining REDtone, he was the Country Manager for Hitachi Data Systems Malaysia from year 2005 to 2008. Under his leadership in Hitachi, he strengthened the organisation and company’s channel partner, and helped the company grow its business in Malaysia.

Mr. Lau’s 14 years of experience as Sales Director in the ICT and telecommunications industry provides expertise in corporate leadership and strategic marketing planning. In his career, he has held numerous other positions, including sales director, partner sales manager, enterprise division account manager, business development manager, systems engineer, and research and design engineer.  He has held these positions with organizations such as Cisco Systems, Sun Microsystems, Compaq Computer, TQC Consultant (IT Division) Sdn Bhd, and Motorola Penang. During his tenure with these organizations, he received various Partner Management Excellence awards as well as many accolades as a high achiever in sales.  


 Ms. Hui Nooi Ng, age 39, a Malaysian Chartered Accountant, obtained her Professional Degree from The Association of Chartered Certified Accountants in 2004.   Ms. Ng has more than sixteen years of working experience in accountancy and has held various positions from accountant to finance manager with companies in Malaysia and Vietnam. In 1999, she joined ChemQuest Sdn Bhd, as an accountant, fully responsible for the finance and accounting operations for the company. In 2010, she joined Poh Huat Furniture Ind. Vietnam Joint Stock Co, a Malaysian manufacturing company based in Vietnam as the Finance Manager.  In this position, her main responsibilities included financial review and reporting, budgeting, business planning and risk management and treasury functions.  In May 2011, she joined Redtone Telecommunications Sdn Bhd, a subsidiary of REDtone International Berhad as a Senior Finance Manager and was responsible for the accounting functions and financial reporting.  She was seconded to REDtone Asia Inc. on 12 March 2012 as the Chief Financial Officer and is entrusted with the responsibilities of financial reporting, business analysis, investment appraisal, tax planning and liaison with bankers and auditors of REDtone Asia Group.

Number and Terms of Office of Directors

A Board of Directors, consisting of at least one (1) person shall be chosen annually by the Stockholders at their meeting to manage the affairs of the company. The Directors' term of office shall be one year, and Directors may be re-elected for successive annual terms.  There is no family relationship between any of our executive officers and directors.

Code of Ethics

The Company has not yet adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, comprising written standards that are reasonably designed to deter wrongdoing and to promote the behavior described in Item 406 of Regulation S-K promulgated by the Securities and Exchange Commission. Due to the small size of the Company, management does not believe such a code is needed at this time.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and changes in ownership of the Company’s Common Stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended May 31, 2012, all Reporting Persons complied with all applicable filing requirements.
 



ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth, for the fiscal years ended May 31, 2012 and 2011, certain information regarding the compensation earned by the Company’s named executive officers. Where columns have been omitted from the Summary Compensation Table below, it is because no such compensation was paid to the named executive officer during the 2012 or 2011 fiscal years.

 
SUMMARY COMPENSATION TABLE
           
   
Annual Compensation
 
       
Other
All Other
Name and
Year
   
Annual
Compen-
Principal
Ended
Salary
Bonus
Compen-
Sation
Position
May 31
($)
($)
sation ($)
($)
Chuan Beng Wei,
2012
-0- -0- -0- -0-
Director, CEO
2011
-0- -0- -0- -0-
           
Bik Soon, Lau
2012
-0- -0- -0- -0-
Director
2011
-0- -0- -0- -0-
           
Zainal Amanshah Bin Zainal
2012
-0- -0- -0-  
Director, Former Director
2011
-0- -0- -0- -0-
           
Chee Keong, Lee
2012
52,157 -0- 22,203 -0-
Former CFO 2011 -0- -0- -0-  -0- 
           
Hui Nooi, Ng  2012 8,503 -0-  -0-  -0- 
CFO  2011 -0- -0-  -0-  -0- 
           
 

 
Director Compensation

Members of the Board of Directors did not receive any cash or non-cash compensation for their service as Directors during our 2012 and 2011 fiscal years.


Compensation Committee Interlocks and Insider Participation

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.


Compensation Committee Report

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.
 



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth beneficial ownership information as of May 31, 2012: (i) each of the Company’s officers and directors, (ii) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of common stock, and (iii) all of the Company’s officers and directors as a group. As of the date of this report, the Company had  282,315,325  shares of common stock outstanding.

 
 
(i)
Security Ownership of directors and executive officers: None
 
 
 
(ii)
Security ownership of certain beneficial owners:
 
       
Title of Class
Name and Address
Amount &
Nature of
 Beneficial
 Ownership
Percentage
 of Class
       
 
Common shares
Redtone International Bhd, Suites 22-28, 5th Floor, IOI
Business Park, 47100 Puchong,
Malaysia.
 
260,619,364
 
92.31%
     
       
 
(iii)
Security ownership of officers and directors as a group:  None.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE


During the fiscal year ended May 31, 2012 and 2011, there were no related transactions between the Company and the directors.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Madsen and Associates CPA’s Inc. has served as the Company’s principal accountant since September 8, 2008. Their fees billed to the Company for the past two fiscal years are set forth below:

   
Fiscal Year ended May 31,
 
   
2012
   
2011
 
Audit Fees
  $ 50,500       55,500  
                 
Audit Related Fees
    0       0  
                 
Tax Fees
    0       0  
                 
All Other Fees
    0       0  
                 
Total Fees
    50,500       55,500  




Audit Fees.
   
 
-Including fees for professional services for the audit of our annual financial statements and for the reviews of the financial statements included in each of our quarterly reports on Form 10-QSB and 10-Q.
   
Audit Related Fees
   
 
-Consists of assurance related services by the independent auditors that are reasonably related to the performance of the audit and review of our financial statements and are not included under audit fees.
   
Tax Fees
   
 
- These services included assistance regarding federal, state and local tax compliance and return preparation.
   
All Other Fees
   
 
-Includes time and procedures related to change in independent accountants and research and assistance provided to the Company.

During its fiscal year ended May 31, 2012, the Company did not have an Audit Committee and the Company’s director pre-approved all fees of the principal accountant.
 
 

 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as a part of this Report:
 
1. FINANCIAL STATEMENTS - beginning on page F-1 of this Report:
 
 
- Independent Auditors’ Report – Madsen and Associates F1
- Independent Auditors’ Report – Consolidated Balance Sheet at May 31, 2012 and 2011 F2
- Consolidated Statements of Operations and Comprehensive Loss for the Years Ended May 31, 2012 and 2011 F3
- Consolidated Statements of Stockholders’ Deficit for the Years Ended May 31, 2012 and 2011 F4
- Consolidated Statements of Cash Flows for the Year Ended May 31, 2012 and 2011 F5
- Notes to Consolidated Financial Statements F6
   

 


Board of Directors
Redtone Asia, Inc. and Subsidiaries
Hong Kong


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of Redtone Asia, Inc. and subsidiaries (formerly Hotgate Technology, Inc. (the Company) as of May 31, 2012 and 2011 and the consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the years in the two-year period ended May 31, 2012.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (“PCAOB”).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used, significant estimates made by management and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the consolidated financial position of the Company as of May 31, 2012 and 2011, and the consolidated results of its operations and cash flows for each of the years in the two-year period ended May 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
.

s/Madsen & Associates CPA’s, Inc.
Madsen & Associates CPA’s, Inc.
August 29, 2012
Salt Lake City, Utah

 
 
F-1


 
 
REDTONE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 2012 and 2011
 
   
2012
   
2011
 
             
Assets
           
Current assets
           
Cash and cash equivalents
 
$
3,520,248 
   
$
4,580,189
 
Inventories
   
18,385 
     
6,679
 
Accounts receivable
   
633,009 
     
644,642
 
Tax recoverable
   
22,755 
     
107,308
 
Other receivables and deposits
   
383,443 
     
441,351
 
Total current assets
   
4,577,840 
     
5,780,169
 
                 
Property, plant and equipment, net
   
2,367,320 
     
2,936,979
 
Intangible assets, net
   
1,680,972 
     
1,798,397
 
Goodwill
   
610,386 
     
610,386
 
Available-for-sale investments
   
315,689 
     
308,734
 
Amount due from a related company
   
3,261,155 
     
1,182,200
 
                 
Total assets
 
$
12,813,362 
   
$
12,616,865
 
                 
Liabilities and stockholders’ equity
               
Liabilities
               
Current liabilities
               
Deferred income
 
$
1,423,566 
   
$
1,841,152
 
Accounts payable
   
715,078 
     
939,932
 
Accrued expenses and other payables
   
576,331
     
422,837
 
Amount due to a related company
   
77,128 
     
101,818
 
Taxes payable
   
450,700 
     
120,484
 
Total current liabilities
   
3,242,803
     
3,426,223
 
                 
Deferred tax liabilities
   
33,604 
     
47,927
 
                 
Total liabilities
   
3,276,407
     
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
   
1,045,811 
     
787,825
 
Accumulated other comprehensive income
   
736,019 
     
599,765
 
Total stockholders’ equity
   
9,536,955
     
9,142,715
 
                 
Total liabilities and stockholders’ equity
 
$
12,813,362
   
$
12,616,865
 
                 

See accompanying notes to the consolidated financial statements.


 
F-2

 
 
REDTONE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Year ended May 31, 2012 and 2011

             
   
2012
   
2011
 
             
Revenue
 
$
8,423,049
   
$
5,465,564
 
                 
Other income and gains
   
209,154
     
137,494
 
                 
Service costs
   
5,224,044
     
2,362,519
 
                 
Administrative expenses
   
718,366 
     
1,028,504
 
                 
Personnel cost
   
1,232,640
     
705,265
 
                 
Provision for obsolete inventories
   
31,703 
     
 
                 
Depreciation expense
   
647,538
     
491,442
 
                 
Amortization expense
   
121,632
     
118,875
 
                 
Other operating expense
   
68,356 
     
46,472
 
                 
Income before provision for income taxes
   
587,924
     
849,981
 
                 
Provision for income taxes
   
329,938 
     
200,078
 
                 
Net income
 
$
257,986
   
$
649,903
 
                 
Other comprehensive income
               
Gain on foreign currency translation
   
136,254
     
150,482
 
                 
Total comprehensive income
 
$
394,240
   
$
800,385
 
                 
Net income per share, basic and diluted
 
$
   
$
-
 
                 
Weighted average number of shares
   
282,315,325 
     
277,020,426
 
                 

See accompanying notes to the consolidated financial statements.


 
F-3


REDTONE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended May 31, 2012 and 2011
 
   
Number of
common
shares
issued
   
Common
stock
   
Additional paid-in capital
   
Retained
earnings/
(accumulated
deficits)
   
Accumulated
other
comprehensive
income
   
Total
equity
 
                                     
Balance at June 1, 2010
   
269,168,128
     
26,917
   
$
7,473,211
     
137,922
     
449,283
     
8,087,333
 
                                                 
Reverse acquisition
   
-
     
-
     
(928,251
)
   
-
     
-
     
(928,251
)
                                                 
Conversion of amount due to a related party to shares
   
13,147,197
     
1,315
     
1,181,933
     
-
     
-
     
1,183,248
 
                                                 
                                                 
                                                 
                                                 
Net income for the year
   
-
     
-
     
-
     
649,903
     
-
     
649,903
 
                                                 
Gain on foreign exchange translation
   
-
     
-
     
-
     
-
     
150,482
     
150,482
 
                                                 
Balance at May 31, 2011 and June 1, 2011
   
282,315,325
     
28,232
     
7,726,893
     
787,825
     
599,765
     
9,142,715
 
                                                 
Net income for the year
   
-
     
-
     
-
     
257,986
     
-
     
257,986
 
                                                 
Gain on foreign exchange translation
   
-
     
-
     
-
     
-
     
136,254
     
136,254
 
                                                 
Balance at May 31, 2012
   
282,315,325
     
28,232
     
7,726,893
     
1,045,811
     
736,019
     
9,536,955
 
                                                 

See accompanying notes to the consolidated financial statements.
 

 
F-4


 
REDTONE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended May 31, 2012 and 2011
 
   
2012
   
2011
 
             
Cash flows from operating activities
           
Net income
 
$
257,986
   
$
649,903
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Deferred tax
   
(12,569
)
   
(10,305
)
Amortization expense
   
121,632
     
118,875
 
Depreciation expense
   
647,538 
     
491,442
 
Provision for obsolete inventories
   
31,703
     
-
 
Impairment loss on intangible assets
   
     
46,259
 
Impairment loss on available-for-sale investment
   
     
390,603
 
Changes in operating assets and liabilities:
               
Decrease/(increase) in accounts receivable
   
11,633
     
(498,507
)
Increase in inventories
   
(43,409
)
   
(80
)
Decrease/(increase) in other receivables and deposits
   
57,908
     
481,677
 
Decrease/(increase) in tax recoverable
   
84,553
     
(40,853
)
Decrease in deferred income
   
(417,586
)
   
(385,557
)
Decrease in accounts payable
   
(224,854
)
   
(45,865
)
Increase in tax payables
   
330,216
     
10,448
 
Increase in accrued liabilities and other payables
   
153,494
     
52,316
 
                 
Net cash provided by operating activities
 
$
998,245
   
$
1,260,356
 
                 
Cash flows from investing activities
               
Purchase of property, plant and equipment
   
(13,701
)
   
(52,533
)
(Increase)/decrease in amount due from a related company
   
(2,078,955
)
   
110,220
 
Arising from acquisition of a subsidiary
   
-
     
(835,438
)
Arising from reverse acquisition
   
-
     
21,144
 
Purchase of available for sale investment
   
-
     
(308,734
)
                 
Net cash used in investing activities
 
$
(2,092,656
)
 
$
(1,065,341
)
                 
Cash flows from financing activities
               
Decrease in amount due to related companies
   
(24,690
)
   
(25,361
)
                 
Net cash used in financing activities
 
$
(24,690
)
 
$
(25,361
)
                 
Net (decrease)/increase in cash and cash equivalents
   
(1,119,101
)
   
169,654
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
59,160
     
90,701
 
                 
Cash and cash equivalents at beginning of year
   
4,580,189
     
4,319,834
 
                 
Cash and cash equivalents at end of year
 
$
3,520,248
   
$
4,580,189
 
                 
Cash paid for interest
 
$
-
   
$
-
 
                 
Cash paid for income taxes
 
$
58,662
   
$
231,113
 
                 
Non-cash transaction:
               
Issuance of shares to satisfy debts
 
$
   
$
1,183,248
 
                 

See accompanying notes to the consolidated financial statements.
 

 
F-5

 
 
REDTONE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2012

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. REDtone also offer prepaid shopping card services via its newly acquired subsidiary, Shanghai QianYueBusiness Administaration Co., Ltd (“QBA”)

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 May 31, 2012, 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 14.
           

On March 7, 2011, through its wholly-subsidiary Shanghai Hongsheng Net Telecommunications Company Limited ("Hongsheng "), entered into a share sales agreement with Shanghai QianYue Information Technology Co., Ltd. ("QIT") for the acquisition of the entire paid-up capital of QBA for a cash consideration of $1,205,540.  QBA is an established prepaid shopping-card issuer in Shanghai known as “VeryPass”.

On May 17, 2011, Nantong Jiatong was incorporated for the purpose of investment holding.

Jiamao is not reported as a distinct operating segment as the revenue, profit or loss and total assets in association with the ecommerce business are immaterial to the Company’s revenue, reported profit or loss and total assets.
 
NOTE 2 – PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements for the years ended May 31, 2012 and 2011 include the accounts of the Company, the Company’s subsidiaries and VIEs (see Note 1). The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America, and all significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”), while the reporting currency is the US Dollar.
 
 
 
F-6

 
 
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Economic and political risk

The Company’s major operations are conducted in the PRC. Accordingly, the political, economic, and legal environments in PRC may influence the Company’s business, financial condition, and results of operations.

The Company’s major operations in the PRC are subject to considerations and significant risks typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

(b) Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

(c) Accounts receivable

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable.

(d) Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation. The cost of maintenance and repairs is charged to the statement of operations as incurred, whereas significant renewals and improvements are capitalized. The cost and the related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of operations.

The Company provides for depreciation of property, plant and equipment principally by use of the straight-line method for financial reporting purposes. Plant and equipment are depreciated over the following estimated useful lives:
                                     
Computer and software
 5 years
Furniture, fixtures and equipment
 5 years
Motor vehicles
 5 years
Leasehold improvements
 5 years
Telecommunication equipment
 10 years
 
Depreciation expense for the years ended May 31, 2012 and 2011 amounted to $647,538 and $491,442, respectively.

(e) Intangible assets

Intangible assets primarily represent license and software and are generally amortized on a straight-line basis over the periods of benefit, in 20 years.

The Company performs regular review of identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than the original Company policies. If such facts and circumstances exist, the Company regularly assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Amortization expense for the years ended May 31, 2012 and 2011 amounted to $121,632and $118,875, respectively.

(f) Available-for-sale investments

Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized in the balance sheet at cost less impairment losses.

(g) Accounting for the impairment of long-lived assets

The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

There is no impairment loss recognized during the year ended May 31, 2012. During the year ended May 31, 2011 the Company recognized impairment losses of $436,862 in aggregate, of which impairment loss for an available-for-sale investment amounted to $390,603 and impairment loss for intangible assets amounted to $46,259.
 
 
 
F-6

 
 
(h) Income tax

Income taxes are based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company periodically assesses the need to establish valuation allowances against its deferred tax assets to the extent the Company no longer believes it is more likely than not that the tax assets will be fully utilized.

The Company evaluates a tax position to determine whether it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is subject to a measurement assessment to determine the amount of benefit to recognize and the appropriate reserve to establish, if any. If a tax position does not meet the more-likely-than-not recognition threshold, no benefit is recognized.

(i) 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.

(j) Revenue recognition

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:

o Persuasive evidence of an arrangement exists,
o Delivery has occurred or services have been rendered,
o The seller’s price to the buyer is fixed or determinable, and
o Collectability is reasonably assured

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

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

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

o
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 and pricing policies 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 costs on the books of Redtone China).  In this regard, Redtone China will recognize the revenue when airtime is utilized by the consumer and the value recognized as revenue is the call charges gross value.    Redtone China’s role for Business Collaboration with China Unicom would be as “Principal” as China Unicom is playing a 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 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, it will be deemed expired and revenue will be recognized 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 earned from distributing the discounted call services to corporate customer; and

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

3.  
Reload services for prepaid mobile – revenue recognized is the commission earned.
 
4. [QBA]

(k) 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 May 31, 2011 and 2010, there were no dilutive securities outstanding.

(l) Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

(m) Retirement benefits

Most of the Company’s employees are Chinese nationals and subject to Social Security Provident Fund and Housing Provident Fund of PRC. For Social Security Provident Fund, the Company is required to contribute 37% per month of the employees’ relevant income while 11% is deducted from employee income as employee’s contribution. For Housing Provident Fund, the Company and employee contributions are 7% each per month of the employees’ relevant income. Each year, minimum and maximum threshold will be set as contribution base and will be revised once a year based on social income level of the society.

Contributions from the Company and employee may not be 100% vested in the employees as the Social Security regime is subject to centralized planning and allocation scheme in China. Contributions to the scheme are expensed in the statement of operations as they become payable in accordance with the rules of the scheme. The assets of the scheme are held separately from those of the Company and managed by government agencies.

The Company provides no other retirement benefits to its employees.

(n) 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:

   
May 31, 2012
   
May 31, 2011
 
             
Year end RMB : US$ exchange rate
   
0.1578
     
0.1542
 
Average yearly RMB : US$ exchange rate
   
0.1585
     
0.1544
 
Year end HK$ : US$ exchange rate
   
0.1288
     
0.1285
 
Average yearly HK$ : US$ exchange rate
   
0.1288
     
0.1287
 
 
 
 
 
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.

 (o) 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 4 – CASH & CASH EQUIVALENTS

As of the balance sheet dates, cash & cash equivalents are summarized as follows:
 
   
2012
   
2011
 
             
Cash and bank
 
$
868,462
   
$
4,181,973
 
Time deposits
   
2,651,786
     
398,216
 
                 
Total
 
$
3,520,248
   
$
4,580,189
 
                 

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

NOTE 5 – AVAILABLE-FOR-SALE INVESTMENT

As of the balance sheet dates, available-for-sale investments are summarized as follows:
 
   
2012
   
2011
 
Investment in trust fund
 
$
315,689
   
$
308,734
 
Shanghai Hai He Computing Technology Company Limited (“Hai He”)
   
-
     
390,603
 
     
315,689
     
699,337
 
Less: Impairment of investments in Hai He
   
-
     
(390,603
)
Total
 
$
315,689
   
$
308,734
 
                 

During the third quarter of fiscal year 2011, the Company invested in CITIC Trust for the investment project of CITIC Cheng Jing and China Agriculture Technological Cultural share capital. Upon maturity, the trust fund provides an expected return of 8% per annum in 2 years. As of May 31, 2012 and 2011, the fair value of the trust fund approximates the investment cost.

NOTE 6 –OTHER RECEIVABLES AND DEPOSITS

Other receivables and deposits as of the balance sheet dates were summarized as follows:
 
   
2012
   
2011
 
             
Deposits
 
$
117,718
   
$
68,775
 
Other receivables
   
265,725
     
372,576
 
Total
 
$
383,443
   
$
441,351
 
                 
 
 
 
 
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of the balance sheet dates are summarized as follows:
 
   
2012
   
2011
 
At cost:
           
   Computer and software
 
$
553,680
   
$
553,328
 
   Telecommunication equipment
   
 4,895,607
     
4,784,536
 
   Furniture, fixtures and equipment
   
213,144
     
219,869
 
   Motor vehicles
   
 32,516
     
31,800
 
   Leasehold improvement
   
33,912
     
29,907
 
     
    5,728,859
     
5,619,440
 
                 
Less: Accumulated depreciation
   
 (3,361,539
)
   
(2,682,461
)
Property, plant and equipment, net
 
$
2,367,320
   
$
2,936,979
 
                 

Depreciation expense for the years ended May 31, 2012 and 2011 amounted to $647,538 and $491,442, 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:
 
 
           
   
2012
   
2011
 
At cost:
           
   Licenses and software
 
$
2,278,425
   
$
2,273,118
 
                 
Less: Accumulated amortization
   
(597,453
)
   
(474,721
)
                 
Intangible assets, net
 
$
1,680,972
   
$
1,798,397
 
                 

Amortization expense for the years ended May 31, 2012 and 2011 amounted to $121,632and $118,875, respectively.

Impairment loss on intangible assets for the years ended May 31, 2012 and 2011 are $nil and $46,259, 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:
 
   
2012
   
2011
 
Fellow subsidiary:
           
REDtone Technology Sdn. Bhd.
 
$
3,261,155
   
$
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:
 
   
2012
   
2011
 
Fellow subsidiary:
           
Redtone Telecommunications Sdn Bhd
 
$
77,128
   
$
101,818
 
                 

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:
 
   
2012
   
2011
 
             
Accrued expenses
 
$
373,129
   
$
62,811
 
Other payables
   
196,132
     
389,033
 
Total
 
$
569,261
   
$
451,844
 
                 

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:
 
   
2012
   
2011
 
             
Business tax payable
 
$
166,612
   
$
120,449
 
Income tax payable
   
283,880
     
35
 
Others
   
208
     
-
 
Total
 
$
450,700
   
$
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 13 – PROVISION FOR INCOME TAXES

Income tax expense for the year ended May 31, 2012 and 2011 are summarized as follows:
 
   
2012
   
2011
 
             
Current – PRC income tax provision
 
$
342,507
   
$
210,383
 
Deferred income tax income
   
(12,569
)
   
(10,305
Total
 
$
329,938
   
$
200,078
 
                 

A reconciliation of the expected tax with the actual tax expense is as follows:
 
   
2012
   
2011
 
   
Amount
   
%
   
Amount
   
%
 
                         
Income before provision for income taxes
 
$
587,924
         
$
849,981
       
                             
Expected PRC income tax expense at statutory tax rate of 25%
   
146,981
     
25.0
     
212,496
     
25.0
 
Different tax rate for PRC/Hong Kong local authority
   
(27,729
)
   
(4.7
)
   
(44,295
)
   
(5.2
)
Expenses not deductible for tax
   
60,008
     
10.2
     
-
     
-
 
Utilization of tax loss brought forward
   
-
     
-
     
(82,187
)
   
(9.7
)
Tax losses not provided for deferred tax
   
150,678
     
25.6
     
114,064
     
13.4
 
                                 
Actual tax expense
 
$
329,938
     
56.1
   
$
200,078
     
23.5
 
                                 
 
(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 14 – VARIABLE INTEREST ENTITIES (“VIEs”)

Hongsheng, Huitong, Nanjing Jiatong, QBA and Jiamao were all VIEs of the Company. The status of these VIEs has not changed since the date of the combination.

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:
 
   
2012
   
2011
 
Assets
           
Cash and cash equivalents
 
$
3,466,743
   
$
4,003,765
 
Inventories
   
18,385
     
6,679
 
Accounts receivable
   
633,009
     
642,843
 
Tax recoverable
   
22,755
     
81,086
 
Other receivables and deposits
   
237,490
     
363,823
 
Goodwill
   
610,386
     
610,386
 
Property, plant and equipment, net
   
454,875
     
646,972
 
Available-for-sale investment
           
-
 
Total assets (not include amount due from intra-group companies)
 
$
5,443,643
   
$
6,355,554
 
                 
Liabilities
               
Deferred income
 
$
1,441,347
   
$
1,857,752
 
Accounts payable
   
694,626
     
913,504
 
Accrued expenses and other payables
   
467,246
     
314,925
 
Tax payables
   
44,424
     
15,560
 
Total liabilities
 
$
2,647,643
   
$
3,101,741
 
                 

The statements of income of the consolidated VIEs for the years ended May 31, 2012 and 2011 are as follows, and are included in the consolidated statements of income of the Company:
 
   
2012
   
2011
 
             
Revenue
 
$
8,380,973
   
$
5,429,783
 
Other income and gains
   
189,213
     
31,370
 
Service costs
   
5,169,715
     
2,188,434
 
Administrative expenses
   
561,203
     
712,994
 
Personnel cost
   
1,231,423
     
587,965
 
Depreciation expense
   
647,444
     
55,053
 
Other operating expenses
   
101,873
     
40,044
 
                 
Income before provision for income taxes (Not including service costs payable to intra-group companies)
   
858,528
     
1,876,663
 
                 
Provision for income taxes
   
329,938
     
19,686
 
                 
Net income
 
$
528,590
   
$
1,856,977
 
                 
 
NOTE 15 – 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.  

On October 25, 2010, the Company satisfied certain debts due from the Company to Redtone International Berhad amounting to $1,183,248 by way of issuance and allotment of 13,147,197 shares of the Company’s common stock.

Weighted average number of shares for the year ended May 31, 2012 is 282,315,325 shares. The calculation of weighted average number of shares for the year ended May 31, 2011 is illustrated as follows:
 
   
Number
of shares
   
Weighted average
number of shares
 
             
At June 1, 2010
   
269,168,128
     
269,168,128
 
Issuance of shares on October 25, 2010 to satisfied debts to Redtone International Berhad
   
13,147,197
     
7,852,298
 
                 
At May 31, 2011
   
282,315,325
     
277,020,426
 
                 
 
 
 
 
NOTE 16 – SEGMENTAL ANALYSIS

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

   
2012
   
2011
 
Revenues from:
           
Telecommunications
  $ 8,141,830     $ 5,374,884  
Prepaid business solution
    281,219       90,680  
      8,423,049       5,465,564